The Seven Deadly Innocent Misinterpretations

Deadly Innocent Misinterpretation #1: ‘Federal taxes are a destruction’…


Fact: Only federal taxes paid after a certain point has been reached is an actual ‘destruction’.


Saying ‘taxes is a destruction’ is not entirely accurate. It misses a much more important concept that only MMTers who are fully grasping the distinctions between deficit spending, which adds dollars to the banking system (adds net financial assets because they are not funded by taxes); and surplus spending, which doesn’t add dollars to the banking system (doesn’t add net financial assets because it is funded by taxes).

After federal taxes (usually paid with a check made payable to ‘The Treasury’) are ‘destroyed’ (debited), there is an equal and opposite ‘creation’ (credit) of reserves to the Treasury’s General FUNDS Account (GFA) at the Fed, the same Treasury account that all federal spending is drawn from.

There are two ways that injections of newly-created reserves to the GFA are decreased:

1) Those reserves are debited from the GFA and newly-created dollars are spent towards on-budget federal expenditure (a bygone remnant known as ‘surplus spending’). If those reserve amounts have accumulated to the point where there is no deficit spending needed at all for the fiscal period (the Clinton years), then…

2) …those reserves are also debited from the GFA and newly-created dollars are credited to individual Treasury bondholders INSTEAD of to people that provided goods or services provisioning the gov’t. In other words, the reserves are ‘spent’ towards ‘paying off’ the national ‘debt’ (that idiosyncratic, gold-standard-era throwback to the fiscal-year ‘budget surplus’).

NOTE that in the first scenario, there is NO permanent ‘destruction’ of net financial assets from the banking system (the surplus spending ‘refunds’ a temporary ‘destruction’); and in the second scenario, there IS a permanent destruction because there are less of those non-federal gov’t savings accounts. Sustained fiscal year budget surpluses result in less of those non-federal gov’t assets that we still call US Treasury bonds (aka the national ‘debt’ by those still using not-so-modern monetary ‘mentality’)…

If at the end of a fiscal year, the federal gov’t had a budget deficit, that means that there was a creation of net financial assets. If at the end of a fiscal year, the federal gov’t had a balanced budget, that means that there was no creation. If at the end of a fiscal year, there was a budget surplus, there was a destruction.

This crucial distinction, this ACTUAL DESTRUCTION, is why all six depressions in US history were preceded by sustained, fiscal year federal gov’t budget surpluses.


Deadly Innocent Misinterpretation #2: ‘Gov’t deficits equal non gov’t surpluses’…


Fact: Gov’t deficits can also equal non gov’t deficits.


Gov’t deficits equal non gov’t surpluses’ isn’t entirely accurate because the non gov’t is comprised of two sectors, so in the post-gold standard, POST-NAFTA, modern monetary system, we need to be careful when blurting that out.

First of all, I suggest never saying ‘government v. non government’ because it is too easy to confuse a local gov’t or a state gov’t as being part of the ‘government’ rather than being part of the ‘non government’. Whenever explaining MMT to the uninitiated, I always say ‘federal government v. non federal government’. Once you have hard-wired ‘federal government v. non federal government’ into your MMT thinking (into your listener’s MMT thinking), trust me, it is much easier to separate out the federal gov’t from the households, the businesses, the local governments, the state governments (and even the foreign governments) in the non federal government.

As all MMTers are aware, the non federal gov’t consists of two sectors, the ‘non federal gov’t / Domestic’ (aka the private sector) and the ‘non federal gov’t / International’. As per the Sectoral Balances chart, the federal gov’t deficit always equals the two non federal gov’t sectors COMBINED, yes; but sometimes a federal gov’t deficit results in a deficit for the non federal gov’t / Domestic as well. Case in point, in each of these following years, while the federal gov’t had run a fiscal year budget deficit, the ‘non federal gov’t / Domestic’ had run a deficit as well (h/t Chris Brown ‘Sectoral Balances info-graph of US Private Sector Dollar Drains & Dollar Adds Since 1992′)…


$107B federal gov’t deficit in 1996:

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

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


$22B federal gov’t deficit in 1997:

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

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


$157B federal gov’t deficit in 2002:

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

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


$378B federal gov’t deficit in 2003:

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

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


$412B federal gov’t deficit in 2004:

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

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


$318B federal gov’t deficit in 2005:

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

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


$248B federal gov’t deficit in 2006:

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

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


$161B federal gov’t deficit in 2007:

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

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


$458B federal gov’t deficit in 2008:

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

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


We all remember what happened in 2008.

