“It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank, so, to lend to a bank, we simply use the
computer to mark up the size of the account that they have with the Fed.”—Chair Ben Bernanke, 03/15/2009, answering Scott Pelley’s (60 Minutes) question “Is that tax money that the Fed is spending?”
What Fed Chair Bernanke WAS NOT talking about right there was federal gov’t deficit spending (aka vertical money creation) and he WAS NOT talking about non-federal gov’t deficit spending (aka horizontal money creation) either. Ben Bernanke was talking about the Fed’s emergency rescue lending to banks (support for auto loans, student loans, money market funds, mortgages, short-term lending for small business loans)—the first $1T of Fed money creation undertaken early in the credit crisis.
There’s a big difference between a vertical money creation during federal gov’t ‘borrowing’, plus a horizontal money creation by the non-federal gov’t (by our own actual borrowing); vs. a money creation by the Fed for that kind of emergency lending in 2009, or just like for the Large Scale Asset Purchases soon afterwards (for so-called QE). To help explain the difference, let’s call any money creation by the Fed a ‘diagonal’ money creation.
First, let’s do a hypothetical…
Imagine an Authority of Roads and their agent, an Emergency Towing Department, in their bid to maintain traffic flow by employing one four measures:
1) If traffic flow is balanced, the Authority doesn’t need to do anything except observe how many small cars are being organically added on the road.
2) If traffic flow builds up in concentrated places, the Authority takes small cars from those places and redistributes them to places that don’t have as many cars at all (which doesn’t add to the total amount of cars on the road).
3) If traffic flow is getting too light, then the Authority again takes action and distributes newly-created big cars (which intentionally adds to the amount of cars on the road).
4) If traffic flow has completely seized up due to an infrastructure crisis, then the towing department of the Authority clears the damaged roads by removing big cars off the road, reimbursing the big car owners, impounding the cars inside the towing agent’s parking lot (which adds the exact same amount to the assets & liabilities on the Authority’s balance sheet, while also changing by the exact same amount, the composition of the assets of the former, big car owner’s balance sheet); until the infrastructure crisis is resolved, after which the compounded big cars are sold back and return on the road (which reverts the amount of cars on the road back to the original amount before the crisis, while both the Fed’s balance sheet and the big car owner’s balance sheet reverts back to exactly where it was before the crisis…as if it all never happened).
Authority of Roads = Federal gov’t fiscal policymakers
3) = Federal gov’t deficit spending (vertical money creation)
Big cars = Treasury bonds (dollars with a coupon)
4) = QE & unwind
Infrastructure crisis = Financial crisis
Emergency Towing department’s parking lot = Central bank’s balance sheet
…and then next, here’s the actual:
During any ‘horizontal’ (endogenous) creation of dollars when the non-federal gov’t is deficit spending or ‘vertical’ (exogenous) creation of dollars when the federal gov’t is deficit spending, in both instances, dollars are being added to the banking system.
Furthermore (and this is the major point of the post), those ‘endo’ and ‘exo’ creations of dollars are always going into the NON-FEDERAL GOV’T (either into the non-federal gov’t / Domestic, aka private sector; or into the non federal gov’t /International, aka foreign sector).
QE was the exception…QE is an example of money creation where the dollars are being added to the banking system WITHOUT those dollars going into the non-federal gov’t.
The Fed created $4.2T to pay for all those bonds that the Fed bought during QE, which was federal gov’t money creation of $4.2T (that added $4.2T to the banking system) BUT THOSE DOLLARS STAYED IN THE FEDERAL GOV’T SECTOR.
Like many others, the bond ‘kings’ and hedge fund ‘stars’ thought that QE looked like vertical money creation, quacked like horizontal money creation, so they figured it probably was money creation going into the private sector (which would cause inflation, a bond sell-off, yada yada), and they placed their bets accordingly.
What everybody got wrong there, was that the $4.2T in money creation by the Fed for QE (unlike ‘exo’ money creation by Congress for deficit spending or unlike ‘endo’ money creation by banks for private sector deficit spending), DID NOT get injected into the non-federal gov’t (private or foreign sectors) like all deficit spending does.
