77 Deadly Innocent Fraudulent Misinterpretations (#58)

77DIF MISINTERPRETATION #58: “Only after the government spends its new currency does the population have the funds to pay the tax. To repeat: the funds to pay taxes, from inception, come from government spending (or lending).”

Fact: The monetarily-sovereign federal government doesn’t necessarily have to spend its new currency so that the population has the funds to pay federal taxes. To repeat: the funds to pay taxes, from inception, do not necessarily come from government spending or loans from the Fed.

One of several reasons that ‘the funds to pay taxes come from government spending’ (from public-sector money creation) is wrong, is a US law called the Taxpayer Relief Act of 1997—which allows you to pay taxes with a credit card (with private-sector money creation).

The above quote from Warren Mosler’s 2010 book Seven Deadly Innocent Frauds (pg 20) foreshadowed this 58th of the 77 Deadly and Innocent Fraudulent misinterpretations that we are now hearing from the ‘prescription’ MMT community today. In other words, just as Mr. Mosler does in the course of explaining fraud #1 starting with the brilliant insight—that the federal gov’t has no ‘solvency risk’—along with more ‘description’ MMT enlightenment for the 100% (7DIF parts I & II) ends up getting undermined when data is cherry-picked and feelings replace facts to fit narratives pushing political ‘prescriptions’ (7DIF part III).   

Please note that I too (along with all MMTers) consider Warren Mosler an MMT champion, but even the Great Ones swing and miss sometimes. By pointing out mistakes, I am actually trying to help improve the MMT message to the mainstream—to the 100%.

All MMTers should do so as well. If we don’t, if MMTers discourage that, if we instead consider MMT ‘chiseled in stone’, then MMT becomes more like a religion (and more people will continue to assume that MMTers are in a cult).

To fit the ‘funds to pay taxes comes from government spending’ narrative, Mr. Mosler reasons that whenever taxes are paid to the Treasury, since the taxpayer’s bank’s reserve account at the Fed is debited, and the Treasury’s account at the Fed is credited with reserves; thus, since “the private sector cannot generate reserves” (pg 20 / footnote #3), therefore that means “the funds to make payments to the federal government can only come from the federal government.” Using an analogy, “the government, in this case, is just like the parents who have to spend their coupons first, before they can actually start collecting them from their children” (with reserves being “the coupons the kids need to make their payments to their parents—that have to come from their parents”). Sure, that analogy works—if we were all kids and didn’t have credit cards (if we didn’t have the ability to create allowance coupons ourselves along with collecting the ones our parents created).

If you use a credit card (if you ‘deficit spend’), that’s a creation of dollars by the private-sector financial institution that issued the credit card; and if you pay federal taxes with a credit card, those taxes paid didn’t come from gov’t spending. If the US monetary system had the same rules as The Monopoly Game, which states that Monopoly Players can not borrow from other Monopoly Players (meaning no private-sector money creation), then that ‘Federal Gov’t (Monopoly Bank) Funds The People (Monopoly Players)’ narrative would hold true, but that’s not the case. The ‘bathtub’ (the economy) doesn’t just get the ‘water’ (newly-created dollars) from the ‘faucet’ (federal-gov’t spending); the economy ALSO gets dollars from private-sector money creation as well. Today’s MMTers (who prefer memey catchphrases over facts, math & data) don’t count those private-sector creations because those dollars ‘net-out’—so they are told. The monetary reality is that if a household takes out a 30-year mortgage, that means it takes THIRTY YEARS for that private-sector creation of dollars that went into the ‘bathtub’ to ‘net-out’ (while those newly-created dollars are working their magic in money-supply circulation). The same goes for large corporations who are constantly rolling over debt in the wholesale interbank funding markets—meaning lots of private-sector money creation that rarely ‘nets-out’. The MMT insight (Mr. Mosler’s original ‘description’ that went off course) is that instead of the gold-standard era where the gov’t had to wait to collect gold-backed dollars first, the order of operations switched. The gov’t can now issue fiat dollars out of thin air and fund us first (the ‘federal stadium’ distributes ‘tickets’ first)—and then we fund the gov’t back (and then we pay the stadium for the tickets).

Another deadly innocent misinterpretation in that 7DIF fraud #1 is where Mr. Mosler writes that in addition to taxes, the funds to buy Treasury bonds also comes from government spending as well. More specifically, that the Fed “does repos – to add the funds to the banking system that banks then have to buy the Treasury Securities; otherwise, the funds wouldn’t be there to buy the Treasury securities and the banks would have overdrafts in their reserve accounts.” (pg 20 / footnote #2). So, the first narrative was that ‘the funds to pay taxes comes from government spending’ and this narrative is that ‘the funds to buy the Treasury securities comes from government’ too. The former cherry-picks one tiny ‘reserve accounting’ part of the process to say taxes aren’t ‘technically’ funding taxes (which is like saying that the gasoline you put in your car doesn’t make the wheels turn because the gas is ‘destroyed’ in the pistons); with the latter misinterpreting repurchase agreements (‘repos’) done by the Fed as meaning that the Fed is providing the funds on behalf of private investors to facilitate their purchases of Treasury securities. For example, in the pre-LSAP (pre-quantitative easing) days, the Fed did repo transactions called Open Market Operations in the secondary market—meaning with existing Treasury bonds—with banks to maintain the Fed’s target (the Fed’s desired) overnight borrowing rate; however, the Fed DOES NOT do repos—the temporary purchase and selling of Treasury securities—to fund the banks in order to buy newly-issued Treasury bonds at auction in the primary market.

Don’t take my word for it. A copy of a 08/20/15 letter posted up on the Intro to MMT facebook page from James A. Clouse, Deputy Director, Division of Monetary Affairs of the Federal Reserve System in Washington, D.C., responding to a question by Stanley Mulaik (regarding the mechanics of Treasury debt auctions) said the following:

“Chair Yellen asked me to respond to your recent letter…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…Contrary to some of the MMT website discussion you mentioned, primary dealers are never overdrawn at the Federal Reserve—they do not have reserve accounts with the Federal Reserve that can be overdrawn…It bears emphasizing that at no point in the Treasury auction process, does the Federal Reserve temporarily purchase or sell Treasury securities to facilitate settlement on behalf of private investors nor does it provide credit temporarily to facilitate their purchases of Treasury securities.”—BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

Here’s another example of Mr. Mosler cherry-picking to fit a narrative. To show that federal gov’t spending is just like changing numbers on a scoreboard, 7DIF fraud #1 includes the following transcript from a 03/15/09 episode of a 60 Minutes interview of Ben Bernanke during the early phase of the credit crisis when the Fed was lending money (with the bank’s toxic assets as collateral) to these troubled banks then suffering liquidity problems (when the Fed was creating reserves and giving them to the banks to ‘exchange’ for dollars to be spent into money supply circulation):

Pelley: “Is that tax money that the Fed is spending?”

Bernanke: “It is not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed…

Which is a perfect statement that all MMTers should use to explain how federal gov’t spending is completely different in the post-gold-standard era using fiat dollars. That’s as golden a line for the MMT community as that Greenspan “There is nothing to prevent the government from creating as much money as it wants” response to then-Chair of the House Budget Committee Paul Ryan (R-WI); but the very next line Bernanke said—that Mr. Mosler intentionally left out—was this:

…so it’s much more akin, although not exactly the same, but it’s much more akin to printing money than to borrowing.”

Pelley: “You’ve been printing money?”

Bernanke: “Well, effectively yes, and we need to do that because our economy is very weak and inflation is very low. When the economy begins to recover, that’ll be the time that we need to unwind those programs, raise interest rates, reduce the money supply and make sure that we have a recovery that does not involve inflation.”

Again, that’s a perfect printing-money-friendly quote for MMT, because ‘printing money’ = ‘money creation’ (the kind of money creation just like federal-gov’t deficit spending that results in needed net additions of financial assets feeding into money-supply circulation along with welcome increases in newly-created aggregate demand), and that’s how easy it’s done by our gov’t these days; but Mr. Mosler left that part out because like all political ‘prescription’ MMTers, he hates the term ‘printing money’ (since it means different things to different people).

(Pure ‘description’ MMT—NOTE: In a follow-up interview with 60 Minutes on 12/05/10, Chair Bernanke explained that even though quantitative easing was also a creation of reserves to pay for the bank’s AAA-rated Treasury bonds, that was NOT to be considered ‘printing money’ because unlike Japan’s QE which includes buying commercial debt and equity ETFs to get more money into circulation—to specifically increase Japan’s money supply—the Fed’s QE was not creations that were intended to enter money-supply circulation. Rather than being like those earlier Fed loans for subprime bonds to cash-poor banks to be spent into circulation to keep their lights on, or just like routine federal-gov’t deficit spending, QE is not ‘printing money’ because QE is only a swap of bonds specifically done to extend a 0% short-term interest rate monetary policy (ZIRP)—by also lowering long-term interest rates. Rather than ‘printing money’, QE is ‘credit easing’; and rather than changing the money supply, QE only replaces the bank’s holdings of higher-yielding bonds that are not in the money supply, with holdings of lower-yielding reserves that are also not in the money supply).

(Political ‘prescription’ MMT—NOTE: Disregard all that. Bernanke is wrong to say ‘printing money’ and the clueless Fed ‘has the pedals backwards’. In addition, Marx was right, Bernanke and the evil Fed are always plotting to ‘intentionally’ throw people out of work to control inflation. That plus any other cute story that fits an anti-Fed narrative to peddle a ‘prescription’ that dismantles capitalism).

The reason why today’s ‘prescription’ MMTers get very squeamish when it comes to the topic of inflation (the loss of consumer purchasing power as a result of an increase in federal-gov’t money creation entering money-supply circulation without an offsetting increase in productivity) is because MMTers can’t stand when folks—bashing their beloved proposals—say things like ‘Oh sure, you just want to print more money, for more free stuff.’

Even though ‘printing money’ isn’t applicable now because we are in a digital computer age—and not ‘because MMT’—as the saying goes, never let facts get in the way of a good narrative. To avoid ‘prescription’ MMTers getting their feelings hurt, Mr. Mosler deploys some clever sleight-of-hand by telling them that ‘Saying printing money is wrong’ —meaning Bernanke is wrong— ‘because it’s a non-applicable gold-standard era term’.

Saying printing money is ‘wrong’ so let’s leave that part out of 7DIF (because it doesn’t fit the narrative), but let’s cherry-pick the part Bernanke is ‘right’ about (which does fit nicely).

In closing, may I repeat, the ‘description’ MMT found in Warren Mosler’s 7DIF is brilliant. There is nothing wrong with having ‘prescriptions’—and the more the merrier (from both sides of the political aisle because that’s how the best solutions are found). However, just like that paradigm difference between the federal gov’t and your household, there’s also a big difference between the ‘description’ (the facts) and your ‘prescription’ (and your feelings). Pure MMTers are way ahead on the MMT learning curve because they separate their economics from their politics. Those who don’t, dilute their expertise in both at the same time.

“All things are poison, and nothing is without poison, the dosage alone makes it so a thing is not a poison.”—Swiss physician Paracelsus,1538

“Expansive fiscal policy and expansive monetary policy is a very powerful tool, which should be used if needed and at the same time handled with great care. Once again: It is the dose that makes the poison.”—German economist Peter Bofinger, 2019

Thanks for reading,

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Seventy Seven Deadly Innocent Fraudulent Misinterpretations (#50-56)

77DIF MISINTERPRETATION #50: Every time that the Federal Reserve Bank pays interest on excess reserves, they are subsidizing the banks.

Fact: Every time that the Federal Reserve Bank pays interest on excess reserves, they are not subsidizing the banks.

“It’s a bit of a misnomer to think that there’s a subsidy there. We aren’t paying an interest that is above the general level of short term rates. We are paying rates to the banks that they can get from other banks or from elsewhere in the short-term money markets. In addition, those Treasury bonds and MBSs (our assets), are yielding much more than the interest we are paying on those reserves (our liabilities), so it is not a subsidy to the banks—and in fact it is a huge profit to the federal taxpayers.”—Fed Chair Jay Powell’s comment after the FOMC unanimously raised the target range for the federal funds rate to 1-1/2 to 1-3/4 percent, 03/21/2018

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77DIF MISINTERPRETATION #51: The Labor Force Participation Rate remaining roughly unchanged is a sign that the job labor market is terrible because disenfranchised people have given up.

Fact: The Labor Force Participation Rate remaining roughly unchanged is not necessarily a sign that the job labor market is terrible because disenfranchised people have given up.

“The LFPR remaining roughly unchanged is actually another sign of improvement of the current strength of the labor force given the downward pressure of our aging population.”—Fed Chair Jay Powell’s comment after the FOMC unanimously raised the target range for the federal funds rate to 1-1/2 to 1-3/4 percent, 03/21/2018

“The recent year’s strengthening of our labor force participation has been an upside surprise that most people didn’t see coming and is extremely welcome.”—Fed Chair Jay Powell, FOMC Statement press conference, 03/20/2019

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77DIF MISINTERPRETATION #52: The Fed is trying to fight inflation by creating unemployment.

Fact: The Fed is not trying to fight inflation by creating unemployment.

The Fed targets (the Fed sets) the overnight interest rate between banks (known as the Federal Funds Rate)—and adjusts that rate as it sees fit in order to (as mandated by Congress) maintain price stability and achieve MAXIMUM employment. The Fed also makes ‘predictions’ (known as the Summary of Economic Projections) of what the Fed’s committee guesses what the unemployment rate will be in the future. This ‘dot plot’ of projections is dangerously, innocently and fraudulently misunderstood by the entire MMT community as meaning that the Fed is ‘targeting the unemployment rate’ and ‘intentionally creating unemployment’.

Anyone (from the new MMT student all the way to the veteran MMT academic) who says that ‘the Fed is trying to fight inflation by creating unemployment’ during The Longest Jobs Growth And The Longest Economic Expansion In UNITED STATES HISTORY—many thanks to the Fed—is being a tad fantastical.

Anyone saying ‘the Fed is intentionally creating unemployment’ has no idea how out of touch they are with how capitalism works nor has any idea how ridiculous they sound. It’s understandable when ‘entertainers’ over the airwaves today (playing to a specific ‘audience’) create stories to fit an anti-Fed narrative (because the first rule of feeding a conspiracy theory is that you never let facts, math & data get in the way of a good story). However, it’s another thing when political ‘prescription’ MMTers make things up. The Fed is mandated by Congress. Do ideologically-extreme MMT ‘scholars’ who think that the Fed is ‘intentionally causing involuntary unemployment’ think that Congress is in on this conspiracy too?

By the way, ‘involuntary’ means ‘forced’. Think bread lines during the 1930s—people were forced to be unemployed because THERE WERE NO JOBS—and then think about today’s 7,000,000 JOLTS. Meaning that there are more than 7 million jobs available! Meanwhile MMTers (with PhDs in Econ) think it would be a good idea to address those 7,000,000 open jobs currently going unfilled with a $500B federal ‘job’ guarantee (to ‘create’ more ‘jobs’). If you think that’s probably a bad idea then you will be reprimanded for being worried about ‘how will we pay for it’ and that you need to #learnmmt.

Another ‘prescription’ MMT proposal is to take away the Fed’s power of adjusting the overnight interest rate (resulting in the Fed no longer having that tool at its disposal to immediately respond in the event of financial emergencies). Many voices of reason, including the central banker in Japan—the so-called ‘poster child’ of MMT—have let the world know what they think of that proposal (and of today’s radicalized version of MMT).

“To be fair, both sides of the spectrum love to hate the ‘mysterious’ Fed and blame it for everything that is wrong—including sunspots. The better the Fed gets at the job assigned to it by Congress the more they are hated by each side. Although I would really like to see the Fed stop assigning a number to maximum employment as the NAIRU does not exist or at least changes its address so often as to be useless as a policy indicator. I think if one reads between the lines, Fed Chair Powell is there, but openly saying the NAIRU is dead by a Fed Chair would likely be very jarring to markets. I know the Chair of Economic Advisors Larry Kudlow has said the Phillips Curve which underlies the NAIRU is dead.”—Charles ‘Kondy’ Kondak

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77DIF MISINTERPRETATION #53: Higher rates = higher interest payments to the economy.

Fact: Higher rates = higher interest payments to the bondholders (to the top 5% of the economy).

In a 03/06/19 discussion on Twitter, a comment by Monetary Wonk (@monetarywonk) that “MMTers want a permanent ZIRP [want to anchor the overnight fed funds rate to 0%] because they believe that Treasury [bond] rates are net neutral and don’t influence [aggregate] demand,” got this reply from Warren Mosler:

“No, the private sector credit is nominally ‘net neutral’ regarding non gov interest paid and earned, but the Treasury and fed—the gov sector—are net payers of interest to the economy. Higher rates = higher interest payments to the economy.”

Meaning that whenever you or I deficit spend (whenever the non federal gov’t creates money), that is an actual debt (for users of dollars), which is intended to be paid back (‘net-out’); so Mr. Mosler is correctly pointing out that it isn’t the case when the federal gov’t deficit spends (whenever the issuer of dollars creates money), since the federal gov’t is a ‘net payer’ because that money creation, is a net addition of dollar-denominated assets aka Net Financial Assets being added into the banking system, that is not intended to be paid back (to ever ‘net-out’).

That money creation by federal gov’t deficit spending is a stimulus to the economy. The reason why Fed Chair Eccles coined federal gov’t money creation ‘High Powered Money’ is because unlike federal gov’t surplus spending that DOES NOT add NFAs (which has a deflationary bias); federal gov’t deficit spending DOES add NFAs (which has an inflationary bias).

However, it is a bit of a stretch to also say that higher interest rates are a stimulus to the economy in the same way that more federal gov’t deficit spending is since (as the logic goes) ‘higher interest rates = higher interest payments to the economy’. According to this logic, the Fed is mistaken because it thinks that rate hikes are effective at slowing the economy—and therefore ‘the fed has the pedals backwards’.

That logic would be correct if most Americans were bond holders (if most were savers and only a few were borrowers), but in reality the opposite is true (making that logic seem ‘backwards’).

When the Fed raises rates, only the top 5%—the savers—are receiving higher interest; while the 95%—the borrowers—are paying higher interest to service debt +/or to deficit spend any further.

That’s why when the Fed sees too much inflation coming, they raise rates (a ‘net neutral’ dollar drain from borrowers to savers) as a disincentive to the 95%; and conversely, when the Fed sees too little inflation coming, they lower rates (a ‘net neutral’ dollar drain from savers to borrowers) as an incentive to the 95%.

“A change in money prices and money income does have ‘real effects’. If you increase the cost of money, that is a cost for debtors and an income source for creditors. This is real. By making debtors worse off and making creditors better off, there will be changes in the distribution of income, there will be changes in demand and in output. Real magnitudes in the economy will change.”—Steve Keen, ‘Can We Avoid Another Financial Crisis?’, 2017

Furthermore, when fiscal policy makers are not in agreement (like during a Republican ‘sequester’ or when Democrats are being ‘obstructionists’), the Federal Reserve Bank and their monetary policy makers become, as Mohamed El Erian put it in his book, ‘The Only Game In Town’. Meaning that monetary policy may not the best tool to stimulate the economy (and why so many are always critical of the Fed), but in absence of action from fiscal policy makers—when time is of the essence—the Fed becomes the Policymaker Of Last Resort.

With all due respect, anyone calling for taking those price-stabilizing abilities away from central bankers; or calling for a federal job guarantee program which takes employment decisions out of the hands of the private sector; or saying back in early 2016 that “it looks like the Fed began liftoff during a recession” may be the ones getting it backwards.

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77DIF MISINTERPRETATION #54: A monetarily sovereign gov’t can issue all the bonds that it needs in its own local currency without the worry of default risk.

Fact: Even if issued by a monetary sovereign and denominated in their own local currency, there is still a default risk of bonds.

