Budgets Are For Users

     Once upon a time, you could pop open the front hood of a car and when looking inside, it was not so intimidating, it was easy to understand how everything about that engine worked. If you were lucky enough to have a ‘muscle car’, you even knew how to adjust the choke, to increase the amount of gasoline going into that gas / air mix, to get that beast started when it got really cold outside…
     The economy works with a similar principle. During an economic cold snap, the federal gov’t needs to add more gasoline, more potency, to that combustible mixture of public sector demand / private sector demand, to get that engine to turn over and started again…
     Our economy has been in a winter freeze for too long. Our fiscal policymakers could offer a hand by simply adjusting the choke to add more federal gov’t spending (more federal gov’t demand) to that mix (total aggregate demand). Instead, we only have our monetary policymakers just giving the car more gas (with an improper mix), trying over and over again to start the engine, and the more they try, the more gas they give it, so rather than starting the engine, they have flooded it. The pistons are not in sync because the policymakers are not in sync.
     Perhaps this is because of ideological differences, but my guess is that our fiscal policymakers are out of sync with our monetary policymakers because when most fiscal policymakers open that federal gov’t hood and look inside, they’re afraid to admit that they really don’t understand how the modern model works.
     First the ideological differences: Some of your policymakers today are ‘Keynesian’ deficit doves and some are ‘Austrian’ deficit hawks. The Keynesian says that we shouldn’t worry about federal gov’t deficit spending because creating money ‘doesn’t cause inflation’, and the Austrian says that we should worry about federal gov’t deficit spending because ‘printing money’ will cause inflation.
     Both are mistaken. In 1971, President Nixon unilaterally cancelled the direct international convertibility of the US dollar to gold, meaning from that day on, our US dollar was a pure, fiat currency, and the US officially entered the post-gold standard, modern monetary system. Since then, the US economy has had only one deflationary year (a negative print on the historical charts), so the Keynesian is wrong about the ‘creating money doesn’t cause inflation’ thing. In fact, a 1971 dollar today is worth about 18 cents, but that decrease in purchasing power is the secret sauce. Newly-printed dollars are the engine lubricant that keeps the economic moving parts running smoothly, and a big advantage is that since 1971, the federal gov’t uses its own motor oil instead of borrowed motor oil. Since 1971, the federal gov’t is the monopoly issuer of their very own ‘fiat brand’ of motor oil that the post-gold-standard era engine takes. Just like motor oil for any engine, more newly-issued dollars needs to be routinely added to our economy. Constant additions of newly-issued dollars, like motor oil, keeps our economy from seizing up and going into depressions (which the economy did six times before 1971 and also has never happened since). Furthermore, the United States is the largest economy in history, the dollar is the world’s reserve currency and our Treasury bonds are one of the safest investments on earth today. Meaning that there is no ‘capital flight’ and there is no desperate urgency to convert out of US dollars into another currency, so the Austrian is wrong about the ‘printing money will cause inflation’ thing as well. That said, both the Keynesian and the Austrian don’t need to fight an endless ideological battle between each other; because today, in this modern monetary system, hawks AND doves are needed very much at crucial times by the users of dollars (that seeks to maintain prosperity) and ALSO by the issuer of dollars (that seeks to widen prosperity). So instead, the Keynesian (with a fear of deflation) and the Austrian (with a fear of inflation) should make an effort to see both perspectives and work together with each other.
     Let’s get back to what is really happening under that hood. During the gold standard era, the federal gov’t could not just ‘print’ gold out of thin air. Federal gov’t deficit spending was being financed by borrowing gold-backed dollars. For whatever amount of debt that was incurred, it meant that the federal gov’t was on the hook in gold-backed dollars. Back then, Step 1 was for the federal gov’t to get authorization from Congress to deficit spend. Step 2 was to issue bonds to borrow the gold-backed dollars. Step 3 was to pay the vendors. After officially replacing gold-backed dollars with pure-fiat dollars, federal gov’t deficit spending became a different paradigm. Now, the federal gov’t, the issuer of fiat dollars, can just issue fiat dollars out of thin air. Post-gold standard, Step 1 is still the same, the federal gov’t gets authorization to deficit spend. Step 2 is the federal gov’t prints new fiat dollars by clicking on a computer keyboard. Step 3 is to ‘credit’ the vendor’s bank account with that computer keyboard. Step 4 is to issue bonds in the same exact amount that was newly-printed, however, not to borrow that amount, but only as an accounting entry, a ledger posting, a ‘debit’, of that same amount of fiat dollars, to consolidate the federal gov’t balance sheet. So before, federal gov’t deficit spending added to an actual outstanding debt of gold-backed dollars (similar to a household borrowing more and causing indebtedness); now federal gov’t deficit spending subtracts from the purchasing power of all outstanding fiat dollars (similar to a company issuing more stock and causing dilution). A gold-standard era credit card that ‘monetized debts’ with gold-backed dollars was cut in half and replaced by a post-gold-standard-era debit card that ‘monetizes deficits’ with fiat dollars. What causes the puzzled look on most fiscal policymakers whenever looking under the hood these days is understandable, because the US Treasury and the central bank are still using an outdated, gold-standard-era driver’s manual. Those bygone instructions, that were taught to all of us long ago and still told to us today, stick to the narrative that the federal gov’t, the issuer of fiat dollars, needs to ‘borrow’ fiat dollars, however, what is actually going on under that hood is quite different. In the post-gold standard, modern monetary system, federal gov’t deficit spending has been ‘money’ (debit) financed for decades, yet still to this day, takes place behind what is only an archaic facade of being ‘bond’ (debt) financed. The national debt, what was once an actual debt of gold-backed dollars before 1971, is now nothing more than a national debit of fiat dollars.
     For the non-federal gov’t, nothing much changed in 1971. You, me, all households, all businesses, state & local gov’t, we are not issuers of dollars, we are still just users of dollars. For the non-federal gov’t, the users of dollars, it’s simple: We can deficit spend more if our personal debts are low, and we shouldn’t deficit spend more if our personal debts are high. For the non-federal gov’t, the users of dollars, the dashboard indicator is the same one that we have always used, and is easy to understand:
Scenario #1)