QE was NOT a money creation for deficit spending, QE was money creation for a glorified swap. The $4.2T created by the Fed during QE added dollars to the banking system BUT ONLY added dollars to the Fed’s balance sheet AND DID NOT add dollars to the balance sheets of the non-federal gov’t private / foreign sectors.
During QE, the total amounts of assets on the balance sheets of those bondholders in the private / foreign sectors never changed. For the private / foreign sectors, QE was just a wash, just a swap, just a change in the composition of dollars (from dollars with a high interest-rate coupon to dollars without a coupon), and NOT a change in the total amount of dollars in the private / foreign sectors (and why QE didn’t cause any inflation). After QE is fully unwound, both the bondholder’s balance sheet and the Fed’s balance sheet revert back to where they were before QE, as if it all never happened. In addition, if you think about it, because the Fed bought those high-coupon (high-interest paying) bonds from the banks, meaning that the Fed started collecting the interest payments (instead of the banks), that $4.2T that the Fed created and added to the banking system was actually, counter-intuitively, a dollar DRAIN from the non-federal gov’t private / foreign sectors. Which is another reason why QE ‘monetary stimulus’, didn’t (nor will ever), cause much inflation, nor much stimulus (a sugar high to stock prices as dollars seeking yield get pushed off the curve, yes; but a stimulus, no).
You (monetary policymakers) can lead the horse (aggregate demand) to water (cheaper liquid financing) but you can’t make it drink. Fiscal stimulus is a job done only by fiscal policymakers in the Authority (and not to be confused with the monetary policymakers driving the tow trucks).
Swing and a miss…The MMT pillar is that, operationally, “Taxes ARE NOT NEEDED to fund spending (not that they don’t.)”—Warren Mosler, final comments, MMT Conference, Sept 2017
2) “Taxation destroys money. Physical notes are shredded, and in accounting terms, the liability represented on paper is cancelled (-100 + 100 = 0).”
Swing and a miss…When paying taxes, physical cash is shredded, checks for federal taxes due made payable to the US TREASURY are cancelled, any other dollars used to pay federal taxes are debited from the money supply; AND, at the same time, an equal & opposite amount is credited (is ‘created’) into the Daily Treasury Statement (the exact same account where all federal gov’t spending is drawn).
3) “I’ll let Ben Bernanke explain it.”
Swing and a miss…In that clip Ben Bernanke was talking about dollar creation for the Fed’s Large Scale Asset Program (aka QE) to ‘buyback’ (read: ‘unprint’) bonds to lower long-term interest rates (a swap that doesn’t add dollars to the private sector); and NOT talking about dollar creation for federal gov’t deficit spending (an outright addition of dollars into the private sector)—two totally separate things that the MMT kiddie pool routinely conflates; and why, even though there is no financial ‘funding’ constraint, #FAKEMMTers in the MMT Party continue to be frustrated by the modern monetary formality (the political ‘funding’ constraint) that, albeit unnecessary, still gets in the way of the modern monetary theory.
4) “That taxes don’t fund spending was one of the lessons learned by the FDR administration which lead one former chairman to publish a paper with the title ‘taxes for revenue are obsolete.'”
Swing and a miss…In that brilliant 1946 article, NY Fed Chair Beardsley Ruml wrote that the federal gov’t is “free of money worries and NEED NO LONGER levy taxes for the purpose of providing itself with revenue”. SEE #1
P.S. Beardsley Ruml, the guy that wrote ‘Taxes For Revenue Are Obsolete’ in 1946 which is quoted by every single ‘prescription’ MMT ‘academic’ from Pavlina Tcherneva to Bill Mitchell, also said this: “The corporation income tax must go, taxes on corporation profits have three principal consequences and all of them are bad.” As chairman of the Federal Reserve in New York, Mr. Ruml insisted that the case for ending the corporate tax was overwhelming. “It is evil…it should be abolished,” he said.
