(G-T) + (I-S) + (X-M) = 0

Perhaps nothing has lead the MMT Party and their #FAKEMMT followers off the cliff more than that ‘Sectoral Balances’ equation. It’s just another source of more Deadly Innocent Misinterpretations (one of the 77 DIMS), because just like the Monopoly Game (Monopoly rules state that no Player may borrow Monopoly Money from another Player), it is only talking about ‘vertical’ dollar adds (federal gov’t creation), AND NOT ‘horizontal’ dollar adds (bank creation). In other words, Charles Darrow (who wrote the Monopoly Game rules) understood pure ‘description’ MMT in 1933 better than most fake ‘prescription’ MMTers do today.

“I have been giving myself a headache thinking through that simple ‘Sectoral Balance’ equation which underpins the MMT Party’s (who are so fond of saying they are describing ‘operational reality’) assertions that Government Deficits = Private Sector Savings. The headache finally passed when I realized that for Government Deficits to equal Private Savings, the (I – S) part of the equation must net to 0, as if only Government Deficits can add to Private Savings. Sure, those Government Deficits do add to Private Savings and I do basically understand what the MMT Party is trying to say, but as the sole source of Savings (?) That’s where they go off the rails. The MMT Party is netting out the Private Sector’s ability to create money ex nihilo (‘out of nothing’) through the banking system (which can also add to Private Savings). The MMT Party maintains that bank-created money cannot add to Private Savings (and they will go to great lengths trying to prove it’s an illusion). Does anyone really believe that (I-S) must net to 0 in order to get to Government Deficits = Private Savings? If so, you are not describing the ‘operational reality’ of our capitalist economy and you do belong in the MMT party, comrade.”—Charles ‘Kondy’ Kondak

That’s exactly right…While #FAKEMMTers are saying ‘Their deficits (their red ink) = Our savings’, Pure MMTers are asking ‘Their deficits = WHOSE savings’ (WHOSE black ink) because most of the deficits bypass the 95% (they get whacked up between the foreign sector and the 5%). Sure, IF (I – S) was equaling zero, IF all bank loans were ‘netting-to-zero’ and IF the US trade deficits were zero, Their deficits = Private Savings, but even then, those federal gov’t deficits would still eventually wind up with the 5% (in the savings bubble).

In addition, as per Egmont Kakarot-Handtke, creator of the AXEC New Foundations of Economics website, the sectoral balances equation is incomplete at best; or wrong, at worst. He posits that [‘G’ov’t spending – ‘T’axes] + [‘I’nvestment – ‘S’avings] + [e’X’ports – i’M’ports] DOESN’T EQUAL ZERO at all. He is saying that, albeit being an identity, the equation is useless because it ignores business profit (it deals with a neo-marxist zero-profit utopia). So to reflect reality, the sectoral balances equation should include profit (two more variables), ‘business monetary profit’ (Qm) and ‘distributed profit’ (Yd).

The Profit Law’ is expressed as (G – T) + (I – S) + (X – M) minus (business profit – distributed profit) = 0

Which reduces to Public Deficit = Private Profit.

Just like the Daily Treasury Statement proves that taxes are not ‘destroyed’, this Profit Law proves that deficits feed the savings bubble. Egmont is not a fan of fake ‘prescription’ MMTers. He notes (correctly) that MMTers’ (the ones pointing their fingers at ‘evil neoliberal murders-by-proxy’) policy guidance ultimately boils down to more deficit-spending / money-creation and since it is a macroeconomic fact that Public Deficit = Private Profit, “the MMT Party policy of ever-increasing public debt amounts to the permanent self-financing of the oligarchy.” In other words, they (#FAKEMMTers ‘prescriptions’) are money-makers for the one-percenters. “MMT is ALWAYS a bad deal for the ninety-nine-percent”, he adds.

“Investment is money that’s circulating in the economy and Savings is money which isn’t circulating in the economy, all in relation to the private sector.” —Damian Penston

Bingo…However, #FAKEMMTers don’t see it that way. The MMT Party fails to grasp that ‘Our Savings’ isn’t circulating in the economy; or they choose to ignore this fact that ‘Their Deficits’ detours the functional (real) economy and head to the nonfunctional (financial) economy because it doesn’t fit their virtuous marketing narrative.

The answer to economic problems (like wealth inequality, low wages or underemployment) is not the fake MMT ‘prescription’ fix-all of more ‘this’ and more ‘that’ (more federal deficits). As per Jim ‘MINETHIS1’ Boukis, the answer lies in organic solutions, that unlock nonproductive savings back into productive capital. “We need an eco-feedback loop that embraces human capital producing more useful output instead of continuing to increase gov’t deficits that results in just more capital producing more capital.”

Meanwhile, the MMT Party (pushing ideological fake ‘prescription’ MMT under the guise of promoting pure ‘description’ MMT) repeats mantras like ‘Their Deficits = Our Savings” to their choirs and call it a day (to avoid headaches).

