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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

…however…

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

 

 

Thanks for reading,

eddiedelz@gmail.com

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

Local taxes do fund spending.

 

State taxes do fund spending.

 

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

 

The oft-abused phrase “Federal Taxes Do Not Fund Spending” is not entirely accurate. I don’t question anyone’s motive saying it, to be clear, I am 100% positive that each time it is said by an MMTer (Modern Monetary Theory enthusiast), no question it is to promote MMT. Federal gov’t DEFICIT spending (the spending that is not funded by taxes) was only 15% of total spending last year. Besides not being entirely accurate, saying ‘Federal taxes do not fund spending’ veers off course from that first of Seven Deadly Innocent Frauds, which states that it is incorrect to think that federal taxes “must raise funds through taxation”, and that it is incorrect to think that federal “gov’t spending is limited by its ability to tax” (7DIF pg 13). I interpret that not as saying that federal taxes do not fund spending, but only as saying that the federal gov’t, while it is taking in tax revenues, while it is indeed spending those funds, because it is the issuer of dollars, those revenues, those federal taxes are NOT NEEDED to fund spending anymore, a big difference. ’Federal taxes do not fund spending’ is a deadly innocent misinterpretation of this MMT pillar…

 

‘Federal taxes do not fund spending’ is also a misinterpretation of the accounting construct on the consolidated balance sheets of the federal gov’t. When taxes are paid, yes, those dollars are ‘destroyed’, it’s a simple bank entry, a bank debit, a ‘dollar drain’, debited from the taxpayer’s account, but that’s only half of it, only one side of the seesaw. Rather than thinking that ‘dollar drain’ is a simple change of numbers on a spreadsheet, you should be thinking where are those dollars draining to; and more importantly, other than a taxpayer’s bank account balance, that federal taxation just ‘destroyed’ net financial assets (dollars in the banking system). Thanks to the consolidated balance sheets of the federal gov’t however, that debit of taxes creates an equal and opposite entry, a ledger posting, a credit (funded by taxes), to the federal gov’t, which in turn is immediately debited back, to someone else, a.k.a. ‘surplus spending’, the spending funded by dollars that DO NOT add net financial assets (that is not a net increase in the amount of dollars in the banking system). So rather than only seeing taxes as a ‘destruction’ (debit) of dollars, better to also see it as an equal and opposite creation (credit) to the federal gov’t of previously-existing, or more significantly, as previously-Congressional-approved dollars being immediately ‘recycled’, and instantly making whole those net financial assets, those dollars in the banking system, that were just previously ‘destroyed’ by federal taxation…

 

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

 

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

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

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

[Gov’t spending – Taxes] = 0

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

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

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

G – T = 100 – 0

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

S – I  +  M – X = 100

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

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

G – T = 100-85

S – I  +  M – X = 15

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

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

G – T = 0-85

S – I  +  M – X  =  (-85)

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

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

G – T = 85 – 0

S – I  +  M – X  =  85

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

 

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

G – T = 15 – 0

S – I  +  M – X  =  15

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

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

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

 

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

 

Let’s take an even closer look at our federal government’s central bank, the Federal Reserve. The Fed is part of the federal gov’t, or as they define it, ‘independent within the federal government’. That said, there are some characteristics of the Fed that lead many folks to believe (incorrectly) that the Fed is ‘private’. For example, even though it is part of the federal gov’t, the Fed is not capitalized by the federal gov’t. The way the Fed gets its equity capital is by private sector US banks being required to buy and hold non-voting shares in the Fed. Furthermore, some spending by the Fed (part of the federal gov’t) is not funded by the federal gov’t. Show me someone who thinks that we in the private sector do not fund federal gov’t spending at all, and I’ll show you someone who does not know (or does not like to mention the fact) that the Fed’s spending IS NOT funded through the congressional budgetary process. The Fed gets most of its revenues from the bonds it holds. Meaning the Fed pays for some its spending from the interest income of mortgage bonds held at the Fed, like for example, at the time of this writing, the $2T of mortgage-backed securities (MBS) that the Fed purchased during the Large Scale Asset Program (LSAP) and presently held on the Fed’s balance sheet. So to this day every time some folks in the private sector make a mortgage payment, a mortgage payment that includes interest expense servicing that mortgage, that interest, those hard-earned dollars, goes to where the mortgage is held, which right now has a one in six chance of being at the Fed. The Fed pays for its own spending with that interest income from the private sector. In other words, payments from the private sector *literally* funded gov’t (Fed) spending in 2016. Furthermore, any profits after funding the Fed’s expenses are handed over to the Treasury. Last year the Fed sent a record $97.7 billion in profits to the U.S. Treasury. Same as you paying federal taxes, when the Fed paid that amount, it was debited (‘destroyed’) on one side of the federal gov’t accounting seesaw, that amount was then promptly credited on the other side of the federal gov’t accounting seesaw, and immediately debited (using newly-created dollars) right back to the private sector for on-budget expenditure (federal gov’t surplus spending). In other words, exactly the same as when you pay federal taxes, these Fed payments sent to the US Treasury (the same place you make out your check to whenever paying US federal taxes) were ‘destroyed’, but that’s just half of the story. These revenues are simultaneously reducing the deficit spending portion of total federal gov’t spending. Q) What funded this reduction in deficit spending? A) Revenues. Semantics aside, the MMT pillar is that revenues ARE NOT NEEDED to reduce deficit spending, that revenues, like taxes ARE NOT NEEDED to fund spending (not ‘taxes don’t fund spending’). Anyone like one of these ‘No Such Thing As Surplus Or Deficit Owls’ thinking ‘Federal revenues don’t fund federal gov’t spending’, simply has it wrong. The correct thinking is that we, our revenues, don’t fund federal gov’t spending PER SE (Latin for “by itself”). Meaning that even though federal gov’t revenues are intrinsically part of funding federal gov’t spending, they ARE NOT ESSENTIAL to funding federal gov’t spending.

