This is the next installment of ‘Another Seven Deadly Innocent Fraudulent Misinterpretations’ which talks about how some ‘prescription’ MMTers (using personal ‘feelings’ and anecdotal ‘stories’) are getting confused with pure ‘description’ MMT (which only uses facts, data & math).
Since then there have been more online examples from ‘prescription’ MMTers that are not fully grasping pure MMT, or even basic finance; or who do, but are instead promoting an ideological narrative (under the guise of promoting pure MMT). Once you filter out what they are getting wrong (or just making up) there are some good insights to be found.
Deadly Innocent Fraudulent Misinterpretation #15: “Banks create IOUs denominated in USD and function like lookalike dollars.”
Fact: All money, including private bank-created dollars (denominated in USD) as well as federal gov’t-created dollars (denominated in USD), are DOLLARS IN THE BANKING SYSTEM—PERIOD.
In an August 2018 piece titled ‘The Explicable Mystery of the National Debt’, J.D. Alt superbly pens an enlightened perspective of how the modern monetary system really works. Brilliant in its brevity, J.D. Alt once again shines his light on the current facade that federal gov’t deficit-spending is quote unquote ‘bond-financed’ (via ‘borrowing’ dollars); and cleverly illuminates the reality that federal gov’t deficit-spending—unlike the bygone gold-standard era—is actually cash-financed (via creating fiat dollars).
As explained nicely by J.D. Alt, the only difference between federal gov’t deficit spending and private sector deficit spending is that (obvious to the mainstream) dollars created and spent by the federal gov’t are not spent in the pursuit of personal or corporate financial profits but “to pursue the collective goals—and address the collective needs—of society at large”; BUT MORE IMPORTANTLY (not as obvious to the mainstream) is that unlike dollars that are created by the banking system and spent by the private sector, these fiat dollars created for federal gov’t deficit spending are not ‘borrowed’ (like gold-backed dollars were in that bygone gold-standard era). J.D. Alt correctly concludes that by continuing the federal gov’t ‘borrowing’ narrative; by labeling the cumulative amount of federal deficit spending our national ‘debt’; and worst of all, by the mainstream “falsely believing it…it is encumbering us”.
Charles Hayden, an ‘MMT Admin’ took issue on his Facebook page with J.D. Alt saying “banks create dollars”. When asked why Charles had a problem with ‘banks create dollars’, his reply was that unlike ‘government money’, “they (bank money) are not ‘US dollars’ but functionally lookalike IOUs”. Yes, you read that right folks and wait, there’s more.
“Neither bank deposits nor cash are US dollars, but IOUs for US dollars…and money is inherently a hierarchy of securities that together have varying degrees of moneyness,” Charles posited.
There are two main reasons for this deadly innocent fraudulent misinterpretation that is routinely regurgitated. The first is an attempt, a fake-out (a continuing narrative by fake ‘prescription’ MMTers) to denigrate private sector money creation as being ‘lower’ in a ‘hierarchy’; and that federal spending is of the utmost importance, that federal gov’t creation (and by extension any creation for ‘prescriptions’) is ‘superior’. The second reason is simply a lack of basic understanding of money (+/or knowing your choir lacks a basic understanding of money), so like a Benihana chef putting on a performance to a captive audience, better to baffle them with bullshit while you sell the ‘prescription’ sizzle and not the ‘description’ steak.
John Terrence, who understands money and is fully grasping MMT, threw a lifeline to Charles and offered this compromise: “Government only deals in the money it creates…It doesn’t accept bank IOUs, it only accepts its own IOUs…So, yeah, except for that difference, they are all the same.”
In other words, except for the difference that dollars can be at the Federal Reserve Bank, or at your own bank, or wherever, they (because ‘they’ are all denominated in DOLLARS) are all the same.
“A $1000 Treasury bond is the same ‘thing’ as 1000 dollars —only better, because it earns interest! “—J.D. Alt
In a letter written “to correct the inaccuracies in the description of the settlement process that is passed along MMT website discussions”, Deputy Director James Clouse at the Board of Governors of the Federal Reserve System in Washington, D.C. wrote this: “The Federal Reserve acts as a ‘banker’ for depository institutions, the federal government, and selected other financial institutions. Just as households and businesses maintain transaction accounts at commercial banks, these institutions maintain transaction accounts at the Federal Reserve. These accounts are typically called ‘reserve accounts’ and the balances held in these accounts at the Federal Reserve are commonly referred to as ‘reserve balances’. During any settlement (like the purchase of a Treasury bond for example) 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).”
That’s it folks. It’s as simple as that and this is not MMT, this is basic understanding of money. There is no need for MMTers to change the names of dollars that are in their pockets, in their Treasury bonds, in their own checking & savings accounts, or are even in the Fed’s checking & savings accounts (in M1, 2, 3, 4), whatever, wherever, they are ALL DOLLARS IN THE BANKING SYSTEM.
Have you (or anyone you have ever known) EVER seen an account balance statement or a stat of US national debt or a graph of US GDP or a chart of US Household Net Worth that had the dollar amounts broken down into ‘bank IOUs’ vs. ‘gov’t IOUs’ or by ‘degree of moneyness’?
No, of course not, because there’s no such thing. Except if you are a tourist being treated to a dazzling Benihana show by a fake (‘lookalike’) MMTer.
Deadly Innocent Fraudulent Misinterpretation #16: “All money is debt by its very nature.”
Fact: All money is a unit of measure that measures debt.