The result of sustained private sector (non federal gov’t / domestic) deficits.

Unlike federal gov’t deficits, counter-intuitive to mainstream belief, only private sector deficits are the deficits that are actually unsustainable.

In all these years above, the non federal gov’t / International’s ‘black ink’ was the non federal gov’t / Domestic’s ‘red ink’. If you take a step back from the picture and think about that, in effect, all those years above, from the perspective of the US private sector, those years had the same exact debilitating consequences as if the federal gov’t, by proxy, ran sustained budget surpluses.

All previous depressions in US history were preceded by sustained federal gov’t surpluses. As per Warren Mosler, using old metrics (before the 1990s when the federal gov’t sliced up unemployment into multiple ‘tranches’ from U1 to U6), the definition of a depression used to be if unemployment hit (averaged over) 10%. According to the Bureau of Labor Statistics (BLS), a unit of the US Department of Labor, at the end of the last (‘Great’) recession, in June 2009, unemployment (the ‘U3’ official unemployment rate) was 9.5 percent. In the months after the recession, the unemployment rate peaked at 10.0 percent (in October 2009). Mr. Mosler was onto something. Calling the last economic downturn a ‘recession’ was sugar-coating the reality. The ‘Great’ recession, the ‘Worst Economic Downturn Since The Great Depression’ (as we were told), was a depression, and for practically the same reason as all the others (sustained private sector deficits).

My guess, when MMT goes mainstream, focusing on the accumulated amounts of these private sector deficits (instead of focusing on the accumulated amounts of federal gov’t deficits) will not only be considered another leading economic indicator, but will serve as a much better guide for fiscal policymakers when making deficit spending decisions.


Deadly Innocent Misinterpretation #3: ‘The subway token doesn’t fund the subway’…


Fact: This is a misinterpretation of 7DIF Fraud #1. The subway token and the stadium ticket analogies only mean that the monetary sovereign issuing its own pure fiat currency won’t ever run out of tokens or tickets (no solvency risk, no constraint on spending), not ‘the tokens don’t fund the subway’.


This misinterpretation is a classic example of MMT ‘academics’ confusing the modern monetary ‘theory’ (where we will be in the not-so-distant future) with the not-so-modern monetary ‘formalities’ still existing (albeit unnecessarily) in our not-so-modern monetary ‘reality’ (where we are right now). Of course subway systems don’t pay subway employees in tokens (which makes the utterance *technically* correct), but instead of saying ‘the tokens don’t fund the subway’, perhaps it’s better to say something like, “The tokens are part of the transfer mechanism and the subway company controls the transfer mechanism by feeding it with tokens at will” (h/t Teo Teodorescu).

The MMT ‘academics’ that keep using this meme have no idea how ridiculous they sound when they say this outside their choir (to someone who has actually bought a subway token or a stadium ticket). “They insist on reducing MMT to useless platitudes, all over this stupid term ‘fund’” (h/t Vernon Etzel).

My question to these ‘academics’ who wave bye bye to double entry accounting each time they say ‘the subway token doesn’t fund the subway’ is: Does the subway rider also get ‘destroyed’ when he puts the token in the turnstile?

Of course not.

The ‘destruction’ (The debit) of tokens (of tax credits) triggers a ‘creation’ (triggers a credit) of riders (of reserves) into the subway car (into the Treasury’s General FUNDS account at the Federal Reserve Bank) and travel (and are electronically key stroked) in a special tube underneath the city (via the monetary base) which those riders soon exit (which soon get debited) out from the subway (out from the GFA) and go back into (and credited to) the city (the money supply) from whence they came (from whence they came).


Deadly Innocent Misinterpretation #4: ‘All federal spending is financed by High Powered Money’…

Fact: ‘Newly-created’ money finances all spending, but ‘newly-created’ money is not the same as ‘High-Powered’ Money.