 

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

 

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

 

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

 

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

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

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

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

_____________

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

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

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

_____________

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

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

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

______________

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

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

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

______________

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

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

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

_______________

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

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

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

______________

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

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

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

______________

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

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

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

______________

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

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

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

______________

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

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

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

______________

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

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

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

_______________

 

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

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

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

_______________

 

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

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

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

 

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

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

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

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

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

_____________

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

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

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

______________

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

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

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

_______________

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

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

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

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

 

My biggest problem with ‘taxes don’t fund spending’ is the tone of it. Saying that dollars today are just like points on a scoreboard is an excellent analogy, but don’t take the analogies too literally. Dr. Kelton, yes, ok, the tickets (taxes) are ‘destroyed’ at the turnstile (the reserve ledger) but that doesn’t mean THEY AREN’T COUNTED. The stadium (federal gov’t) is ‘destroying’ (debiting) the taxes, but of course that 70,000 seat stadium is counting (crediting) them, counting the people (dollars), making sure they don’t let in too many (inflation). How does an MMTer say ‘taxes are only to control inflation’ but then also says taxes aren’t counted (aren’t funding surplus spending) with a straight face? Saying that taxes are simply ‘destroyed’ and do not fund spending is like saying that the gas (taxes) you put in your car doesn’t make the car go, only the wheels make the car go, and the gas doesn’t ‘fund’ acceleration because the gas is ‘destroyed’ in the engine. Saying that your taxes do not fund spending because they are ‘only points on a scoreboard’ is like saying to the football player that his touchdown didn’t put the seven points up. If some MMT academic pointing to her blackboard tries to tell that running back that he doesn’t understand how it works, that the points on the scoreboard change ‘via crediting accounts’ and that ‘they don’t come from anywhere’, that sweating, bleeding and exhausted player (someone who is interested in learning about MMT) who knows exactly who funded those seven points is not going to agree at all (setting back the MMT cause). This schoolroom notion that federal gov’t spending is just dollars being ‘keyboarded in’, that it’s only just a ‘1’ and a ‘0’, and nothing more, oversimplifies what is happening in the real world. In a June 2017 Real Progressives broadcast, Warren Mosler said “if you were to pay your taxes with a bunch of old twenty dollar bills, the gov’t would take your money, give you a receipt, say ‘Thank You’ very much FOR FUNDING the last airstrike in Syria or whatever THEY DID WITH THE MONEY, and that money goes out the back door, into a shredder.” Mosler’s point there was not ‘taxes don’t fund spending’, it was that the users of dollars (you and I) are different from the issuer of dollars (the federal gov’t). When you or I receive dollars (a $20 bill), we USE those same dollars (that same $20 bill) for spending, whereas the federal gov’t does not, because the federal gov’t ISSUES new dollars for spending. Total federal gov’t spending