The ‘all money is debt by its very nature’ narrative in the MMT world (which contradicts the nature of money since the Babylonian days) comes from Alfred Mitchell-Innes (a top British diplomat to America at the time the Fed was being established) and his ‘Credit theory of money’. In opposition to the ‘Metallic theory’, the ‘Credit theory’ says that when “a credit on the public treasury is opened, a public debt incurred”. However, that was written in 1914 when the federal national debt (denominated in gold-back dollars) was an actual debt. Post-Keynesians default to the ‘Monetary circuit theory’ which holds that all money is created endogenously by banking-sector lending (with attached debt) and NOT exogenously by central-bank creation (without attached debt). As per the narrative, for every creditor (extending credit) and creating money, there must be a debtor (incurring debt), so proponents of these ‘debt theories of money’ (depending on which point of view), money & credit, +/or MONEY & DEBT, are the same thing.
To be fair to the MMT ‘money is debt’ narrative, if you (like many economists) do not consider Treasury bonds that are being created and added (that are increasing Net Financial Assets) into the banking system by the federal gov’t during deficit spending as being ‘money’ (that only the dollars created by banks with attached debt that are entering M1—the money supply—are ‘money’), then the ‘all money is debt’ logic holds.
It’s no secret that a rift exists between MMT progressives (who typically embrace ‘tactical’ democratic-socialism) and Green Party socialists (who typically embrace ‘practical’ social-democracy). Since the Green Party hierarchy supports the American Monetary Institute, there’s also a rift-by-proxy between AMI and MMT. In an online critique of MMT titled ‘Evaluation of MMT’ posted on the home page of the American Monetary Institute website, AMI is critical of MMT’s insistence on calling money ‘debt’ (or even calling money a liability), because as per AMI, “people think of debt or liability as being something owed and due.” As per AMI, the MMT mis-definition of money as ‘debt’ is incompatible with the chartal (legal) nature of money that MMT espouses.
AMI is right.
All money is not debt.
All money is a unit of measure.
What does it measure?
It measures debt.
Money and debt are two different things. When you ask somebody ‘How much?’, you are asking for a measurement. After you agree to that price (that measurement),THEN you are in debt. Money is what we use to pay something owed and due. We pay our debts with money (money springs from debt) and that’s why we have different words for them. “For those of you struggling with the concept that all money is inherently debt, ask yourselves why money is created? Money doesn’t just pop into existence of its own accord. Money is created to satisfy a transaction.”—Mike Morris. All transactions are swaps, of two components, of a debit and a credit, between two counter-parties. Money represents both the debits (liabilities) and the credits (assets) at the same time. In other words, ‘money is debt’ (or a liability of the gov’t that created it) and ‘money is a tax credit’ (to you), at the same time. Of course your mileage may vary because of the fundamental differences that EVERYONE (myself included—as per the title of this post) has regarding the ‘definition of money’.
Q) (to Michael Hudson, American economist, professor of economics at the University of Missouri in Kansas City and a researcher at the Levy Economics Institute at Bard College) “Money is debt or money is not debt, so what? Who cares? Why not merge with these people (MMTers)?”
A) “Exactly, and of course, all money, the money in your pocket, is *technically* debt, but it’s a debt that is never expected to be repaid. Why fight over terminology, declare war on your friends, and isolate yourselves? This AMI argument is about how many angels can sit on a pin, except this argument makes it personal against Innes, Knapp, Occupy Wall Street, the Kansas City group (MMT), and against all your closest associates. AMI has made us cultish, it has made it impossible for you to work with academia and I’m one of the MMT leaders, I can speak with authority of the group. We have a travesty when AMI singles out that Innes article. The historical analysis of money is that money came into being as a means of paying debts. Not as a means of paying off loans (from borrowing), but as a means of paying off tax debts (money owed) to the temples, to the palaces, for public services, for water, for armies, etc. and there had to be a way of denominating this (of measuring this). So when the kings of Mesopotamia would come to office, the first thing they would do is to announce a price schedule for gov’t services (for taxes). For example, one litter of grain (or a certain amount of cotton, copper, or animal) equaled one shekel of silver (was ‘legal tender’ like silver) so that poorer people (who had no silver) could pay the tax in what they produced. All Innes, an amateur journalist, was saying, was the point that Knapp was making, the ‘State theory’ of money, that what gives money the value, is its acceptability for payment of taxes.”—Michael Hudson
What Michael Hudson may not be realizing however, is that AMI’s differences with MMT could have less to do with Innes; and more to do with the political-ideological shift that MMT took with academics like anti-capitalist Michael Hudson (a godson of Marxist Leon Trotsky) or L. Randall Wray (whose ‘taxes are destroyed’ thought processes and other writings can be logically obtuse and disjointed). Fast forward to today and AMI might also be getting disenfranchised with MMT when listening to Stephanie Kelton and Pavlina R. Tcherneva (who wish they got their Ph.Ds in politics instead of economics) pushing a soviet-style ‘job guarantee’, as if the US had a jobs shortage problem (as if we needed the federal gov’t to create jobs during The Longest Jobs Growth In US History). Perhaps another reason AMI moved away from MMT is because MMT moved away from being ‘the Description and not the Prescription’. That adage officially went out the window when Dr. Bill Mitchell, who, (because he feels the Green Party ISN’T far Left enough calls them ‘neoliberals on bikes’ or even calls his own fellow progressives that aren’t progressive enough ‘neoliberals in disguise’) said “I note that various social media discussions still don’t quite grasp the idea that the Job Guarantee is a specific and intrinsic element of MMT…”
Conversely, perhaps the reason why MMT has moved away from AMI also goes beyond Innes. AMI too can come off sounding a bit kooky (as extreme as MMT) when saying things like the ‘federal gov’t doesn’t create money’, or that the Treasury and the Fed combined, ‘are not the government’, are not the ‘public sector’. AMI doesn’t trust the federal gov’t to control society’s monetary mechanism because ‘they only misuse it to dominate credit (the banks) and create bubbles, until the whole system crashes’. AMI’s ‘prescription’ is HR 2990, a bill in Congress, that proposes to explicitly takes the ‘money-power’ back to Congress, ‘to where it belongs’. That sounds a lot like what MMTers are saying too, which isn’t lost on AMI, who makes their case for HR 2990 with MMTers in mind: “HR 2990 enables government to spend money without taxing or borrowing; plus it requires non-inflationary results and provides funds to improve our infrastructure and education at all levels, the functional approach MMT espouses. HR 2990 is the missing link that makes what MMT says happens really happen, by treating money as money, not debt. MMT needs HR 2990 for the things they say they want to become a reality. MMT can then be about calling for more money instead of more debt – a more reasonable position and a much easier sell politically.”—AMI’s evaluation of ‘Modern Monetary Theory’
The only flaw with AMI’s proposal is that it all may ‘sound’ good (to go back in time to a ‘sound’ money policy) but what this bill calls for is that private banks have a 100% reserve requirement (that deposits create loans). Which makes AMI sound like a giant group of goldbugs. So rather than this being an argument about ‘all money is debt’, what is really bothering MMT about AMI, is that AMI can’t be serious (or be taken seriously).