    USER OF DOLLARS dashboard ‘indicator’:

    No Debt————X————–Too Much Debt


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

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

Scenario #2)

    USER OF DOLLARS dashboard ‘indicator’:

    No Debt—X————————Too Much Debt


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

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

Scenario #3)

    USER OF DOLLARS dashboard ‘indicator’:

    No Debt————————X—Too Much Debt


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

= NEED TO DELEVERAGE AND BALANCE YOUR BUDGET (Here is the time to be a deficit hawk, because if deficits of any user of dollars gets too high, they may ‘run out of dollars’, so any user of dollars must reduce spending in order to get their budget in balance).  
     The issuer of dollars is a completely separate paradigm from the user of dollars. The federal gov’t, the issuer of dollars, should use a different dashboard indicator, but sadly, because too many fiscal policymakers suffer from a federal-gov’t-is-the-same-as-a-household delusion, they don’t use it, despite also being very easy to understand:
Scenario #1)
ISSUER OF DOLLARS dashboard ‘indicator’:
 Inflation: —0%—————X—2%—
This is the best scenario, where the newly-created dollars that finance federal gov’t deficit spending & entering the money supply is closely matched by the newly-created goods & services entering the expanding economy. Those newly-created dollars are neither causing more than 2% inflation (dangerously subtracting too much purchasing power from all dollars) nor any deflation (dangerously adding too much purchasing power to all dollars). In this optimum ‘not-too-hot-not-too-cold-Goldilocks’ economic environment, the decrease of purchasing power of all dollars is contained to a desired level of inflation, just under 2%, the perfect margin of safety away from 0%:
= STRONG GROWTH SUSTAINED, MONETARY POLICYMAKER MANDATE OF PRICE STABILITY ACHIEVED…No need for the deficit hawks nor the deficit doves to prod their fiscal policymakers to take any counter-measures, because the economy is balanced. However, fiscal policymakers could still strive to correct remaining social imbalances, by addressing wealth inequality, and creating opportunities for all those that are not benefiting from the growing economy, like the underemployed, the unemployed, or the non-participating (Collateral damage from that ugly, yet just-as-important, other blade side on the sword of capitalism).
Scenario 2)
ISSUER OF DOLLARS dashboard ‘indicator’:
 Inflation: —0%——————2%—X—
Not a good scenario, but an easy problem for both monetary & fiscal policymakers to solve. In this scenario, newly-created dollars that finance federal gov’t deficit spending & entering the money supply is overpowering the newly-created goods & services entering the economy. Too many dollars chasing too few goods has resulted in inflation over 2%:
= INFLATION WARNING: MONETARY POLICYMAKERS SHOULD REDUCE ACCOMMODATING MEASURES (RAISE INTEREST RATES), WHILE FISCAL POLICYMAKERS SHOULD REDUCE STIMULUS MEASURES (LESS FEDERAL SPENDING AND/OR RAISE FEDERAL TAX RATES) TO GET THE ECONOMY BACK IN BALANCE…(Here is the time for the deficit hawks, taking the cue from their monetary policymakers, to prod their fiscal policymakers to act, but note, it’s a separate paradigm, the issuer of dollars is reducing spending to get the economy that is running too hot in balance, NOT to get ‘the budget’ in balance).
Scenario 3)
ISSUER OF DOLLARS dashboard ‘indicator’:
 Inflation: —0%—X——————2%—
In this scenario, the newly-created dollars that finance federal gov’t deficit spending & entering the money supply is getting overpowered by the newly-created goods & services entering the economy. Too many goods and services chasing too few dollars has resulted in disinflation to levels near zero which is threatening to worsen into a full-blown deflationary spiral. This is the worst scenario, the situation that many countries are stuck in today, and not an easy problem to solve, especially if fiscal policymakers fail to act because they think like users of dollars (they think like households):