Thanks for reading,

Follow Jim ‘MineThis1’ Boukis at IMMT – Investing Using Modern Monetary Theory https://www.facebook.com/InvestingMMT/

H/T Egmont Kakarot-Handtke (@AXECorg on twitter) https://axecorg.blogspot.com/2018/03/dsge-and-profit-forget-it-mmt-and.html

P.S. In future posts, MineThis1 elaborated on this some more, referring to it as the ‘Household savings v. Business profit conundrum’.  MMTers need to go beyond the ‘Their Deficits = Our Savings’ catchphrase and grasp WHOSE Savings Do Federal Deficits Equal? The answer is less and less household savings; and more and more business ‘savings’ (aka profit). “The imbalance between household savings vs business savings will only get worse with more deficits.”—MineThis1

P.S.S. Why saying ‘THEIR DEFICITS = OUR SAVINGS’ (or ‘Their red ink is Our black ink’) is not entirely accurate:

For example, if Federal Gov’t Sector (G-T) + Non Federal Gov’t Domestic Sector (I-S) + Non Federal Gov’t Foreign Sector (X-M) = 0

…and in 2015 the US federal gov’t deficit (G – T) was $439B…

…and in 2015 the US trade deficit (X – M) was $500B (meaning a foreign sector SURPLUS of $500B)…

(-439) + (I-S) + (+500) = 0

So in 2015, that third component, the Non Federal Gov’t Domestic (private sector) SAVINGS WAS NEGATIVE $61B.

(-439) + (-61) + (+500) = 0

Their deficit = Whose savings?

Wait…There’s more.

$157B federal gov’t deficit in 2002:

$532B surplus to non federal gov’t / Foreign sector

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


$378B federal gov’t deficit in 2003:

$532B surplus to non federal gov’t / Foreign sector

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


$412B federal gov’t deficit in 2004:

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

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


$318B federal gov’t deficit in 2005:

$772B surplus to non federal gov’t / Foreign sector

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


$248B federal gov’t deficit in 2006:

$647B surplus to non federal gov’t / Foreign sector

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


$161B federal gov’t deficit in 2007:

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

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


$458B federal gov’t deficit in 2008:

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

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

We all remember what happened in 2008.

If you take a step back from the picture, in effect, all those years above, from the perspective of the US private sector, those years had the same debilitating consequences as if the federal gov’t, by proxy, ran sustained budget surpluses.

In other words, for seven straight years prior to the last recession, the worst economic crisis since the Great Depression, ‘Their red ink WAS NOT your black ink’.


“MMT ‘scholars’ mock Ben Bernanke for saying ‘public debt is a problem’.

While everyone laughs, he is right.

The national ‘debt’ is 170% of GDP, which would have been catastrophic 30 years ago, but today, it’s not. PE stock values of 28 today would have been extreme 30 years ago, but today, it’s not. It’s a ‘conundrum’ that the prices of bonds are so high as well (that the long term interest rates are so low).

Those high federal gov’t deficits, those high stock valuations and those high bond prices are not a coincidence, why?

A) The savings bubble

Deficits wind up in savings.
Fake MMTers say ‘Their deficits = Our savings’.
Pure MMTers ask ‘Their deficits = Whose savings?’
A) The 5%.

It can be seen everywhere.

Instead of GDP outperforming debt, the reverse is happening (because of the savings bubble).

Noninflation in the functional economies v. higher inflation in the nonfunctional economies.

Unproductive capital (production of capital with capital) without increases in production of goods (relative to the amount of dollars, pounds, euro, & yen being pumped into the economy).

While laughing at the Fed, the MMT ‘scholars’ are suggesting a Soviet ‘Job Guarantee’ (spending $500B on having the gov’t create ‘jobs’ during a labor shortage) while having no idea that their ‘remedy’ (their #fakemmter ‘prescription’) of the problem only enhances it.”—Jim ‘MINETHIS1’ Boukis, creator of the Investing Modern Monetary Theory Facebook page

P.S. MINETHIS1 is right. When monetary policymakers (Ben Bernanke or Janet Yellen or Jerome Powell) say we need ‘to lower our federal debt’ because ‘our fiscal course is unsustainable’, they don’t mean in a financially-sustainable sense. The Fed knows that the US federal gov’t, the issuer of dollars, can’t ‘go broke’ or ‘run out of dollars’ (like anyone else, a user of dollars, can). The Fed knows that the US federal gov’t is not in ‘debt’, because they know that those Treasury bonds are now denominated in fiat dollars (unlike during a bygone era when those bonds were denominated in gold-backed dollars). There is no such thing as the issuer of US dollars being in debt in US dollars (just like IBM, the issuer of IBM stock, is never in ‘debt’ of IBM stock). However, 95% of The People don’t know this, so the Fed has to keep talking in code about the ‘debt’. Just like when fiscal policymakers talk in code and say things like ‘We can’t afford that’ or ‘How are you going to pay for that’, they are talking in code. For example, if you have to explain to a PhD in Economics WHY her proposal to spend $500B for the federal gov’t to create quote ‘jobs’ unquote during The Largest Jobs Growth in Human History, during a labor shortage, is an idiotic idea (is obviously another ‘free ponies for votes’ ploy that only attempts to solve a political problem—not an economic one), THAT’S why the busy policymakers just say ‘we can’t afford that’. It’s the same reason why a busy parent in the supermarket says ‘we can’t afford it’ to a child that wants more candy ‘this’ and more candy ‘that’ because that’s what you do (you tell white lies to those you can’t reason with).

Thanks for reading,

Pure MMT for the 100%

Follow us at https://www.facebook.com/PureMMT/


ENCL: IMMT Patreon page link to ‘IMMT Exposes FAKEMMT PARTY and Soviet Job Guarantee’.


P.S. As of October 2018, IMMT is called ‘REALMACRO INVESTING’ (RMI). The reason being, that ‘modern monetary theory’ has become too political, too toxic and too loony to be associated with real-world econ, so Jim ‘MineThis1’ Boukis decided (correctly) that he should no longer use the letters MMT anymore. Here in his own words, he explains the reasons for the name change:


After years of hoping that MMT would not turn into the laughing stock of the economic community with extremist political, Neo Marxist and cult groups such as the Real Progressives, it has been decided that IMMT will no longer be associated with MMT cheap circus act.