“AMI is proposing a solution to a scarcity of money within the economy by binding the money supply, as we’ve already experienced. Commodity money is inherently unstable because the lack of elasticity cannot meet the demands of a fluid (I like to use organic) economy. Even a full reserve (100% reserve requirement that the ‘positive money’ folks want) model relies upon debt because those customer deposits must originate from a transaction which motivated the creation of the money which filled the deposit.”—Mike Morris
“None of it is valid…What I told AMI people over the years is that they don’t need to make any institutional changes to the monetary system to achieve the fiscal ‘policies’ they propose. We have a Fed that fully regulates and supervises bank lending as per the Fed Reserve Act passed by Congress and subject to change by Congress, so it’s all already there for Gov’t to directly control lending to its liking.”—Warren Mosler
Deadly Innocent Fraudulent Misinterpretation #17: “The Fed is the price setter.”
Fact: The Fed is the price ‘stabilizer’.
The price of money is the interest rate.
When you are ‘buying’ money (when you are the debtor) you pay an interest rate; and when you are ‘selling’ money (when you are the creditor) you receive a interest rate. The Fed sets the price of money by targeting the overnight interest rate known as the Fed Funds Rate (FFR). That’s not MMT, that’s just keeping it simple, and to keep it simple, MMTers should not take the ‘Fed is the price setter’ too literally. Unless of course you want to overseason your MMT and put on a Benihana show for your captive audience: “Jamie Dimon said he expects the 10 year Treasury yield to go to 5% from just under 3% now…He gets it or maybe he’s reading my stuff…It’s not only Fed rate setting but the fact that every time they raise rates, they raise the inflation rate because rate setting is price setting HIGHER. We see that. Look at any chart of inflation, go back to December 15, 2015, at the Fed liftoff, and all those things started to go up, even gold started to go up, gold was $1043/oz and it’s at $1220 now.”—Mike Norman, YouTube video 08/08/18
In Mike Norman’s case, he has not only taken ‘the Fed is the price setter’ meme too literally, but in order to dazzle his ‘all profits’ subscribers, he actually gets it backwards. Yes, the Fed is the ‘price setter’, but better to think of the Fed as the ‘price stabilizer’.
The Fed changed policy in 2015 and began liftoff because they saw inflation ALREADY coming.
The correlation of higher inflation to Fed hikes is NOT causation.
The purpose of Fed hikes is to slow down the rate of inflation, not to cause inflation. When the Fed wants to cause inflation in the functional economy (on the 95%) they lower rates. The CEO of JPMorgan Chase predicts that the 10 year Treasury yield is going to 5% because that’s how confident he is in the economy’s strength causing more inflation.
In other words, Jamie Dimon is expecting, that in order to maintain price stability, the ‘price stabilizer’ will be hiking that much more.
Deadly Innocent Fraudulent Misinterpretation #18: “The Fed has the pedals backwards—The Fed hiking rates is expansionary.”
Fact: The Fed hiking rates is expansionary for the financial economy (the 5%) but not for the functional economy (the 95%).
The reason why Mike Norman gets rate hikes by the Fed backwards (‘Deadly Innocent Fraudulent Misinterpretation #17’) is the Deadly Innocent Fraudulent Misinterpretation #18.
Mike gets “the Fed hiking rates is expansionary” (is inflationary) from Warren Mosler, who often likes to say that the Fed “gets the pedals backwards” because Fed rate hikes means higher interest income is being “paid by the state to the economy.” As per Mr. Mosler, it’s “a matter of logic” that because the gov’t is the “net payer of interest” that this increased interest income being paid out would cause inflation rather than reduce it.
Which is true if you are talking about WHO is being ‘paid by the state’—and that answer is the creditors in the FINANCIAL economy, aka the ‘savings bubble’ participants (the 5%); however, not true if you are talking about WHO ISN’T being paid—and that answer of course is the debtors in the real FUNCTIONAL economy (the 95%).
Sure, the Fed’s ‘brake pedal’ (higher rates) has historically proven to be much more effective than the Fed’s ‘gas pedal’ (lower rates); however, as per Jim ‘MineThis1’ Boukis, where ‘the Fed has the pedals backwards’ misinterpretation stems from is when political prescription MMTers regurgitate the ‘Their Deficits = Our Savings’ meme (and call it a day). MineThis1’s pure description MMT ‘savings bubble’ insight is that this meme, although ‘technically’ true (although it’s an ‘accounting identity’ on that Sectoral Balance Chart), is clearly misrepresenting the economic reality of the 100%.
In a deeper dive, the question that should be asked by all MMTers is ‘Their Deficits = WHOSE Savings’? —because federal gov’t deficits (that initially go out to the 100%) eventually wind up in the hands of the savers (the 5%).