= DEFLATION WARNING: MONETARY POLICYMAKERS SHOULD INITIATE ACCOMMODATING MEASURES (LOWER INTEREST RATES), WHILE FISCAL POLICYMAKERS SHOULD INITIATE STIMULUS MEASURES (MORE FEDERAL SPENDING AND/OR LOWER FEDERAL TAX RATES) TO GET THE ECONOMY BACK IN BALANCE…Here is the time for the deficit doves, taking the cue from their monetary policymakers, to prod their fiscal policymakers to act, but again note, it’s a separate paradigm. Unlike a household (the user of dollars), the federal gov’t (the issuer of dollars) is not as concerned with getting a budget in balance; the federal gov’t is increasing spending to get an economy, that is running too slow, back in balance.
     In conclusion, unlike the users of dollars, the dashboard indicator for the issuer of dollars is the current rate of inflation, not the current amount of debt. The perfect inflation rate, one that provides a margin of safety, is just under 2% per year. This 2% annual decrease in the purchasing power of all outstanding dollars, this slight level of inflation, is much more preferable to the alternative, which would be dangerously low inflation, or worse, outright destructive deflation. What determines how much the federal gov’t, the issuer of dollars, should deficit spend, is ALWAYS to keep inflation balanced, to keep the economy in balance, and NEVER to keep a budget balanced.
     The questions that fiscal policymakers need to ask themselves while looking under the hood: Is that newly-created demand entering the economy from that federal govt deficit spending increasing aggregate demand (?) Are the newly-created dollars entering the economy from that federal govt deficit spending stoking inflation (?)
     OR, is the stimulative effect of that newly-created demand and the inflationary bias of those newly-created dollars vaporizing on impact (?)
     If so, then please give your monetary policymakers a hand, and adjust that choke.
Happy driving,
Eddie D
Follow Pure MMT for the 100% on Facebook: https://www.facebook.com/PureMMT/
Also special thanks to @netbacker for his suggestions that inspired this post (Follow @netbacker on Twitter for more about the economy).
Using this ‘Inflation Indicator’ should be the US federal gov’t policymaker’s guide; but ONLY in the event of an economic crisis should it be THE guide. For example, similar to a badly-injured patient losing blood, the federal gov’t should perform an immediate transfusion of increased spending (s/b priority one in that triage situation).
However, when the economy has recovered, for the issuer of dollars, other ‘indicators’ should also be the guide when deciding on spending policies. Indicators such as productivity gains (are you seeing increased wage gains along with increased federal spending?); wealth inequality (are you only seeing stock & bond price gains?); price gains (are you only seeing currency-induced stagflation?); etc., must be considered by federal policymakers (taking cues from monetary policymakers) when making spending plans.
“MMT needs a more detailed explanation as to the limits of federal government spending and understanding of how we prioritize spending besides the catch-all inflation. Inflation is not as useful guide as it is more difficult to create in more developed countries than in the past. Inflation is not as relevant nowadays, because world-wide productive capacity has increased, and the ‘Savings Bubble’ liquidity trap takes money out of the consumer [functional] economy and puts it on ice.”—CHARLES ‘Kondy’ KONDAK, co-contributor to the Pure MMT for the 100% page.
Kondy next dives deeper into why the ‘inflation indicator’ (even though it is way better than using the ‘budget indicator’), still isn’t the only indicator to look at when making federal spending plans—even in a weak economy:
“Introducing money into the economy without increasing the percentage of people that can save, without improving productivity, or without producing a tangible asset for the public purpose, now or in the future, runs a much greater risk of just being ‘inflationary’. Yes, increased production wherever it occurs is beneficial; but increasing the ‘Savings Bubble’ [nonfunctional economy] without a healthy flow back into the productive [functional economy]?