We have tried for years to save MMT by sticking to the ‘Description’ and avoiding the ‘Prescription’ Political MMT Party, Soviet Sympathizing, Free lunch, economic Voodoo that it has become: Full of oversimplification, memes, lies, with over-promising and under-delivering rhetoric.

We have also during that time taken an incomplete MMT theory and made it more whole while simplifying it in the process. Most importantly we made it applicable in the Real World! Not just on some spreadsheet.

Our great efforts for the past few years has added the two missing sectoral balances, Household and Business, within the private sector that reveals the truth behind unnecessary deficits beyond the scope of removing fear in the markets. When the two missing sectoral balances are plugged in then show that:

Households must DISSAVE in order for Businesses to have PROFITS.

One can easily see that unnecessary deficit spending only lead to savings for the top 5% in Profit/savings. Thus “(Their) Gov’t Deficits = (Our) Private Sector Assets” really means Private sector assets for the top 5% and not the 95% which fake MMT most desperately wants you to believe. In short, Trickle Up economics is just as bad as Trickle Down economics.

We also corrected and simplified the constant redefinition of money and what it is with ‘All MONEY IS MONEY’. No more reserve money, high powered money, net financial assets money, horizontal money, tax credit money, bank credit money, treasury money, tax debt money, endogenous money, exogenous money, unit of account money, debt money, IOU money, M1 M2 M3 money, fiscal space money, gold money, real money, on and on. These are all designed to confuse people by pseudo-intellectuals to push their cultist political views. As you can see above, the word money is constant. They are all denominated in dollars. That is all one needs to know. ALL MONEY IS MONEY!

We exposed the lie that federal taxes, when collected, are destroyed. Only surpluses that result in Treasury bond debt repayment can destroy money.

We exposed that higher rates cause inflation due to increase money supply. That is the cart ahead of the horse voodoo economics. Rates rise as a consequence of the economy is booming. We also exposed that limiting the money supply cause higher FOREX prices. Absolutely not true. EUROZONE has imposed Austerity and running current account surpluses. The result? EUR collapsed from 1.60 to as low as 1.03. Another failed MMT prediction.

We exposed the job-creating ‘Exports are a cost’ and job-destroying ‘Imports are a benefit’ fallacy. As Venezuela, Argentina, Turkey, Egypt, Russia, India, Tunisia etc. have proven that is not the case. Not even close. Qatar as a fine example showed that its isolation from neighboring trading partners never lost the peg to the USD due to large exports and foreign reserve money holdings. While print borrow and import countries that faced similar problems collapsed their currencies and most saw high unemployment and inflation.

We exposed that Taxes drive the currency or ‘value the currency’. Just look at the Middle East countries that do not tax.

We also exposed that MMT has no model to predict inflation, let alone deal with inflation other than to impose spending cuts, higher taxes pitchforking the rich, after the fact. Which is not an even economic solution but again a political one.

MMT predicted economic recession since 2015, 16, 17, 18 and now, 19. We also debunked that as well as we debunked that a ‘Job Guarantee’ is needed during a labor shortage, while companies are starving for workers in the midst of the longest job expansion in history.

Clearly, MMT is not MMT but rather the #FAKEMMT PARTY. Even the #FAKEMMT PARTY is an utter disaster as a political movement. Mosler with 8k followers on Twitter and Natasha Kelton 34k. Despite the Trump election outcome, and the Bernie Sanders movement and the publicity. Not to mention all the money thrown at it for the Marketing campaign.

The MMT brand has been trashed by the likes of the emotionally unstable, and emotionally bankrupt, Steve Grambine (AKA SNIFFLES) since he is always on youtube pretending he is crying, exploiting cancer victims and even his own son to scam money out of people. Mike Mousey Boy Norman promising all profits and blowing people’s account out. While the Wigs Natasha Kelton, Bill Bitchell, Mosler, Wray etc. continue to support such an extremist cult.

IMMT no longer wishes to hold the last torch to salvage the MMT brand, nor should #FAKEMMT benefit from all the hard work we have done over the years. MMT has become a huge disadvantage for IMMT. As soon as people see the MMT in our logo we are automatically blocked, laughed at and ridiculed before we even have a chance to make our PUREMMT case. Simply embarrassing, IMMT has been tied to a sinking ship.

#RealMacro Investing is Born! in the days and weeks ahead you will see us transform and continue to give people what they really want and have always expected from us. The Real Macro Economic Facts. We will continue to enhance the product and in doing so build our brand with winners who care bout the real world data.”—Jim ‘Minethis1’ Boukis 10/22/18

10 Years Ago Today: The Lehman Shock

45:36: “We (the Fed) had only one tool which was lending against collateral, we were unable to put capital in, that would only come later with TARP.”—Ben Bernanke, 09/12/18, Fed Chair in 2008

48:15: “There’s a lot of magical thinking about what central banks can do, can they provide artificial support to asset prices, can they levitate them, but these tools the Fed were given were designed to be limited.”— Tim Geithner, 09/12/18, President of the NY Fed in 2008

51:31: “There was so much dry tinder, even if BOA bought Lehman then Merrill would have gone down, so ultimately, it was going to take capital, from fiscal authorities, we were going to have to go to Congress.”—Henry Paulson, 09/12/18, United States Secretary of the Treasury in 2008

I’m not sure if many MMTers would agree with this, but here goes anyway.

All reserves are not ‘High Powered Money’.

‘High Powered Money’ (a term coined by former Fed Chair Marriner Eccles) means newly-created dollars that are additions of dollars to the banking system (that adds Net Financial Assets). In other words, ‘HPM’ is federal gov’t deficit spending.