Which begs the question: Why don’t the same MMT ‘scholars’ that love to quote Beardsley Ruml, ever mention that, or ever give the current administration any credit for dropping the corporate tax rate to 21% from 35% which Beardsley Ruml would have approved of (?)
No, that’s not quite exactly how they did it in the late 18th century.
Our own central government issued paper money ($241,552,780 in Continental currency) when the Continental Congress printed Continental Dollars from May 10, 1775 to January 14, 1779 during the Revolution.
By the end of the war, they had become worthless (“not worth a continental”) which left the colonists with a searing memory (read: a legitimate fear) of ‘printing money’.
Price stability depends less on whether money is issued by fiat (‘created out of thin air’) or fixed (with a convertibility rate ‘created out of thin air’) and more on the credibility of the fiscal and monetary authorities to manage the price stability of the economy’s money supply in a responsible manner.
To explain price instability leading to hyperinflation, you don’t need to go all the way to Wiemar, or Zimbabwe. Nor do you need to go all the way back in time, just look at what is happening right now in Turkey (a monetary sovereign, a net-importer, using a free-floating, non-convertible currency).
It was interesting to see that at the end of the same week when many had (yet again) gotten all excited about a brand-new, easy-to-remember, catchy meme that smugly checkmates fiat ‘money printing’ (deficit spending) causing higher inflation; or fiat money printing causing bond vigilantes (speculative short selling) driving interest rates up; or fiat money printing causing losing confidence in the currency; can now all be pooh-poohed by the (fake) ‘academic’ MMT community, by simply saying “JAPAN”…which…like most of the dopey memes always regurgitated…is not necessarily accurate…and why…(?)…because….”TURKEY”.
There are many moving pieces that have caused Japan’s lost decades (mainly demographics), so it’s disingenuous for #FAKEMMTers to say that what is happening (or more specifically, what ISN’T happening) in Japan is ‘because MMT’ (or that Fed rate hikes will cause the dollar index to weaken ‘because MMT’).
Similar to the U.S., Turkey is a monetary sovereign. Similar to the U.S., Turkey is an importer. Similar to the U.S. Dollar (USD), the Turkish Lira (TRY) is a free floating, non-convertible currency (Turkey adopted the free-floating exchange-rate regime between 2002 and 2007). Once a currency is no longer backed by gold (or fixed to another currency), then the currency, just like the USD or just like the TRY, is now ‘only’ backed by the full faith and credit of the gov’t that issues it.
In other words, once you change from a fixed-currency regime to a floating-currency regime, the ‘value’ of the currency changes from whatever it was backed by, to other moving pieces like the ‘value’ (real and perceived) of the federal gov’t, the issuer of the currency. Note that this is just one, of many, fundamental BIASes, meaning one of many moving pieces that affects floating-currency valuations that shouldn’t be ignored (which is presently costing USD short sellers like Mike Norman and his subscribers dearly).
MineThis1 (correctly) reminds his followers over at IMMT that it is important for Pure MMTers to remember that just because a monetary sovereign can never ‘run out of money’, you can run out of something else, so MMT doesn’t mean you can print print print…because “JAPAN” (…because ‘MMT’).
So, what are they (Turkey) going to do now?
That’s a good question.
The answer (and fully grasping MMT) goes beyond the memes.
“When returned, both liability and asset are destroyed.”
Better: ‘When returned (when the Recipient pays federal taxes) both liability and asset, OF THE RECIPIENT (on the Recipient’s balance sheet), are destroyed; but only those who are fully grasping MMT know that the amount of dollars in the banking system (the amount of net financial assets) are unchanged.
Fake MMT: ‘Taxes don’t fund federal spending.’
Pure MMT: Operationally, taxes are NOT NEEDED to fund federal spending (not that they don’t at all).
Fake MMT: When Recipients pay federal taxes, those dollars are ‘destroyed’.