—NO! Further, even if none of these things are accomplished with deficit spending money creation [even if the spending plans were ‘paid for’ by taxes], it would still be a waste of money as it creates nothing of real value. We may run into having to make political decisions to prioritize spending, as we cannot do it all. This said there is a time and place during recessions for solely propping up aggregate demand. In the meantime, instead of using the ‘inflation indicator’, the gold-standard ‘federal-gov’t-is-the-same-as-a-household’ mentality of using the ‘budget indicator’ with federal spending decisions, continues (today in 2018). You have the Republicans, cutting taxes while increasing spending. Then, while we wait for those tax cuts ‘to pay for themselves’ (through increased economic growth), that’s when the Republicans next get busy and demagogue budget deficits and drumbeat the need to cut spending on other functions of government (except the military of course). The Democrats, not so much, but similar to the Republicans (some things never change), the exception to their spending plans is that they almost always come with ‘the pay for’ (with increased taxes upfront).”—Charles ‘Kondy” Kondak
Follow Kondy and his PURE MMT for the 100% co-Admins at https://www.facebook.com/PureMMT/
Another dashboard ‘indicator’ that the federal gov’t, the issuer of dollars (spending in its own fiat dollars), must also watch is Debt to GDP; because, even if you achieve your desired ‘level’ of inflation, it still might not be a desired ‘type’ of inflation.
If deficits are creating increases in productivity, then the Debt to GDP ratio should be falling; so if the economy is at the desired level of inflation, the Debt to GDP ratio should not be rising. If the Debt to GDP is rising, either we are stuffing the top 5% with just more dollars, with no production (inflation of asset bubbles / dollars stuck in the nonfunctional economy / wider wealth inequality), at best; or, at worst, we could be heading for a crisis.”—MINETHIS1
I agree…I think that MineThis1 is absolutely right. My understanding, when then-Vice President Dick Cheney said “Reagan proved that deficits don’t matter” in January 2004, he meant that what matters is GDP. As long as your GDP (your productive output) is rising at the same pace of deficits (federal ‘debt’), then you’re fine (and it’s even better if your GDP is rising faster than your rising ‘debt’).
H/T Jim ‘MINETHIS1’ Boukis
Follow MineThis1 and his REAL MACRO trading instructors at https://www.facebook.com/InvestingMMT/
“I’m not a fan of MMT — not at all.”—Warren Buffett
In a telephone interview today (Fri 3/15/19) the Berkshire Hathaway Inc. chief executive officer said that the deficit spending that’s part of the theory could risk inflation, perhaps even—in his words— a “spiraling” inflation. “It would be unwise to have the ratio of debt to gross domestic product grow consistently,” he added.
Note: If MMTers understand that ‘Their Deficits (Their Debt) = Our Savings (Our Money), then MMTers need to heed what Buffett & Minethis1 are saying. If Our Money (DEBT) is growing faster than Our Productivity (GDP), then you are heading for danger and as per Buffett “We don’t need to get near danger zones because we don’t know precisely where they are.”
“MMT persuaded me that deficits are ¯\_(ツ)_/¯, but I am still cautious about debt as a % of GDP (which is currently ~105% in the US).”—JLP (@JLouisPitcock on Twitter)
“Recently, Kelton (2019) has slipped in another long-standing Keynesian argument that stability of the debt-GDP ratio requires that the nominal interest rate be less than the nominal rate of growth (i < g). In doing so, she tacitly admits another financial constraint on government and continues the walking back process. On one hand, the walking back process is reasonable; on the other hand, it undermines MMT’s claims regarding government being financially unconstrained.”—Thomas Palley, ‘WHAT’S WRONG WITH MODERN MONEY THEORY (MMT): A CRITICAL PRIMER’, March 2019
Bingo…In addition to inflation, federal ‘debt’ / gdp is an important dashboard ‘indicator’ to keep an eye on. Look at Japan—the MMT ‘poster child’. In 1991, Japan’s ‘debt’/gdp was 50%. That was the start of their ‘lost decade’ (the first of more to come). While Japan’s ‘debt’/gdp ratio kept rising, Japan dropped from the world’s second largest economy to the third largest economy. In 2018, Japan’s GDP was $5.17T. That’s less than it was in the nineties (Japan’s GDP was $5.45T in 1995). MMTers should think twice before regurgitating that yarn about Japan being the ‘poster child’ since, as per Dr. Steve Keen in his 2017 book, Japan now features in popular culture as a cautionary tale about fading stars rather than rising suns.”