MMTers say ‘HPM’ means ALL reserves meaning ALL newly-created dollars for ALL federal gov’t spending, including surplus spending, because the MMT pillar is that the function of federal taxation and Treasury bond sales is no longer a gold-standard-era financing function—that ALL federal spending now comes ‘first’—then afterwards both federal tax collections & federal bond sales are done as a ‘dollar drain’ out from the money supply to maintain fiat dollar demand and also to maintain price stability.

However, it’s hard to defend that ALL reserves (created by the Fed for all federal spending) are ‘HPM’.

Marriner Eccles had a fight with the Treasury Secretary because he didn’t want to follow an order to use ‘HPM’ to buy Treasury bonds. Eccles refused to use ‘HPM’—he wanted to use existing dollars (he wanted the public to pay for the bonds). Eccles (not wanting inflation) stopped the Treasury (wanting cheap financing) from forcing the Fed to create ‘HPM’ to pay for bonds (a fight that Eccles won and led to the Fed’s independence from the Treasury in the ’51 Accord).

Fast forward to recent years, would you consider all of the $4.2T in reserves that the Fed created to pay for bonds during QE as being ‘High Powered’? That answer is no, you shouldn’t have considered any of those newly-created reserves ‘High Powered’ because that $4.2T was a swap of bonds for reserves. Unlike any federal spending, that $4.2T in newly-created reserves were added to the banking system but were not added to the money supply. Would you consider all the newly-created reserves that went to pay for $3.98T of total federal spending in 2017, that were added to the money supply, as being ‘High Powered’? That answer is also no, you shouldn’t have either because even though that $3.98T was newly-created dollars (that came into the money supply), most of it ($3.315T) was a swap for tax dollars (that came out of the money supply). Only the amount of federal deficit spending in 2017 ($666B) was ‘High Powered’ because an already-existing $666B was swapped for Treasury bonds AND THEN ANOTHER $666B was ‘vertically’ added (unlike ‘horizontally’, another $666B was added WITHOUT attached bank debt), meaning like any fiscal year’s amount of deficit spending, that newly-created $666B was a net addition of dollars to the banking system that goes into the money supply (aka Net Financial Assets). Only those newly-created, ‘NEWLY-EXISTING’ dollars are ‘HPM’. Which is why deficit spending dollars are ‘High Powered’—because it has an inflationary bias; and why surplus spending dollars (or heaven-forbid running sustained federal budget surpluses) are not ‘High Powered’—because it has a deflationary bias.

Some reserves created by the Fed are ‘High Powered Money’ and some are not. When asked why ten years ago, on September 15, 2008 the Fed didn’t save Lehman Brothers, holding over $600,000,000,000 in assets, from filing for Chapter 11 bankruptcy protection, the largest bankruptcy filing in U.S. history, the answer was that, unlike Bear Stearns with a liquidity problem (low on cash BUT still with assets greater than liabilities), Lehman had a solvency problem (low on cash AND with liabilities greater than assets). The Fed can help with the former and not the latter because the Fed is “unable to put capital in”, the tools the Fed are given “were designed to be limited” and that “ultimately it was going to take capital from fiscal authorities”.

In other words, Congress must first authorize the Fed to create reserves that adds capital (like for TARP); and likewise, Congress must first authorize the Fed to create reserves that adds Net Financial Assets (like for deficit spending). All NFAs are ‘High Powered Money’ (and all reserves are not).

This is where the ‘reserves are HPM’ meme comes from.

“…the proceeds from taxation and bond sales are technically incapable of financing government spending. Modern governments actually finance all of their spending through the direct creation of high-powered money.”—Dr. Stephanie Kelton (nee Bell), ‘Can Taxes and Bonds Finance Government Spending?’

The first sentence is perfect and why MMTers should say ‘taxes don’t *technically* finance spending’ (instead of saying ‘taxes don’t fund spending’).

The second sentence is close but no cigar (see the above difference between ‘newly-created’ money for federal surplus spending that doesn’t add Net Financial Assets v. ‘newly-existing’ money for federal deficit spending that does).

The second sentence should say that ‘modern governments actually finance all of their DEFICIT spending through the direct creation of high-powered money.’ If not, then Dr. Kelton is, at best, jumping the gun to that Pure MMT phase (after MMT has been accepted by the mainstream) when we don’t use terms like national ‘debt’ (we instead say national debit or national savings), when we don’t say trade ‘deficit’ (we instead say trade differential), when we don’t say ‘deficit’ spending (we instead say how many dollars that the issuer added to the banking system); or at worst, Dr. Kelton and her listeners are still not fully grasping that gap between the modern monetary theory and that pesky, albeit unnecessary, modern monetary formality.

Thanks for reading,

Follow us at Pure MMT for the 100% https://www.facebook.com/PureMMT/

Seventy Seven Deadly Innocent Misinterpretations (77 DIMs #15 – 21)

This next installment of Deadly Innocent Misinterpretations talks about how some political ‘prescription’ MMTers (relying on personal feelings and anecdotal stories) are getting confused with pure ‘description’ MMT (because it only relies on facts, math & data).

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 grasp MMT, 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 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 administrator for the ‘Modern Money Planning Committee’ Facebook page took issue with J.D. Alt saying “banks create dollars”. When Mr. Hayden was asked why he had a problem with saying ‘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,” Mr. Hayden added.

There are two main reasons for this deadly innocent misinterpretation that is routinely regurgitated. The first is an attempt, a fake-out (a continuing narrative by political ‘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 Mr. Hayden 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 Misinterpretation #16: “All money is debt by its very nature.”

Fact: All money is simply a unit of measure—that measures debt.