“It is a complete fallacy that a gov’t with monetary sovereignty can issue all the bonds that it needs in local currency without worry of default risk. It is also untrue that because you are a monetarily sovereign gov’t (that because you have the monopoly of issuing the currency) you can issue all the money that you want to finance deficit spending without risk of high inflation. The reason why a gov’t, that is monetarily sovereign, issues bonds (adds debt) that is denominated in a foreign currency—rather than in its own local currency—is not because they don’t understand MMT. It’s because there’s no longer any real demand for their own local currency. If an investor knows that a gov’t will continuously depreciate the currency (if an investor knows that a gov’t thinks it can create its own bonds without risk of default and create its own currency without risk of hyperinflation), then that investor will simply not want that local currency either. The reason why citizens nor investors don’t want their own local currency—the reason why they reject it—is because they don’t want to suffer the currency risk. There is evidence of more than 20 defaults of bonds denominated in local currency of gov’t with monetary sovereignty since the 1960s. In addition, throughout history there are more than 150 cases of fiat currencies, that because of high inflation, have disappeared—and in none of those cases did that gov’t decide to stop creating more currency (or issuing more bonds).”—Daniel Lacalle

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77DIF MISINTERPRETATION #55: US Treasury bond coupon rates are not determined by market forces, they are instead set by the Treasury.

Fact: All US Treasury bond coupon rates are determined by market forces at origination.

A post on the Intro to MMT page on Facebook by Jim Gaddis (author of the book ‘Richard Gatlin and the Confederate Defense of Eastern North Carolina’) posed the question whether or not federal gov’t bond coupons were ‘set’ by the Treasury prior to auction or ‘set’ by market forces during the auction.

That was an excellent question.

The answer is both.

The Treasury used to set the coupon rate of all new bonds by an explicit pronouncement but that all got changed in the ’51 Accord. Now the market sets the coupon rate. It’s a ‘dutch’ auction for newly-issued Treasury securities. That’s where the highest bidder—the lowest interest rate (the lowest yield) that the bidder is willing to receive—gets filled first, then the next highest and etc, etc, until all the bonds are sold. The coupon becomes the average of all the yields accepted, rounded down to the nearest eighths of a percentage point.  

Anyone can go to the TreasuryDirect.gov website and after clicking the ‘upcoming auctions’ tab, they can see the ‘announcement’ (the details) of all marketable US Treasury bonds that are about to be sold to the public.

The coupon of any newly-issued Treasury bond is quote “to be determined” unquote during the auction (meaning whatever the market will bear).

There is an exception.

The coupon may however, be ‘set’, before the auction, but ONLY in the case that a Treasury bond is being ‘re-issued’ (aka ‘re-opened’).

If you look at the announcement details of a re-issued Treasury bond, the COUPON is already ‘set’ because the Treasury bond already exists and the YIELD (the final price that buyers will pay) for that additional batch is quote “to be determined’ unquote based on prevailing market yields. For example, if at origination (at initial offering) a 10-year Treasury note gets a 3% coupon (determined by market forces) and then the following month it is re-opened; if prevailing rates have dropped to 2.5%, then buyers of that batch will pay a premium because of that ‘set’ 3% coupon. In other words, the price that the investors will pay (the effective yield of that batch) is going to be in the neighborhood of 2.5% (determined by market forces).

The reason why the Treasury offers more of the same bond for sale is because federal gov’t deficits are rising, so they are increasing the frequency of bond sales. For example, the 10-year Treasury note usually is offered every 3 months. If deficits are rising quickly, the Treasury will re-issue that same 10-yr note the following month (technically as a 9-yr 11-month note auction).

If deficits keep rising, we may even see the Treasury bring back the issuance of the 4yr note or the 7yr note or maybe even the 20yr bond again (meaning less ‘re-openings’ of existing bonds needed).

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77DIF MISINTERPRETATION #56: When a Non-bank (a ‘non formal bank’) lends EXISTING money to a borrower, it is NOT a credit creation. Only when a Bank (a ‘formal or traditional bank’) lends newly-created money is it a credit creation.

Fact: ALL borrowing is a credit creation (an expansion denominated in dollars).

“While Non-banks grant credit, it would be misleading to speak of ‘credit creation’ by Non-banks.”—Richard Werner, German economist, ‘International Review of Financial Analysis’, Volume 36, Pages 71-77, December 2014 (Mr. Werner earned a BSc at the London School of Economics. Further studies at Oxford University were interrupted by a year studying at the University of Tokyo—Japan’s most prestigious university—after which his doctorate in economics was conferred by Oxford. In Tokyo he was also a Visiting Researcher at the Institute for Monetary and Economic Studies at the Bank of Japan; plus he was a Visiting Scholar at the Institute for Monetary and Fiscal Studies at Japan’s Ministry of Finance. Mr. Werner coined the term ‘quantitative easing’. As chief economist of Jardine Fleming Securities Asia he used this expression during presentations to institutional clients in Tokyo in 1994).

He wrote that because when the Non-Bank (short for ‘non-formal bank’ like a shadow bank) is lending (which by UK law must always—only—lend with existing money), the Non-Bank gives up the same amount of their cash (-$100) in exchange for the same amount of the borrower’s IOU (+$100).

Thus, as this logic goes, since there is no change in the Non-Bank lender’s balance-sheet totals at the end of the day then that means there’s no credit creation.

(Speaking of being ‘misleading’, what about the borrower’s balance sheet that expanded—that went up from $0 to +$100)?

Perhaps, in Mr. Werner’s view, when the opposite happens, when formal banks that are lending with newly-created money, that is a different (read: lower) ‘hierarchy’ of borrowing. He calls newly-created bank deposits ‘fictitious’ and ‘imaginary’. That implies that he thinks only a loan using already-existing money is ‘sound’. Which is an ‘unsound’ argument because it makes no difference whether any money that was lent out was either newly-created or already-existing—because it mostly has to do with the ‘soundness’ of the person the money was lent to.

“They [AMI & ‘positive money’ folks] are wrong because as Minsky argued—and my models demonstrate—crises can still occur even if all lending was entirely ‘responsible’, meaning it was for productive purposes.”—Steve Keen, ‘Can We Avoid Another Financial Crisis?’, 2017

As per Mr. Werner, it is only when lending is done using newly-created money is it a ‘credit creation’. Apparently, if just lending with already-existing money, that’s totally different, that’s not extending credit, that’s not credit-creation, that’s ‘fronting’ someone money (or something like that).

Which completely ignores the fact that when someone gives you cash out of their pocket for you to borrow, not only do you the borrower receive an asset, so does the lender—and THAT’S the expansion, that’s the creation (of credit). The lender receives a NEWLY-CREATED IOU that goes in the lender’s pocket. Even if there is no actual IOU written out and handed over—if it is just ‘fictitious’ and ‘imaginary’—rest assured, that IOU is a real and potent thing because it’s a damsel named Faith (hooking up with a stud called Creditworthiness).

The only difference is that, unlike a credit creation using already-existing money, a credit creation using newly-created dollars involves a middleman (an underwriter). Whether funded by newly-created money or not, it is that promise to pay back the money with interest, it’s that newly-created IOU, that ‘bond’—that you conjured up out of thin air—that makes ALL borrowing a credit creation. The added account receivable, that asset, that credit creation, is always happening with any bond issuance, with any borrowing—with any extension of credit. When you pay the money back (when you put the bond in the ‘shredder’), that is the destruction. Those bonds being newly-created and newly-destroyed expand and contract the balance sheets. This leveraging v. deleveraging is the ‘beating heart’ and understanding that allows you to feel the ‘pulse’ of the economy.

Since the days of credit creation using tally sticks in medieval England, the lender’s faith in the borrower’s ability to pay back the money is a pillar of the economy. That’s why even to this day, a fiat dollar bill which is not backed by gold is still very valuable and why we say it’s backed by the full faith and credit—because it’s backed by the full faith and credit of the person who printed that piece of paper.

When it comes to borrowing in the private sector, it is WE who ‘print’ that bond, not the Bank and not the Non-Bank—they are only facilitating YOUR ‘printing’ of credit (represented by your newly-created bond). For example, VISA doesn’t contact you to let you know when they’re ready for you to go out to eat and pay on credit; and VISA doesn’t tell you whether to make the minimum monthly-balance payment, or tell you to pay the balance in full and destroy the credit creation—it’s the other way around. Anyone saying that credit creation is ‘only in the case of when borrowing newly-created money’ is missing the bigger picture. When someone lends, it is a granting of purchasing power—no matter if it involves any actual banks or any actual newly-created money or not. Whether banks are involved, or whether newly-created money is created or isn’t created, that is only a subset of the credit-creation process. As Dr. Steve Keen correctly wrote in his 2017 book, “credit is equivalent to the growth in private debt”. Meaning that EVERY time someone borrows, they are increasing private-sector debt (they are ALWAYS expanding private-sector balance sheets).

“Is Minsky (1986) right and ‘everyone can issue money'”?—Richard Werner

That’s close. Everyone can issue (can extend) credit. In other words, everyone can grant purchasing power and all borrowing by everyone is a credit creation (an expansion denominated in dollars). To believe otherwise is fictitious and imaginary.

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All Borrowing is Credit Creation (is an expansion denominated in dollars)

“While Non-banks grant credit, it would be misleading to speak of ‘credit creation’ by Non-banks.”—Richard Werner, German economist (Mr. Werner earned a BSc at the London School of Economics. Further studies at Oxford University were interrupted by a year studying at the University of Tokyo—Japan’s most prestigious university—after which his doctorate in economics was conferred by Oxford. In Tokyo he was also a Visiting Researcher at the Institute for Monetary and Economic Studies at the Bank of Japan; plus he was a Visiting Scholar at the Institute for Monetary and Fiscal Studies at Japan’s Ministry of Finance. Mr. Werner coined the term ‘quantitative easing’. As chief economist of Jardine Fleming Securities Asia he used this expression during presentations to institutional clients in Tokyo in 1994).

He wrote that because when the Non-Bank (short for ‘non-formal bank’ like a shadow bank) is lending (which by UK law must always—only—lend with existing money), the Non-Bank gives up the same amount of their cash (-$100) in exchange for the same amount of the borrower’s IOU (+$100).

Thus, as this logic goes, since there is no change in the Non-Bank lender’s balance-sheet totals at the end of the day then that means there’s no credit creation.

(Speaking of being ‘misleading’, what about the borrower’s balance sheet that expanded—that went up from $0 to +$100)?

Perhaps, in Mr. Werner’s view, when the opposite happens, when formal banks that are lending with newly-created money, that is a different (read: lower) ‘hierarchy’ of borrowing. He calls newly-created bank deposits ‘fictitious’ and ‘imaginary’. That implies that he thinks only a loan using already-existing money is ‘sound’.

Which is an ‘unsound’ argument because it makes no difference whether any money that was lent out was newly-created or already-existing—because it mostly has to do with the ‘soundness’ of the person the money was lent to.

As per Mr. Werner, it is only when lending is done using newly-created money is it a ‘credit creation’. Apparently, if just lending with already-existing money, that’s totally different, that’s not extending credit, that’s not credit-creation, that’s ‘fronting’ someone money (or something like that).

Which completely ignores the fact that when someone gives you cash out of their pocket for you to borrow, not only do you the borrower receive an asset, so does the lender—and THAT’S the expansion, that’s the creation (of credit). The lender receives a NEWLY-CREATED IOU that goes in the lender’s pocket. Even if there is no actual IOU written out and handed over—if it is just ‘fictitious’ and ‘imaginary’—rest assured, that IOU is a real and potent thing because it’s a damsel named Faith (hooking up with a stud called Creditworthiness).

The only difference is that, unlike a credit creation using already-existing money, a credit creation using newly-created dollars involves a middleman (an underwriter). Whether funded by newly-created money or not, it is that promise to pay back the money with interest, it’s that newly-created IOU, that ‘bond’—that you conjured up out of thin air—that makes ALL borrowing a credit creation. The added account receivable, that asset, that credit creation, is always happening with any bond issuance, with any borrowing—with any extension of credit. When you pay the money back (when you put the bond in the ‘shredder’), that is the destruction. Those bonds being newly-created and newly-destroyed expand and contract the balance sheets. This leveraging v. deleveraging is the ‘beating heart’ and understanding that allows you to feel the ‘pulse’ of the economy.

Since the days of credit creation using tally sticks in medieval England, the lender’s faith in the borrower’s ability to pay back the money is a pillar of the economy. That’s why even to this day, a fiat dollar bill which is not backed by gold is still very valuable and why we say it’s backed by the full faith and credit—because it’s backed by the full faith and credit of the person who printed that piece of paper.

When it comes to borrowing in the private sector, it is WE who ‘print’ that bond, not the Bank and not the Non-Bank—they are only facilitating YOUR ‘printing’ of credit (represented by your newly-created bond). For example, VISA doesn’t contact you to let you know when they’re ready for you to go out to eat and pay on credit; and VISA doesn’t tell you whether to make the minimum monthly-balance payment, or tell you to pay the balance in full and destroy the credit creation—it’s the other way around. Anyone saying that credit creation is ‘only in the case of when borrowing newly-created money’ is missing the bigger picture. When someone borrows, it is a granting of purchasing power—no matter if it involves any actual newly-created money or not. Whether newly-created money is created or isn’t created, that is only a subset of the credit-creation process. As per Dr. Steve Keen in his 2017 book titled ‘Can We Avoid Another Financial Crisis?’, “credit” he writes, “is equivalent to the growth in private debt”. Every time someone borrows, they are increasing private-sector debt and they are expanding private-sector balance sheets.

“Is Minsky (1986) right and ‘everyone can issue money'”?—Richard Werner

That’s close. Everyone can extend (issue) credit and all borrowing is a credit creation (an expansion denominated in dollars). To believe otherwise is fictitious and imaginary.

Thanks for reading,

Pure MMT for the 100% https://www.facebook.com/PureMMT/

P.S.

If you want to know how money works, it helps to know how money trades. Follow MineThis1 and his REAL MACRO instructors @ https://www.facebook.com/InvestingMMT/

Source: ‘How do banks create money, and why can other firms not do the same? An explanation for the coexistence of lending and deposit-taking?’ https://www.sciencedirect.com/science/article/pii/S1057521914001434?fbclid=IwAR0bB904qYxwdq9on1iWEXZ7zyxyvuAk9QCMo3KLi7VOQubrVFwpbX5tM-s

P.S.

03/13/19:

No, I do not agree with anyone that says that the Fed (or any other central bank) is a private cartel. The Fed is part of the federal gov’t. As the Fed puts it on their website, the Fed is “independent within the federal gov’t”.

To believe otherwise is fictitious and imaginary.

February 2019 was not a good month for political ‘prescription’ MMT

It was not a good February 2019 for political ‘prescription’ MMT (nor for their anti-central bank, anti-capitalist, gloom-and-doom choir).

On February 1st, Keith Weiner wrote a piece titled ‘Modern Monetary Theory Is A Cult’, referencing the real-life islander tribe known as the ‘cargo cult’. Just like a fake MMTer who doesn’t fully-understand concepts like ‘value’ or ‘productivity’, the cargo cult assumed that all they had to do was to build a runway (just ‘keyboard’ it in) and then airplanes full of cargo would come.

Nonfarm Payrolls (monthly unemployment figures) blew away expectations, meaning that the Longest Job Expansion In United States History—now 100 straight months strong—continued. Which (yet once again) kicked the ass of anyone still left that actually thinks a $500B federal ‘job’ guarantee program DURING A LABOR SHORTAGE is a good idea.

‘The Intercept’ dropped this on the gullible MMT community (who still didn’t get the hint after Democrats re-instituted PayGo and Speaker Nancy Pelosi frustrated Green New Deal proponents by not giving them the kind of committee they wanted): “Pelosi Aide Privately Tells Insurance Executives Not To Worry About Democrats Pushing Medicare For All”—Ryan Grim

Which didn’t go over too well with MMT academics: “Democrats, Do you deny that you are the PARTY OF SATAN?”—Bill Mitchell

If Professor Mitchell had fully-understood the article, he would have realized there were more reasons than just that gold-standard era “Monies are needed for other priorities” excuse. The Democrats had simply made the decision that M4A was a political loser and that for now policymakers should focus their messaging on lowering drug prices. “The comfort level with a broader base of the American people (for single payer) is not there yet,” as per Speaker Pelosi (read: She will be aligned with private insurers and will oppose Big Pharma).

When asked if the deficit will be mentioned in the SOTU Address, White House chief of staff Mulvaney said ‘no’ because ‘nobody cares’.

Is it because of that Progressive ‘revolution’ that nobody cares about deficits? 

Nope…

Here’s why: 

“Republicans…are the biggest MMT people we’ve seen in our lifetime.”—Logan Mohtashami

“One of the funny things that happened is that in a way, the Republicans…kind of advanced the MMT agenda.”—Stephanie Kelton

Then during the SOTU speech, after the president said “We were born free and we will stay free…The United States will never be a socialist nation,” even some over on the Democrat side of the aisle cheered (while Sen. Sanders fumed).

Meanwhile, another bullet hole (in ‘bulletproof’) #fakeMMT is that, just like the cargo cult, the MMT community has the blinders on when it comes to inflation. They think that consumer prices are the only thing to measure (that consumer price inflation is the risk) and refuse to see anything else (like asset price inflation being fed by deficits that is worsening wealth inequality). Fake MMTers just look at consumer price inflation and not at the asset price inflation (stocks, bonds, real estate, aka the ‘savings bubble’).

“They are fond of saying ‘deficit spending should be large enough to satisfy the desire of the private sector to save’ as if there is a limit on the price of financial assets.”—Charles Kondak

Bingo…Either the MMT community is not fully grasping how incomplete it is to say that it’s fine to deficit spend ‘as long as there is no (consumer) price inflation’, or they are just bullshitting everyone—again. H/T to Jim ‘MineThis1’ Boukis for being the first one to sound the alarm on the savings bubble imbalance and those deficits that feed it (those Gov’t Deficits that = THEIR Savings). To just say it’s fine to deficit spend ‘as long as (consumer price) inflation is low’ is not only fake mmt, it’s borderline dangerous for the stability of the nation to not include asset price inflation in that federal spending calculus (to not consider creative pen strokes instead of keystrokes). Instead of calling it wealth inequality, perhaps we should call it ‘wealth inflation’ and then maybe the MMT community would get it.

Which is unlikely because MMT was carjacked and the first thing the carjackers did was to throw that pure ‘description’ baby out the window. What the #fakemmt kiddie pool doesn’t like is that pesky political constraint to federal spending—they can’t stand knowing that we can afford any policy proposal, BUT it still has to be approved. To a fakeMMTer, it doesn’t matter if their ‘description’ is wrong, as long as all ‘prescription’ roads lead to the same place: More free ‘this’ and more free ‘that’ (without considering the unintended consequences of their supposedly good intentions). When saying that we should spend on whatever THEY want—and don’t worry about it—’because MMT’, fake MMTers keep showing their true ideals. Which is to usurp the Power of the Purse of Congress, take away the Fed’s ability to change interest rates as they see fit and dismantle capitalism (to replace it with a cradle-to-grave welfare state).

Finally, and perhaps one of the biggest whoppers overheard during February was that oft-repeated, wishful-thinking that ‘MMT is getting more mainstream’. In other words, while peddling their political ‘prescription’ (that has little chance of seeing the light of day) under the guise of promoting pure ‘description’ (that has a big chance of seeing the light of day), they keep pissing down people’s legs and telling them that it’s raining.

Here’s some more examples of the downpour:

FEB 07: Noah Smith (Bloomberg Opinion and former assistant professor of finance at Stony Brook University): “So until the Green New Deal proposal is substantially revamped, every Democrat’s answer to the question ‘Do you support the GND?’ should be NO.”

FEB 08: Tucker Carlson: Why would we ever pay people quote ‘unwilling to work’?