Pure MMT: When Recipients pay federal taxes (when Recipient’s dollars are debited) there is NO CHANGE in the amount of dollars in the banking system because those federal tax dollars ‘drain’ (are credited) to the Daily Treasury Statement, the exact same account where all federal spending is drawn.
(Don’t take our word for it, ask any plumber, and they will confirm, that the water, after it goes down a drain, is not ‘destroyed’.)
Thankfully, most folks are now seeing that these silly ‘deficit owls’ (just like the dopey ‘REalproGRESSIVES’) are pushing fake ideological ‘prescription’ mmt under the guise of promoting Pure ‘description’ MMT. It’s becoming more obvious by the day that these kids are not happy that the American economy is strong and would rather dismantle capitalism (to replace it with a post-modern neo-marxist cradle-to-grave welfare state).
It’s a good thing that these #FAKEMMTers have no idea how ridiculous they sound when they tell the person looking at a brand new dollar bill (or one of the 2000 employees of the Bureau of Engraving and Printing) that ‘we don’t print money anymore’; or when they tell the football player that he doesn’t know how the game is played (that his touchdown didn’t put the 7 points on the ‘scoreboard’); or when they tell a lawyer who wrote the US appropriations law that ‘federal taxes don’t fund spending’ (because ‘there’s no such thing as a taxpayer or taxpayer dollars on the federal level’); or when they tell the bookkeeper that a debit is a ‘destruction’ (without a simultaneous creation, aka credit, on another ledger). Hopefully they’ll remain as clueless to how ridiculous they sound to anyone outside their choirs (to the accountants, to the lawyers, to the bankers, to the policymakers, and to the hard-working, patriotic, law-abiding American constituents) as they are about PURE MMT.
P.S. Although the gold-standard era ended and the financing function of federal gov’t revenue took a back seat to other, more important, functions (mostly to maintain price stability and to maintain demand for the currency); the pure MMT enlightenment is that, operationally, any monetary sovereign, issuing its own fiat currency, no longer needs to collect federal taxes or sell Treasury bonds to fund spending (not that they don’t at all). That modern monetary ‘formality’ (albeit unnecessary) is still getting in the way of the modern monetary theory (is still frustrating the Deficit Owls). MMTers would be able to follow those seesaws (debits & credits) much easier if they just tried to keep it simple (to keep it pure).
First it was saying ‘federal taxes fund spending’, then it was saying ‘federal taxpayer’ or ‘federal tax dollars’ and now if you say ‘printing money’ the #FAKEMMTers get triggered as well…
Agreed that, as per Ellis Winningham, “a misinformed public believes ‘printing money’ will create inflation”, or even worse, “a misinformed public believes that when the government ‘prints money’ it will eventually create hyperinflation”, but that doesn’t mean you should reprimand them for saying ‘printing money’. Although Ellis does acknowledge that “the US gov’t does in fact print paper cash”, he insists that paper cash is only based on consumer demand and “has absolutely nothing to do with funding federal spending.” Which isn’t entirely accurate since banks CANNOT convert bank ‘IOUs’ to paper cash to dispense to consumers without having the ‘IOUs’. Where does a bank get the ‘IOUs’? “All federal spending is merely the crediting of bank accounts with IOUs,” as per Ellis Winningham.
When the federal gov’t deficit spends, meaning that when there is an addition by the federal gov’t of net financial assets, of dollars, being added to the banking system, this ‘net issuance of currency’ (Ellis’s preferred way to say it) ADDS TO AN OUTSTANDING FLOAT OF FIAT DOLLARS. That is the paradigm difference since 1971, that unlike before, during the gold-standard era, when federal gov’t deficit spending added to an actual debt denominated in (a limited amount of) gold-backed dollars; now, federal gov’t deficit spending instead adds to an outstanding float denominated in (an unlimited amount of) fiat dollars. Granted that this deficit spending DOES NOT have the same dilution that can be measured with the same precision as a net issuance a stock does to all the rest of the current stockholders, but printing money does have an inflationary BIAS. The key word there is BIAS because that inflationary (dilution of fiat dollar) bias of newly-printed money, unlike newly-printed stock, can evaporate on impact (as an aging demographic all worldwide now well know). Rather than scolding people for saying ‘printing money’, the MMT enlightenment is that what the mainstream should be more worried about is NOT ENOUGH money being printed by the federal gov’t, or wrongly thinking the federal gov’t should be surplus spending, which would have a deflationary bias, or even worse, thinking we should have sustained federal budget surpluses, which would cause hyperDEFLATION….