“It’s just money. It’s made up. Pieces of paper with pictures on it so we don’t have to kill each other just to get something to eat.”— John Tuld (Jeremy Irons) to Sam Rogers (Kevin Spacey) in Margin Call, 2011

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 along with central bankers) 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 Misinterpretation #17: “The Fed is the price setter.”
Fact: The Fed is the price ‘stabilizer’.
Money has a price.
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 an 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 functionally productive ‘real’ economy (the 95%) they lower rates—at the expense of savers (the 5%) in the nonproductive ‘financial’ economy where capital just creates more capital. 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.
“Political MMTers have tunnel vision—they discount the private sector. One must study private sector flows to understand price stability. The federal gov’t is A price setter, not THE price setter.”—Mike Morris
Deadly Innocent 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 Misinterpretation #17’) is the Deadly Innocent 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 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%.
Don’t take my word for it. Using common sense, just ask yourself—if a bank had higher or lower interest rates—which one would make people NOT want to get a mortgage to buy a house (which is not expansionary) / make people want to pay down or even pay off their existing mortgage (which is not expansionary) vs. which one would make people want to get a mortgage (which is expansionary) / refinance an existing mortgage (which is expansionary if more debt is added in a ‘cash-out’ refinancing)? Which one would make people want to buy a car (which is expansionary)—if a car dealership had higher financing rates or lower financing rates? If you think that lower rates are better for economic expansion, good for you (and feel free to explain why to anyone going around saying The Fed has the pedals backwards—The Fed hiking rates is expansionary.”)
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 (consuming) by taking the water (the cheaper liquidity) away; but harder to lead the horse to water & make it drink.
As the saying goes, ‘fool me once, shame on you; fool me twice, shame on me.’ Mr. Mosler’s ‘Rate hikes are expansionary / The Fed has the pedals backwards’, is an example of just how skilled a politician he has become. It’s a unique ability to not only get folks to agree that ‘tax hikes for the rich’ that only go to the very few who are high earners—that are rich—ARE NOT expansionary; but also that rate hikes by the Fed giving out more interest income that only go to the very few who are savers—that are rich—ARE expansionary! Readers, I hate to break this to you, but if you fell for the (trickle-down) ‘supply-side economics IS NOT expansionary’; and also fall for Mr. Mosler’s (trickle-down) ‘Fed rate hikes IS expansionary’, then that’s not Mr. Mosler’s bad—that’s on you.
“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 is failing to create headline inflation—even though US stocks are at all-time record highs along with all those worldwide bonds at negative yields. In other words, asset prices are a ‘bubble’, but not in the sense that it will ‘pop’; only that it’s a savings ‘glut’, that keeps getting ‘inflated’ (in a good way) but growing disproportionately (in a bad way). One of the many causes of growing wealth inequality in the USA today (an unintended consequence) was those tax advantages that were enacted by policymakers in the past to encourage retirement savings (of good intentions). As a result, the feedback loop of dollars going TO savers is overpowering the traditional feedback loops FROM savers (like collecting federal taxes, selling Treasury bonds and the lowering of interest rates). Perhaps we just need some simple tweaks by fiscal policymakers that creates more feedback loops going out from the 5% (the nonproductive ‘financial’ economy), going back to the 95% (the functional ‘real’ economy)—to get the feedback loops back towards ‘balance’.
The Fed is only playing the hand that was dealt to them by prevailing economic conditions. Keep in mind that bashing the Fed (or any similar marketing strategy like saying that ‘the Fed has the pedals backwards’) is usually deployed when trying to solve a prevailing political problem.
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).



For readers who want to go beyond ‘the Fed has the pedals backwards’ meme (for those who want to wade a little deeper out from the intro level of MMT instead of regurgitating that meme and calling it a day), here’s a guide to help easily understand what the Fed has been doing in addition to lowering/raising rates (the same Fed who provided brilliant guidance getting the world’s largest economy AWAY FROM The Greatest Recession Since The Great Depression and TOWARDS The Longest Economic Expansion in United States History):

 ‘Printing Money’: Emergency (full pedal to the metal) monetary policy that INTENTIONALLY increases the quantity of money in money-supply circulation, stops the bleeding, helps pull the economy out of recession and provides accommodation that prevents deflationary forces from spiraling out of control (to encourage inflation). For example, what Fed Chair Bernanke did in 2008 when he provided emergency loans with ‘toxic’ assets as collateral (aka the ‘Maiden Lane’ transactions to bailout firms—not with a solvency problem but with with a liquidity problem—pay their bills to keep their lights on). This a form of ‘printing money’ because it is a central-bank creation of reserves being added to the banking system that are also INTENTIONALLY entering (increasing) the money supply.

Scott Pelley (’60 Minutes’ MARCH 2009 episode): “Is that tax money that the Fed is spending?”

Chair Ben Bernanke: “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. 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.”

SOURCE:  https://www.youtube.com/watch?v=U_bjDAZazWU&fbclid=IwAR03eaongu6U8bJTNXMB-gcWb6aeIlYFdIvtRgYD_5hrUmJ8GYi5kWQkF6M

 ‘Credit Easing’: Accomodative monetary policy intended to help the economy—but only by lowering LONG term interest rates and NOT by intentionally increasing the quantity of money in money-supply circulation. The federal gov’t is NO longer needed to increase inflation that way because the private sector has gotten back on their feet (the economy is out of the emergency room and recovering), with inflation moving towards the Fed’s target. For example, the ‘Large Scale Asset Purchase’ (LSAP) program—aka ‘QE’—that Fed Chair Bernanke did starting in December 2008, which did not change the money supply nor is it ‘printing money’ because LSAP is not lending to banks. A credit easing is just swaps of newly-created reserves for existing AAA-rated long-term bonds with banks. It was just a change in the composition of bank assets—and not a change (not an INTENTIONAL increase) of the quantity of money in money-supply circulation. An increase of dollars in the banking system (an increase of newly-created reserves in the monetary base), YES; an increase in ‘M1’ money supply (an increase that has an inflationary bias because it enters circulation), NO.