Robert Hockett: We never would. AOC has never said anything like that. I think you’re referring to some sort of doctored document that someone other than us has been circulating.

Tucker Carlson: That was from the backgrounder from her office.

Robert Hockett: No. She actually laughed at that, she just tweeted out that apparently some Republicans have put that out there.

Tucker Carlson: Ok, good, thank you for correcting me. That seems a little ridiculous. Almost as ridiculous as the idea that we’re going to build enough rail to make airplanes unnecessary which I think is actually from the plan.

Robert Hockett: I don’t know where you got that from either Tucker. I’m not clear on where that ‘airplane disappearance’ is coming from.

Tucker Carlson: This is the Frequently Asked Questions released by her office and I’m quoting from it. Maybe this is fraudulent and I hope you’ll correct me. It says, and I’m quoting, the Green New Deal will totally overhaul transportation, building out high-speed rail at a scale where air travel would stop becoming necessary. Hawaii Democrat Senator Mazie Keiko Hirono responded by saying that would be hard for Hawaii—so I don’t think that’s made up.

Robert Hockett: It’s being misunderstood. We are talking about expanding optionality, not getting rid of anything.

Tucker Carlson: I’m now being told that the ‘unwilling to work’ thing, that is absolutely confirmed, that was in the backgrounder that her office released.

Robert Hockett: No, no, definitely not.

Tucker Carlson: It was in the overview document.

Robert Hockett: It’s the wrong document.

Tucker Carlson: We’ll follow up on this next week. That ‘unwilling to work’ line that you are obviously embarrassed by, you should be embarrassed, it was in the document.

Robert Hockett: No Tucker, it’s not embarrassing, it wasn’t us. We’re not embarrassed by what’s not ours.

Tucker Carlson was right. It wasn’t a doctored document put out by the Republicans. The actual resolution (the legislation) submitted to Congress that outlined the Green New Deal didn’t include the ‘unwilling to work’ part; but the overview document (the accompanying FAQ document), released by New York Rep. Alexandria Ocasio-Cortez’s office, did include the ‘unwilling’ language…and they were embarrassed by it—AOC’s staff was forced to take the gaffe-riddled summary of the bill off their website. Robert Hockett later tweeted “Typo in a draft doc that went up by mistake and was taken down once noticed.”

Included in Ocasio-Cortez’s original FAQ document was the promise of “economic security to all who are unable or unwilling to work,” it called for a “build out of high-speed rail at a scale where air travel stops becoming necessary,” it said that we “plant lots of trees” to reduce emissions, it laid out the goal to “move America to 100% clean and renewable energy” within 10 years and it explained how the resolution submitted to Congress used the term “net-zero emissions, rather than zero emissions” because “we aren’t sure that we’ll be able to fully get rid of cow emissions and airplanes that fast.”

FEB 12: Bill Gates called modern monetary theory (MMT) – which asserts that because the government controls its own currency, there is no need to worry about balancing the budget some ‘crazy’ talk. “Well, that’s crazy. I mean, in the short run actually because of macroeconomic conditions, it’s absolutely true that you can get debt even to probably 150 percent of GDP in this environment without it becoming inflationary. But it will come and bite you.”

FEB 16: No question that things are NOT going well for political ‘prescription’ MMT when even Breitbart agrees with Mayor Bill de Blasio (about Rep. Alexandria Ocasio-Cortez being too far to the left).

FEB 26: In testimony before the Senate Banking Committee
on Capitol Hill, Fed Chair Jay Powell said this:

“Let me say I haven’t seen a carefully worked out description by what is meant by MMT. It may exist but I haven’t seen it. I have heard some pretty extreme claims attributed to that framework and I don’t know whether that’s fair or not. I will say this. The idea that deficits don’t matter for countries that can borrow in their own currency, I think is just wrong. I think US debt is fairly high, at a level of GDP and much more importantly than that, it’s growing faster than GDP, significantly faster. We are not even close to ‘primary balance’, which means the deficit before interest payments. So we’re going to have to either spend less or raise more revenue. In addition, to the extent people are talking about using the Fed as a sort of [financing], our role is not to provide support for particular policies. That’s central banks everywhere. Our role is to achieve maximum employment and stable prices—that’s what it is. Decisions about spending, about controlling spending and about ‘paying for it’, are really, for you.”
—Fed Chair Powell, 02/26/19

FEB 27: In the next day’s testimony before the House Financial Services Committee, Fed Chair Jay Powell pushed back on the MMT ‘prescription’ (on Mr. Mosler’s 7DIF Part III Public Purpose proposal) to anchor the federal funds rate to 0% (to completely take away the Fed’s ability to quickly respond to either an economic crisis or an approaching crisis like a dangerously overheating economy):

“There is a new sort of focus on modern monetary theory that says taxes can better fight inflation than monetary policy. Do you have a basic philosophical view on that?”—Rep. Steve Stivers (R-Ohio)

“That aspect of it would be a complete change. I would say the reason why the Fed does that is that we can move quickly with our tools (we can move immediately), and to give the legislature that responsibility—in principle you can do that—but we have a system, that’s got lots of checks and balances.”—Fed Chair Powell, 02/27/19

In conclusion, during the month of February when Econ Ph.D Stephanie Kelton was again tweeting that Gov’t Deficits = OUR Savings (that THEIR red ink is OUR black ink), Warren Buffett disclosed in his annual Shareholder Letter that Berkshire had $112B in US Treasury bills (which is almost 1% of the entire $15.5T US marketable Debt Held by the Public).

By the way, it’s fine if you think that we need a ‘JG’, a ‘GND’, ‘M4A’, +/or student debt forgiveness—the more policy suggestions the better. It’s even fine if you hate the president—everybody goes through that (just like we all went through that adolescent phase in sports when you think that ‘our’ team is ‘great’ and the ‘other’ team ‘sucks’).

Notice however that most of the criticism during the month was not questioning the politics of the proposals—they were mostly questioning the economics. Meaning that when talking to experts in the field, if you are getting the econ (the ‘description’) wrong, you are making it harder for everyone else to take your pet policies (your ‘prescription’) seriously.

Here’s some advise for the ‘ideological’ MMT community: If you mix your politics with your economics, you dilute your expertise in both at the same time—so stop naively buying into Every.Single.Dopey political ‘prescription’ #fakeMMT meme.

In an age of ‘fake news’, you need to go Beyond The Memes—you need to become your own journalist. Don’t be afraid to do some due diligence on your own about the veracity of the claims made by MMT academics (before you too sound like someone that spent their entire lives in a classroom).

Thanks for reading,

Pure MMT for the 100% https://www.facebook.com/PureMMT/

If you want to know how money works, it may help to know how money trades. Follow MineThis1 and his Real Macro Instructors:

https://www.facebook.com/InvestingMMT/

P.S. On February 28th, former Fed Chair Alan Greenspan did not sound too enthused with the ‘prescription’ MMT proposal to curtail the Fed’s role as ‘price setter’ and the notion that we should leave all that up to fiscal policymakers because the Fed doesn’t know what they’re doing (because the Fed ‘has the pedals backwards’).

As per the Maestro, if you shut down the Fed’s ability to immediately respond to changing economic conditions (if you take away the Fed’s agility at influencing prices with changes in interest rates); then while you’re at it, to stop the stampede out of the US dollar, you should probably shut down our foreign exchange market as well—so that nobody will be able to dump their dollars (even after it’s too late for them to save themselves):

Bloomberg’s Mike McKee: There is a theory out there, modern monetary theory, MMT, a lot of people are debating it. It suggests that a country that prints money in its own currency doesn’t have to worry about deficits as long as inflation isn’t breaking out, if it does, then the fiscal agent comes in and raises taxes [+/or cuts federal spending]. What do you think of that idea because it’s being rooted as a way to spend more money, on infrastructure, on the Green New Deal, things like that?

Former Federal Reserve Chairman Alan Greenspan: You’d have to shut down your foreign exchange markets. How do you exchange (laughs)? People will be trying to fly out of your currency and if there’s no vehicle in which they can do it, it doesn’t happen.

Seventy Seven Deadly Innocent Fraudulent Misinterpretations (#29-35)(#36-42) (#43-49)

77DIF MISINTERPRETATION #29: The Fed neither ‘has’ nor ‘doesn’t have’ dollars.

Fact: The Fed has dollars.

It’s comical to watch the MMT community twist and contort themselves while playing that fake MMT version of the game of Twister.

What part of those dollar signs on the Federal Reserve System Balance Sheet (Left Hand Blue!) or the Daily Treasury Statement account at the Federal Reserve Bank (Right Leg Yellow!) is confusing the MMTers who say ‘the Fed has no dollars’ (Right Hand Red!) or ‘there’s no such thing as dollars’ (Left Leg Green!) on the federal level?

Do MMTers using ‘the Fed neither has nor doesn’t have dollars’ logic forget why it’s called the federal RESERVE system? When banks transfer their required reserves to the Fed, do they think that’s not dollars (credits) being held at the Fed—because those dollars were ‘destroyed’ (just like they also think those federal tax dollars are ‘destroyed’) too?

This is just another MMT analogy (that it’s just ‘points on a scoreboard’) gone amok—to fit a politically-extreme ‘prescription’ MMT narrative.

“Of course the Fed has dollars. This is just more stupid s*** that pseudo-intellectuals come up with to sound smart.”—Jim ‘MineThis1’ Boukis

Agreed…The Fed sent 91 billion DOLLARS to the Treasury in 2016 and the Fed sent 80 billion DOLLARS to the Treasury in 2017. Derived from its bond holdings (like mortgage-backed securities) on their balance sheet, the Fed has handed over more than 700 billion DOLLARS since the 2008 financial crisis…

…and that’s the net amount, after, you know, all those ‘old’ bills, that were ‘shredded’, at the ‘IRS’ (as per that recently ‘modified’ yarn).

_________________

77DIF MISINTERPRETATION #30: “Printing is a word that goes back to the gold standard.”

Fact: Printing is a word that goes way, Way, WAY back BEFORE the gold standard.

In that grand arc of monetary history, the gold standard was just a short blip. MMT (the currency analysis, the ‘chartalism’ and the fiat currency) goes back before the gold-standard era.

“Printing is a word that goes back to the gold standard. It meant the ratio between the printed money and the gold supply, it’s no longer an applicable term. When you have a non-convertible currency and a floating exchange rate, the spending is operationally independent of the taxing, so all government spending is merely changing numbers in banking accounts—there’s no operational constraint by revenues.”—Center for Economic and Public Policy’s Warren Mosler on Fox Business News with Stuart Varney discussing further government spending to improve the economy, May 7, 2011

To be fair, anyone dismissing your pet ‘prescription’ MMT policy (like Stuart Varney did to Mr. Mosler) by uttering ‘Oh you just want to print more money’—instead of debating the merits of the proposal itself—isn’t making a good-faith effort to understand your perspective.

That said, anytime anyone in the MMT community says ‘Don’t say print money’, that is borderline fake MMT.

Anyone with a basic knowledge of American history knows that ‘printing money’ goes back before the gold standard (and why they won’t fall for that ‘Don’t say printing money’ meme as easily as the MMT community does). Those ‘Continentals’ were NOT backed by gold (they were backed by the ‘anticipation’ of tax revenues), nor were those original ‘Greenbacks’ (at first as an ’emergency’ war measure they had no convertibility to gold), so ‘printing money’ simply refers to the days before the computer age, before ‘keystrokes’.

We all still say ‘printing money’ just like we all still say how much ‘horsepower’ a car has, or how much ‘shipping’ charge we have to pay to the person driving that brown delivery truck. The words ‘printing money’ (if not used sarcastically) simply refers to ‘deficit spending’, aka an addition of net financial assets, that is increasing the amount of $$$ in circulation (that is expanding the money supply)—what Fed Chair Eccles referred to as ‘High Powered’ (which is another thing that the MMT community gets completely wrong).

Most people today (correctly) associate ‘printing money’ with conjuring up money out of thin air—as opposed to using existing $$$ (as opposed to ‘surplus spending’).

For example, if you are paying for a restaurant tab with money out of your pocket (paying with existing $$$), then that isn’t ‘printing money’ (isn’t adding dollar-denominated assets into the banking system); but if you are instead, paying with a credit card, if you are deficit spending, you are ‘printing money’ (adding dollar-denominated assets into the banking system). That newly-created little piece of paper, printed with $$$ signs on it, that you sign, that the restaurant retains, think of THAT as the financial asset, that you just created, which is a ‘notes receivable’, your ‘promise’, your ‘bond’, an ASSET, that increases NFAs; while in addition, that printed receipt, that you keep whenever paying on credit, whenever printing money, is the ‘notes payable’, the liability, that nets-out the creation.

The federal gov’t is of course not the same as a household using a credit card. The pure MMT insight is that, operationally, borrowing or tax collection is not needed to fund federal spending, BUT those formalities remain to maintain the Constitutionally-enshrined Power of the Purse of policymakers—only Congress can sign the ‘receipt’.

Furthermore, where the MMT community goes over the cliff is thinking that all spending is newly-created money (instead of knowing that all spending is newly-created money, yes; net additions of $$$ going into the banking system, no).

It’s pure MMT to explain that the newly-created (newly-printed) dollars (assets) that you just added into money-supply circulation to pay for that lunch at a diner probably won’t cause hyperinflation and destroy the economy; however, telling folks—especially the 2,000 employees at the Bureau of Engraving and Printing—not to say ‘printing money’, isn’t.

Fed Chair Bernanke: “It’s much more akin to printing money more than it is to borrowing.”

Scott Pelley: “You’ve been printing money?”

Fed Chair Bernanke: “Well, effectively, yes…we need to do that because our economy is very weak and inflation is very low.”

NOTE: In that 60 Minutes interview on 03/15/2009, Chair Bernanke was referring to the initial bailouts, early in the credit crisis, where the Fed lent newly-created (newly-printed) money to troubled banks in exchange for their toxic subprime assets, for the so-called Maiden Lane loans. The Fed did this so that these banks, suffering from a liquidity problem, would have the $$$ to spend into money-supply circulation—to pay their bills—to stay in business. In a follow-up 60 Minutes interview in 2011, Chair Bernanke explained that QE was not akin to printing money because, unlike the bailouts, which were about buying toxic bonds / changing the money supply*; QE was about buying AAA-rated bonds / changing long-term interest rates.

*(Bernanke tried but failed to get the media and markets to use the term ‘credit easing’ rather than ‘quantitative easing’ which was a term applied to unsuccessful Japanese programs earlier in the decade which differed from the Fed’s securities purchases in many respects. In particular, the Japanese QE programs were aimed at increasing the Japanese money supply to specifically cause a spike in inflation; while the Fed’s QE was only focused on reducing longer-term US interest rates).
____________________________

77DIF MISINTERPRETATION #31: The Fed is the ‘scoreboard’.

Fact: The Fed is the excel spreadsheet.

“The federal gov’t spends money into existence … and deletes money out of existence when it taxes … the taxes don’t pay for anything, they are literally deleted. When you go to a baseball game … and a guy smacks a homer and they put a ‘1’, one run, on the scoreboard … but then on the replay they realize that the ball was foul, it was a foul ball, they take the ‘1’ off the scoreboard. Where did that ‘1’ go? Where did it come from? Did they have to tax somebody to get that run? Or did they just keystroke that run on the board? That’s how banking works.”—Steve Grumbine, Real Progressives broadcast, 01/04/19 (11:35 in the video)

No, that’s not how banking works.

That’s how folks (who take Mr. Mosler’s ‘scoreboard’ analogy too literally) pushing political ‘prescription’ MMT (under the guise of being about banking) works.

The person that hit that homer, that blood, that sweat, those tears that went into the effort (the production) to knock that ball out of the park, is what ‘funds’ that ‘1’ on the scoreboard.

If the ball was ruled foul, then that ‘1 Run’ (that ‘asset’) is ‘debited’ from the ‘Run’ ledger, and then that ‘1’ is ‘credited’ to the ‘Balls & Strikes’ ledger—that ‘1 Run’ becomes a ‘1 Strike’ instead. In other words, the ‘1’ goes from one part of the scoreboard to another (the ‘asset’ goes from one part of the banking system to another).

That’s how banking works.

When explaining MMT to the MMT uninitiated, the 7DIF scoreboard analogy—a great analogy—should only be used as a simple example of the paradigm difference between ‘metalism’ (coins from precious metals in a gold-standard era) v. ‘chartalism’ (fiat currency from keystrokes in a computer era).

In other words, our monetary system went from mostly using a limited amount of ‘hard’ currency (kept in secure vaults) to mostly using an unlimited amount of ‘soft’ currency (kept in secure ledgers).

Of course the Fed ‘has’ dollars…More than just being electronic ‘points’, dollars are still ACTUAL Assets & Liabilities (credit & debit flows)—postings that reconcile those ledgers.

Of course dollars exist on the federal level…What part of those little dollars signs on the Fed’s balance sheet or on the Daily Treasury Statement is confusing MMTers who take the scoreboard analogy too literally and say that?

The very least that all MMTers should have taken away from The Longest Shutdown In US History was the pure MMT insight, which is that, those accounting constructs (those pesky funding rules & appropriations laws), albeit unnecessary, still exist—not as much as a ‘financing’ constraint but more as a ‘political’ constraint.

Despite the pillow-talk MMT promises that keeps getting whispered into your ear, you can’t have anything YOU want—‘because MMT’—that’s not how it works.

Do yourself (and the MMT cause) a favor and don’t confuse a scoreboard (an analogy) with an excel spreadsheet (the consolidated balance sheets of the United States federal government).
_______________

77DIF MISINTERPRETATION #32: Payment of federal taxes is a ‘destruction’ of dollars.

Fact: Payment of taxes is a drain of $$$ to the DTS (the same exact account where all federal spending is drawn).

The payment of federal taxes is a ‘destruction’ of the taxpayer’s federal tax liability, but not a destruction of $$$. The payment of those taxes is a ‘destruction’ of $$$ from the money supply (they are ‘deleted’ from your bank account), but not from the banking system.

Only Congress can ‘destroy’ $$$ (reduce the NFAs that Congress created).

Even if you burned a dollar bill to a crisp, you wouldn’t change the numbers on that ‘scoreboard’. However, same as Congress, if you burned your mortgage (your ‘bond’ that you previously created), THAT’S A DESTRUCTION.

Think about a pumping heart. The blood is flowing out of that heart—to somewhere else—it’s not getting ‘destroyed’.
Rather than ‘keystrokes’ that fund surplus spending followed by the subsequent collection of federal taxes, what actually expands & contracts money supply circulation (the pumping heart of the economy) is the creation & destruction of bonds (aka leveraging v. deleveraging).

Rather than being ‘bulletproof’, political ‘prescription’ MMT is rendered with bullet holes—and they are all self-inflicted. Here’s some more holes:

MMTers (who are supposed to be good at being ‘chartalists’) are confusing credits & debits (‘postings’ that are consolidations of ledger charts) with creation & destruction (net ADDITIONS into the banking system v. the deleveraging of that leveraging).

When deficit spending, the Treasury is ‘fronting’ the ‘newly-created’ money via its Daily Treasury Statement account at its central banking agent, the Fed. For example, if deficit spending $1B today, the equal and opposite ledger entry to reconcile (to balance) that +$1B that is credited from the DTS to the accounts of whomever provisioned the gov’t is a debit of -$1B to the DTS. Next, the federal gov’t collects $1B in Treasury bond sales, meaning that tomorrow $1B is coming back out from money supply circulation—which is the main reason to sell the bonds (to maintain price stability by neutralizing the potentially inflationary-bias of deficit spending). That ‘newly-created’ $1B, credited to the DTS, brings both the DTS and the money supply back to where it was—meaning that so far it’s all a ‘wash’. The final step, the ADDITION, is when the federal gov’t keyboards $1B in ‘newly-created’ Treasury bonds to those investors who just paid for them. Those assets are the Net Financial Assets that are added (that are ADDITIONS) into the banking system.