Until that day comes when society is 100% cashless (it’s coming), you are only insulting people’s intelligence and hurting the MMT cause by saying things like “We don’t print money anymore! You need to catch up to the 20th century!” (ATTN Geoff: You need to catch up! We’re in the 21ST century!). Sure, these days, the amount of currency in cash, in printed Federal Reserve (bank)Notes, is only about 3% of the money supply; and most of it, about 97% of it, is in the form of electronic entries over a computer, but 3% is not 0%. Imagine how ridiculous you would sound saying “we don’t print money anymore” to one of the two thousand employees of the US Bureau of Engraving and Printing. Instead of over-seasoning their MMT lectures, these ‘academics’ should perhaps keep it simple and try this approach:
In the post-gold standard, modern monetary system, since the federal gov’t (any monetary sovereign) is now spending its own fiat currency (since it doesn’t need to be funded anymore), when the gov’t is ‘printing money’ (deficit spending), it only now means that they are ‘supplying’ a growing economy with more currency needed to accommodate that growth. Same as you constantly needing to add more cans of oil to your hard-working car every 3 months to keep all those moving pieces inside the engine lubricated otherwise they will seize up. The big difference is that today, the federal gov’t creates its own ‘Fiat Brand’ oil instead of borrowing someone else’s ‘Gold Standard Brand’ oil (under the guise of still going into ‘debt’ to ‘borrow’ it).
Aside from the Modern Modern Formality that the federal gov’t can shut down because there isn’t enough tax revenues to fund spending (the ‘political’ constraint), another thing that really frustrates the Modern Monetary Theory community is hearing anyone say ‘printing money’.
“Printing is a word that goes back to the gold standard. It meant the ratio between the printed money and the gold supply, it’s no longer an applicable term. When you have a non-convertible currency and a floating exchange rate, the spending is operationally independent of the taxing, so all government spending is merely changing numbers in banking accounts—there’s no operational constraint by revenues.”—Center for Economic and Public Policy’s Warren Mosler on Fox Business News with Stuart Varney discussing further government spending to improve the economy, May 7, 2011
To be fair, anyone dismissing your pet prescription MMT policy (like Stuart Varney did) by uttering ‘Oh you just want to print more money’—instead of debating the merits of the proposal itself—isn’t making a good-faith effort to understand your perspective.
That said, anytime anyone says ‘don’t say print money’ is borderline Fake MMT.
Anyone with a basic knowledge of American history knows that ‘printing money’ goes back before the gold standard (and why they won’t fall for that ‘Don’t say printing money’ meme as easily as the MMT community does). Those ‘Continentals’ were NOT backed by gold (backed by the ‘anticipation’ of tax revenues), nor were those original ‘Greenbacks’ (at first no convertibility to gold as an ’emergency’ war measure), so ‘printing money’ actually refers to the days before the computer age, before ‘keystrokes’. We all still say ‘printing money’ just like we all still say how much ‘horsepower’ a car has, or how much ‘shipping’ charge we have to pay to the person driving the brown delivery truck. The words ‘printing money’ (if not used sarcastically) simply refers to ‘deficit spending’, aka an addition of net financial assets, that is increasing the amount of $$$ in circulation (that is expanding the money supply)—what Fed Chair Eccles referred to as ‘High Powered’ (which is another thing that the MMT community gets completely wrong). Most people today (correctly) associate ‘printing money’ with conjuring up money out of thin air—as opposed to using existing $$$ (as opposed to ‘surplus spending’).
For example, if you are paying for a restaurant tab with money out of your pocket (paying with existing $$$), then that isn’t ‘printing money’; but if you are instead, paying with a credit card, if you are deficit spending, you are ‘printing money’.