While a Ph.D. candidate in 1998, Stephanie Bell wrote a paper entitled ‘Can Taxes and Bonds Finance Gov’t Spending?’ 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’.


The Federal Reserve Bank is independent, and the reason why, was the result of a public spat in 1948 (the end of WWII / beginning of the Korean ‘conflict’) between the Fed and the Treasury that was eventually resolved in the ‘51 Fed-Treasury Accord. That argument, between the Fed (Marriner Eccles, Chair of the Federal Reserve since 1934) and the Treasury (Secretary of Treasury Henry Morgenthau) started because the Treasury didn’t understand the difference between ‘newly-created’ money and ‘high-powered’ money (HPM). The Fed won that fight but it cost Eccles his job.


At the time Eccles had this rift with Treasury, the Fed (unlike today as a result of the ‘51 Accord) could buy Treasury bonds directly from the Treasury. In those days, instead of holding auctions, the Treasury would simply set the coupon rate of new Treasury bonds as low as possible. If the public didn’t buy them (with existing dollars), the Treasury would tell the Fed to support the interest rate peg (buy the bonds) with newly-created dollars. While the Treasury was only concerned about cheap financing for the war, Eccles was only concerned about stoking post-war inflation (which would ultimately increase the cost of the war).


As per Chair Eccles, the inflation between VJ Day and the Korean War was NOT caused by armament production (most of the weapons were already made), nor large deficits (the gov’t was in near surplus), it was caused ONLY by the Treasury department’s low rate easy money debt management policy.


Saying ‘all federal spending is HPM’ is similar to saying ‘all federal spending is endogenous money’, another misinterpretation. The Exo (‘exogenous’-created, or ‘vertically’-created money) v. Endo (‘endogenous’-created, or ‘horizontally’-created money) question comes down to whether money is newly-created by the former, in other words, by the issuer (no corresponding liability attached); or by the latter, one of the users (corresponding liability attached). All federal gov’t spending is ‘newly-created dollars, yes, and when the federal gov’t adds newly-created dollars, that’s the Fed’s doing (aka ‘Inside Money’), sure, but that only appears to be endogenous. Keep in mind, when the Fed creates reserves that are added to the Treasury’s spending account (GFA), that’s just the Fed acting as the agent (for the Exo guys over at Treasury & Congress).


For instance, all federal gov’t spending is newly-created money (newly created reserves into commercial banks which in turn become newly-created dollars into the money supply), absolutely; but the newly-created money of surplus spending is only making whole a previous destruction (‘defunding’) of net financial assets (or a future destruction, whatever). Only deficit spending adds dollars to the banking system, only deficit spending increases net financial assets, so we should only be calling the newly-created money of deficit spending (only 15% of total spending in 2016) ‘high powered money’, not total spending (100%). Unlike surplus spending, only deficit spending has the inflationary bias, and why Eccles feared HPM in 1948.


Another for instance, during the credit crisis after the Lehman bankruptcy, should those $4.2T in ‘newly-created’ reserves that financed all that federal government spending on Treasury & MBS bonds that the Fed bought from banks for quantitative easing (QE) have be considered HPM?

That answer would have depended on which MMT ‘academic’ (or which bond ‘king’, or which hedge fund ‘star’) you asked.


If you asked me, I would have said that those newly-created reserves for federal gov’t spending during QE were not HPM (they did not have an inflationary bias), because those newly-created reserves were merely a ‘swap’ trade (same as the newly-created money for any surplus spending).


On the other hand, unlike QE (and unlike surplus spending), deficit spending is not a ‘swap’ trade. Deficit spending is an ‘outright’ trade. Unlike QE (and unlike surplus spending), only Congress can authorize an outright trade. Deficit spending is an outright increase in net financial assets, meaning that ONLY deficit spending, unlike QE (and unlike surplus spending), results in an outright addition of ‘hot’ money into the banking system that has an inflationary bias, and that’s why Fed Chair Eccles coined that money ‘HPM’.

I highly recommend all MMTers, after reading Warren Mosler’s 7DIF, next read Beckoning Frontiers by Marriner Eccles, our Fed system’s first chairman, from whom all the ideas of FDR’s New Deal came from, and whom the Federal Reserve System’s building in Washington, D.C. four blocks from the White House, is named after.