95% of the people are borrowers (they have car, student, credit card +/or mortgage debts that are punished by higher rates). Only 5% are lenders, only 5% own Treasury bonds, only 5% are helped by rising rates (because they earn more interest income off the 95%). So if just talking about them (5% of the economy), then the Fed’s pedals are ‘backwards’, BUT, not so, not for the borrower (95% of the economy). Furthermore, saying that the gov’t is “the net payer of interest” only adds insult to the borrower’s injury. After the Fed hikes rates and your adjustable mortgage rate goes up, does the gov’t pay that higher mortgage bill?
“We do not consider interest rates effectively control inflation – in fact, they probably add to inflation (via cost increases and income flows to creditors).”—Bill Mitchell @billy_blog, 06/09/19
‘Income flows to creditors’ —FROM DEBTORS! Sure, interest rate increases do not control inflation for the few who are creditors; but since Fed rate hikes are income flows to the 5% (the savers) at the expense of the 95% (the borrower), they control inflation to the many who are debtors. When the Fed hikes, the borrower is paying more interest, meaning less discretionary income for debtors—it’s like a ‘tax increase’ on the 95%. This is not MMT, same as Deadly Innocent Fraudulent Misinterpretation #17 above, this is basic stuff.
It’s ironic that MMTers aren’t grasping this (the same ones who correctly say that the primary function of taxes is to check inflation).
To be fair, Mike Norman likes to use the early ’80s as an example of higher rates ‘being expansionary’. As the largest line-item federal gov’t spending of that period, those high interest rates that Fed Chair Volcker imposed on the economy to battle inflation were indeed throwing off higher interest income into the economy and could be argued were ‘expansionary’—AT FIRST. That part of the story Mike likes to cherry-pick to fit the ‘Fed hiking rates is expansionary’ narrative.
The part of the story left out however, is if you remember those 2 x 4’s that furious construction workers were mailing to the Fed, what EVENTUALLY happened was that those higher rates started to hurt the 95%. By raising rates, yes, the Fed helps the 5%, but the Fed isn’t raising rates to help the 5%, the Fed is raising rates to tap the brakes on the 95%.
In a 06/13/19 Tweet, Mr. Mosler wrote that “rate hikes are expansionary and inflationary, and rate cuts are contractionary and deflationary.” The facts, math and data don’t support that narrative—just look at what happened after the Fed’s 2018 rate hikes (and the Fed’s jawboning during 2018 of even more hikes for 2019). What actually happened, was that right up to the time of Mr. Mosler’s Tweet, the markets have been pricing in expectations that the Fed may have been too aggressive (their rate hikes may have been too contractionary / too deflationary) and that rate CUTS were a strong probability. On Friday 06/14/19, futures markets were forecasting as many as three cuts in July, September and December. It sure is some Magical Monetary Thinking if anyone thinks that not only does the Fed “have the pedals backwards”, but so does the ENTIRE BOND MARKET.
Adding to Fed Chair Powell’s noticeable shift in posture on rates, Vice Chair Richard Clarida also recently opened the door to the possibility that the Fed may need “insurance cuts”—pre-emptively lowering rates—just in case the economic outlook starts to deteriorate.
One possible reason why Mr. Mosler incorrectly ‘feels’ that ‘low rates are contractionary and deflationary’ is perhaps because lowering rates simply doesn’t work as easy as raising rates does. In other words, what many around the world are now seeing, is that it’s easy to stop a horse (aggregate demand) from drinking (from being expansionary and inflationary) by taking the water (the cheaper liquidity) away; but harder to lead the horse to water & make it drink.
To be fair, however—what Mr. Mosler does get right—is that it is indeed frustrating to watch a monetary sovereign relying solely on monetary policymakers to kick-start an economy. Especially when—to paraphrase The Good Witch in the book The Wonderful Wizard of Oz which was an allegory for the 1896 election—the federal gov’t ‘Always Had The Power’ by simply clicking the silver slippers (by simply jiggling some silver coins into money-supply circulation).
“A change in money prices and money income does have ‘real effects’. If you increase the cost of money, that is a cost for debtors and an income source for creditors. This is real. By making debtors worse off and making creditors better off, there will be changes in the distribution of income, there will be changes in demand and in output—real magnitudes in the economy will change.”—Dr. Steve Keen, ‘Can We Avoid Another Financial Crisis?’, 2017
BINGO…Steve is right. So take any unsophisticated, anti-central-bank rhetoric like the Fed is ‘getting the pedals backwards’ with a grain of salt because that’s the ideological ‘prescription’ MMT (political economics using personal feelings)—not the pure ‘description’ MMT (not the pure economics using facts, math & data).
We know this because when Mr. Mosler was saying back in late December 2015 and early January 2016 that “it looks like the Fed started liftoff during a recession”, even though his prediction of recession was wrong (even though he had his pedals backwards on the economic outlook), at least his description was pure—he was implying that you shouldn’t raise rates if the economy is weak.
We also know that Warren Mosler was keeping it pure back in June 1999 when correctly pointing out that no one was putting two plus two together regarding the national savings rate (that was falling) vs. the federal budget surplus (that was rising). Fast forward to today, all the Very Smart People on the airwaves seemingly have the same disconnect while saying that the Fed’s low rates and Quantitative Easing did not create any headline inflation—even though we now have an asset bubble in stocks at all-time record highs along with all those bonds at negative yields.
Perhaps what Mr. Mosler should be saying today (instead of saying ‘the Fed has the pedals backwards’) is that in lieu of action by worldwide fiscal policymakers, central banks with good intentions are unintentionally creating ‘inflation’ in the wrong parts of the economy (in their nonproductive ‘financial’ economies instead of in their functional ‘real’ economies).