“This fear of inflation is way overstated. One myth that’s out there is that we’re printing money. We’re [This is] not printing money. The amount of currency in circulation is not changing. We’re not changing the money supply.”—Fed Chair Ben Bernanke, ’60 Minutes’ (follow-up) interview with Scott Pelley in 2011

SOURCE:  https://www.youtube.com/watch?v=EQZx0s-qT4o&fbclid=IwAR07VB3Nyh7a3BZVEoMPC5DmYpINavs7UNFfO20ncQykmGcjSNMCLh4YCMc

 ‘Repo Market Operations’: An organic (a non-emergency) Fed balance sheet expansion (increase of dollars in the banking system) which—unlike ‘printing money’ or ‘credit easing’—is neither an accommodation for the economy nor any change whatsoever of monetary policy. It is only intended to increase money in the monetary base to facilitate short-term lending (overnight settlement) and keep the SHORT term overnight ‘Federal Funds Rate’ (FFR) within the Fed’s target and prevent repo market spikes caused by dollar scarcity. For example, what the NY Fed did in September 2019 of over $100 billion (and is still doing until year-end to the tune of $500B total) to pump newly-created reserves into the monetary base.

 ‘Technical Program’: In addition to their repo operations, a month later the Fed began (restarted) regularly-scheduled Fed purchases of short-term Treasury securities (paid for with newly-created reserves) as well, so that there will be ample reserves in the banking system (until there is no further need for Fed repo market operations).

 “Let me stress that these are very important operational matters but are not likely to have any macroeconomic implications. The key to our strategy is to supply reserves in the near-term through overnight and term repo [‘repo operations’]; and at the same time, we’re raising the underlying level of reserves through Treasury bill purchases [‘technical program’]. The purpose of all this is to make sure that our monetary policy decisions will be transmitted to the overnight Federal Funds Rate, which in turn affects other short-term rates.—Fed Chair Jay Powell, 12/11/19


Deadly Innocent 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 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 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 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.
“Previous administrations failed to stand up to China’s unfair trade practices, but not mine. We are dealing from a position of great strength!“—Tweeted by President Trump
08/08/19 THE WHITE HOUSE: The ‘experts’ who broke our economy (who made deals driven by politics rather than substance) don’t understand how President Trump is fixing it. American jobless claims fell yet again last week, meaning fewer of our citizens are having to file for unemployment benefits in this strong labor market. Unsurprisingly, the left-wing media and their chosen economists weren’t predicting that result. So while the left’s mostly self-appointed experts claim this President doesn’t know what he’s doing on trade or the economy, the results prove they’re the ones with much to learn. Take China. For years, both Democrats and Republicans promised to hold Beijing accountable for breaking the rules on trade. China is responsible for 87 percent of the counterfeit goods seized entering America. Its intellectual property theft costs U.S. employers billions each year. Its average tariff rate is nearly three times what we charge. Unlike past leaders, President Trump is actually keeping his promise to make China play by the rules. The left doesn’t like that: They argue that upsetting China will hurt the economy. In reality, the Trump program of tax cuts for workers, deregulation, and policies that put American industries first—from farmers to manufacturers to energy producers—is finally allowing the United States to negotiate from a position of strength.
One last point, 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 77DIM#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 Free FAIRER Trade which gets US trade deficits back in balance is a good idea (because ‘Imports are a benefit’—until they’re not).
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“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
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 (unfair dumping, intellectual property theft, back-door IPOs, cyber interventions, currency manipulations, 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).
In an 08/26/19 Debatepolitics.com discussion originally posted by Intro to MMT admin John Biesterfeldt regarding the Circular Flow of Income Theory (aka the Circular Model), John asked ‘Why is it wrong to say that net imports [US trade deficits] has a negative effect on GDP?’ A reply from ‘Kushinator’ was a legitimate ‘Imports are a benefit’ factoid, which was that from a Gross Domestic Product (GDP) and/or a National Income and Product Accounts (NIPA) standpoint, ‘US consumption of an imported good or service adds to aggregate consumption and therefore adds to total output’; HOWEVER, ‘imports are not a reduction in domestic output’ [not a negative effect on GDP] because ‘imports are a net zero since their consumption and investment properties are subtracted’ [from the other components of GDP i.e. personal consumption expenditures, gross private domestic investment, government consumption expenditures and gross investment]. John countered that ‘Net imports [US trade deficits] result in a loss of domestic demand and the result of that income [that demand] leaving the U.S. economy is less future income [less future demand] for the U.S. economy.’ The Kushinator wasn’t having any of that and replied, ‘No it does not! I cannot understand why you’re refusing to acknowledge the simple point which is that imports do not reduce GDP. Repeat after me. Imports do not reduce GDP. Imports are not a reduction in domestic output.’ Furthermore, ‘US exports,’ the Kushinator added, ‘increases our GDP’ because ‘exports increase domestic output.’ BINGO…and to be fair to the Kushinator, he made a good point that imports are a benefit if you look at a US trade deficit as only (as innocently) being that ‘we didn’t produce enough to satisfy consumption preferences—and therefore we are consuming beyond domestic production, that’s all’; HOWEVER, John Biesterfeldt is right—imports DO reduce GDP—if you take a step back from the US GDP picture. We know this because the Kushinator just told us that US exports increases our US GDP; and, Our US imports = Their exports. So using the same logic, their exports (our imports) to the United States ARE counted in THEIR GDP, which makes OUR GDP get ‘reduced’ compared to their GDP—and that’s John’s point. Just because US imports are a ‘net zero’ (just because the value of imports—the component of US spending on foreign goods—is NOT included when calculating GDP), it doesn’t mean that those deficits have vanished like a fart in the wind. More specifically, any annual US trade deficit amount is the exact amount, in dollars, to the penny, of a transfer of demand between one nonfederal gov’t sector, the US domestic private sector (S – I), to another nonfederal gov’t sector, the international foreign sector (X – M). Meaning that the foreign sectors (the foreign companies) who captured more aggregate demand from the US domestic sector (away from US companies) are then paying more foreign workers—who don’t spend their earnings income in the US domestic sector. As John Biesterfeldt (correctly) points out, that is ‘income that won’t be used to buy US domestic goods’—not to mention the loss of sales at all the other surrounding US local businesses affected by that loss of income—’and the result of that is less future income for the U.S. economy.’ Which doesn’t bode well for future US GDP, especially when US manufacturing loses business unfairly (i.e. illegal ‘dumping’, intellectual property theft, currency manipulations, etc)—and why both imports, and exports, have both benefits, and costs—that the federal gov’t strives to keep in ‘balance’ in order to properly grow prosperity.
“It is doubtful many in the #FakeMMT crowd would give up their ‘idol’ worship and realize that Mr. Keen had just won the debate. Mr. Mosler asked (at the 37:00 minute mark in the video) ‘What happens when a country runs out of assets, what would a day of reckoning look like?’ Mr. Keen lands a strong jab with ‘That day is far off. You’d have a nation consisting of workers and all your nation’s capital [became the capital of] foreigners.’ Mr. Mosler, always composed, then gives the example, ‘Let’s say you sold the [Australian] Opera House to China. What are they going to do dig it up and take it home?’ Mr. Keen got all professorial instead of landing the knock-out Left uppercut. A chuckle would have sufficed followed by saying ‘the Opera House is owned and operated by the Government of New South Wales. What you just said translates out to privatization of the Opera House by the Chinese.’ Many, if not all, see the implementation of MMT policies as a way to avoid Privatization and their hero has just uttered the words that contradict one of #FakeMMTs most cherished objectives, which is to stop the privatization of Public Services…and by China to boot.”—Charles Kondak
Agreed…Both imports & exports have both benefits & costs. Anyone saying ‘imports are a benefit & exports are a cost’ is either confusing actual econ (facts/math/data) with political econ (stories/feelings/narratives), at best; or simply isn’t fully grasping economics, at worst. Thankfully most folks along with Steve Keen in Australia—which hasn’t had a recession in 28 straight years due to export led growth—do NOT take #FakeMMT’s ‘Exports are a Cost’ seriously. China has become the second largest economy in the world (good for them) thanks to large exports. If you think ‘Exports are a cost’, I’ve got a bridge in Brooklyn (or an Opera House in Australia) to sell you too.