Deadly Innocent Misinterpretation #5: ‘Banks don’t lend reserves’…


Fact: Banks don’t lend reserves as loans to retail clients, not that they don’t lend reserves at all.


Saying ‘banks don’t lend reserves’ was accurate before the credit crisis (when there was only $42B in non formal bank reserves), but not entirely accurate post-LSAP.

Banks do, in fact ‘lend reserves’ all the time. It’s called the overnight market” (h/t Vernon Etzel).

Agreed…Trading desks at non formal banks are *literally* lending their Fed reserves in the repo market to the tune of a half a trillion in notional value today:


Statement of Condition of Each Federal Reserve Bank (The Fed balance sheet):


06/26/08 Before LSAP (‘Q.E.’)

Fed total liabilities = $1.044T ($989B cash currency in circulation ;

$42B Non formal bank reverse repurchase agreements;

$13B Formal bank reserves held on account at the Fed)


09/28/17 After LSAP (‘Q.E.’)

Fed total liabilities = $4.2T ($1.533T cash currency in circulation;

$0.455T Reverse repurchase agreements with the Fed which are reserves being “lent out” for collateral at 1.00% aka the FFR ‘floor’;

$2.178T Formal bank reserves at the Fed earning 1.25% aka the FFR ‘ceiling’)

Banks don’t need deposits from outside the banking system to make loans to the private sector. Bank lending to the private sector creates reserves within the banking system. These reserves are traded through interbank bank lending (overnight market) to meet the reserve requirements (of other commercial lenders). Perhaps, the defensible ‘meme’ is: “Banks don’t need deposits to make loans” (h/t Charles Kondack).

“The phrase is meant to attack fractional reserve lending– and in that sense it’s true; but it is not a tautology without further qualification. Platitudes like ‘banks don’t lend reserves’ are useful in a brawl with the radical fringe, but useless in persuading common people to a pro-deficit position” (h/t Vernon Etzel)


Deadly Innocent Misinterpretation #6: ‘Bank reserves held at the Fed don’t enter the economy’…


Fact: Bank reserves held at the Fed do enter the economy.


Banks in aggregate can reduce their reserves which can actually enter the economy only to the extent that they initiate new lending and the public demands more physical currency (cash) that flow into the economy as new banknotes.


Statement of Condition of Each Federal Reserve Bank (The Fed balance sheet):


06/26/08 Before LSAP (‘Q.E.’)

Fed total liabilities = $1.044T ($989B cash currency in circulation;

$42B Non formal bank reverse repurchase agreements;

$13B Formal bank reserves held on account at the Fed)


09/28/17 After LSAP (‘Q.E.’)

Fed total liabilities = $4.2T ($1.533T cash currency in circulation;

$0.455T Reverse repurchase agreements with the Fed which are reserves being “lent out” for collateral at 1.00% aka the FFR ‘floor’;

$2.178T Formal bank reserves at the Fed earning 1.25% aka the FFR ‘ceiling’)


Deadly Innocent Misinterpretation #7: ‘Taxes don’t fund spending’…


Fact: In the post-gold standard, modern monetary system, because taxes now perform other more important functions, taxes ARE NOT NEEDED to fund spending (not that they don’t at all).


This is the worst of the seven deadly innocent misinterpretations. It is often regurgitated by MMT ‘academics’ and those in their choir especially because Dr. Bill Mitchell, Professor L. Randall Wray and Professor Stephanie Kelton love to say it too. Don’t get me wrong, Mitchell, Wray & Kelton are the great ones; however, even the great ones do swing and miss sometimes, and saying ‘taxes don’t fund spending’ is a miss.

Warren Mosler has explained many times before why MMTers shouldn’t say ‘taxes do not fund spending’. The MMT pillar is ‘taxes ARE NOT NEEDED to fund spending’ (not that they don’t). Warren Mosler doesn’t say ‘taxes don’t fund spending’ because in his words, “it’s ambiguous.” Furthermore, Mr. Mosler also says “tax liabilities are not…revenue PER SE” (he doesn’t say that they aren’t AT ALL).

Saying ‘taxes don’t fund spending’ shows a lack of banking experience and a confusion with simple financial concepts like funding (which gets ironically weird if MMTers are saying ‘taxes don’t fund spending’ while lecturing other people on banking and finance).