Deadly Innocent Fraudulent Misinterpretation #19: “Government deficits = Non government savings”
Fact: FEDERAL Government deficits = NON-FEDERAL government savings’
Take these three entities:
A) Federal gov’t B) State & Local gov’t C) Private sector households & businesses
Of the entities above, A), B), & C), which one, or two, and/or maybe all three all together, match these following scenarios:
1) This entity has the AUTHORITY TO TAX.
2) The taxation by this entity MUST be done to finance its spending.
3) Once all revenue inflow (no matter what source) is exhausted, this entity MUST then borrow dollars to spend.
4) In order to borrow, dollars must be LENT to this entity (this entity must ‘get’ dollars from someone else).
5) When borrowing dollars, this entity goes into actual DEBT.
6) All of this entity’s debt must be ‘PAID BACK’.
7) This entity is the ‘ISSUER’ of dollars.
8) This entity is a ‘USER’ of dollars.
9) In the game of Monopoly, this entity is more like ‘BANKER’.
10) In the game of Monopoly, this entity is more like ‘PLAYER’.
11) This entity IS NOT revenue constrained (it always has unlimited dollars).
12) This entity IS revenue constrained (it only has limited dollars).
13) This entity needs to BALANCE THE ECONOMY because it will never run out of dollars.
14) This entity needs to BALANCE THEIR BUDGET or else they will run out of dollars.
15) This entity acts for the greater good and a common cause for ALL people.
16) This entity acts as either a ‘non-profit’ or a ‘for-profit’ only for CERTAIN people.
17) This entity IS the ‘Lender-of-last-resort’.
18) This entity IS NOT the ‘Lender-of-last-resort’.
19) This entity has NEVER experienced a missed interest payment, a debt restructuring, or actual default of their debt (this entity has very little ‘leverage vulnerability’).
20) This entity MAY have in the past experienced a missed interest payment, a debt restructuring, or actual default of their debt (this entity has some ‘leverage vulnerability’.
How many times did you choose A) Federal gov’t AND B) State & Local gov’t together at the same time…once or twice (?)
How many times did you choose B) State & Local govt AND C) Private sector together at the same time…more than that (?)
If B & C together walk like a duck….and B & C together sound like a duck…perhaps start calling them a ‘Non federal government’ duck (?)
Deadly Innocent Fraudulent Misinterpretation #18 explains why we should be diving deeper and asking ‘gov’t deficits equals whose non gov’t savings’; but even better, when explaining MMT we should be saying ‘FEDERAL Government deficits = NON FEDERAL government savings’.
MMTers understand that ‘Government’ means the federal gov’t and they understand that ‘Non government’ means the private sector and the foreign sector; but are you sure that people who are uninitiated to MMT understand that’s what it means?
What MMTers (who are interesting in explaining ‘description’ MMT to listeners) should be saying is Federal gov’t deficits = Non federal gov’t savings. Otherwise the MMT gets further blurred with that Gov’t Deficits = Non Gov’t Savings meme and as a result you get more deadly misinterpretations.
For example, on a given day, if the federal government deficit spent (which was a net increase of added dollars to the banking system) that ONLY went to state & local gov’t, then this gov’t dollar drain / non gov’t dollar add isn’t easily grasped by just saying Gov’t v. Non Gov’t. Meaning that if the federal gov’t deficit spent only to state & local gov’t (for grants, infrastructure, workforce development, or medicare/medicaid reimbursement), many people will be confused when you say to them that money went from the Gov’t to the Non Gov’t (because the state & local gov’t is gov’t). In reverse, in another scenario where ONLY the state & local governments cutting spending and creating a federal gov’t surplus, again the Gov’t = Non Gov’t meme is confusing (because again, everybody knows that the state & local gov’t is gov’t).
In a Tweet to Stephanie Kelton, I asked her how does she expect her students to easily grasp whether she is talking about the local Kansas City gov’t or the Missouri state gov’t or the federal gov’t whenever MMTers say Gov’t v. Non gov’t? She didn’t reply (because she is now more interested in explaining ‘prescription’ MMT to listeners).
For those that are more interested in explaining ‘description’ MMT, trust me, by saying ‘federal gov’t deficits = non federal gov’t savings’ the uninitiated (including many of your fellow MMTers) will better understand and more easily accept the concepts of MMT; the ‘issuer’ of dollars v. the ‘users’ of dollars will start to make more sense; folks will no longer commingle federal gov’t with state & local gov’t; and they will more easily get what ‘the-federal-gov’t-is-not-the-same-as-a-household’ (‘the-federal-gov’t-is-not-the-same-as-a-state-&-local-govt’) really means.
Saying it correctly also appeals to the ‘fiscally conservative deficit hawks’ who can continue to fight their good fight for keeping the non federal government’s fiscal houses in order, while at the same time becoming less suspicious of MMT proponents who (properly) see the federal gov’t as a separate paradigm.
Deadly Innocent Fraudulent Misinterpretation #20: “Trade deficits are a third source of money creation.”
Fact: Trade deficits are not a third source of money creation for monetary sovereigns using free-floating non-convertible currency.
A few years back, Professor Steve Keen loved saying silly things like the ‘coming crisis’ of the ‘Walking Dead of Debt’ (like the USA) or the ‘coming crises’ of ‘Zombies-To-Be’ (like China) to rile up that always-plentiful, ridiculously-gullible, doom-and-gloom-loving folk.
As the world economy started gaining more strength however, it eventually dawned on him that debt was also the ‘smoking gun’ of strong economies too.
So the good professor piped down on ‘the end is nigh’ stuff and went back to his blackboard to work on those ‘dynamic techniques’ of his ‘mathematical models’.
In a 05/07/18 RealProgressives broadcast, after Steve Keen proclaimed to Warren Mosler that ‘trade deficits are a third source of money creation’, it quickly escalated into quite the kerfuffle.
It was soon apparent in this battle of the network MMT stars that even Steve Keen himself, like many in the mainstream, is getting (understandably) confused with the word ‘deficit’ in Trade Deficit (like so many get confused with the word ‘debt’ in National Debt).