Same goes for when a household deficit spends (wants to pay on credit), the financial intermediary (the bank) is ‘fronting’ the ‘newly-created’ money in exchange for your ‘newly-created’ promise to pay back the money with interest (your ‘bond’). Your newly-created bonds create loans create deposits.

MMTers shouldn’t confuse ALL these ‘newly-created’ assets flowing back & forth above as being ADDITIONS of NFAs.

Furthermore, it’s only a ‘destruction’ if Congress decides to pay off those federal bonds for good; and the same goes for a household, it’s only a ‘destruction’ if they pay off their ‘bond’—the opposite of the creation.

Just like all debts (household debt) are liabilities but not all liabilities (Treasury bonds) are debt; all destruction (paying off Treasury bonds) are debits but not all debits (federal tax / Treasury bond collections) are a destruction.
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77DIF MISINTERPRETATION #33: “The Fed has raised rates to try to keep unemployment from dropping below 4%”—MMTer with a Ph.D (name withheld to protect the gullible innocent)

Fact: “It would not be appropriate to specify a fixed goal for employment”—Federal Open Market Committee Statement on Longer-Run Goals and Monetary Policy Strategy, 01/29/19

Many Misery-loves-company folks of the fake MMT community are anti-Fed people, or doom-and-gloom perma-bears, or anti-capitalists (or all of the above). As a result, they routinely misinterpret basic economic concepts. For example, many fake MMTers (some with Ph.Ds) hear ‘The Fed’s Mandate Is Maximum Employment’ and conclude ‘The Fed is Intentionally Targeting Unemployment’.

The reason why, is because the FOMC Committee estimates the neutral (or ‘normal’ or ‘natural’) rate (aka ‘r star’) as the unemployment rate that ‘is neither increasing nor decreasing inflation’. The Fed posts this in their Summary of Economic Projections (aka the ‘dot plot’). Fake MMTers confuse that as meaning that the Fed is specifically ‘targeting’ that rate.

“We don’t look at the neutral rate of unemployment because it moves too slowly”—Fed Chair Powell, in Jackson Hole, Wyoming, 03/21/18

Rather than the fake MMT narrative that the Fed sets the unemployment rate, the Fed sets the ‘price’—or the interest rate—of money to attempt (to the best of its ability) to influence the rate of inflation (as mandated by Congress).

What the Fed is doing is inflation ‘targeting’ (setting interest rates to discourage price instability) and that is NOT to be confused with unemployment rate ‘targeting’ (setting unemployment rates to discourage more employment).

The pure MMT is that the Fed NEVER wants less employment. The Fed is ALWAYS trying to keep the jobs growth party going for as long as possible. Come this July, THE LONGEST JOBS GROWTH IN US HISTORY will officially become THE LONGEST ECONOMIC EXPANSION IN UNITED STATES HISTORY (which is more proof of just how brilliantly the Fed’s monetary-policy handling of the financial crisis has been).

Until that day, as usual, fake MMTers will keep ‘targeting’ gullible folks and will keep telling them that the reason why the masses are unemployed is all the government’s fault. They also ‘target’ those ‘evil’ fiscal policymakers, the ‘plotting’ Fed, and that ‘murdering-by-proxy’ Congress who is in on this ‘conspiracy’ to throw the person out of employment. As per the MMT ‘academics’ (who are better at politics than they are at teaching), unemployment is NEVER the fault of the person in the mirror.

The real reason why those lies are spread is because that person in the mirror that might not have a good job or any job at all will ALWAYS have a vote.

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77DIF MISINTERPRETATION #34: “Japan is our MMT poster child that keeps exposing the myths.”

Fact: Japan is a pure MMT case study why, from the very start of economic troubles, PEN STROKES, not more keystrokes, make much better solutions to grow an economy.

To be fair to Professor Bill Mitchell (where the above quote is derived) Japan first experimented with QE way before the US did, and that was good (that was a good step in the ‘Pure’ or ‘end-game’ MMT direction); but to paraphrase Jim ‘Minethis1’ Boukis, what political ‘prescription’ MMTers today aren’t grasping, is all that Debt / GDP in Japan, like many things, is fine—UNTIL IT ISN’T. To understand more about Debt / GDP, let’s take a step back into history.

Due to the inflationary measures undertaken to finance the US Civil War, it was too difficult to pay back debt in gold or silver, so the US gov’t suspended payments of obligations not legally specified in specie (gold bonds or gold certificates). This led banks to suspend the conversion of bank liabilities (bank notes and deposits) into specie. In 1862 paper money was made legal tender and as a fiat money (not convertible on demand at a fixed rate into specie) as a temporary ‘emergency’ war measure. These notes came to be called ‘greenbacks’. After the Civil War, Congress wanted to reestablish the metallic standard at pre-war rates; but, the market price of gold in greenbacks was above the pre-War fixed price ($20.67 per ounce of gold) requiring an intentional, gov’t-induced deflation to achieve the pre-War conversion price. This could be accomplished by growing the stock of money less rapidly than real output. The coinage act of 1873 (aka the Crime of ‘73) deflated the money supply. This act removed the 412.5 grain silver dollar from circulation leaving only silver coins worth less than $1 able to be used. It worked. By 1879 the market price matched the mint price of gold. With the resumption of convertibility on June 30, 1879 the gov’t went back to paying back its debts in gold and redeemed greenbacks on demand in gold. Greenbacks became perfect substitutes for gold coins.

Fast forward to today, as per MINETHIS1, a good way to predict currency appreciation / depreciation is to watch the stock of money (to watch the rate of money creations via federal ‘DEBT’), against the real output (to GDP).

Monetary policymakers today (who studied those monetary-policy actions taken in 1873) know that if you want deflation / currency appreciation, then grow the stock of money much less rapidly than real output: and conversely, if you want inflation / currency depreciation, then grow the stock of money much more rapidly than real output.

Japan is a ‘homogeneous’ nation (read: prefers racial ‘purity’—but not in a racist way, just in a way that cherishes & seeks to preserve its ancient customs & culture); which, like ‘anything’ (which like everything else) ‘is fine until it isn’t’. For example, as a result of wanting to embrace demographic purity, Japan today now has the most aged population among the G20.

Meaning that Japan’s labor force has been literally dying off which (among other moving pieces) has been causing deflationary forces, hurting the Japanese economy (suffering from ‘Lost Decades’). So Japan, which isn’t crazy about immigration (growing the ‘people stock’), has instead been fighting that deflation by growing the money stock (debt) more rapidly than real output (GDP). In other words, Japan’s monetary policymakers will keep trying to ‘keystroke’ their way out of a perilous economic situation (while blaming the Japanese citizens for having a ‘deflationary mindset’).

Rather than being an ‘MMT poster child’ and ridiculously saying ‘We Can Do That Too #learnmmt‘, Japan is a prime example of what NOT to do.

Here’s how political ‘prescription’ MMTers sound while whispering their sweet-nothings (their promises that you can have ‘anything’ because there is no financial constraint) in your ear (the pillow talk MMT):

“Japan has been a gem for demonstrating the neo-liberal myths about government deficits, debt and central bank debt purchases, inflation and bond yields. Japan is a living laboratory that should give you confidence that MMT is a much more robust explanation of what happens in a monetary economy where the government is sovereign (issues its own currency) than the mainstream economics approach.”—Bill Mitchell, ‘Our poster child keeps exposing the myths’, September 9, 2014

Here’s how they sound afterwards (after you-know-what-went-you-know-where) and it starts becoming more apparent that what Japan is doing is NOT working (is NOT ‘a gem’ / is NOT ‘a model’ / is NOT ‘a laboratory’ / is NOT ‘a poster child’): “Japan’s QE is a sideshow. While the Bank of Japan [BOJ] can accumulate Japanese Gov’t Bonds [JGBs] in whatever volumes they choose and can never go broke if the price of those bonds in the secondary markets create ‘losses’, the policy will not deliver the inflationary spike that the IMF and the Bank of Japan is seeking. Inflation will accelerate only if fiscal policy pushes the growth rate and the demand for real resources above the potential growth rate and the resource availability.”—Bill Mitchell, ‘Bank of Japan’s QE strategy is failing’, April 24, 2018

That’s wrong professor. Just like America’s QE was NOT a ‘sideshow’, Japan’s QE is NOT a ‘sideshow’. Perhaps MMTers should stop listening to the pillow talk and pick up a copy of ‘The Only Game in Town’ by Mohamed El-Erian, which correctly posited that if fiscal policymakers choose to ‘sequester’ (read: cower in foxholes and let others do the fighting against the enemy forces of deflation) then the central bank’s monetary policy—like QE—is the POLICY OF LAST RESORT.

Rather than the Bank of Japan’s QE strategy ‘failing’, right now QE is the only thing that is stopping the Japanese economy from falling into a deflationary death-spiral dive. Just like America’s monetary policymakers were able to successfully perform life-saving triage to the US banking system after the credit crisis struck; Japan’s monetary policymaker anesthesiologists are keeping the patient (the economy) in an induced coma—doing the best they can to buy time with QE & QQE—until fiscal policymaker surgeons show up and do the needed procedures that actually gets the patient back to strong health.

Instead, Japan keeps losing steam. Japan’s GDP last year ($5.17T) was less than it was in 1995 ($5.45T). Japan was passed as the world’s second-largest economy by China in 2010 and today China keeps passing Japan in other ways (larger UN contributor, larger importer of natural gas, etc). Keystrokes (the BOJ buying bonds / the BOJ buying stock funds / the BOJ keeping short-term rates negative and the 10yr rate at zero percent with ‘curve control’) is not enough to get Japan back on track. Instead of more keystrokes, Japan needs creative pen strokes (simple adjustments to immigration laws / labor laws / corporate laws, etc). Until then, as Steve Keen writes in his 2017 book titled ‘Can We Avoid Another Financial Crisis?’, “Japan now features in popular culture as a cautionary tale about fading stars rather than rising suns”.

Note: Don’t get me wrong, I’m rooting for Japan. After living in the paradise city of Tokyo while working for a ‘shoken kaisha’ for 14 years; and even better, meeting my wonderful wife of 25 years there, I would love to see Japan make a comeback. Until then, fellow MMTers, let’s not kid ourselves. Japan’s BOJ is at the point now where they have to save their economy by creating an illusion of financial (public) activity. After all these years, Japan’s BOJ is still doing QE. In addition, the BOJ has negative short-term rates…plus the BOJ is doing ‘curve control’ (the BOJ’s trading desk has kept the 10yr Japanese Gov’t Bond price trading at 0% yield)…plus the BOJ is buying stock funds. In other words, this is not just normal central bank ‘guidance’ in response to a financial crisis (like the Fed’s QE was)—this is literal control, or as per Jesper Koll, Japan head of U.S. asset manager WisdomTree puts it, this is more like “a new form of financial socialism”.

Rather than being a fake MMT poster child, Japan is a pure MMT case study of why, from the very start of economic troubles, PEN STROKES, not more keystrokes, are the needed solutions to grow an economy.

Don’t take my word for it. On 03/15/19, when asked about MMT, Japan’s central banker, BoJ Governor Kuroda said “I think it is an extreme argument that won’t be accepted widely.”

If you’re looking for a pure MMT ‘poster child’, here you go:

“I am going to say something that will offend both sides of this debate, but Trump is the most MMT-like-President ever elected.”—Kevin Muir, the MacroTourist, ‘TRUMP: THE FIRST MMT PRESIDENT’, Feb. 2019 (Mr. Mosler tweeted “Nice to see MMT articles like this.”)

“There’s no economic reason for raising taxes—and that’s been our position all along. To say you can’t do anything, because everything has to be ‘payed for’, or that ‘you are going to have to raise taxes’—meanwhile, these guys, are running the tables.
They’re doing defense spending—no ‘pay fors’. 
They’re doing a trillion in tax cuts—no ‘pay fors’. 
They’re going to come along with a tax cut 2.0—no ‘pay fors’. 
They’re going to give money for a wall—no ‘pay fors’. 
They’re already there.” /
“One of the funny things that happened is that in a way, the Republicans…kind of advanced the MMT agenda.”—Stephanie Kelton, The Second International Conference of MMT, Sept. 28, 2018 / Presidential Lecture Series Oct. 15, 2018 
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77DIF MISINTERPRETATION #35: “US taxpayers do not fund the US government. The US government funds US taxpayers. All dollars used by the US private sector to pay federal taxes come from the US federal government.”

Fact: All dollars used by the private sector to pay federal taxes DO NOT necessarily come from the US federal government.

Unbeknownst to those in the MMT kiddie pool who wear those ‘all dollars used to pay taxes come from the government’ floaties, under the Taxpayer Relief Act of 1997, federal taxpayers can pay with a credit card.

The federal gov’t is the sole monopoly ‘issuer’ of dollars, but the MMT community often misinterprets that with meaning the federal gov’t is the sole monopoly ‘supplier’ of dollars.

Using their logic, if the total national ‘debt’ (all 22 trillion dollars that was created and entered into existence by the federal gov’t), was all completely ‘destroyed’ (taxed back), then there would be no money left to pay taxes. Which is nonsense—and why fake MMTers cannot get the ‘prescriptions’ taken seriously by experts in the field (because they can’t get the pure ‘description’ MMT right).

The pure MMT insight is that, when switching from a gold-backed currency to a fiat currency, the order of funding operations also switched. Unlike a ‘user’ of dollars, the monetary sovereign now doesn’t have to ‘collect’ (its own) money first. In fact, the federal gov’t doesn’t even have to collect any of its own dollars at all to fund spending; however, the paradigm difference is that the funding function took a back seat to other functions—like maintaining demand for the currency, maintaining price stability and the political functions.

The US government funds the US taxpayers first and then the US taxpayers fund the US government right back. That’s it—there’s no need to ‘create’ anymore MMT out of that.

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Seventy Seven Deadly Innocent Fraudulent MMT Misinterpretations (#36-42)

77DIF MISINTERPRETATION # 36: The Job Guarantee is like the WPA of yesteryear.

Fact: The Job Guarantee is NOT like the WPA of yesteryear.

To play along with fakeMMTers, not only do you have to pretend the federal ‘job’ guarantee is like the WPA, one must also ignore all facts, math & data. For example, you must close your eyes and ears to all those record-breaking jobs figures and only think about those depression-era black & white images of *actual* involuntarily unemployed people standing in soup lines. Just like the sad and discredited ideology of political extremism is deeply-rooted in the total ignorance of both human history and human nature; fakeMMTers are constantly making things up to fit their narrative.

“The proposed MMT Job Guarantee (JG) pays a fixed wage with benefits. The most quoted wage is $15/hr. All workers in the JG are paid the same in all areas of the country. Aficionados of the JG are fond of comparing it to New Deal style work programs. The Work Progress Administration (WPA) was the main program that was responsible for building the infrastructure, some of which is still in use today. Job Guarantee advocates will make sure to point that out to prove the overwhelming success of the New Deal 1930s Work Progress Administration. Yes, it did some excellent work in its time and place in history. Job Guarantee supporters leave out one small detail. The Work Progress Administration (WPA) did not set a fixed Nationwide wage and the wage varied based on skills of the worker. The WPA Division of Employment selected the worker’s placement to WPA projects based on previous experience or training. Worker pay was based on three factors: the region of the country, the degree of urbanization, and the individual’s skill. It varied from $19 per month to $94 per month, with the average wage being about $52.50—$934.00 in present-day terms. The goal was to pay the local prevailing wage. Basically, the Job Guarantee is not like the WPA of yesteryear…”—Charles ‘Kondy’ Kondak.
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77DIF MISINTERPRETATION # 37: “Spending & taxation are separate & independent operations.”

Fact: Spending and taxation are interdependent operations that are intentionally coordinated.

When debating Bloomberg columnist Noah Smith (who was mocking the fakeMMTer mantra that everything THEY want can be ‘paid for by MMT’), Pavlina Tcherneva tweeted on 02/07/19 that “spending & taxation are separate & independent gov’t operations.”

However (and as usual), one quote from one MMT academic doesn’t quite square with other quotes from other MMT academics:

“The gov’t chooses to coordinate spending & taxation in order to mitigate the impact on bank’s reserve positions and interest rates…This interdependence is not de facto ‘financing’ role for taxes.”—Stephanie Bell, ‘Can Taxes and Bonds Finance Government Spending?’ Jerome Levy Economics Institute Working Paper No. 2441998, July 1998

These mixed signals between the pure MMT (how capitalism works) and the fake MMT (how to dismantle capitalism)—that’s the ‘separate independent operations’.

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77DIF MISINTERPRETATION #38: “Don’t say ‘Federal taxes don’t fund federal spending’. Instead say, ‘Federal taxes do not need to fund federal spending’. Translation: Don’t tell me that I am an asshole. Instead say, I don’t need to be an asshole.”—Ellis Winningham, 09/06/18

Fact: “Don’t say that ‘federal taxes don’t fund federal spending’. It’s better to say that federal taxes are not needed to be able to spend, not that it doesn’t fund it.”—Warren Mosler, MMT conference closing remarks, 09/24/17

To be fair, Mr. Winningham is just not yet grasping the pure MMT insight and probably doesn’t think that Mr. Mosler is an asshole for (correctly) advising the MMT community that it’s better to say that federal taxes do not need to fund federal spending—not that they don’t at all.

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77DIF MISINTERPRETATION #39: “If the private sector wishes to run surpluses, the federal gov’t must run deficits.”

Fact: If the private sector wishes to run surpluses, the federal gov’t does NOT have to run deficits.

The above quote (a 02/14/19 tweet from Pavlina Tcherneva responding to Bloomberg columnist Noah Smith) is a common misinterpretation made by most of the MMT community. The real culprit is that Sectoral Balances chart which (correctly) shows that the amount of federal-gov’t deficits (the amount of money creation ‘debited’ out from the issuer of dollars) equals the amount of nonfederal-gov’t surplus (the amount of money creation ‘credited’ to the users of dollars). The problem is that the MMT choirs (as they often do) take that accounting identity of those Almighty federal-gov’t deficits as gospel—and call it a day.

The ‘federal gov’t must run deficits for the private sector to have a surplus’ is only correct if you ignore private-sector money creation. For example, it’s true in the Monopoly game because as per the Monopoly Game rules, ‘No Player may borrow Monopoly Money from another Player’—meaning that, unlike our actual monetary system, in the Monopoly Game there is no ‘horizontal’ private-sector money creation.

There are several reasons why the MMT community ignores private-sector money creation. Mostly it is because they are simply regurgitating the MMT academics, at best; or just confusing the federal gov’t as being the sole-monopoly ‘issuer’ of dollars with meaning that the federal gov’t is the sole-monopoly ‘supplier’ of dollars, at worst. MMTers still haven’t yet grasped the concept that Net Financial Assets CAN and DO come from the private sector as well—as Mr. Mosler, a former bank owner, attempted to explain to MMTers (but to no avail because it doesn’t fit the ‘more federal deficits to the rescue’ narrative). In order for political ‘prescription’ MMTers to reach their goal of dismantling capitalism and replacing it with a cradle-to-grave welfare state, they need people to believe that federal-gov’t money creation is the only solution for all the problems. MMTers even go as far as renaming money that is created in the private sector as ‘lookalike IOUs’ or even place private-sector money creation ‘lower’ in a ‘hierarchy’ of money. In short, ‘if the private sector wishes to run surpluses, the federal gov’t must run deficits’ becomes ‘true’ as long as it pushes for more federal deficits (which pushes the MMT community over a cliff).