Whether we like it or not, the simple fact that doesn’t fit the ‘taxes don’t fund spending’ narrative is that all federal taxes paid are a ‘destruction’ (debit) from our commercial bank account, yes; but that’s only the half of it (only one ledger side of the double entry ledger). Those taxes simultaneously trigger an equal and opposite ‘creation’ (credit) to the Treasury’s General FUNDS Account at the Fed (which is the exact same account where all federal spending is drawn from). Until those accounting rules and appropriations laws are changed, ‘taxes don’t fund spending’ remains the ‘theory’ in Modern Monetary Theory, so if you say it, you are jumping ahead at best; or at worst, you are unwittingly admitting that you haven’t fully grasped MMT.

“The whole bit about taxes not funding spending is this: Reserves are destroyed upon receipt by the Fed, and newly created upon spending. That is the thrust of the (Stephanie Bell) paper, and I’m not disagreeing with that. It’s just an accounting thing; reserves don’t “exist” in the interim between receipt and spending, so the reserves used to pay taxes cannot be used to spend. It’s an esoteric point, because the numbers do show up as an addition to Treasury’s account. I think that it’s important to understand what ‘taxes don’t fund spending’ really means, and I think the discussion should have been a useful exercise – but people are getting up in arms about it, instead of learning” (h/t John Biesterfeldt, Founder of Intro to MMT – Modern Monetary Theory).

Sure, saying ‘Taxes don’t fund spending’ is *technically* correct, so why don’t MMTers instead say ‘Taxes don’t *technically* fund spending’ (same as it says in the Stephanie Bell paper)? Even better, if an MMTer really wants to sound like they are truly comprehending both ‘pure’ modern monetary theory plus the not-so-modern monetary reality, say this:


  1. Surplus spending ‘refunds’ a future decrease of net financial assets…
  2. Taxes ‘defund’ net financial assets…
  3. Deficit spending ‘funds’ net financial assets…


Saying ‘taxes don’t fund spending’ also shows a lack of understanding, that, even though we left the gold standard, and we are now a monetary sovereign, some remnants, several old processes, many accounting constructs, US appropriation laws, of the past monetary system, ARE STILL IN PLACE. We need to recognize these complexities. Remember, MMT is the heterodox. We cannot afford to make mistakes when explaining MMT (especially to folks that are suspicious of our intentions). If we want to make the MMT case to experts in the field (the folks we need to change these pesky accounting rules and US laws), oversimplifications are not good enough for them.

“Saying ‘Taxes don’t fund spending’ is an excellent sermon to preach to the choir… not gonna fill the pews with new converts though” (h/t David Swan).

Agreed…but I’d be even more blunt. If you are having trouble keeping your listeners on the MMT bunny slope over at ‘academic’ hill awake during your lectures, then keep saying ‘taxes don’t fund spending.’ If you are promoting some product or promoting yourself under the guise of promoting MMT, then say ‘taxes don’t fund spending’. If you are selling some amateurish double-down trading system to compulsive gamblers trying to get rich quick, say ‘taxes don’t fund spending’. If you are speaking to a simplistic flock of lost souls and lonely hearts that ‘like’ you, ‘share’ you, and ‘heart’ you, (will vote for you) because you’ve sold them on the notion that their bad lot in life is someone else’s fault, and that you’re going to get them free stuff in a Marxist utopia, then say ‘taxes don’t fund spending’. If, however, you are truly speaking for the MMT cause, then take the hint from Warren Mosler, so for everyone’s sake (mainly yours), stop saying it.

Don’t get me wrong, by suggesting that MMTers go beyond the memes and use better verbiage, I’m just trying to help the MMT cause. Whatever politics someone has, whatever spending on public purpose anyone wants, for the common good, for the country, is fine by me. Please know that I understand when any MMTer says any of these seven gimmicky catchphrases (misinterpretations), they mean well. There is no doubt in my mind that all MMTers understand that description of “the workings of the monetary system, what’s gone wrong and how gold standard rhetoric has been carried over to a nonconvertible currency with a floating exchange rate and is undermining national prosperity.” Warren Mosler 7DIF

Thanks for reading,


Eddie D


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