As Warren Mosler explained (correctly) to Steve Keen, a trade ‘deficit’ does NOT mean that the currency ‘leaves’ and ‘goes overseas’.
Like the word ‘debt’ in the national debt, the word ‘deficit’ in trade deficit is a throwback to that bygone era when ‘hard’ currency (gold, silver, tobacco, cotton, wampum or whatever was legal tender at the time to settle debts for imports) was loaded aboard a foreign merchant ship (and that money literally left the country).
Today, when a foreign importer sells an import, thanks to the modern foreign-exchange market (the biggest market in the world), no country, using ‘soft’ currency (fiat), running a trade deficit with another country also using ‘soft’ currency, does any of the local currency ‘go’ anywhere.
“I have received many E-mails and direct twitter messages overnight and today following the ‘debate’ on Real Progressives yesterday. I concluded that only one of the guests knew what happened when nations exported and imported. Net export surpluses [trade differentials] do not increase currency balances [is not money creation], they just change the ownership.” —Bill Mitchell
What Bill Mitchell (who agreed with Warren Mosler) meant was that a US trade deficit only means a TRANSFER of currency from one owner in the nonfederal gov’t/ domestic (private sector) to another owner in the nonfederal gov’t / international (foreign sector).
The middleman between the private sector and the foreign sector in that transfer of ownership is a currency exchange intermediary (an f/x broker), and NOT a central bank.
For example (and without using the USA in this example as per Steve’s request to Warren) let’s say that you are in London, England (who is running a trade deficit with the European Union) and buying a Mercedes Benz (an EU import). After you pay for the car in British pounds, that local Benz dealership will do one of two things with those pounds: It will (more likely) leave those pounds as pounds deposited in their local London bank account and use them to pay salaries, rent, utilities plus all other expenses (denominated in pounds) incurred at that London dealership; or (less likely), the Benz dealership in London will convert the pounds to euros with a local currency-exchange broker (as a financial-intermediary middleman in the private sector) and the Benz Dealership will transfer the euros to their HQ in Germany.
Unlike the central bank (as a financial-intermediary middleman in the federal gov’t) using fiat (free-floating non-convertible) currency that MUST be involved with a federal BUDGET deficit, the central bank isn’t involved with a federal TRADE deficit in fiat currency.
When that Londoner buys the Benz (when the UK has a trade deficit with Germany), British pounds never leave the British banking system (British pounds don’t ‘go’ to Germany and wind up at the ECB); and thus no ‘creation’ of euros by the ECB because of the UK trade deficit (nor does any trade deficit cause any creation of fiat currency by any central bank).
That said, it doesn’t mean that a UK trade deficit has nothing to do with euro creation at the ECB.
If someone in Germany decided to try to get in on the action selling cars in London, then the domestic loans, CREATING MORE EUROS, taken out in Germany (to finance that new start-up car operation), there’s your ‘3rd source’ of money creation (but that’s separate from all that Benz-buying in London causing UK trade deficits).
Another for instance, let’s say that Mario Draghi decided to keep EU-made cars priced cheap in London by intentionally weakening the value of the euro against pounds to maintain Mercedes-Benz market share. The ECB would pull out their keyboard, CREATING MORE EUROS (to dump them in the f/x market for pounds) and presto, there’s yet another source of money creation (but again that’s separate from the UK trade deficits).
In the post-gold standard, modern monetary system, all that ever happens in any trade differential, is a simple transfer of ownership, of two different fiat currencies, between a local currency-exchange broker and an overseas seller of goods & services.
Instead of gold coins ‘going’ overseas (and here’s the main point of this post), a trade deficit today means that it’s that company that could have made products in your country (and all that additional organic growth, all those added sales, all that aggregate demand that it would have locally generated), that has ‘gone’ overseas.
Meaning less US workers, less US managers, less US secretaries, less US janitors, less US lawyers, less US accountants, are needed; and less sales from less workers means less paying customers for nearby businesses like stores, delis, restaurants, and medical facilities, are needed; nor any new housing developments are needed, so less real estate development construction workers and less real estate professionals are needed.
Every time a company leaves the US to produce overseas, you can literally hear it (the sound of silence). That’s what Ross Perot, the 1992 Reform Party presidential candidate meant by a “Giant sucking sound going South (of the border)” if candidate Bill Clinton were to get elected and pass NAFTA. Which no doubt resonated with citizen Trump (along with 19% of the US popular vote that voted for Perot).
Other than the fact that trade deficits dangerously depletes your manufacturing base wiping out millions and millions of middle class jobs, free trade can morph into unfair trade.
More specifically, unfair trade practices that pressures the transfer of sensitive intellectual property to overseas governments, undermines your proprietary technology by depriving you of the ability to license it at full value and weakens your global competitiveness.
After watching the US trade deficit go from $115B in 1993 (the year before NAFTA implementation), to $800B in 2017, you get to the point (US manufacturing less than 12% of GDP) when somebody has to say ‘enough is enough’. President Trump, after watching enough US factories close, after watching enough US jobs exported, said ‘that’s enough’, and just renegotiated our trade deal with Mexico to include new ‘rules of origin’ requirements that will ‘encourage billions a year in vehicle and automobile parts production in the United States, supporting high-wage jobs across the USA’.
So when hearing about a US trade ‘deficit’, which is a dollar drain from the private sector to the foreign sector on those sectorial balances charts, rather than thinking that DOLLARS are draining overseas, it’s better for Pure MMTers to be thinking that DEMAND is draining overseas.
In other words, unlike a budget deficit, a US trade ‘deficit’ is not a shortfall of money to the USA (that must be immediately reconciled with a creation of money); a US trade ‘deficit’ is a shortfall of aggregate demand to the US private sector (that must be eventually addressed in other ways).