in 2016 was $3.854T. Taxes ‘destroyed’ dollars in the banking system and new dollars were issued to fund all that total spending, but not all that total spending of $3.854T was deficit spending. Not all that total spending was a net addition of dollars in the banking system. In 2016 only $0.587T was deficit spending. What reduced the amount of total federal gov’t spending, funded by newly-created dollars, from $3.854T in 2016 to only $0.587T of deficit spending? The answer, surplus spending, funded by taxes, is obvious to most, including Mr. Mosler (except the MMT ‘academics’ that say ‘taxes don’t fund spending’). Taxes ‘destroy’ dollars, yes, so all federal spending is newly-created dollars, sure, but what these academics don’t see is a very important distinction, which is that ALL federal spending IS NOT adding net financial assets (IS NOT increasing dollars in the banking system). Only deficit spending (15% of total spending in 2016) adds net financial assets (actual “HPM”), and the newly-created dollars of surplus spending DOES NOT. Surplus spending doesn’t add net financial assets because surplus spending is funded by taxes (makes whole a previous ‘destruction’ of net financial assets). Only deficit spending adds net financial assets. Every fiscal year, the amount of federal gov’t deficit spending is reduced, is offset, is funded by taxes. Another important distinction, unlike deficit spending, surplus spending (85% of total spending in 2016) DOES NOT need Congressional approval, because it is funded by taxes. Furthermore, all federal spending isn’t the same, like a helicopter drop, those dollars aren’t keyboarded in to just anyone. Anyone getting federal gov’t spending dollars performed a service, provided some goods, they ‘provisioned’ the federal gov’t, which carries forward, in a non-stop, circular, trade-off, inside a man-made ecology of labor for dollars. If you say ‘taxes don’t fund spending’ to a non MMTer, then you are saying to that person, who just finishing a double shift, that their labor, 33% of it needed to get those tax dollars, that their payments to the gov’t from withholding, and that their checks written out on April 15th to the gov’t, doesn’t fund the gov’t, doesn’t fund spending, because their tax dollars are destroyed, because those dollars just go ‘poof’, they will tune you out. If however, you say it correctly, if you instead say that their ‘taxes ARE NOT NEEDED to fund spending’, they will be intrigued. Regarding those tickets collected in the analogy, before being ‘destroyed’ (on one side of the seesaw), those tickets were counted, and those tickets offset deficit spending by funding the stadium’s surplus spending (the other side of the seesaw). Any non federal gov’t debit entry (payment of taxes) triggers an automatic, equal and opposite, federal gov’t credit entry (receipt of funding), and like any revenue, is immediately debited out (surplus spending) against on-budget federal spending. The same goes for federal revenues from Treasury bond sales as well. Semantics aside, the more important point is that unlike over at ‘Local Gov’t Stadium’ and unlike over at ‘State Gov’t Stadium’ where those tickets (taxes and bond sales) are needed to fund their spending, at ‘Federal Gov’t Stadium’, those tickets ARE NOT NEEDED to fund spending (that’s not saying they don’t at all). To be clear, ‘Federal Gov’t Stadium’ is still getting funded like the other stadiums, but unlike the other stadiums, as a monetary sovereign, ‘Federal Gov’t Stadium’ doesn’t actually need that funding for spending, or more specifically, its spending is no longer by constrained by ticket sales. That’s why there are so many more arguments with the accountants about expenses at ‘Federal Gov’t Stadium’…

 

J.D. Alt, author of ‘The Millennials’ Money’, has a video that perfectly visualizes how our monetary system works with both his ‘old diagram’ (the narrative using gold standard mentality) and his ‘new diagram’ (the reality using the MMT description). The video is perfect…because….J.D. doesn’t veer away from that MMT pillar that says taxes are NOT NEEDED to fund spending. Instead of innocently misinterpreting that MMT pillar with ‘taxes don’t fund spending’, J.D. says it correctly. In his video he says “The federal gov’t DOESN’T NEED the cancelled iou in order to issue and spend new fiat dollars” and “The sovereign federal gov’t HAS NO NEED to harvest what it can create on its own anytime it needs to.” Furthermore, J.D. Alt offers suggestions for new mainstream thinking. For example, he suggests that we all start saying “Net Spending Achievement” instead of federal gov’t deficit spending, and call the national debt “The National Savings.” I give J.D. Alt a lot of credit for understanding that this is a giant leap in new thinking for most people, and he is very careful to include those words ‘not needed’ in his statements…because…as he also says in that video, “We need to make sure we use the right terminology.”

 

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

 

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

 

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

 

During an online discussion, fellow MMTer Mike Morris wrote, “I see the MMT position as the endgame, wholeheartedly supporting it, once we have a Congress capable of enforcing it, and an electorate educated enough to back said Congress. Takes time.” That is well said and that, is the crux of this discussion. When that endgame happens, after the electorate has become educated, and after said Congress has reconfigured their thinking about our monetary system, which will take time, that’s the day we can say ‘taxes don’t fund spending.’ If you say it before then, you are jumping the gun, and you sound like a complete boob. If however, you say ‘taxes are not needed to fund spending’, then good for you, because then you are helping the MMT cause, then you are helping getting us closer to the endgame.