“This is why it is so important to distinguish between productive spending and unproductive spending. Productive spending adds to the real wealth of the real economy. Unproductive spending does not. The specific problem with an unproductive-debt boom is that it will further increase the total amount of credit flows WITHOUT a corresponding increase in the real wealth of the economy [it will further increase Debt/GDP, or in other words, it increases the ratio of ‘Our’ Savings v. output ]. Of course, just where inflation shows up varies from case to case. Sometimes the results of an unproductive-debt boom can show up as pure, unadulterated asset inflation. This is the heroin and cocaine of Wall Street—when all those extra flows push up the value of stocks, real estate, junk bonds et cetera while leaving the Fed’s traditional inflation-warning gauges untouched. Party! Paper-asset inflation can be just as destructive as any other kind of inflation. When the government malinvests, i.e. borrows or spends unproductively, it does not help things. In fact it only makes matters worse.”—Jack Litle aka ‘Jack Sparrow’, CEO of Mercenary Trader



It’s good to see that more folks are going beyond the political ‘prescription’ memes and are picking up on this:

“Some MMT advocates – including Stephanie Kelton, an economic adviser to Sanders – point to Japan as proof that the approach works. Despite high public debt, its economy is steadily recovering, and standards of living are high. It is not true that Japan’s experience proves that Modern Monetary Theory works, as some have argued. Though Japan’s gross debt-to-GDP ratio, at 240%, is the highest in the developed world, what really matters – for the government, just like for private firms – is the net debt-to-GDP ratio, which accounts for real and financial assets. And Japan’s public companies have very large real assets. In fact, by this measure, Japan is about on par with the US, and doing much better than France and Germany, according to the International Monetary Fund’s October 2018 Fiscal Monitor report ‘Managing Public Wealth’. Further challenging Kelton’s assessment, Japan’s primary balance has improved under Abenomics, thanks to its economic recovery.—Koichi Hamada, ‘Does Japan Vindicate Modern Monetary Theory?

Which is what MineThis1 has (correctly) been saying all along, which is that Japan is a ‘poster child’ not because the MMT approach works; but simply because Japan—good for her—is a wealthy nation. Meaning Japan or any other rich monetary sovereign with a rising ‘Debt’/GDP will be fine…UNTIL IT ISN’T.



Japan’s government Debt/GDP ratio reached 253% in 2017—but is it an *actual* ratio of 253%?

In a post-gold standard, post-QE world, if Japan has a 253% Debt/GDP ratio BUT their central bank bought back 40% of their bonds, perhaps it’s more like a net 152% Debt/GDP (60% of 253).

In other words, don’t count the bonds at the federal government’s own central bank (nor the newly-created reserves that replaced them) as part of the Debt/GDP ratio. Don’t take my word for it, ask someone in finance that’s worth their salt if bonds that are ‘called’ back from bondholders, by the bond issuer, are still a debt to that issuer? 

What I’m getting at is that in Japan’s private sector, the public-held debt in that 253% Debt/GDP was broken up. 101% of it (40% of 253) went to the BOJ—leaving a net 152% Debt/ GDP (60% of 253) in the private sector.

That 101% became newly-created reserves that the BOJ paid (for the bonds that replaced that 101% of that 253% Debt/GDP out from the private sector).

Meaning that (not including the 101% of JGBs that left the private sector and went to the central bank’s balance sheet) the 253% Debt/GDP is actually 152% Debt + 101% reserves / GDP in the private sector.

Furthermore, why count those reserves as debt (why include those reserves in the Debt/GDP ratio) if after all, those reserves are not debt. They are liabilities, yes; debt, no.

So that 253% Japan Debt/GDP ratio (that Godzilla) is more like 152%…and that’s even if you consider it a ‘debt’ (if you consider it a real monster).

So rather than thinking that Debt/GDP is actually a ‘debt’…or if that ‘debt’ is even actually that high…if it’s RISING is the real warning indicator

“The nation is selling out its national wealth as ‘Debt’ to GDP rises (as ‘Debt’ to Assets rise). If ‘Debt’ / GDP only keeps rising, that means federal-gov’t money creation is continuously outpacing its economy’s growth. In other words, the increase in private-sector production is not keeping up with the increase in public-sector printing. At some point, more people start losing faith in that currency and sooner or later, less people want it.”—MineThis1

“One could argue that Japan is a classic example of when federal-gov’t deficit spending (more ‘keystrokes’ instead of needed ‘pen-strokes’) has the effect of diminishing marginal returns on the productive economy.”—Charles Kondak


September, 2019:

H/T Jim ‘MINETHIS1″ Boukis:

“Dr. Stephanie Kelton’s ‘The Deficit Myth’ is a political ‘prescription’ MMT deficit myth. In the real world (outside classrooms), federal deficits are made possible by good-old fashioned hard work by the private sector. Federal deficits are predicated on the private sector to innovate and invest (using foreign or domestic savings—on existing wealth—that is assessed and collateralized into loans by bankers seeking to make a profit). That leads to the growing production of future wealth, which the federal gov’t can tax and ‘borrow’ from its citizen’s wealth (which enables every Uncle Sam to deficit spend).