“Comparing countries with a free floating currency and one that is pegged may have been the source of Keen’s confusion.”—Charles ‘Kondy’ Kondak
“If talking about a fixed currency regime (i.e. Middle East countries), then our trade deficits are a money creation by their central bank.”—Jim ‘MineThis1’ Boukis
Both are correct. Steve Keen was saying to Warren Mosler that ‘your country’s trade deficit results in a central bank somewhere acquiring your money’. Which isn’t entirely accurate, as Mr. Mosler explained to Mr. Keen, there is only one definitive way that a central bank acquires foreign reserves, and that is if they go into the f/x marketplace and buy them.
The exception to that rule would be an oil-exporting nation, a net-exporter, that is running trade surpluses, and selling oil from their state-owned enterprise (a business enterprise where the gov’t has significant control through full, majority, or significant minority ownership).
Examples of such nations would be Saudi Arabia (the second-largest oil producing country in the world after the USA), the United Arab Emirates (the eighth largest) and Kuwait (the tenth largest). All three of those nation’s currencies are pegged and all three of those nations ran trade surpluses in 2017. Meaning that, because oil is priced in dollars, that oil-exporter’s central bank is acquiring dollars, from nations around the world (some of which are running trade deficits).
So in the case of the US, our US trade deficits do provide a source of money creation for those central banks because those particular countries using a fixed currency that is pegged to the USD (similar to the US using a ‘gold-backed’ currency), as their central bank acquires more dollars (as they hold more USD in reserve), it results in more creation of their own ‘USD-backed’ currency. Which is a good thing since those US trade deficits are functionally ‘backing’ global economic growth and encouraging economic expansion (that lifts all boats).
Furthermore, countries with ever-growing USD +/or foreign-denominated private debt need their central banks to constantly acquire and hold even more USD in reserve to hedge that exposure, to avoid, for example, what happened in Thailand in 1997 and what is happening right now in Turkey, both suffering from the same consequence (of their central banks having insufficient foreign reserves to come to their rescue).
In order to properly manage the modern international ‘USD standard’ (that replaced the gold standard), US trade deficits are necessary to ‘supply’ the world economy with dollars (with the world’s reserve currency) that are needed by the global economy (that are used in 50% of the world’s daily transactions), for the exact same reason why a car needs constant injections of oil to keep all those parts moving (so those parts don’t seize up). Otherwise we repeat the mistakes made by the US & France prior to the Great Depression (we repeat the worldwide deflation caused by our hoarding of gold in the 1920s).
However, Steve Keen wasn’t talking about a fixed regime or a pegged currency, he was talking about the Eurozone and the euro currency. The example he cited (living in the UK and buying software from a vendor in Italy) seemed like he was confusing the Eurozone’s Italy (a ‘fixed’ currency ‘regime’ like any single one of the 50 US states because they have no monetary sovereignty) with the Eurozone itself (which has monetary sovereignty).
“He realized he was struggling with the balance sheets.”—Mike Morris
Agreed, and to avoid confusion, when we stop calling it the national ‘debt’ (perhaps we should call it the national debit instead), we should stop calling it trade ‘deficit’ (perhaps we should call it the trade ‘differential’ instead).
To be fair, Steve Keen wisely and gracefully backpedaled in a comment later on (in a follow-up tweet) saying that trade deficits “may be transfers” (and not money creations).
Deadly Innocent Fraudulent Misinterpretation #21: “Imports are real benefits and exports are real costs.”
Fact: Imports and exports are both a benefit and a cost; however, imports are the position of strength.
Like Sly Stallone in the original Rocky movie, at the end of the fight (the 05/07/18 RealProgressives broadcast), Professor Steve Keen did rise from the canvas and scored some punishing body blows to Apollo Creed.
“Imports are a benefit and exports are a cost” first appeared in Seven Deadly Innocent Frauds (7DIF) to get the mainstream to stop seeing trade deficits as being ‘bad’ (which was fine), but then that meme went wildly off course. When Warren Mosler threw his trusty ‘there-is-only-a-nominal-payment-for-trade-deficits’ roundhouse (meaning that it’s ‘only pieces of paper’ in exchange for ‘real’ goods), Steve Keen, who was expecting it, weaved and counter-punched brilliantly:
Mosler: “Having a trade deficit doesn’t constrain investment.”
Keen: “[When Australia runs a trade deficit, it means] a lot of our [Australian] assets have gone overseas…it is going to foreigners.”
Mosler: “Assets are not going overseas by running trade deficits…If you sold your Australian Opera house, are they going to dig it up and take it away?”
Keen: “I’m talking about the financial transactions paying for imports that lead to the foreign sector then buying our assets…They have claims on our assets. You are saying that is good and that exports are the real costs, that by being a net exporter [running a trade surplus], that sending real goods for receiving credit balances at the central banks is bad.”
Mosler: “There is a only nominal payment for trade deficits.”
Keen: “There is nothing ‘nominal’ about foreigners owning our assets…In every trade transaction, both parties PERCEIVE a benefit, otherwise the trade would not take place.”
Why Steve Keen was able to nicely counterattack there is because ‘exports are a cost’ is a swing and a miss that tries to cherry-pick one of many quickly moving parts. The 7DIF insight is that a monetary sovereign is able keep handing over pieces of paper off a printing press all day long (unlike being able to keep handing over ‘real’ tangible goods all day long). However, it’s one thing to make a point that we shouldn’t be played into thinking that federal trade deficits are always bad just like we shouldn’t buy into the narrative that federal budget deficits are always bad (because of the MMT enlightenment that there isn’t a problem for the issuer of dollars to ‘finance’ deficits denominated in fiat dollars). That’s fine, BUT it’s another thing to push the notion that JOB DESTROYING trade deficits are good (‘imports are a benefit’) and JOB CREATING trade surpluses are bad (‘exports are a cost’). That ignores the monetary analysis (‘description’ MMT) to instead push a political agenda (‘prescription’ MMT). This is yet another example why you should never mix your politics with your economics (because when you do, you dilute your expertise in both). The same ideologues who are today going around saying exporting (that creates real jobs during a jobs shortage) ‘is a cost’, have convinced themselves that a $500B federal ‘job’ guarantee program (that creates fake jobs during a labor shortage) would make economic sense.