 

To be fair to the ‘Taxes don’t fund spending!’ element out there, here’s really why they insist on saying that: If they cede the fact that taxes do fund surplus spending, they fear they will get outflanked by the ‘How are we going to pay for that?’ element and the country will never get free healthcare, free college, free whatever. I get that. In my opinion, they should cede that ground, take the higher road, and just say it right, say ‘taxes are not needed to fund spending’ to win the day (to get groupthink out from that gold standard era mentality). After I posted an excerpt of this very blog on the Investing Money Monetary Theory (IMMT) Facebook website created by MINETHIS1 on 05/30/17, Warren Mosler commented that he “never made the statement ‘federal taxes don’t fund spending’ and if perchance I did it was carefully qualified”. My reply to Mr. Mosler was yes, I knew he was saying it right, that he has been saying it right all along (7DIF), just that getting all other MMTers to also say it right was my only interest. Rather than trying to be argumentative with MMTers, I’m simply offering a suggestion that I believe would help them. “Whatever politics an MMTer has, whatever spending on public purpose they want for the common good, is fine by me,” I added. He agreed.

 

The nonsensical ‘taxes don’t fund spending’ narrative takes the ‘stadium tickets get ripped up at the turnstile’ analogy too literally. Warren Mosler’s point with all that was to change our thinking how we look at the order of funding operations from once upon a time vs. now. Back then, federal taxes paid with gold-backed dollars were collected from us first and then spent back to us. The amount of spending, the amount of ‘ticket sales’, was constrained by the amount of gold. Now, the the order is flipped, it’s a new paradigm, a new currency. Now, similar to a stadium, the federal gov’t ‘supplies’ the fiat dollars (‘stadium tickets’), to us first, and then collects them back. In other words, back then, we first funded ‘Federal Gov’t Stadium’ with a limited amount of already-existing, gold-backed dollars, and then they funded us back; now, ‘Federal Gov’t Stadium’ funds you first with newly-created, fiat dollars, and then you fund them back. As the issuer of fiat dollars, the potential for ‘ticket sales’ at ‘Federal Gov’t Stadium’ is now theoretically unlimited. Mr. Mosler’s stadium ticket analogy is just to get us to rethink the order of funding operations, not to think that ‘taxes don’t fund spending.’ Mr. Mosler also wants you to rethink what funding means.

 

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

 

It’s a new order of funding operations. Taxes as a ‘financing’ operation (which involves running balances of surplus spending financed by taxes vs. deficit spending not financed by taxes) takes the back seat; and taxes as a ‘funding’ operation (which involves movements of dollars vs. reserves that maintains price stability) is now in the front seat.

 

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

 

Mr. Mosler’s answer to that question was not ‘Yes, that’s right, that’s correct, and whoever disagrees or posts otherwise doesn’t understand MMT’; that answer was Q) Federal taxes do not fund spending, right? A) Wrong. Interpret that as him wavering on ‘federal taxes do not fund spending’, why he never says it, and for a very good reason (because it ain’t MMT). Warren Mosler, the father of MMT, doesn’t say it that way because it’s ambiguous, it’s not entirely accurate, and it shows a lack of actual banking experience and a confusion with simple financial concepts like ‘funding’. Which gets ironically weird if you are going around telling people that they don’t know how banking and finance really works. If you are speaking to a simplistic flock of lost souls and lonely hearts that ‘like’ you, ‘share’ you, and ‘heart’ you, (will vote for you) because you’ve convinced them that their bad lot in life is someone else’s fault and that you are going to get them free stuff (oldest trick in the political book), then say ‘taxes don’t fund spending’ (it works brilliantly for that cause). If, however, you are speaking for the MMT cause, then trust Warren Mosler and for everyone’s sake (mainly yours), don’t say it. I hope you now know why.

 

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

Q) “Taxes don’t fund spending right?”

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

I rest my case.

 

Local taxes are needed to finance spending…

State taxes are needed to finance spending…

* Federal revenues ARE NOT NEEDED to finance spending…

* Federal Treasury bond sales ARE NOT NEEDED to finance deficit spending…

* Federal taxes ARE NOT NEEDED to finance surplus spending.

 

 

Thanks for reading,

 

 

eddie d

eddiedelz@gmail.com