CONTINUED: 77 Deadly Innocent Misinterpretations (77 DIMs #22 – 28) http://thenationaldebit.com/wordpress/2018/12/30/another-seven-deadly-innocent-fraudulent-misinterpretations-22-28/

The Flattened / Inverted Yield Curve —With An Asterisk


In 2006, Capital Advisers (correctly) wrote that “Compared to past periods, the yield curve inversion we are experiencing is quite benign, so there need not be profound concerns that an economic recession will automatically derive from this phenomenon”. It wasn’t a hunch that made Capital Advisers write this, it was historical Facts, Math & Data:

“The yield curve inverted (negative 2yr & 10yr yield differential) eight times, for at least one month at a time, in the last 30 years…

The average duration of an inversion was seven months…

The average negative spread was 0.33% (33 bps)…

Dispersion of severity exist, for example, a mild one started June 1998 with an inversion lasting one month of 3 bps; and an inversion beginning Aug 1978 lasting 21 months getting to as much as 202 bps.

Conclusion: Not all inversions lead to recessions, there is ONLY a correlation between severe inversions leading to recessions.

Furthermore, not all recessions were preceded by inversions—between 1954 and 1966 there were three recessions but no inversions.”—Capital Advisers, 03/01/2006

Fast forward to 2018, one other point that should also ease concerns about this flattening yield curve (or any possible yield-curve inversion in the near future), is that this yield curve had an asterisk—because this was a yield curve while the Fed was sitting on $4.2T of bonds ($2.4T in Treasury bonds and $1.8T in mortgage-backed bonds) on its balance sheet. Removing those long-term securities from the bond market gave today’s yield curve a flattening ‘advantage’ over other yield curves of the past, so any comparison would be ‘unfair’.

Meaning that today’s flattening yield curve (and if it happens, an inverted curve), has an asterisk, because of bonds (Treasury Bonds); similar to that baseball that has an asterisk, because of bonds (Barry Bonds).

The issuer of dollars (the federal gov’t) has complete monopoly power over dollars and it mandates its banking agent (the Fed) with monopoly power over the ‘price’, or interest rate, of dollars to maintain price stability throughout the economy. The purpose of the Large Scale Asset Purchases, so-called ‘QE’, begun by the Fed in November 2008, was to intentionally drive long-term bond yields lower (and the Fed also lowered the short-term target interest rate to ZERO percent the next month). So while nobody knows where long-term bond yields *should* be right now, we can all safely assume that long-term bond yields would today be higher right now if the Fed never bought and was not still engorged with all those long-term bonds.