‘Imports are a benefit, exports are a cost’ oversimplifies the many other moving parts involved in trade differentials. In that 1992 Presidential Debate, candidate Ross Perot was (correctly) pointing out that every dollar of every US trade deficit represents an aggregate demand drain from a US community that could’ve been manufacturing the goods. Here are the seesaws (the ‘whole truth and nothing but the truth’) and depending on the country your mileage may vary:
Country running trade surplus: Raw materials and the sweat equity needed to produce the goods & services are a COST; the added aggregate demand to your private sector is a BENEFIT.
Country running trade deficit: Imported goods & services received are a BENEFIT; the aggregate demand drain from your private sector is a COST.
Country running trade surplus: A strong manufacturing base that is creating jobs is GOOD; International (export)-led growth that makes you very susceptible to economic downturns +/or vulnerable to commodity price decreases is BAD.
Country running trade deficit: Organic, domestic (consumption)-led growth makes you less susceptible to economic downturns +/or less vulnerable to commodity price decreases is GOOD; a weak manufacturing base that is losing jobs is BAD.
What did Dr. Bill Mitchell, who also loves to say ‘exports are a real cost’ have to say afterwards? “I might not write about trade for a while”—Bill Mitchell, ‘Last Word’ BillyBlog post 05/25/18
Which is a good idea, because if you are a professor of economics at the University of Newcastle in Australia, a country in its 27th year without a recession—all thanks to the BENEFIT of being an export-led economy—it’s probably best to not be writing “exports are a real cost” for awhile. Perhaps better to at least wait until your biggest customer, China, slows down buying your stuff and then your exports—your export-dependent economy—becomes an actual COST.
“Mosler’s refusal to acknowledge the impact of the production aspect of trade made him wrong. He knows what Keen is saying but refuses to budge on his ‘pieces of paper for production’. Keen got that part right.”—Mike Morris
“Why is Mr. Mosler only going one way, saying everything is a ‘cost’. It’s called ‘cost / benefit analysis’. Without considering the benefit, in relation to the cost, your cause is lost in policy decision-making (public or private).”—Charles Kondak
Agreed…and finally, who would you rather be, the guy (the country running a trade surplus) making things and getting the paycheck; or the guy (the country running a trade deficit) paying someone else to make things for you (?)
The position of strength is the guy paying others to do the manual labor.
The country running trade deficits has simply delegated the assembly-line work to others (because they are too busy making even more money doing other more important things).
The countries running trade surpluses are on the factory room floor while the countries running trade deficits are in the executive R&D suites innovating the products of the future.
Rather than thinking that exports are NOT a benefit (which isn’t true), since there are BOTH costs & benefits, both bad & good, for both importer & exporter, in both trade deficit & surplus, thanks to Professor Steve Keen, Pure MMTers would be better off thinking that ‘imports are the position of strength‘.
Imports are the “position of great strength” and that’s why (if you are running trade deficits) it’s easier to win trade wars with vendors —because The Customer Is Always Right.
In many years prior to the Great Recession (the greatest recession since the Great Depression), massive US trade deficits—that were higher than US budget deficits—resulted in ALL of the federal gov’t ‘red ink’ going to the foreign sector (resulted in foreign sector’s ‘black ink’ and private sector’s ‘red ink’). In effect, if you take a step back from that picture, from the perspective of the US non-federal gov’t domestic sector, those years (1996, 1997, 2002, 2003, 2004, 2005, 2006, 2007, 2008—SEE 77DIF#2) had the SAME debilitating consequences for US households as if the federal gov’t, by proxy, ran sustained budget surpluses—just like the US federal gov’t did right before all six depressions in US history. In other words, the ‘users’ of dollars were essentially forced to rely on borrowing (like using their homes as ATMs) to sustain spending—which always ends badly for ‘users’ because that’s the deficit spending that’s unsustainable. MMTers—especially the ones who love to wave that ‘Sectoral Balances’ chart around—should know more than anyone else exactly why policy seeking fairer trade that lowers US trade deficits is a good idea (because ‘Imports are a benefit’—until they’re not).
Thanks for reading,
Follow Minethis1 and his instructors @ Real Macro for the 100%
P.S. “If the EU was doing their part to import, the global economy would soar. Emerging markets would crap themselves with so many jobs. As they would grow so would all. One could argue that this is what the trade war is all about: The US is telling the world to screw themselves, because the US cannot be the only job creators for the world (by importing so much of their goods). When we import so much, we are starving our US domestic sector (of job-creating demand). The powers that be (overseas) better start playing (trading) fair or else we will starve the world of $$$ (of job-creating demand).”—Jim ‘MineThis1’ Boukis, 09/16/2018
P.S.S. Watch this video,
look at where Japan & Germany were in 1985, and then recollect what happened in ’85—The Plaza Accord with Japan & Germany. Which basically was the US saying ‘OK, that’s enough, you’re doing fine now, you don’t need as much of our help anymore, we’re not going to let you get away with murder
(intellectual property theft, back-door IPOs, currency manipulation, dumping, etc.) anymore, so if you want to be an economic might, that’s great, but from now on, you’ll start doing it more on your own volition’.
Meaning more free-trading and less free-riding (which is actual fair-trading). Same as in 1985, what the US is saying to China today is, ‘OK, That’s enough’
(and the customer is always right).