That newly-created little piece of paper, printed with $$$ signs on it, that you sign, that the restaurant retains, think of THAT as the financial asset, that you just created, which is a ‘notes receivable’, your ‘promise’, your ‘bond’, an ASSET, that increases NFAs; while in addition, that printed receipt, that you keep whenever paying on credit, whenever printing money, is the ‘notes payable’, the liability, that nets-out the creation.
The federal gov’t is not the same as a household using a credit card. The Pure MMT insight is that, operationally, borrowing or tax collection is not needed to fund federal spending, BUT those formalities remain to maintain the Constitutionally-enshrined Power of the Purse of policymakers—only Congress can sign the ‘receipt’. Furthermore, where the MMT community goes over the cliff is thinking that all spending is newly-created money (instead of knowing that all spending is newly-created money, yes; net additions of $$$ going into the banking system, no).
It’s Pure MMT to explain that the newly-created (newly-printed) dollars (assets) that you just added into money-supply circulation to pay for that lunch at a diner probably won’t cause hyperinflation and destroy the economy; however, telling folks—especially the 2,000 employees at the Bureau of Engraving and Printing—not to say ‘printing money’, isn’t.
NOTE: In the video, Chair Bernanke was referring to the initial bailouts, early in the credit crisis, where the Fed lent newly-created (newly-printed) money to troubled banks in exchange for their toxic sub-prime assets, for the so-called Maiden Lane loans. The Fed did this so that these banks, suffering from a liquidity problem, would have the $$$ to spend into money-supply circulation—to pay their bills—to stay in business. In a follow-up 60 Minutes interview in 2011, Chair Bernanke explained that QE wasn’t printing money because, unlike the bailouts, QE was not about toxic bonds / changing the money supply, QE was about AAA bonds / changing long-term interest rates.
Fed Chair Bernanke: “It’s much more akin to printing money more than it is to borrowing.”
Scott Pelley: “You’ve been printing money?”
Fed Chair Bernanke: “Well, effectively, yes…we need to do that because our economy is very weak and inflation is very low.”
AGREED: “The gov’t essentially prints money each time it authorizes new unpaid programs [programs unfunded by taxes].”
“No, I do not get ‘triggered’ (a dumb, asinine word by the way) when a layperson or student uses the term ‘printing money’ in discussions with the public on social media and elsewhere. The notion is patently absurd and quite laughable really, and, more than likely, such a conclusion stems from the failure of the individual making the statement to fully digest what I’ve written on the subject – I hope that is the case. So let’s clarify…
Mosler: If government spending is printing money, then taxation is the ‘unprinting’ of money.
An undeniable fact.”—Ellis Winningham
Taxation IS NOT the ‘unprinting’ of money. That is another deadly, innocent, fraudulent MMT misinterpretation that confuses a dollar ‘drain’ (paying federal taxes) with a dollar ‘destruction’ (paying off Treasury bonds).
Don’t take my word for it, here you go:
“Don’t say that ‘federal taxes don’t fund federal spending’. It’s better to say that federal taxes are not needed to be able to spend, not that it doesn’t fund it.”—Warren Mosler, MMT conference closing remarks, 09/24/17
“Don’t say ‘federal taxes don’t fund federal spending’. Instead say, ‘federal taxes do not need to fund federal spending’. Translation: Don’t tell me that I am an asshole. Instead say, I don’t need to be an asshole.”—Ellis Winningham, 09/06/18
Even though it would certainly sound so, to be fair, Ellis Winningham probably doesn’t think that Warren Mosler is an asshole for saying that ‘it’s better to say federal taxes do not need to fund federal spending’ (because Ellis wouldn’t know Mr. Mosler’s pure MMT insight if he tripped over it); and that’s why Ellis Winningham is affectionately known as the ‘Toofless Dentist of Fake MMT’ (because the candy that Ellis is dishing out at his MMT kiddie pool is fine—until it isn’t).