Note that the same MMTers who believe that ‘if the private sector wishes to run surpluses, the federal gov’t must run deficits’ struggle to believe the opposite. For example, just like during the Clinton surplus years (when the private sector paid more in federal taxes than the federal gov’t spent), these same MMTers hide their Sectoral Balance charts and stop talking about accounting identities. What then becomes ‘true’ in the fake MMT kiddie pool is that during those years (when the private sector ran deficits) there was no federal-gov’t surplus of dollars because ‘Those tax dollars were destroyed’ / ‘There’s no such thing as tax dollars at the federal level’ / ‘The federal gov’t neither Has or Doesn’t Have dollars’. 
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77DIF MISINTERPRETATION #40: Federal gov’t deficits do not ‘crowd-out’ investment.

Fact: Federal gov’t deficits do ‘crowd-out’ investment.

Abba Lerner developed the principles of Functional Finance (1941, 1943, 1944, 1948, 1951, 1961, 1973) which argued that government policy should be designed to obtain maximum employment and price stability regardless of whether it increased or decreased public debt by debunking the ‘burden of the debt’ and ‘crowding out’ arguments used against deficit spending. In Paul Krugman’s recent NYT’s OpEd piece he wrote “I am not a fan of MMT which is basically Abba Lerner’s ‘functional finance’, which while clever, missed some possibly important things”.

One of those important things Paul Krugman meant is that we shouldn’t buy into that ‘deficits do not crowd out investment’ part. “If you think that the magic of heterodox monetary thinking somehow means that deficit spending is never inflationary, or crowding out never happens, or something, you don’t understand the functional finance that MMT advocates themselves claim underlies their doctrine,” he added.

If interest rates go up (if the Fed is raising rates because the economy is getting stronger), more people are normally inclined to move their investment dollars from risk-on to risk-off to change portfolio weighting into safer bonds paying a satisfactory amount of fixed income—which is a kind of ‘crowding out’ (that is intentionally done by the Fed to lift its foot off the accelerator).

Another example is that as interest rates go up, more federal spending, which is budgeted (which is politically constrained) is diverted towards servicing the ‘debt’. In FY 2017 federal debt service was 7% ($275B) of total spending ($4T) and projected to be at least 10% ($500B) in 2020. Meaning that more dollars are going for less-productive uses (going to the 5%) and are potentially ‘crowding out’ federal spending for the functional economy (for the 95%).

“The Loanable Funds Model states that there is a fixed pool of money that federal gov’t deficits compete with for non-federal gov’t borrowing, which is the same as saying that federal gov’t deficits crowd out private-sector investment. In my estimation this is false as far as it goes. However, there are other forces at play that makes this whole line of thinking somewhat specious as federal gov’t deficits do affect private-sector borrowing once we take interest rates into account. When interest rates rise it compresses private-sector profit margins, such that companies begin to cut back on borrowing. This happens when the Federal Reserve is in a raising interest rate mode, usually because they see the incipient risk of inflation. The raising and lowering of interest rates by the Federal Reserve does affect the cost of borrowing (credit) in the economy. If the federal gov’t is pumping increasingly large deficits into an economy that is near or at full capacity it will add to inflationary pressure, at least to some degree. If the Federal Reserve raises rates some more, then profit margins compress even further. Meaning that the private sector is borrowing less as the public sector is borrowing more. Hence there is nothing left to call it, but the crowding out of private sector investment by running increasingly large deficits when the economy is doing well.”—Charles ‘Kondy’ Kondak
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77DIF MISINTERPRETATION #41: The deregulation of natural gas prices—not Paul Volcker’s rate hikes—broke the back of the 1970s inflation.

Fact: Paul Volcker’s rate hikes—not the deregulation of natural gas prices—broke the back of the 1970s inflation.

Nat Gas deregulation accounted for the breaking of the back of the 1970s inflation—and not Volcker’s rate hikes (?) I don’t seem to remember folks sending 2 x 4s to any natural gas companies (!)

“Most MMTers say that the deregulation of natural gas prices created a massive demand shock for oil (as U.S. utilities switched from oil to natural gas), which destroyed OPEC’s pricing power and broke the back of the 1970s inflation. They even go as far to say that then-Fed Chair Paul Volcker’s rate hikes were actually counterproductive; however, for that thesis to be correct, one would expect a surge in natural gas consumption. As per the facts, math & data, natural gas consumption fell from 22.1 million cubic feet in 1972 to 16.2 million cubic feet in 1986 (26% decline). Meanwhile, the inflation rate in 1980 was 13.5% and fell to 1.9% in 1986. Meaning that based on both the natural gas consumption and the inflation rate data, it can safely be said that natural gas deregulation did NOT play a role in breaking the back of OPECs oil pricing power nor the inflation of the 1970s.”—Charles ‘Kondy’ Kondak

Yet another deadly innocent fraudulent mmt misinterpretation—just another yarn to go along with ‘the Fed is counter-productive’ / ‘the Fed has the pedals backwards’ / ‘the Fed creates inflation by raising rates’ that fits the anti-central bank narrative that plays so well in the ‘modern’ monetary community during The Longest United States Economic Expansion In History (thanks to the Fed).
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77DIF MISINTERPRETATION #42: Loans create deposits.

Fact: Bonds create loans create deposits.

Similar to the 20th century switch on Wall Street from ‘physical delivery’ of securities (when stock certificates & bearer bonds literally changed hands); to securities becoming electronically ‘registered’ (the present system where stocks & bonds only exist as ledger posting, aka ‘book entry’), the MMT analysis is that the same thing also happened to currency.

Once upon a time, all transactions were settled with cash on the barrel-head, using valuable coins made of gold or silver (‘metalism’); until the concept of extending credit (the ‘value’ of creditworthiness) came along, and then transactions were settled with postings on a centralized ledger (‘chartalism’).

One example of using credit was using ‘tally sticks’ in England during the Middle Ages, where transactions could be settled without any currency up front. The buyer’s indebtedness to the seller was recorded with markings on a tally stick—the precursor to today’s postings (‘points’) on a ledger (on a ‘scoreboard’). One could safely argue that the innovation of tally sticks was the beginning of the end of ‘metalism’.

In other words, to this day, instead of buyers & sellers needing to settle all transactions by physically handling dollars, those dollars can instead be transferred electronically as corresponding assets (+$) and liabilities (-$) being entered on a balanced spreadsheet, like ‘points on a scoreboard’. Today, when the federal gov’t deficit spends, it is recorded as a liability (-$) and since there’s no such thing as a ‘negative dollar’, that’s where the MMT refrain ‘The Fed doesn’t Have or Not Have dollars’ comes from.

However, the politically-extreme MMTers, also to this day, takes that analogy (that refrain) too literally and they fail to grasp that those ‘points on the scoreboard’ are denominated in dollars. Meaning that, just because those dollars went from a metal form (gold coin) into chart form (tally stick) doesn’t mean that there are no dollars involved ‘AT ALL’. These same folks who say ‘Taxes don’t fund spending AT ALL’ are now also regurgitating ‘There’s no such thing as tax dollars on the federal level AT ALL’—and have no idea how ridiculous they sound. Despite the evidence to the contrary, these deadly innocent fraudulent MMT misinterpretations are often repeated to fit their political ‘prescription’ narrative. It is also a form of character assassination because when trying to dismantle capitalism, one must first dismantle the ‘evil’ capitalist ‘notion’ that a federal ‘taxpayer’ exists (so that no one AT ALL can ever again have the audacity to question how federal tax dollars are spent).

Just like those tally sticks of yesteryear (and just like those newly-created ‘points on the scoreboard’ today), the pure MMT insight is that for both the federal gov’t and the non-federal gov’t (read: for absolutely everyone), all money creation begins at the moment that someone (someone with good credit) promises to pay someone else back. For example, your promise (your guarantee) to pay money to a vendor after a certain period of time (maturity term), at a certain cost (principal + interest rate), is your ‘bond’. Whenever deficit spending, that ‘bond’ is the origin of all money creation. Your ‘IOU’ is the asset that you are ‘selling’ in exchange for whatever asset the vendor is selling you. That IOU, that creation, denominated in dollars, represents the net addition of assets entering the banking system (aka ‘leveraging’); and the opposite, when that IOU is paid off, is the destruction of assets exiting the banking system (aka ‘deleveraging’). DO NOT confuse that *actual* expansion (creation) and that *actual* contraction (destruction) of the banking system with federal taxation (with SURPLUS spending)—which is only a transfer (which is only a ‘drain’) of previously-created dollars ebbing and flowing (to and from) money supply circulation.

Also note that any bank (whether it is the Federal Reserve Bank or a small community bank) is only acting as a financial-intermediary middleman (a broker) between the primary players (counterparties) involved in all money creation—the buyer & seller. In other words, to fully-understand how and when newly-created money is conceived, it is better to instead focus on that promise, that guarantee, that ‘bond’ creation, as the initial step. For the federal gov’t, once Congress authorizes more issuance of Treasury bonds to deficit spend on approved expenditures, Congress is ‘printing’ the money—not the Fed; and the same goes for the non-federal gov’t, when deficit spending, you and I are ‘printing’ the money when we sign off on it—not the private bank. The Fed and the private banks are only FACILITATING our ‘printing’ of money.

Unlike the federal gov’t, the rest of us in the private sector are users of dollars. So unlike the issuer of dollars, if we want to deficit spend, we still need to first get dollars from the issuer (or an agent of the issuer). The MMT insight is that in the post-gold standard, modern monetary system (using fiat dollars) whenever deficit spending, the private sector doesn’t borrow existing bank reserves, the dollars are newly-created.

Which is a money creation process that starts with our newly-created BONDS—conjured up out of thin air and backed not only by the full faith in the value of our creditworthiness but also by the confidence in the value of our future economic prospects—which next CREATE LOANS, which then CREATE DEPOSITS of dollars.

________________________________________________________________

________________________________________________________________

FROM DOWN UNDER here’s another seven MMT misinterpretations:

John Adams (Chief Economist at ‘As Good As Gold Australia’, an Adelaide based gold and silver dealership where he regularly contributes political, cultural and public policy commentary for the Daily Telegraph, the Spectator Australia, the Canberra Times and the Australian Business Executive): Some of the claims by the proponents of MMT are quite fanciful and why I recently wrote my OpEd titled ‘The Madness Of Modern Monetary Theory’.

Martin North (Principal of Digital Finance Analytics, a consulting firm providing advisory services, primary consumer research, industry modelling and economic analysis to companies in Australia and beyond): Let’s go through some of the claims by MMT proponents and the Australian members of parliament who are subscribing to the theory.

John Adams: The proponents of MMT—the biggest proponent of MMT here in Australia is Prof. Bill Mitchell—would have you believe that MMT is a comprehensive theory to address a specific problem.

Martin North: Let’s talk about Prof. Bill Mitchell’s claims in his presentations.

Seventy Seven Deadly Innocent Fraudulent MMT Misinterpretations (#43-49)

77DIF MISINTERPRETATION # 43: The macroeconomics taught in Australian universities is ‘fake knowledge’—that academics are teaching ‘lies’ and the research produced by academic economists is neoliberal ideological ‘propaganda’.

Fact: “It’s not true. Sure, some things taught today are wrong and you need to unlearn them but the professor is asserting his theory to undermine the entire economics profession. He is trying to say that you’re all wrong and you need to think of something different.”—John Adams
__________________

77DIF MISINTERPRETATION # 44: A federal gov’t budget is not equivalent to a household budget.

Fact: “If the people see that the gov’t budget is not the same as a household budget (that there is no traditional constraints), then ultimately people won’t accept the unit of currency that the gov’t is paying (which is precisely what is happening in Venezuela). So in ‘theory’ the gov’t can continue to spend—until in reality it can’t.”—John Adams

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77DIF MISINTERPRETATION # 45: A currency issuing gov’t can never run out of money and never has to fund its spending.

Fact: “Saying that a currency issuing gov’t can never run out of money and that it never has to fund its spending is making the point to advance a different set of priorities. When you get a gov’t that keeps spending money, it can become a problem.”—John Adams 
________________

77DIF MISINTERPRETATION # 46: For the non-gov’t sector to save, the gov’t needs to run continual budget deficits; and continuous deficits won’t be inflationary, as long as if it maintains that proportional relationship between spending and productive capacity.

Fact: “The gov’t does not necessarily have to spend in order for the non-gov’t to save. Look at Singapore. What a unique story. Singapore went from a third-world country after gaining independence from the British in 1965, to a first-world country within a single generation. Part of the reason why Singapore’s private sector jumped to first-world status was the high (40%) rates of private-sector saving. Then they were able to reinvest their savings into productive investments, create competitive companies and create even more wealth. Singapore proves that public-sector spending has little to do with private-sector savings. Furthermore, that arbitrary rule that if the growth of spending keeps pace with the growth of production (the supply side of the economy), then you are not going to have any growth of inflation. Traditional Keynesian theory is that you will avoid inflation as long as resources that were previously underutilized are utilized, but that ignores the nature of inflation and the nature of money. Inflation is the growth of the money supply. When you finance deficit spending (when you ‘print’ the money), you devalue the currency and that’s where the inflation comes from. MMT doesn’t recognize that point at all.”—John Adams
____________________

77DIF MISINTERPRETATION # 47: “The gov’t ultimately chooses the unemployment rate (because tomorrow the gov’t could engineer full employment by starting a federal Job Guarantee program but the gov’t chooses not to have full employment).

Fact: “There are a number of things that are wrong with the thinking that the gov’t can choose the rate of unemployment or reach full employment by spending willy-nilly. In ‘theory’, you could employ idle people to reach full employment in the short run; but, in the long run, you can’t square trading-off increasing debt just to hire idle people in unproductive jobs.”—John Adams
___________________

77DIF MISINTERPRETATION # 48: Hyperinflation in Weimar and Zimbabwe was not caused because of excessive money printing but because of a fall in productive output.

Fact: “Hyperinflation is when you print too much money. When you print too much money, you devalue that money; and how much you devalue that money depends on how much printed money is pushed into the system. If it’s pushed through the private banking system then you will have excessive private-sector debt levels—you’re going to have bubbles (like in the Australian housing sector now). Money printing can also be pushed through the public sector, like Japan’s QE, just look at the proportion of their gov’t debt vs. GDP—which is over 250%. China’s printing push is in their private financial sector and the US push is in their corporate sector, etc. As per MMT, that hyperinflation in Weimar Republic (WWI Treaty of Versailles imposed restrictions on rural manufactures in western Germany resulting in a massive drop of industrial production); and the country of Zimbabwe (Black Freedom Fighters in southern Africa breaking the yoke from British Colonialism getting rewarded with confiscated farms resulting in a 60% drop in farm output) was not caused by excessive money printing but instead by a fall in productive capacity in the economy. That argument is completely wrong and fallacious. For example, in 2006, Australia had a massive cyclone in Queensland (the nation’s largest growing region which produces 95% of Australia’s bananas) which wiped out about 80% of the banana crop (more than the productive drop of Zimbabwe). Before the cyclone, the price of bananas was about $2 / kilo and after the cyclone the price climbed above $14 / kilo. That’s a rate of inflation of 600% due to the drop in the production of bananas compared to Zimbabwe which suffered inflation of 231 MILLION percent (!) Granted that my Queensland banana example is just one crop, but if all of Australia had a 60% drop in production, would that result in 231,000,000.00 % inflation (?) The answer is no. That 1923 hyperinflation in Germany was over 300% PER MONTH; so again, if Australia had a similar drop of industrial production, just that productive output factor alone would certainly not result in that much inflation.”—John Adams
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77DIF MISINTERPRETATION # 49: Involuntary unemployment is a great economic evil and MMT solves that problem.

Fact: “Another specific problem that MMT is most concerned about is ‘involuntary’ unemployment, meaning people who want a job who can’t get a job (or ‘forced’ to be unemployed). MMT says that there are people who want a job and can’t find a job or want more hours. To solve that particular problem, MMT believes the federal gov’t that issues the currency should employ a Job Guarantee program to reach ‘full employment’. MMT then makes a series of claims (MMT skirts around the questions) of what exact jobs these will be or how you will maintain the value of the currency. This JG program is the biggest issue I have with the MMT theory.

What they don’t talk about, is that when you print all this money and employ all these people in a JG, what kind of structural imbalances do you create in the economy (?) They say nothing about what happens if you expand the money supply, if you employ idle labor, if you’re going to see some bubbles in parts of the economy, etc. They say nothing about the productivity of the work that’s being done for the gov’t or if the work by these newly-employed is useful to society. If you want full employment, rather than this massive gov’t program, how about just do something about private sector regulations—like adjusting labor laws and/or modifying the corporate laws, etc (?)

If you want to improve Australia, rather than looking at MMT, like I mentioned already, we should just instead look at Singapore. They have 2% unemployment with no minimum wage. They run with basically balanced budgets. They have little or no welfare state benefits. They have very low taxes. You don’t need MMT to reach this pathway. If we want to prepare for crisis in the coming years, instead of simply tweaking existing laws, should we just print more money and not worry about any consequences to our society—not worry about the value of our money (?)”—John Adams

Thanks for reading & keep it pure,

Pure MMT for the 100%https://www.facebook.com/PureMMT/

Follow MINETHIS1 and his REAL MACRO instructors at https://www.facebook.com/InvestingMMT/

Fellow MMTers: Be an MMT user, not an MMT issuer.

P.S.

02/26/19

Regarding hyperinflation: “The notion that no sovereign currency issuer fails to pay debts denominated in their own currency so deficits are never problematical ignores two realities. One, every hyperinflation has a deficit component. Two, when nobody wants your money you end up incurring debt in other nation’s money, which you can’t pay back.”—Mike Morris

Regarding crowding out: “Will Social Security go bankrupt unless we start effectively managing it (?) Let me say it this way. What happens over time is that we wind up spending more and more of our precious revenues to service the debt as opposed to investing in the things like education and the other things we need so we can compete in the global economy.”—Jerome H. Powell, Chairman, Board of Governors of the Federal Reserve System, Semiannual Monetary Policy Report to Congress and testimony to the Senate Banking Committee

The Down Low on the Shut Down

The Total Public Debt Outstanding, aka ‘the national debt’ (approx $22 trillion) includes the total principal amount of marketable and non-marketable securities currently outstanding.

Marketable securities, aka ‘debt held by the public’ (approx $16 trillion) include Treasury bills, Treasury notes, Treasury bonds and Treasury Inflation-Protected Securities (TIPS), all of which are ‘commercial book-entry’ and can be bought and sold in the secondary market at prevailing prices.

Non-marketable securities, aka ‘intra-government holdings’ (approx $6 trillion) include savings bonds as well as special securities called Government Account Series (GAS) issued only to local governments, state governments and Federal trust funds (payable only to the persons or entities to whom they are registered such as Social Security).

The Total Public Debt Subject to Limit (the ‘debt ceiling’) is the maximum amount of money the federal government is allowed to ‘borrow’ (the amount of deficit spending allowed to be financed with net additions of $$$ into the banking system) under the authority granted by Congress.

In 1917, Congress, pursuant to the Second Liberty Bond Act, for the purpose of expediency, delegated authority to the Treasury Department to ‘borrow’ without needing to seek congressional authority—subject to a limit (ceiling) previously set by Congress.

“The debt ceiling law was a historical accident. At some point, it dawned on legislators that approval of the debt ceiling could be used as a bargaining chip. Debt ceiling deadlocks soon became much more dangerous.”—Ben Bernanke

The debt limit (debt ceiling) is the total amount of money that the federal government is authorized to deficit spend including Social Security checks, Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.

Congress imposes a debt ceiling on the ‘statutory debt’. The statutory debt is a little less than the total outstanding U.S. debt that is shown on the national debt ‘clock’ (it is the outstanding ‘debt’ after adjustments like unamortized discounts, old debt, guaranteed debt and debt held by the Federal Financing Bank).

The debt limit does not authorize new spending commitments—it simply allows the federal government to finance existing legal obligations that Congresses and presidents of both parties have already made in the past. Failing to increase the debt ceiling would be a ‘full’ government shut down (which has never happened in American history because it would cause the government to default on its legal obligations causing catastrophic economic consequences).