This is how America—with only $23 trillion of all federal deficits combined aka the public ‘debt’—yet with only 5% of the total global population produces 25% of global GDP. Once you consider those US total national assets of about $150 trillion—almost a 6:1 ratio—it should become clear that federal deficits were not the driver of the creation of that wealth.

In fact, the complete opposite is true. It is private-sector PRODUCTIVITY that enables private-sector deficit spending (private-sector money creation) that enables those ‘almighty’ federal gov’t deficits and NOT the other way around—as political ‘prescription’ MMTers desperately try to get everyone to believe.

If you don’t have that private sector productivity, your economy is toast. For example, the cause of hyperinflation is always and everywhere a collapse in private sector productivity. Syria, Iran, Iraq, Turkey, Egypt, Cuba, Tunisia, the Soviet Union, Ukraine, Venezuela, Argentina, Zimbabwe are all fine examples. Whether it was war, civil war, gov’t corruption, or natural disaster, the cause of hyperinflation was a hindrance of the private sector to produce. NONE of these economies ended up hyperinflating because the federal gov’t wasn’t deficit spending enough on ‘prescriptions’ like gov’t subsidies or social programs and NONE couldn’t prevent hyperinflation with more federal taxation—both which are claims made by #FakeMMT that a US economy serving the ‘common good’ and ‘functionally financing’ the ‘public purpose’ would do in the event of rising inflation. Lastly, what about those other deficits, the TRADE deficits? #FakeMMT tells you that ‘imports are a benefit’ and so it’s a ‘myth’ to worry about trade deficits too. Yet NONE of those economies ended up hyperinflating because they didn’t have enough imports. The problem was that their citizens didn’t have enough money to pay for them (because their local currency was becoming worthless).

Excessive federal-gov’t budget deficit growth (‘debt’) to production growth (to GDP) is what diminishes—is what devalues—the currency. It ‘crowds out’ the private sector’s appetite to invest and lend in that currency. If deficits are not excessive / if ‘Debt’ to GDP isn’t rising excessively / if production is keeping up with deficits, it’s fine…until it isn’t. Until you’ve reached a danger zone where inflation only reflects monetary growth (where capital just creates more capital which only coddles the 5%) rather than reflecting economic growth (where capital creates more production which benefits all).

#FakeMMT skips the part where a nation first trashed the currency and points at private-sector borrowing as the root cause of all the economic problems—a huge mistake. In addition, another deadly innocent misinterpretation is that when the IMF steps in to implement changes (to discipline) a country’s excessive public-sector ‘printing’ and ‘borrowing’, it’s called ‘Neo-Liberal’ by #FakeMMT. But that is what got the country in trouble in the first place—so returning to sound economics is a must! There is no other way.

#FakeMMT puts the cart before their trojan horse (their Free Pony For All). They cleverly (deceivingly) using marketing strategy (political economics) to push dogma (ideological narratives) to indoctrinate unsuspecting economically illiterate people (voters). If you disagree, then you don’t care about global warming, you are against humanity, you haven’t read the literature, you’re a racist—or some other circular logical fallacy. As my friend Edward Delzio rightly says, MMTer’s politics are just fine, it’s the economics behind it that sometimes makes little sense. I agree. In politics, lying, cheating, kicking and scratching is the norm. In actual economics, math, facts and data are cold, hard truths that most people do not like to hear, so most would rather listen to political economics (aka pandering) without realizing the dire implications.

The private sector drives the economy and the value of a currency—period. Free Stuff For All is always voodoo economics because all deficit spending initially goes to the borrowers (the 95%) in the productive ‘real’ economy, but eventually winds up with the savers (the 5%) in the non-functional ‘financial’ economy. Deficits don’t equal ‘our’ savings, their deficits = profit for the top 5%. No profit can ever exist without household dissavings, so it is crucial that funding of income for the 95% come via investment from that top 5%—NOT from federal gov’t deficits. If you want to maintain an ecosystem feedback loop ‘balance’ between the productive (95%) and non-functional (5%) sectoral balances within the private sector, what is needed in the US now (during an economic expansion) are federal policy proposals that maintains current economic growth without requiring deficits. Today, you need more pen strokes, not keystrokes.