Which is why Fed Chair Powell probably isn’t too concerned that this yield curve, with that asterisk, is flattening.

In addition, the reason why Fed Chair Powell probably isn’t losing too much sleep over the thought of a possible yield curve inversion is this:

Of the $2.4T of the SOMA (Fed balance sheet) Treasury bond holdings (one of two bullets in its double-barreled bazooka), approximately 92% have a 10-year maturity or more. By merely hinting that the Fed was even considering an intra-meeting move and selling those long-term securities back to the secondary bond market (‘dumping’ them on the ‘street’), that yield curve flattening / inversion is gone in 15 nanoseconds.


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NEW YORK: “Legendary former NY Yankees closer Mariano Rivera made history today by becoming the first player ever to be unanimously voted into the National Baseball Hall of Fame. Rivera’s last Major League Baseball appearance was on September 26, 2013.” *

Asterisk: * Meanwhile, Barry Bonds, who last played in 2007 for the San Francisco Giants, was once again left out of contention, finishing well short of the required 75% of votes to earn induction into the Hall of Fame; however, the ball Barry Bonds hit for his record-breaking 756th home run—and permanently branded with an asterisk—made it inside the Cooperstown, New York, museum.




The 10yr Treasury note breaks the 52-week low of 2.44% and prints a yield of 2.42% resulting in a 3MO Treasury bill / 10YR Treasury note yield-curve inversion—for the first time since the financial crisis in 2007.

“I want to point out a few things. 1) Never in history have we increased deficits with an inversion. 2) The average yield on the 10-year during the last nine inversions was 6% and today the 10-year yields less than half. In other words, yield inversions in the past were a very good indicator of a recession (because the drop in long-term yields removed the incentive for banks to lend); but when rates are already so low and then there’s an inversion, it’s not like there’s as big of a drop of an incentive for banks to lend like in the past. I don’t suggest that these facts forever stave off recession, but surely there is a difference with this inversion.”—MineThis1

I agree with MineThis1. It’s an inversion with an asterisk because it’s an inversion with a Fed that just told the world (two days ago on 03/20/19) that, rather than fully ‘unwind’, the Fed intends to keep holding on to $3.5T of long-term bonds (17% of GDP) on its balance sheet. Meaning that the Fed will still be a huge buyer of bonds in the secondary market in order to maintain that $3.5T amount—and while not planning to raise rates for the rest of the year. What do you think the ‘buy side’ players (Wall Street parlance for bulk buyers of long-term bonds like pension funds and insurance companies that seek to lock-in yield for their clients looking for fixed-income products) are going to do when they figure out what that means? What do you think Asian and European investors (looking at Japan and German 10-year bonds in zero or negative territory) are going to do when they figure out what that means? Furthermore, adding fuel to that fire, what do you think the ‘sell side’ intermediaries (Wall Street bond traders) are going to do when they figure out—what everybody else has just figured out—what that means?

This inversion is more of a signal of front-running (and less of a signal of recession).

Another way of putting it, rather than signalling a coming recession, this inversion is more like another ‘taper tantrum’.

In 2013, the Fed hinted that it would start to scale back stimulus measures, which triggered a sell-off in the prices of US Treasury bonds—the so-called ‘Fed-QE-Taper tantrum’—because the Fed was basically telling the bond market that the Fed would soon not be propping up the price of long-term bonds by not adding to their bond holdings on the Fed balance sheet as much as they previously hinted they would.

Fast forward to last week (03/20/19), in their FOMC Statement, the Fed said that they would start to scale back the unwinding measures. In addition to saying that the Fed would not hike rates in 2019 (as much as they previously hinted they would), the Fed basically told the bond market that they would soon not be subtracting from their holdings on the balance sheet (as much as they previously hinted they would, either). That triggered heavy Treasury bond buying, which raises the prices of long-term bonds, which lowers the yields—which you could call a ‘Fed-Unwind-Taper tantrum’.

In both cases, even though the Fed said the economy was strong and that the outlook was good, the markets had ‘tantrums’—meaning everyone initially overreacted. In 2013, everyone at first thought that the Fed contemplating the end of Large Scale Asset Purchases (LSAP)—aka Quantitative Easing (QE)—was bad news for the stock market. The reason why, was because everyone had all along been told by The Very Smart people over the airwaves that stocks were ‘artificially pumped-up by the Fed’s QE’ and now that QE was ending, stocks would therefore collapse (on those rumors). Then everyone figured out that the Fed simply saw the data coming in and knew the economy was doing well, so that’s why the Fed was ending QE and then everyone bought stocks (on that news). 2013 ended up being great for stocks—the S&P 500 posted its largest annual jump in sixteen years and the Dow its biggest gain in eighteen. So the lesson hopefully learned by everyone in 2013 was that our monetary system (the US economy) is now in a post-gold standard, post-LSAP world.

Recently, we are now seeing an overreaction to yield-curve inversions. Don’t misread the Fed-Unwind-Taper as being bad news for the US economic outlook. All it means is that the Fed has decided upon the approximate amount of bonds (assets) that it needs to keep on its balance sheet—in order to maintain that approximate amount of reserves (liabilities). The reason for needing those large amounts of reserves is that, unlike before the credit crisis, banks today—especially the largest financial institutions—need a lot more reserves held at the Fed because banks today now have much larger liquidity requirements (aka new ‘macro-prudential’ regulations) that they must meet in order to avoid getting ‘too big to fail’. The lesson being learned in 2019 (including by the Fed itself since this is all new terrain) is that our monetary system is now in a post-gold standard, post-LSAP, post-stress test world.