Rather than being a full shutdown, this shut down, like any other shutdown, is ‘partial’ because 75% of federal government funding has already been approved for the budget (fiscal) year that started in October 2018. Meaning that only 25% of government agencies no longer have the necessary funding to keep operating.

In a partial shutdown, federal agencies must discontinue all non-essential discretionary functions until new funding legislation is passed and signed into law. Essential services (i.e. related to public safety) continue to function, as do mandatory spending programs not subject to annual appropriations because those are already authorized either for multi-year periods or permanently (i.e. Social Security, Medicare and Medicaid payments).

A year ago, on February 9, 2018, as part of a two-year budget deal (that raised both defense and domestic spending), President Trump signed a bill suspending the debt ceiling until March 1, 2019 (and why the ‘Current Statutory Debt Limit’ on the enclosed graph says ‘$0’).

On March 2, 2019, the debt ceiling will be reinstated at whatever the debt level is at that time (likely around $22+ trillion).

Come March 2, same as in recent years, until the debt ceiling is raised again by Congress, the Treasury Department will delay any fiscal crisis by deploying so-called ‘extraordinary measures’ to continue paying the federal government’s bills after the debt ceiling has been reached using incoming cash flow (i.e. using federal tax revenues).

As for right now, this is the third time that the federal government has partially shut down since President Trump took office. The government partially shut down for three days in January 2018 after an impasse in the Senate over federal funding. The standoff ended when lawmakers passed a short-term spending bill. Less than three weeks later, the government partially shut down for a second time after Congress failed to pass a spending bill to keep the agencies running. That shutdown was the shortest one on record. It lasted less than six hours and ended when lawmakers passed a six-week spending bill. Congress passed a short-term funding bill in late September 2018 to give them time to finish their work.

Many federal government agencies and programs rely on annual funding appropriations made by Congress. Every year, Congress must pass and the President must sign budget legislation for the next fiscal year, consisting of 12 appropriations bills (discretionary funding), one for each Appropriations subcommittee.

When the last fiscal year ended on Sept. 30, 2018, Congress had passed just five out of 12 appropriations bills (setting discretionary spending levels). That short-term bill went through midnight December 7, but after former President Bush died – which led to a national day of mourning and a state funeral – President Trump and lawmakers agreed to extend the deadline through December 21.

Lawmakers had until midnight on December 21 to enact legislation to fund the programs covered by the remaining seven appropriations bills—the deadline specified in the most recent ‘continuing resolutions’ (which temporarily funds the federal government in the absence of full appropriations funding bills) that these programs had been running on.

Note that all this differs from a ‘sequestration’ which is reductions in caps constraining the total amount of funding for annually-appropriated programs.

On December 20, the Senate declined to even vote on a short-term spending package containing $5 billion of southern ‘border wall’ funding knowing it could not get the 60 votes needed (could not get some Democrat senators to support it). This type of legislation can be filibustered and requires 60 senators to end a filibuster—to overturn a procedural objection to a provision believed to be ‘extraneous’ (in this case, a border wall).

In a tweet sent on the morning of December 21, President Trump urged Senate Majority Leader Mitch McConnell to ‘go nuclear’ (abandon Senate rules and allow a simple majority of 51 Republican senator votes to end a filibuster), which was an idea that McConnell rejected. President Trump had seemed to be willing to sign a ‘clean’ spending bill (with no wall funding) but sharply changed course and let the government shut down at midnight.

President Trump allowed the short-term funding to lapse and the shut down to begin just as he insisted in that December 12th Oval Office meeting (with then-incoming House Speaker Pelosi & Senate Minority Leader Schumer) that he would be ‘proud’ to shut the federal government down if he didn’t get the $5B he demands for a border wall with Mexico.

Thanks for reading,

Pure MMT for the 100%

https://www.facebook.com/PureMMT/

P.S.

UPDATE (coincidentally just a few hours after this was posted) :

On January 25, 2019, President Trump announced a deal to reopen the federal gov’t for three weeks (until February 15th) ending a 35-day partial shutdown (now the longest in history) without securing any of the border wall money he had demanded.

P.S.S.

01/26/19:

“It’s not over. The GOP still controls the Senate. The Dems will make some serious concessions to border security before all is said and done. One thing the Left is conveniently ignoring is the Wall GoFundMe which collected 3 times the money that Sanders’ supporters contributed to his POTUS run in 2016.”—Mike Morris

Agreed Mike…Speaker Pelosi won that round impressively but like my dad used to say, ‘It’s a 12 round fight’.

Politics aside, for Pure MMTers, that GoFundMe which Mike Morris mentioned, is another perfect example of using creative pen strokes, not keystrokes, to unlock would-be unproductive savings dollars and looping them back into the functional economy—the modern monetary solution needed in an age of PayGo and rising wealth inequality fed by ‘more deficits’. 

Another thing that the entire MMT community ignored (or completely missed) is that there has been NO DEBT LIMIT for almost a year. This is yet another glimpse of the future, where the Modern Monetary ‘Formality’ of having a debt limit is disposed of and the Modern Monetary Theory enters the final stages to become the Modern Monetary Reality.

Politics Makes Strange Bedfellows

Politics makes strange bedfellows (like when ‘description’ MMT hooks up with ‘prescription’ MMT).

Warren Mosler on a Real Progressives broadcast a year before the 2018 US gubernatorial (midterm) elections:

“How are Treasury securities paid off (?)—the Fed just shifts the dollars from securities accounts at the Fed to reserve accounts.”

NOTE: Mr. Mosler says that THOSE dollars are ‘shifted’. However, when talking about paying federal taxes, when talking about dollars that go to the Daily Treasury Statement account at the Fed—the same account where all federal spending is drawn—he says otherwise. In the case of taxes, Mr. Mosler prefers to say that those particular dollars are ‘shredded’.

“Paying off the debt is just a matter of shifting dollars from somebody’s savings account to their checking account, the Fed does that every month for like $50B when the bonds come due, and there are no grandchildren or taxpayers in the room when that happens.”

NOTE: Mr. Mosler is conflating ‘rolling over’ those Treasury bonds (aka ‘revolving’ the debt), where no taxpayers are involved, with ‘paying off’ the bonds for good, where taxpayers ARE MOST CERTAINLY involved (where prolonged budget surpluses are involved). Similar to the circuitous route of federal tax dollars, that redistribution of bonds from one bond investor to another bond investor, also doesn’t fit the political ‘prescription’ MMT narrative.

“Of course it couldn’t be a problem, that’s complete nonsense, I’ve been hearing that for 45 years, it’s just a reserve DRAIN at the Fed and everybody inside the Fed knows this, they know it’s not a funding operation.”

NOTE: So Mr. Mosler, a seasoned Main Street banker, a successful Wall Street trader and now a national political player, seemingly does know the difference between a dollar ‘drain’ (paying federal taxes / lowering of deficits) vs. a dollar ‘destruction’ (paying off Treasury bonds / lowering the national debt)—as well as everybody inside the Fed knows. Which is why, when convincingly explaining the ‘description’ (the Pure MMT), he can also seductively whisper those sweet nothings of ‘prescription’ (the pillow talk MMT).

Thanks for reading,

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When ‘Chartalists’ (aka MMTers) confuse credits & debits with creation & destruction

The payment of federal taxes is not a ‘destruction’ of dollars.

The payment of taxes is a drain of $$$ to the Daily Treasury Statement (DTS)—the same exact account where all federal spending is drawn.

Only Congress can ‘destroy’ $$$—only Congress can reduce the Net Financial Assets (NFA) that Congress created.

Even if you burned a dollar bill to a crisp, you wouldn’t change the numbers on the ‘scoreboard’.

However, if you burned your mortgage (your ‘bond’ that you previously created), THAT’S A DESTRUCTION.

Think about a pumping heart. The blood is flowing out of that heart—to somewhere else—it’s not getting ‘destroyed’.

Rather than ‘keystrokes’ that fund surplus spending followed by the subsequent collection of federal taxes, what actually expands & contracts money supply circulation (the pumping heart of the economy) is the creation & destruction of bonds (aka leveraging v. deleveraging).

Rather than being ‘bulletproof’, political ‘prescription’ MMT is rendered with bullet holes—and they are all self-inflicted. Here’s some more holes:

MMTers (who are supposed to be good at being ‘chartalists’) are confusing credits & debits (‘postings’ that are consolidations of ledger charts) with creation & destruction (net ADDITIONS into the banking system v. the deleveraging of that leveraging).

When deficit spending, the Treasury is ‘fronting’ the ‘newly-created’ money via its Daily Treasury Statement account at its central banking agent, the Fed.

For example, if deficit spending $1B today, the equal and opposite ledger entry to reconcile (to balance) that +$1B that is credited from the DTS to the accounts of whomever provisioned the gov’t is a debit of -$1B to the DTS. Next, the federal gov’t collects $1B in Treasury bond sales, meaning that tomorrow $1B is coming back out from money supply circulation—which is the main reason to sell the bonds (to maintain price stability by neutralizing the potentially inflationary-bias of deficit spending). That ‘newly-created’ $1B, credited to the DTS, brings both the DTS and the money supply back to where it was—meaning that so far it’s all a ‘wash’. The final step, the ADDITION, is when the federal gov’t keyboards $1B in ‘newly-created’ Treasury bonds to those investors who just paid for them. Those assets are the Net Financial Assets that are added (that are ADDITIONS) into the banking system.

Same goes for when a household deficit spends (wants to pay on credit), the financial intermediary (the bank) is ‘fronting’ the ‘newly-created’ money in exchange for your ‘newly-created’ promise to pay back the money with interest (your ‘bond’). Your newly-created bonds create loans create deposits.

MMTers shouldn’t confuse ALL these ‘newly-created’ assets flowing back & forth above as being ADDITIONS of NFAs.

Furthermore, it’s only a ‘destruction’ if Congress decides to pay off those federal bonds for good; and the same goes for a household, it’s only a ‘destruction’ if they pay off their ‘bond’—the opposite of the creation.

Just like all debts (household debt) are liabilities but not all liabilities (Treasury bonds) are debt; all destruction (paying off Treasury bonds) are debits but not all debits (federal taxation / Treasury bond sale collection) are a destruction.

Pen Strokes Not Keystrokes

FY 2017:

 
Step #1) Federal gov’t keyboards $3.315T & spends $3.315T. 


Step #2) Federal gov’t collects back $3.315T (of EXISTING dollars from taxpayers).


Step #3) Federal gov’t keyboards $.666T & spends another $.666T.


Step #4) Federal gov’t collects back $.666T (of EXISTING dollars from Treasury bond investors).

 
Note: So far it’s all a ‘wash’…


Step #5) Federal gov’t keyboards $.666T of Treasury bonds into existence and keyboards those assets, denominated in $$$, to the bond investors (Note that is a CREATION which is ALSO an ADDITION of Net Financial Assets into the banking system).

 
Those tax & bond collections are not a ‘financing’ function, but are instead a redistribution of $$$ serving a ‘price-stability’ function. Furthermore, rather than being a ‘financial’ constraint, those Treasury bonds serve as a ‘political’ constraint—meaning that the federal gov’t can shut down if policymakers don’t agree on spending.


Those tax & bond collections are just dollar ‘drains’, ebbs & flows, from different parts of the banking system and NOT a dollar ‘destruction’ from the entire banking system. 

This is not rocket science, this is ACCT 101, BANKING 101 and CIVICS 101.

Same as the private sector when ‘deleveraging’, for the federal gov’t it’s not a destruction until the opposite of the creation (THE ADDITION), which means it’s a destruction only if those bonds are paid off for good (if the bonds are put in the ‘shredder’) and the last time that happened was in 1957.

Jim ‘MineThis1’ Boukis was right all along. 

#FakeMMT has it completely backwards.

The pure MMT insight is that, operationally, federal taxes and Treasury bond sales ARE NOT NEEDED to fund spending—not that they don’t at all because tax & bond collections are ‘destroyed’. Fake MMTers saying ‘taxes don’t fund spending’ because taxes are ‘destroyed’ are trying to usurp the ‘Power of the Purse’ of Congress, at best; or they’re confused about how the post-gold standard, modern monetary system really works, at worst.

Fake MMTers are their own worst enemy—If you can’t get the ‘description’ right, then how can you expect constituents to trust that you are getting your ‘prescription’ right (How can you expect policymakers to fund—read: approve—your ‘prescription’)?

There’s a difference between a ‘scoreboard’ (used for political ‘prescription’ MMT metaphors) and an excel spreadsheet (used by the consolidated balance sheets of the United States federal gov’t).

“The ‘keystroke to every need’ crowd are nothing more than populists offering free candy to children that in the end rots their teeth. Resorting to a ‘keystroke-first’ approach shows a lack of thought and creativity. There are ways to get at the underlying problems with pen strokes not keystrokes.”—Charles ‘Kondy’ Kondak

Thanks for reading,

Follow us at Pure MMT for the 100% https://www.facebook.com/PureMMT/

Follow MINETHIS1 and his Real Macro instructors at https://www.facebook.com/InvestingMMT/

P.S.

03/01/19

Sometimes more creative pen strokes, and not just more keystrokes (especially if trying to address modern monetary problems) makes better solutions. Not to take sides in this twitter feud between Stephanie Kelton and Paul Krugman, but note that same insight in this particular tweet:

Another Seven Deadly Innocent Fraudulent Misinterpretations (#22 – #28)

Floating above the muddy waters, the lotus flower is a symbol of PURITY. The lotus plant has several meanings in Buddhism. The main one is that a lotus grows in mud, rises through muddy waters, bypasses attachment, shuns any desire, and once it has risen above the murk, the lotus flower blooms (it achieves enlightenment).

2018, what a year, and it sure was one for the Modern Monetary Theory books.

The year began with one of the MMT PhDs, telling us that “America was a junk economy” (and that was coming from someone with their degree IN ECONOMICS while we were only 15 months shy of officially entering the Longest Economic Expansion In UNITED STATES HISTORY).

That was followed by other MMT econ scholars insisting that we needed a make-work ‘JG’ program, where the federal gov’t creates ‘jobs’ (during A LABOR SHORTAGE).

In Australia, we had another MMT academic lecturing us that “exports are ‘real’ costs” (while Australia, thanks to the ‘real’ benefits of exports, was entering its 27TH STRAIGHT YEAR WITHOUT A RECESSION).

In 2018 we had MMT admins saying that money in bank accounts is “only acting like money” because it’s “lookalike IOU” (and followers actually bought into that nonsense). We had an unemployed MMT evangelist going to Washington, D.C., explaining to federal policymakers how to run the country and after getting back home, setting up a GoFundMe page for handouts (because he couldn’t even run a household). We had MMT leadership telling us that job-CREATING exports “are a cost” (and that job-DESTROYING imports “are a benefit”). We had an MMT trader telling you to leverage out and go long on oil, go long on gold; to short the dollar, to short the 10yr (and if you actually did all of that, you now know what ‘getting mental game’ actually means). We had those adorable Real Progressives still wearing ‘taxes don’t fund spending’ floaties in their MMT kiddie pool (even though Warren Mosler scolded them at least 117 times not to say that). We had 15 midterm-election candidates: Seale, Bashore, Glover, Mimoun, Wylde, Smith, Ayers, Barragan, Hoffman, Ringelstein, Abrahamson, Baumel, Estrada, Canova and even including Mr. Mosler, who thought that appearing on a Real Progressives broadcast was a good idea (who all then lost their elections); and after those midterms, these Real Progressives goofballs kept reprimanding the rest of us to #learnmmt (when ironically it’s them that are still nowhere near the vicinity of grasping MMT).

In other words, 2018 was a year of peddling fake ‘prescription’ MMT (under the guise of promoting pure ‘description’ MMT); it was a year of waving bye-bye to facts (because it got in the way of pushing dopey narratives); and it was a year when folks mixed their politics with their economics (and diluted both at the same time). In short, 2018 was just more of the same.

You can expect, that in 2019, what you’ll be hearing from political ‘prescription’ MMTers will be them telling you (again) who to blame, and that we need to be deficit spending on more ‘this’, and on more ‘that’; because in their utopia, the Fix-All is always just a ‘keyboard stroke’ away (while here in reality no keyboard can stop a federal gov’t shutdown).

In 2019, rather than cursing and fighting the windmills, you can be silently observing and learning how to properly (read: PURELY) play the cards that are presently being dealt (even if they’re ancient cards from a bygone, gold-standard era).

You can be blooming above the muddy waters (above the MMT kiddie pool), relying solely on facts, math & data (relying on the Writings of God).

In the new year you could rise above the ideologies, bypass the pet theories, shun the narratives, and achieve pure MMT enlightenment.

_______

Deadly Innocent Fraudulent Misinterpretation #22: Taxes ‘create unemployment’.

Fact: Taxes create another bill to pay.

Sure, those locals in 1800’s Ghana (where the ‘taxes create unemployment’ yarn is derived) became ‘unemployed’ the day a ‘Hut Tax’ was enforced on them, but that doesn’t mean that they were not working before that!

They weren’t just sitting around doing nothing before the British showed up—they were hunting and gathering the things they needed. All that hut tax did was give them another new thing they needed to hunt and gather (the money to pay the new tax).

Fast forward to the 20th century, before US federal income tax became the law of our land (with the ratification of the 16th Amendment in 1913), citizens were employed—because they had bills to pay—and after those taxes were imposed, the only change was just that citizens had another bill to pay.

‘Taxes create unemployment’ is a catchphrase, using easy-to-remember, bumper-sticker logic to help grasp a simple ‘description’ MMT insight; but once again, the political ‘prescription’ MMTers take yet another analogy or meme too literally.

We can read in ‘The Seven Deadly Innocent Frauds’ (7DIF Fraud #1 pg 25) why—even though the federal gov’t is the issuer of fiat dollars and spends in its own fiat dollars—the federal gov’t still needs to collect tax dollars from us, that “taxes create an ongoing need in the economy to get dollars”. Mr. Mosler (correctly) explains that the financing function of federal taxation took the backseat to more important functions. One of those functions, an MMT pillar, is that in the post-gold-standard, modern monetary system, the federal gov’t no longer needs to collect dollars to spend, but YOU still need to collect dollars to spend—and to pay taxes.

In other words, one function of federal taxes today is to maintain demand for the currency. The other function is to maintain price stability, or as Mr. Mosler puts it, “leaving room for the government to spend without causing inflation”.

The only reason ‘taxes create unemployment’ keeps getting regurgitated is to push a narrative that Thy Federal Gov’t Giveth You Unemployment And Thy Federal Gov’t Can Taketh Unemployment Away, so if in charge, that’s another thing the almighty ‘prescription’ MMTers will do—they’ll also get the federal gov’t to guarantee a ‘job’, for poor little mortal you.

In other words, when the political MMT Party folks distract you by pointing at those ‘Evil’, ‘Neoliberal’, ‘Racist Murderers By Proxy’, they pull the oldest trick in the book (the never-ending finger pointing) when they say that taxes (and other ‘intentional’ federal gov’t policies) ‘create’ unemployment.

Taxes don’t actually create unemployment, but saying it does create a ‘problem’ (that ‘prescription’ MMTers will always be gainfully employed at ‘solving’).

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Deadly Innocent Fraudulent Misinterpretation #23: Taxes ‘value’ the currency.

Fact: Production, not taxes, values the currency.

“All Innes, an amateur journalist, was saying in his ‘Credit theory’, was the same point that Knapp was making in his ‘State theory’, which is, that in opposition to the ‘Metallic theory’, what gives money the value, is its acceptability for payment of taxes.”—Michael Hudson, American economist, professor of economics at the University of Missouri in Kansas City and a researcher at the Levy Economics Institute at Bard College

What Mr. Hudson is saying there is simply pointing out the obvious in those Credit / State / Circuit / Debt theories of money. Which is that the monetary sovereign’s taxing power is the magical reason why today’s ordinary pieces of paper that we call fiat currency, are valuable (compared to yesteryear’s hard currency that needed to be literally made out of, or backed by, a precious metal like gold or silver, in order to be valuable).