The pure ‘description’ MMT ‘deficit myth’ is that federal ‘debt’—denominated in its own fiat currency—is not an actual debt like a household debt. However, that doesn’t mean the federal gov’t can spend willy nilly. Just because there are no ‘financial constraints’ for a monetary sovereign, you still have those ‘political constraints’ when it comes to spending—same as a household. Meaning that you need to take the hint when Congress with the Power of the Purse (or your household spouse) doesn’t approve of your ‘prescription’; not because of the ‘cost’, but because fiscal policymakers are also concerned about the unintended consequences of your good intentions—and don’t want to risk throwing that golden baby goose (that private sector productivity) out with the bathwater. So in order to get Congress to approve any proposals for federal gov’t spending that increases deficits, it’s important to make sure that there will also be corresponding productive growth. That’s why surplus spending doesn’t need approval—because that spending is offset (is approved) by some taxes (by some production). Those are the pesky accounting rules & appropriations laws (the ‘operational reality’) enshrined in the US Constitution. The pure ‘description’ MMT insight is that unlike any user of fiat currency, rather than worry if you can ‘pay for it’ (if you can keep your budget in balance); the concern for any issuer of fiat currency is if you can ‘deliver it’ (if you can keep your ‘debt’/GDP in balance).

All I’m saying (especially to the people having a romance with radicalism now ‘liking’ and ‘hearting’ #FakeMMT), is just be careful about the free candy that you wish for. When you have been led to believe by POLITICAL ‘prescription’ MMT that The State can ‘pay for it’—but we cannot ‘deliver it’—that is a recipe for ‘too many dollars chasing too few goods’. Look at the Lebanese crisis now. Those poor people have no clue that it was years and years of print, borrow and import (and of course corruption) that got them to their economy’s ‘snap’ moment. They just think it’s ONLY corruption and not their lack of productivity relative to the free candy. So what you have now in Lebanon (same as Venezuela and all the other basket cases) is everybody blaming ‘the corrupt guy’ when it snaps, but it’s their fault too—they got what they asked for (for free).

Just because an economy starts using a free-floating non-convertible currency, that doesn’t mean tomorrow you can print, borrow and import as long as it isn’t causing headline inflation today—that’s THE DEFICIT MYTH of political ‘prescription’ MMT!”—Seventy Seven Deadly Innocent Misinterpretation #77  



“The debt is growing faster than the economy. It’s as simple as that. It’s unsustainable. Ultimately you’re going to have to get it NOT growing faster than the economy—not growing faster than the nominal GDP. Just because rates are low, with decent economic growth, it does not mean that we can ignore deficits. We’re going to have to get on a sustainable path—to reduce these deficits. If we don’t do it, what happens is that our children wind up paying more tax dollars on interest than on things they really need like education, security and health. You don’t need to balance the budget or pay down the debt, you just need to get the economy growing faster than the debt.”—Federal Reserve Chairman Jerome Powell testifies before lawmakers, 11/13/19



“Government spending hasn’t crowded out private borrowing YET. Reagan ran the debt up from 30% of GDP to 50% of GDP. The great recession took debt from 65% in 2008 to 100% in 2012.  Can this number just go to infinity without consequence? My concern is that at some point bad things will happen.”—Doug Simpkinson

BINGO…Deficit spending is fine, UNTIL IT ISN’T; however, since all that sounds like yet another ‘printing money causes hyperinflation’ criticism, political ‘prescription’ MMTers are quick to scold anyone asking questions like this with their usual reply that hyperinflation is caused by a collapse in production—not ‘printing money’. Once you wade a little deeper out from the intro level of MMT (once you go beyond the ‘deficit spending doesn’t cause inflation unless you reach the resource constraint’ / ‘printing money doesn’t cause hyperinflation’ / ‘the issuer doesn’t default’ memes), take all those examples posed in the question (where the ‘debt’ increased from 30% of GDP to 50% of GDP in the 1980s and from 65% to 100% after the 2008 credit crisis) and reverse the numerators / denominators. Meaning if you read the same data with the ‘debt’ as the constant, the GDP decreased. In other words, there was a COLLAPSE IN PRODUCTION. The pure ‘description’ MMT answer to the question is that this GDP/’Debt’ number can head towards zero without consequence (It’s fine…) but at some point bad things will happen (…until it isn’t).


Almost All Swiss Gov’t Bonds Have Negative Yield

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

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

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

A recent WSJ graph titled ‘Sub Zero Switzerland’ showed that yields on Swiss gov’t bonds were even lower than America’s, Japan’s and Germany’s gov’t bond yields.