MMTers routinely misinterpret that quote as meaning ‘taxes value the currency’ without realizing that they are putting the cart before the horse. Today’s US dollar, a ‘soft’ currency, is still ‘valuable’, like a ‘hard’ currency used to be, because the dollar, like any legal-tender sovereign currency, can settle debts—with taxes being one of many debts. The fact that taxes must be paid in dollars gives dollars some initial ‘velocity’ (it kick-starts the currency into first gear), sure, but that only goes so far—and that’s exactly where MMTers who say ‘taxes value the currency’ stay stuck in first gear.

For example, let’s again take that analogy about the Ghana Hut Tax in #22 above. That tax ‘creates value’ at first, sure, but Ghana would then need PRODUCTION to keep the currency ‘valuable’. Ghana would need to start actually producing goods & services and making things of ‘value’ available for sale. In addition, they would also need to avoid severe economic shocks, like gov’t corruption, that would affect production, or else the actual value of the currency—regardless of taxation—goes poof. The MMT takeaway is that once you change from a fixed-currency regime to a floating-currency regime (once you take off those ‘golden training wheels’), the currency’s value changes from only being whatever it’s *literally* made of; over to many other moving pieces (over to multiple sophisticated variables), including the production of that country and the full faith (real and perceived) of that monetarily-sovereign issuer.

“Taxes do not ‘drive the currency’ / ‘value the currency’. Look at the Middle East countries that do not tax. Here in the US, which does tax, the Fed mandate is maximum employment, or how I see it, maximum PRODUCTION. That’s what mostly values the currency—not the taxes. No matter how much taxes you collect, if the production collapses to nothing, then what is the currency valuing? A) Nothing! The further an economy is from its full productive output, the less the currency is worth. Anytime there is a large collapse in production, the currency devalues, which causes mild inflation at best, or severe inflation with possible hyperinflation at worse. Take hyperinflation, which is very poorly understood by most traditional economists. The widely held belief is that an increase in government ‘debt’ (aka too much ‘money printing’) causes hyperinflation. But research shows that hyperinflation is not merely the result of ‘money printing’ (an expansion of the money supply). In fact, it tends to occur around very specific and very severe economic circumstances (too much foreign debt, loss of a war, rampant corruption, regime change, collapse in confidence) that resulted in a severe collapse in PRODUCTION, which led to ‘money printing’ (which led to an increase in the money supply)—which ultimately led to hyperinflation. The correlation of ‘money printing’ was not causation.”—Jim ‘MineThis1’ Boukis

“Saying ‘taxes gives value to money’ is sloppy language, sloppy thinking, and just plain wrong. What matters is the obligation against your productive capacity. It can be said that taxes are a predicate condition in order to require work / production to get the money to pay the tax. The corollary is that the value of money is defined as the amount of work / resources needed to produce goods & services for sale either to the Government or within the Private Economy. Then a portion of the money is returned as taxes to make sure you keep using the currency to buy the real goods & services available (which makes money relevant to the economy). Miss the distinction between the predicate and the corollary and all the money and all the taxes in the world will not give currency value if there is little or nothing produced available to purchase (which makes money irrelevant to the economy).”—Charles ‘Kondy’ Kondak

“What is money? It stores value, measured by productivity, at par. In other words, an airline pilot’s dollars aren’t worth more than a sidewalk gum-scraper’s dollars—the pilot just earns more dollars. Money exists in two frames at the same time: Liability = Asset, as well as, Debit = Credit. Analyzing money flows is as simple, and as complex, as tracing which balance sheet shrinks vs. which balance sheet expands. Understanding is found in the awareness of the productivity swap. You’re not trading paper or keystrokes, you’re trading productivity-based value. You’re investing in production. The value is the production in economies, in firms, and in people.”—Mike Morris

“There’s a reason why the MMT people are usually wrong and the technical, non-ideological people are usually right.”—Logan Mohtashami

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Deadly Innocent Fraudulent Misinterpretation #24: The federal gov’t is the sole monopoly ‘supplier’ of dollars.

Fact: The federal gov’t is not the sole monopoly ‘supplier’ of dollars.

The federal gov’t is the sole monopoly ‘issuer’ of dollars (the origin source of dollars), yes; but the sole monopoly ‘supplier’ of dollars (the only source of dollars), no. The federal gov’t supplies dollars, and the federal gov’t also delegates the function of money creation to their banking agents (to also ‘supply’ dollars into the banking system).

When Warren Mosler uses the analogy (one of my favorites) that the federal gov’t is ‘The Center of the Universe’, what that means is that the federal gov’t, the issuer of dollars, has the sole monopoly POWER over dollars. One example, the federal gov’t (via the Fed) has power to manipulate, to literally set, the ‘price’ (the short-term interest rate), of money—to influence long-term rates, spending decisions, etc. Another example, the federal gov’t (via Congress) has the Power of the Purse to authorize federal-gov’t deficit spending (to create money). Furthermore, the federal gov’t delegates the banks (under strict federal-gov’t supervision and regulation) to also create money—or more specifically, to facilitate the rest of us in the private sector to create money.

MMTers routinely get this confused because they are less concerned with the monetary ‘description’ and more interested in pushing a political ‘prescription’. They need listeners to believe that ‘federal gov’t money’ is ‘higher’ in a ‘hierarchy’ of money—that only federal-gov’t deficits can solve the ‘problems’. Try not to let ‘prescription’ MMTers drag you down their ‘banks don’t create money’ rabbit hole, or up into their ivory-tower echo chambers to peddle their pseudo-intellectual ‘exogenous’ creation is ‘superior’ to ‘endogenous’ creation NONSENSE.

There is a reason why you will never, EVER, see any bill in your lifetime quoted in ‘exo’ or ‘endo’; or any statement quoted in ‘federal gov’t money’ or ‘bank credit’.

That’s because all money is money.

They are all DOLLARS IN THE BANKING SYSTEM.

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Deadly Innocent Fraudulent Misinterpretation #25: Only bank money creation ‘nets-out’.

Fact: All money creation ‘nets-out’.

Just like you, me, any household, or any business can pay back their debt, so can the federal gov’t. However, MMTers routinely misinterpret that as there being some perceived differences between federal-gov’t-sector money creation and nonfederal-gov’t (private) sector money creation. They usually do this to propagate a narrative that only more federal-gov’t money creation—that only more federal deficits—is the Fix-all (to their perceived problems).

Those that are fully-grasping MMT know that issuer solvency is basically the main difference between any money creation. For example, you are more likely to get your dollars back if you gave it to the issuer of dollars—like when investing in an interest-bearing term deposit at the Federal Reserve Bank (aka ‘buying a Treasury bond’):

“If one wants to put the finest of points between the two, perhaps the only difference is default risk on the money created by each. In the end, the most overzealous exo/endo MMTers want to eliminate private bank credit. Forgive them for they know not what they say, comrade.”—Charles ‘Kondy’ Kondak

MMTers like to say that ‘bank credit’ (their pet name for private-sector money creation) ‘nets-out’ as if to imply that federal-gov’t money creation can’t. They are misinterpreting the difference between federal-gov’t money creation and private-sector money creation, which is, simply that, one creates ‘risk-free’ bonds, and the other, doesn’t.

The reason why MMTers (deadly and innocently) get so mixed up with all this is that they are confusing Assets with Capital. When thinking about private-sector money creation (deficit spending) that ‘nets-out’, keep in mind that, just like federal-gov’t money creation that adds Net Financial ASSETS, private-sector money creation is an addition of ASSETS going into the banking system—but neither is talking about an addition of CAPITAL. Assets minus liabilities equal capital. A newly-created private-sector ‘bond’ (your personal promise to pay back the money with interest) adds dollars (ADDS ASSETS) into the banking system (but NOT Capital). For example, when you buy a new car on credit, with no money down, your net worth (your Capital) doesn’t go up because that car (your Asset) and your ‘bond’ at the dealership (your Liability) ‘nets-out’, but the assets sitting in your driveway (the total assets posted on your balance sheet) absolutely do up.

The same goes for the federal gov’t. If a new battleship is built and paid for on credit, the amount of ASSETS (the amount of NFAs) goes up, but the amount of the federal government’s net worth (Capital) doesn’t go up because that brand-new USS BONDHOLDER (Asset) ‘nets-out’ with that brand-new Treasury bond (Liability).

When the federal gov’t creates money there is an attached quote ‘debt’ unquote that CAN (just like private-sector money creation) ‘net-zero’; however, another slight difference is that it’s not intended to:

“It is *technically* debt, but it’s a debt that is never expected to be repaid.”—Michael Hudson

The MMT insight is that unlike private-sector money creation, federal gov’t ‘debt’ is never expected to ‘net-out’—not that it doesn’t at all.

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Deadly Innocent Fraudulent Misinterpretation #26: There is no such thing as a ‘Fractional Reserve System’—it does not exist.

Fact: There is such a thing as a fractional reserve system—it still does exist.

“On January 18, 2018, the Fed updated its reserve requirement table. It required that all banks with more than $122.3 million on deposit maintain a reserve of 10 percent of deposits. Banks with $16 million to $122.3 million must reserve 3 percent of all deposits. Banks with deposits of $16 million or less don’t have a reserve requirement. In order to give banks an incentive to grow, the Fed changes the deposit level that is subject to the different ratios each year.”—Reserve Requirement and How It Affects Interest Rates

In other words, here on planet earth, US banks are required to have a ‘fraction’ of their total deposits on ‘reserve’ (called the cash reserve ratio). These $$$ are deposited at the Fed (called ‘required reserves’). Banks also have $$$ on deposit at the Fed that is above the required amount (called ‘excess reserves’). Just like the financing function of federal taxation, the traditional function of the fractional reserve system is no longer needed—but it still exists. It’s still the Modern Monetary Formality, like those pesky accounting rules and appropriations laws that, albeit unnecessary, never cease to frustrate the political ‘prescription’ MMTers.

The pure MMT insight is that, operationally, the federal fractional-reserve system is NOT NEEDED to create deposits—not that there is no fractional reserve system at all. That’s fake MMT, and anyone saying ‘there is no fractional reserve system’ has no idea how ridiculous they sound to experts in the field. Good luck telling the person that just got a costly margin call, or had their f/x account blown out (because their losses exceeded their required fractional reserve), that ‘there is no fractional reserve system’.

H/T to Steven Witcher who was keeping the MMT pure in an online discussion over at the Intro To MMT site on Facebook. He nails it on the head here—that MMTers are confusing ‘unlimited’ fiat $ creation with ‘unrestricted’ fiat $ creation:

“Banks still use the fractional reserve system in the US as a holdover. The difference is, since ’71, there’s no limits on reserves [but there’s still restrictions]. The key dates are 1913 (end of wildcat banking & establishment of the Fed); 1934 (gold became reserves rather than money); and 1971 (gold then becomes just a market commodity & reserves then just become a number). We [the United States] didn’t have any semblance of federal fractional reserve [like other countries did] until the Federal Reserve Act [of 1913]. Exchanging money for gold [domestic convertibility] ended in the 30s. In essence, before 1934, we had a ‘floating’ [a ‘partial’ or ‘managed’] conversion rate and banks were limited in their lending based on reserves—that’s your traditional fractional reserve system. 1934 [The Gold Reserve Act of 1934 changed the convertibility from $20.67 to $35, a 41% devaluation, which also outlawed private possession of gold and ordered all gold held by the Fed to be surrendered then transferred to the Treasury; BUT] changed nothing about the fractional reserve system, it just added reserves. 1934 was a massive increase in that reserve part of the fractional reserve system [by design to ‘inflate’ the money supply to get more dollars into the hands of consumers]. We maintained a fixed exchange rate [international convertibility] to gold afterwards, but because of that, the money supply was still limited by gold until ’71. Post 1971, [private] banks have no limit on how much it can lend, and neither does the [federal] discount window, because the entire system is based on risk assessment—but with no limit [restrictions, yes; a limit ‘ceiling’, no]”—Steven Witcher

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Deadly Innocent Fraudulent Misinterpretation #27: Paying federal taxes is a destruction of dollars.

Fact: Paying federal taxes has not been a destruction of dollars since 1957.

MMTers, even The Great Ones, are still not fully-grasping the subtle differences between a ‘dollar drain’ and a ‘dollar destruction’—and are misinterpreting these two main levers in our modern monetary system.

For example, in a debate about trade differentials, Professor Steve Keen was (incorrectly) saying a trade surplus was a “third source of money creation”. The reason why he was wrong is because, counter-intuitively, a trade ‘deficit’ does not mean a creation of dollars like a budget deficit would mean. A trade deficit only means a drain of dollars to the nonfederal gov’t / international (aka foreign sector) from your nonfederal gov’t / domestic (aka private sector). Rather than a trade ‘deficit’ being ‘financed’ with a ‘creation’ of dollars (as Mr. Keen thought), or being a ‘destruction’ of dollars (as many others think), the amount of the trade deficit is instead only telling you how many dollars that just DRAINED from one nonfederal gov’t sector to another.

In the modern monetary system, using a free-floating currency (using f/x markets), US dollars never ‘leave’ the US banking system in a US trade deficit; however, that trade deficit is telling you exactly how many dollars worth of potential aggregate-demand from factories, salaried employees, surrounding businesses, neighborhood real-estate values, etc etc, that just drained from the US private sector to a foreign country.

It was Warren Mosler who corrected Steve Keen in that 05/07/18 debate (who graciously walked back his ‘third source of money creation’ posit); yet recently, it was Mr. Mosler himself, saying ‘old tax dollars are shredded’ who is now seemingly not seeing that subtle difference between a ‘dollar drain’ and a ‘dollar destruction’. This was overheard in a 12/20/18 post at the Intro to MMT site on Facebook (asking if anyone has worked at the IRS and has first-hand experience with shredding cash tax-payments):

“Warren Mosler, your language here is quite misleading. It’s old cash which is shredded, not tax payments. You probably mean this symbolically, but it’s quite misleading to the lay people we are trying to educate.”—Ken Otwell

“Ken Otwell, any payments made to Gov with old cash, including tax payments, etc., are shredded.”—Warren Mosler

Even the great ones swing and miss sometimes. Ken Otwell is correct. Saying that ‘tax dollars are shredded’ (no matter whether it is meant to be taken literally or metaphorically) is quite misleading and is causing deadly and innocent misinterpretations throughout the MMT community. Can we pinpoint to where this misrepresentation of taxes being ‘destroyed’ is happening? Yes we can, and let’s call it a subset to #27:

Deadly Innocent Fraudulent Misinterpretation #27a: “Federal tax remittance is subtracted from the US national debt on that big spreadsheet the gov’t runs.”

Fact: Federal tax remittance has NOT subtracted US national debt on the consolidated balance sheets of the federal gov’t since 1957.

“In recent years, as federal budget deficits have narrowed and even disappeared…they tend to be short-lived. When the federal government’s fiscal condition improves…do budget surpluses induce increases in federal spending? Or…reductions in taxes? Or, some combination with other possibilities, e.g., reducing the national debt? Consequently, only a small portion of surpluses in the modern era typically goes for debt reduction.”—Budget Surpluses, Deficits and Gov’t Spending, prepared by Vedder & Gallaway, Professors of Economics, for the Chairman of the Joint Economic Committee, December 1998

In other words, what these economists knew two decades ago is what many in the MMT community today haven’t yet grasped—that Congress not only has to approve federal-gov’t money creation (addition of NFAs), but its destruction (subtraction of NFAs) as well. MMTers, especially the ones talking from the political ‘prescription’ side of their mouths, are either letting facts get in the way of a good ‘taxes are a destruction’ story, at best; OR these MMTers are confusing the payment of federal taxes lowering the budget DEFICIT, with taxes lowering the national DEBT, at worst. Federal taxation does pay for debt SERVICE, yes; but do taxes pay for debt REDUCTION, no—not since 1957—the last time the national debt decreased. Political MMTers (that want their ‘prescriptions’ to be taken seriously) need to stop getting their ‘descriptions’ wrong.

Stephanie Kelton once replied “No” to the question “Do taxes fund federal spending.” As a result of that SINGLE Tweet, her entire choir instantly accepted that as gospel and started saying ‘federal taxes don’t fund spending because federal taxes are a destruction’ (sending them over a cliff).

Warren Mosler implies that federal ‘taxes are a destruction’ in 7DIF, based on a SINGLE fact that old cash bills are being shredded by the federal gov’t—but he left out the part where those tax amounts are credited to the Daily Treasury Statement account because he doesn’t consider that asset (that ‘soft currency’) in the DTS, as the Treasury getting, quote, a ‘thing’, unquote—YIKES (try telling the federal taxpayer—who votes—that just sent a check payable to the ‘US Department of the Treasury‘ for federal taxes due that ‘the Treasury isn’t getting a *thing*’)!

Just like Mr. Mosler, Randy Wray also argues that federal ‘taxes are a destruction’ based on a SINGLE instance from 260 years ago. In this case, a time in US colonial history that tax receipts were, indeed, destroyed—but causation is not correlation. Professor Wray (deadly and innocently) misinterprets the ‘burning’ of tax receipts by the Commonwealth of Virginia in the eighteenth century as meaning ‘taxes are a destruction’ today. What actually happened then, was akin to what we now call an Open Market Operation (that executes a dollar add or a dollar drain to maintain price stability). During The Seven Years War (1756–63), Virginia colonists needed to pay more taxes to help finance our then-mother-country’s war effort. Paying more taxes to Britain meant more ‘hard-currency’ dollars leaving Virginia and being shipped to England. In order to counter the deflationary effects of this decrease in the Virginia money supply, the Virginia Commonwealth would (wisely) introduce legal-tender ‘notes’ (do a ‘dollar add’). When the war ended, and the notes had served their purpose and were no longer needed (because the overseas war was no longer needed to be funded), Virginia would simply burn any of these notes received as tax payments (do a ‘dollar drain’) until the notes were out of circulation.

Note that this misinterpretation is similar to any other garden-variety ‘financial helper’ on the airwaves today, who easily (but not as innocently) snake-charms folks by constantly pointing to the tiniest part, to the SINGLE instance and saying ‘See, look right there, I told you so’. Rather than heed any of that ‘financial advice’, you should instead be standing way back from the picture, watching all the moving pieces and tuning out the noise. Which is again the reason why I loved Mr. Mosler’s ‘Center of the Universe’ analogy, because it personally helped me to bypass attachment—meaning to not consider MMT as being chiseled (attached) in stone—and attain pure MMT enlightenment.

What the ‘taxes are a destruction’ mentality is still not (deadly and innocently) grasping is the ever-so-slight difference between a ‘drain’ of dollars (a SWAP of dollars), like paying federal gov’t taxes / like federal gov’t surplus spending / like trade differentials; and a ‘destruction’ of dollars, like when Treasury bonds are paid off / like when corporate bonds are paid off / like when credit-card balances (a personal ‘bond’) are paid off in full. When you pay off your entire credit-card balance at the end of the month, you destroy dollars that you previously created (that you previously ‘conjured up’ during the month). Even more complex, is a Fed operation, where you can have a dollar drain (from savers to borrowers) with a simultaneous dollar creation into the banking system (to buy bonds on credit), and then followed by a dollar destruction (to return back to ‘normal’)—both a $$$ drain and a $$$ destruction happening discreetly out of money-supply-circulation sight (like QE and QE unwind).