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

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

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

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

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

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

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

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

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

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

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

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

Thanks for reading,

Eddie D

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

A Suggestion For MMT

Proponents of Modern Monetary Theory say ‘Gov’t v. Non Gov’t’…

They say that ‘Gov’t Deficits = Non Gov’t Surpluses’…

But on a given day, if the federal government deficit spent and added dollars to the banking system (aka net financial assets or high-powered dollars) which ONLY went to state & local gov’t, this isn’t captured with just Gov’t v. Non Gov’t. For example, if the federal gov’t deficit spent only to state & local gov’t, for grants, infrastructure, workforce development, or medicare/medicaid reimbursement, the Gov’t v. Non Gov’t model shows net nothing happened. Meaning with this present two-sector model, we are missing that improvement of those state & local government’s financial standings due to that significant state & local surplus, which also decreases their municipal bond ‘leverage vulnerability’…

Conversely, in a misguided effort by policymakers to attain federal gov’t surplus, if they were to cut federal funding to the state & local gov’t, again, this model doesn’t reflect state & local gov’t savings deficits that will have negative economic effects to their financial standing. In addition, that may spill over to decrease private sector savings, threatening the private sector’s financial standing, which may not only increase the state & local ‘leverage vulnerability’, but the private sector’s as well…

Perhaps MMTers could improve on the Gov’t v. Non Gov’t model and make it even better? Not to say that there is anything *wrong* with it, just offering an idea that may improve it. We’d still be crank-starting cars if we stopped tweaking them, right? So here’s a suggestion: How about we slide state & local gov’t over with the private sector, and instead say Federal gov’t v. Non federal gov’t…

I believe this modification would go a long way, not just in a slightly better illumination of financial flows, but also in helping the uninitiated better understand and more easily accept the concepts of Modern Monetary Theory (MMT). The ‘issuer’ of dollars v. the ‘users’ of dollars will start to make more sense to more people. This may also have a far-reaching cauterization effect that may heal the political divisiveness that has been so detrimental to solving America’s problems. If we no longer commingle federal gov’t with state & local gov’t, more folks with hard-wired ideology and confirmation bias may begin to understand what ‘the-federal-gov’t-is-not-the-same-as-a-household’ and by extension ‘the-federal-gov’t-is-not-the-same-as-a-state-&-local-govt’ really means. This is a compromise to all the ‘Fiscal conservatives’ and ‘Deficit hawks’ who can continue to fight their good fight for state & local gov’t to get their fiscal houses in order, while at the same time becoming less suspicious of MMT proponents if they, as we, see the federal gov’t as a separate paradigm…

Take these three entities:

A) Federal gov’t  B) State & Local gov’t  C) Private sector households & businesses

Of the entities above, which one, or two, and/or maybe all three all together, match these following scenarios:

1) This entity has the AUTHORITY TO TAX…2) The taxation by this entity MUST be done to finance its spending…3) Once all revenue inflow (no matter what source) is exhausted, this entity MUST then borrow dollars to spend…4) In order to borrow, dollars must be LENT to this entity (this entity must ‘get’ dollars from someone else)…5) When borrowing dollars, this entity goes into actual DEBT…6) All of this entity’s debt must be ‘PAID BACK’…7)  This entity is the ‘ISSUER’ of dollars…8) This entity is a ‘USER’ of dollars…9) In the game of Monopoly, this entity is more like ‘BANKER’…10) In the game of Monopoly, this entity is more like ‘PLAYER’…11) This entity IS NOT revenue constrained (it always has unlimited dollars)…12) This entity IS revenue constrained (it only has limited dollars)…13)  This entity needs to BALANCE THE ECONOMY because it will never run out of dollars…14) This entity needs to BALANCE THEIR BUDGET or else they will run out of dollars…15) This entity acts for the greater good and a common cause for ALL people…16) This entity acts as either a ‘non-profit’ or a ‘for-profit’ only for CERTAIN people…17) This entity IS the ‘Lender-of-last-resort’…18) This entity IS NOT the ‘Lender-of-last-resort’ 19) This entity has NEVER experienced a missed interest payment, a debt restructuring, or actual default of their debt (this entity has very little leverage vulnerability)…20) This entity MAY have in the past experienced a missed interest payment, a debt restructuring, or actual default of their debt (this entity has some leverage vulnerability)…

How many times did you choose A) Federal gov’t AND B) State & Local gov’t together at the same time…once or twice (?)

How many times did you choose B) State & Local govt AND C) Private sector together at the same time…more than that (?)

If B & C together walk like a duck….and B & C together sound like a duck…perhaps start calling them a ‘Non federal government’ duck (?)

Thanks for reading,  

eddie d

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