It’s better to think of all money creation as being the newly-created BOND being created—and not the ‘money’ being created—because sometimes the ‘money’ being created is something you can’t always see. That’s a big reason why many MMTers keep struggling with putting different labels on the ‘money’ that the private sector creates (instead of just calling them $$$)—because they’re trying to wrap their hands around something you can’t always see. Rather than getting sidetracked concentrating on different ‘kinds’ of money, different ‘kinds’ of money creation, and different ‘kinds’ of money hierarchies, MMTers should instead be pinpointing the paramount part of all money creation—the bond creation. Whether the federal gov’t is deficit spending (creating a bond) to put a rover on Mars; or you are deficit spending (created a bond) to drink a cup of Starbucks, that is the exact moment it becomes a net creation of assets.

That newly-created bond is first and foremost. That bond represents the net addition of newly-created $$$ into the banking system (as opposed to not paying on credit and using already-existing $$$ in your pocket). If there is only a single thing that readers takeaway from this entire post, let it be this: Newly-created bonds create loans create deposits.

Here’s a quick story that is both relevant and quite interesting. In medieval England days, when you wanted to pay on credit, a notched tally stick was created (‘dollar creation’). To represent the newly-created asset with an attached liability of debt incurred, the stick was broken in two and the distinct grain-structure of the wood made the pieces ‘carbon copies’. The creditor (let’s say the King of England) got the asset side, the larger piece; and the debtor (let’s say a poor English subject) got the liability side, the shorter piece (and that’s where the phrase ‘getting the short end of the stick’ comes from). When the debt was paid back (when the subject paid the King back), the sticks were destroyed (‘dollar destruction’ aka ‘net-zero’).

Think about how innovative that was. This tally stick basically worked like money (one side was effectively a note-receivable; and the other side was the offsetting note-payable). As Real Macro instructor Mike Morris likes to say about money, the tally stick was ‘liquid production’—and in multiple ways: 1) People could now easily buy on credit (meaning more purchasing power in the hands of consumers); 2) the creditor side of the stick was essentially a note-receivable in bearer form (what we today call a ‘bearer-bond’) so shop owners holding the asset side of the tally stick could make capital with capital along with making money on their sales; 3) when other shops heard about that innovation (shop owners with excess cash, that only needed more sales rather than more cash), they jumped in on this credit action; 4) the more tally sticks created, the more competitive borrowing rates got; and 5) just like the taxing authority today can ‘pump the prime’ and deficit spend to stimulate the economy, the King could do the same by simply spending more ‘legal-tender’ tally sticks, which adds more financial assets into the monetary supply.

If the King was deficit spending (if an English subject provisioned the King on credit), the tally sticks were newly-created with the King as the debtor (the King had the short end of the stick). Here’s why I mentioned tally sticks in the first place: One way to settle that debt that the King owed to that English subject, the King could accept the offsetting piece of the stick as settlement of taxes due to England—and then those particular tally sticks were destroyed. Meaning in that one SINGLE instance of a payment of taxes, yes, that was a destruction, sure; but not to be misinterpreted and to be concluded that ‘tax payments are a destruction’. You can trust me on this, the English subject next in line settling his ‘federal’ taxes due by paying with gold, with bales of tobacco or cotton, with animals or their fur, or whatever else was legal tender—those weren’t ‘shredded’ (those taxes weren’t ‘destroyed’).

Just like deficit spending then, deficit spending today is a dual creation (two pieces). A creation of a newly-created bond (a newly-created Asset); PLUS, what ‘nets-out’ that asset, that other piece, the debt (the Liability). Even to this day, if you use a credit card, you are creating a tally stick, which is your promise to pay the vendor back (which is your ‘bond’). The seller (the creditor) keeps one part of that little piece of wood that you marked (that little piece of paper that you signed); and you the buyer-on-credit (the debtor) gets handed the other piece of wood (the paper receipt)—just like 500 years ago.

In other words, when you borrow / deficit spend / pay for something on credit today, you are creating both an asset and a liability (that ‘nets-out’ the asset). For instance, if you buy a new car on credit / no cash down / borrow the full price, then you are creating the ‘bond’ (your promise to pay back the money with interest) that the dealership gets. The car dealership (creditor) swaps out of a car on the lot and into your newly-created bond (asset). You (debtor) get that car, which doesn’t increase your net worth (capital) because it ‘nets-out’ with other half of the tally stick (liability) that you also get. (Note: The dealership’s net worth doesn’t change either, not until you, or a third counter party, makes good on your loan and only then the dealership collects the mark up, aka ‘profit’—otherwise the dealership’s net worth goes down if you default on your loan). The insight is that unlike an all-cash deal where you hand the dealership money from your pocket (with existing assets in the banking system), you instead, OUT OF THIN AIR, CONJURED UP and entered your ‘bond’, a newly-created financial asset denominated in dollars (a net addition of $$$) into the banking system.

Warren Mosler writes in 7DIF that tax dollars paid in ‘old’ bills are ‘shredded’ by the federal gov’t, so now MMTers (taking that SINGLE analogy too literally) are saying ‘taxes are a destruction’ (wrong), ‘taxes don’t fund anything’ (wrong), and ‘blah blah blah’ (wrong wrong wrong).

The proper interpretation of the 7DIF ‘tax dollars are shredded’ thing is that it’s just an example of one of the many paradigm differences between the issuer of dollars and the user of dollars. The issuer can shred an old $20 bill received, and replace it with a new one; while a user uses the $20 bill received no matter how old and worn it is. That’s all. If you want to take the shredder thing to mean that ‘taxes are a destruction’ to push your preferred politics and peddle your pet prescriptions, that’s fine, then go ahead, and good luck with all that—because you’re going to need it.

Paying federal taxes is not a destruction of dollars. Running a federal gov’t surplus is not a destruction of dollars, either. Taxes are a drain of dollars from the 5% (approx) that drain to the 95% (approx)—an example of Jim ‘MineThis1’ Boukis’s “eco-feedback loop” insight from unproductive capital (from the ‘financial’ economy) draining to productive capital (to the ‘functional’ economy). The payment of federal taxes nor the federal gov’t running a surplus DOES NOT reduce the national ‘debt’. The national ‘debt’ DID NOT go down during the Clinton Administration surpluses. The national ‘debt’ has never gone down since President Nixon severed the final link between the US dollar and gold (when closing the gold window for good) in 1971. The last time the national debt went down was in 1957; and that’s why tons of anti-central bank loons love to say that the Clinton surpluses ‘were a myth’—because they too are also misinterpreting and confusing a dollar drain (collecting taxes / running a surplus) with a dollar destruction (collecting taxes / running a surplus / PLUS paying off debt).

Paying federal taxes is just a series of dollar drains. Draining from one person (from the money supply), to the Treasury Daily Statement account at the Fed (not the money supply), and then right back to another person (back into the money supply).

Think about a circle, call that circle ‘the money supply circulation’; and then picture that circle is inside another bigger circle called ‘the entire banking system’. Paying federal taxes is only a dollar drain to and from the money supply circle (but still within the banking system circle). Since 1958, taxes have never been both a dollar drain PLUS a dollar destruction from the entire banking system:

Scenario #1) Fiscal year ending with a federal-budget surplus but does NOT pay off any Treasury bonds (does NOT lower the national ‘debt’): In this scenario the federal gov’t spent $$$ (dollar add) and collected a bigger amount of $$$ back in taxation (dollar drain). The private sector ended the year in deficit (which equals the amount of the gov’t surplus which is the same amount left unspent—still remaining—in the Daily Treasury Statement account). NOTE: No dollar creation or destruction.

Scenario #2) Fiscal year ending with a federal-budget surplus but also DOES pay off some Treasury bonds (also DOES lower the national ‘debt’): In this scenario the federal gov’t spent $$$ (dollar add) and collected a bigger amount of $$$ back in taxation (dollar drain). The private sector ended the year in deficit (which equals the amount of the gov’t surplus that was then spent on paying off some Treasury bonds—for good—meaning those bonds are not rolled over (the gov’t surplus was also ‘spent’ on lowering some of the national ‘debt’). NOTE: This is dollar destruction.

Scenario #3) Fiscal year ending with a balanced budget: In this scenario the federal gov’t spent $$$ (dollar add) and also collected the EXACT same amount of $$$ in taxation back (dollar drain). The private sector ended the year balanced. NOTE: No dollar creation or destruction.

Scenario #4) Fiscal year ending with a federal-budget deficit which adds newly-created Treasury bonds (which adds to the national ‘debt’): In this scenario, the federal gov’t spent $$$ (dollar add) and collected the exact same amount of $$$ in taxation back (dollar drain). The federal gov’t then spent even more $$$ (dollar add) and collected that exact same amount of $$$ back in Treasury bond sales (dollar drain). The federal gov’t then ALSO issued newly-created bonds, which raises the national ‘debt’, which is a net addition of financial assets (additions of NFAs), going into the banking system. The private sector ended the year in surplus (which equals the amount of the added bonds denominated in dollars). NOTE: This is dollar creation.

Bottom line:

Scenario #1) All of the Clinton Administration surplus years…

Scenario #2) The last time that happened (the last time ‘taxes were a destruction’), was in 1957…

Scenario #3) There were moments when expenditures were exactly equal to receipts during all the Clinton Administration surplus years…

Scenario #4) Every year since 1958…

(Source: TreasuryDirect’s ‘Historical Debt Outstanding—Annual’)

Simply put, the opposite of dollar creation is destruction. Federal gov’t deficit spending is an example of dollar creation, of newly-created Treasury bonds, a net addition of financial assets, denominated in $$$, being added into the banking system. Paying off those Treasury bonds for good is the dollar destruction—and the same goes for the private sector when we destroy any personal debts (when we pay off any ‘bonds’ that we created).

To summarize, We The People paying federal taxes (and the federal gov’t running a surplus) are dollar drains, are ebbs & flows, from parts of the banking system, yes; but out from the banking system, out from the entire dollar dominion, no. However, continuing to collect federal taxes and running sustained budget-surpluses to the point where $$$ are also being ‘spent’ on paying off bonds—on CANCELLING DEBT—meaning that surpluses are given to people that are bondholders instead of people that are provisioning the gov’t, THAT IS THE DESTRUCTION OF $$$ (the opposite of the creation of $$$).

In other words, dollar creation for both the federal gov’t and the nonfederal gov’t sectors is when the bonds (promises to pay a counter party the money back with interest) is newly-created out of thin air; and dollar destruction is when the bonds are paid off.

It is only a destruction when putting those bonds in the shredder.

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Deadly Innocent Fraudulent Misinterpretation #28: “The public debt is nothing more than the $ spent by gov’t that haven’t yet been used to pay taxes, sitting in the economy as cash, as $ in reserve accounts and as securities accounts…It functions as the net money supply.”

Fact: The public debt is nothing more than the $ spent by gov’t that haven’t yet been used to PAY OFF THAT PUBLIC DEBT, sitting in the economy as cash, as $ in reserve accounts and as securities accounts…It functions as the net money supply.

In addition to modifying the part in 7DIF to say that the federal gov’t is destroying ‘old’ cash bills, Warren Mosler may consider also modifying “the public debt is nothing more than the $ spent by gov’t that haven’t yet been used to pay taxes” for the same reason: It also doesn’t make sense because paying federal taxes is only a dollar drain and not a ‘net’ change to anything—unless taxes are both draining dollars AND destroying dollars (paying off public debt).

MMTers understand that federal gov’t deficit-spending creates dollars, but MMTers (deadly and innocently) misinterpret federal taxation as destroying dollars—and that’s why they (incorrectly) believe that taxes ‘don’t pay for anything’:

“So please stop accepting the bullshit that your taxes are paying for something – they aren’t. In fact the only time your taxes are paying for something is when the government’s budget is in surplus. Think about it – they are in surplus because they are taxing you MORE than they are spending. You are being overcharged!”—Ric Testori, AIM Network, ‘Hey, it’s not Taxpayers’ Money!’

Anyone that grasps the concept of being overcharged can see the contradiction there. You can’t say to a taxpayer that during a gov’t-budget surplus ‘You Are Being Overcharged’ (You are paying too much for something) while positing that the taxpayer’s taxes Aren’t Paying For Anything.

‘Taxes don’t pay for anything’ is fake MMT ‘political’ economics. The actual econ, the pure MMT insight, is that, operationally, the taxes are NOT NEEDED to pay for anything—not that they don’t at all.

Rather than misinterpreting the MMT (or more specifically, rather than confusing the modern monetary theory with the modern monetary formality), MMTers would be well-advised to tune out the dopey ‘taxes don’t pay for anything’ noise (ESPECIALLY during a gov’t shutdown that no ‘keyboard stroke’ can stop).

Federal taxes aren’t a net change in the money supply because dollars collected for federal taxes drain right back into circulation—to the penny—from whence they came (aka ‘surplus spending’). The spending, and the subsequent collection of taxes, is a wash.

In addition, dollars collected for Treasury bond sales also drain right back into circulation (aka ‘deficit spending’). That spending, and the subsequent collection of dollars in bond sales, is also a wash. The creation of the Treasury bond is the net creation of financial assets (is the addition of NFAs). The opposite of the creation is the destruction of the bond. So, rather than thinking that taxes are changing the ‘net money supply’, better to know what actually changes it are the expansions and contractions of leveraging and deleveraging (of creation and destruction).

To be fair, Mr. Mosler says “the public debt is nothing more than the $ spent by gov’t that haven’t yet been used to pay taxes” often because he (correctly) thinks that all economists should consider US Treasury bonds (the federal ‘debt’ held by the public) as being included in the definition of ‘money’.

Everybody considers their private money as being the amount of $$$ that is in both their checking account AND their savings account at their bank (not just the checking account)—so why not do the same thing when talking about our public money? As Mr. Mosler explains in 7DIF, $$$ are sitting in a Fed ‘checking account’ (aka the Fed’s Reserve Account) and also in a Fed ‘savings account’ (aka the Fed’s Securities Account). So why does the federal gov’t only consider the ‘checking account’ as being money and not the ‘savings account’?

“Why do they do that, because back in 1933, the reserve accounts were convertible to gold, and the securities accounts were not.”—Warren Mosler

So my interpretation of what Mr. Mosler is saying, is that, what is called ‘money’ (what is called the ‘money supply’), should include the Securities Account (aka Treasury bonds) and the ‘Net Money Supply’ would be the money supply minus those T-bonds.

That’s a great idea—it’s a superb ‘prescription’. What is considered being the money supply should be updated as per Mr. Mosler’s suggestion because ‘it’s about price, not quantity’. Policymakers should have done this the day that money supply figures became useless information on Wall Street trading floors in the mid 1980s. Which was around the same time Milton Friedman’s ‘Quantity Theory’ of money was debunked—when folks starting grasping that it’s more about the Fed controlling interest rates and less about the Fed controlling the money supply. I vividly remember those days, I was working for a brokerage called RMJ Securities near Wall Street in the mid 80s. As a junior Treasury bond broker, I would get pencils throw at my head if I input bond Bid and Ask prices incorrectly after money supply figures were announced every Thursday morning at 8:30AM sharp. A couple years later, ‘the street’ didn’t care about the money supply figures at all (and I would instead get pencils thrown at me when I entered bad prices on FOMC rate decision days).

Mr. Mosler’s idea could be one of the many steps (desperately needed to be taken) by policymakers to help wean the mainstream off that unnecessary fear of federal ‘debt’. Then everyone could start to relax about all those Treasury bonds—because all they really are, is just the part of the ‘money’ in existence that is earning more interest in the ‘savings account’ than the ‘money’ in the ‘checking account’, that’s all.

The national ‘debt’ is nothing more than the newly-created fiat $$$ spent into the banking system by the gov’t that haven’t yet been used to pay off the outstanding Treasury bonds.

The Net Money Supply (the checking account) is the Gross Money Supply (the checking & the savings account) minus the T-bonds (the savings account) that haven’t been paid off (that haven’t been destroyed).

Said another way, Treasury bonds are just an accounting entry of the $$$ that were deficit spent into existence by the gov’t that haven’t yet ‘net-out’ (that haven’t yet been ‘shredded’).

Thanks for reading and HAPPY NEW YEAR to the 100%,

Pure MMT for the 100%

If you want to know how money works, it helps to know how money trades. Follow MineThis1 and his Real Macro instructors at https://www.facebook.com/InvestingMMT/

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P.S.

Fake MMT: “The national government creates money every time it spends. It never spends your ‘tax dollars’, because ‘tax dollars’ do not exist at the national level.”

Pure MMT: What part of those dollar signs and the word ‘taxes’ on yesterday’s DTS is confusing you?


P.S.S.
Fake MMT: “Show me incontrovertible evidence that a dollar, once deleted from a reserve account in the banking system, is the very same dollar that appears in Treasury’s spending account at the central bank afterwards.” 
Pure MMT: Here you go:

P.S.S.S.

FAKE MMT: “Yeah, when the national government taxes, treasury uses a very delicate instrument designed based on quantum mechanics to isolate the photons that make up the number 100 on the computer screen so they cannot escape. Then treasury spends the very same photons by using the rubber mallet to hammer them into some bank’s computer monitor where they appear in someone’s account. This ensures that they are your tax dollars being spent. The government doesn’t need to do this, but it does anyway.” 

PURE MMT: Your last sentence is perfect, you’re getting closer. The pure ‘description’ MMT insight is that, operationally, the federal gov’t DOESN’T NEED taxes to fund spending in its own fiat $$$—not that they don’t at all (because those pesky accounting rules and appropriations laws, albeit unnecessary, still exist). Regarding the rest, that’s funny, but that’s your problem, this is where you and all the fake MMT academics fail, because you are all trying (unsuccessfully) to take basic ACCT 101—to take simple credits & debits to and from the Daily Treasury Statement (the same account where all federal spending is drawn)—and make it into quantum mechanics. 

Do try to understand, whenever there is a gov’t shutdown, it’s ALWAYS for the same reason—because there’s not enough revenues (taxes) to cover (fund) expenditures (surplus spending) so policymakers have to agree on raising the debt limit, meaning give authorization for further deficit spending (the spending that taxes don’t fund); and until then, no keyboard can stop a gov’t shutdown.

P.S.S.S.S.

FAKE MMT: “Nuh uh, US taxpayers do not fund the US government. The US government funds US taxpayers. All dollars used by the US private sector to pay federal taxes come from the US federal government.”

PURE MMT: Deadly Innocent Fraudulent Misinterpretation #29: Under the Taxpayer Relief Act of 1997, federal taxpayers can pay with a credit card (meaning ALL dollars used by the private sector to pay federal taxes DO NOT necessarily come from federal-gov’t money creation).

The MMT insight is that the order of operations switched. The US government now funds the US taxpayers first and then the US taxpayers fund the US government back. 

As the issuer of dollars, the federal gov’t doesn’t actually have to get those tax dollars—not that it doesn’t get those dollars at all.

P.S.S.S.S.S.

FAKE MMT: “Nuh uh, you pay your federal taxes, then your bank account is debited and reserves are deleted from your bank’s reserve account. Deletion means destruction. The reserves exit the banking system for good. The Treasury’s spending account is held at the Fed, it sits outside of the banking system.”

PURE MMT: You started well and then your wheels came off (which is ok, we were all there once). You pay your taxes & your $$$ are debited from your bank account, that’s correct; however, debited means a ‘$ drain’ not a ‘$ destruction’. Only Congress can approve federal creation of $$$ and only Congress can destroy those $$$ (federal taxation has not been a ‘$ destruction’ since before you were born). Taxation only means $$$ exiting money supply circulation (NOT the banking system). 

Treasury’s spending account (the DTS) is held at the Fed, it is outside of money supply circulation, YES; but outside of the banking system (outside of the US dollar dominion), No.

P.S.S.S.S.S.S.

Flustered Fake MMTer to bank teller: Show me incontrovertible evidence that this $20 bill that I just withdrew from the ATM is the very same dollar that I deposited into my account last week. I dare you to do this.

Bank Teller: I won’t.

Fake MMTer: You won’t because you can’t (Storms out of bank).

Bank Teller to co-worker: They’re so adorable when they’re going through their MMT phase.