The Total Public Debt Outstanding, aka ‘the national debt’ (approx $22 trillion) includes the total principal amount of marketable and non-marketable securities currently outstanding.
Marketable securities, aka ‘debt held by the public’ (approx $16 trillion) include Treasury bills, Treasury notes, Treasury bonds and Treasury Inflation-Protected Securities (TIPS), all of which are ‘commercial book-entry’ and can be bought and sold in the secondary market at prevailing prices.
Non-marketable securities, aka ‘intra-government holdings’ (approx $6 trillion) include savings bonds as well as special securities called Government Account Series (GAS) issued only to local governments, state governments and Federal trust funds (payable only to the persons or entities to whom they are registered such as Social Security).
The Total Public Debt Subject to Limit (the ‘debt ceiling’) is the maximum amount of money the federal government is allowed to ‘borrow’ (the amount of deficit spending allowed to be financed with net additions of $$$ into the banking system) under the authority granted by Congress.
In 1917, Congress, pursuant to the Second Liberty Bond Act, for the purpose of expediency, delegated authority to the Treasury Department to ‘borrow’ without needing to seek congressional authority—subject to a limit (ceiling) previously set by Congress.
“The debt ceiling law was a historical accident. At some point, it dawned on legislators that approval of the debt ceiling could be used as a bargaining chip. Debt ceiling deadlocks soon became much more dangerous.”—Ben Bernanke
The debt limit (debt ceiling) is the total amount of money that the federal government is authorized to deficit spend including Social Security checks, Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.
Congress imposes a debt ceiling on the ‘statutory debt’. The statutory debt is a little less than the total outstanding U.S. debt that is shown on the national debt ‘clock’ (it is the outstanding ‘debt’ after adjustments like unamortized discounts, old debt, guaranteed debt and debt held by the Federal Financing Bank).
The debt limit does not authorize new spending commitments—it simply allows the federal government to finance existing legal obligations that Congresses and presidents of both parties have already made in the past. Failing to increase the debt ceiling would be a ‘full’ government shut down (which has never happened in American history because it would cause the government to default on its legal obligations causing catastrophic economic consequences).
Rather than being a full shutdown, this shut down, like any other shutdown, is ‘partial’ because 75% of federal government funding has already been approved for the budget (fiscal) year that started in October 2018. Meaning that only 25% of government agencies no longer have the necessary funding to keep operating.
In a partial shutdown, federal agencies must discontinue all non-essential discretionary functions until new funding legislation is passed and signed into law. Essential services (i.e. related to public safety) continue to function, as do mandatory spending programs not subject to annual appropriations because those are already authorized either for multi-year periods or permanently (i.e. Social Security, Medicare and Medicaid payments).
A year ago, on February 9, 2018, as part of a two-year budget deal (that raised both defense and domestic spending), President Trump signed a bill suspending the debt ceiling until March 1, 2019 (and why the ‘Current Statutory Debt Limit’ on the enclosed graph says ‘$0’).
On March 2, 2019, the debt ceiling will be reinstated at whatever the debt level is at that time (likely around $22+ trillion).
Come March 2, same as in recent years, until the debt ceiling is raised again by Congress, the Treasury Department will delay any fiscal crisis by deploying so-called ‘extraordinary measures’ to continue paying the federal government’s bills after the debt ceiling has been reached using incoming cash flow (i.e. using federal tax revenues).
As for right now, this is the third time that the federal government has partially shut down since President Trump took office. The government partially shut down for three days in January 2018 after an impasse in the Senate over federal funding. The standoff ended when lawmakers passed a short-term spending bill. Less than three weeks later, the government partially shut down for a second time after Congress failed to pass a spending bill to keep the agencies running. That shutdown was the shortest one on record. It lasted less than six hours and ended when lawmakers passed a six-week spending bill. Congress passed a short-term funding bill in late September 2018 to give them time to finish their work.
Many federal government agencies and programs rely on annual funding appropriations made by Congress. Every year, Congress must pass and the President must sign budget legislation for the next fiscal year, consisting of 12 appropriations bills (discretionary funding), one for each Appropriations subcommittee.
When the last fiscal year ended on Sept. 30, 2018, Congress had passed just five out of 12 appropriations bills (setting discretionary spending levels). That short-term bill went through midnight December 7, but after former President Bush died – which led to a national day of mourning and a state funeral – President Trump and lawmakers agreed to extend the deadline through December 21.
Lawmakers had until midnight on December 21 to enact legislation to fund the programs covered by the remaining seven appropriations bills—the deadline specified in the most recent ‘continuing resolutions’ (which temporarily funds the federal government in the absence of full appropriations funding bills) that these programs had been running on.
Note that all this differs from a ‘sequestration’ which is reductions in caps constraining the total amount of funding for annually-appropriated programs.
On December 20, the Senate declined to even vote on a short-term spending package containing $5 billion of southern ‘border wall’ funding knowing it could not get the 60 votes needed (could not get some Democrat senators to support it). This type of legislation can be filibustered and requires 60 senators to end a filibuster—to overturn a procedural objection to a provision believed to be ‘extraneous’ (in this case, a border wall).
In a tweet sent on the morning of December 21, President Trump urged Senate Majority Leader Mitch McConnell to ‘go nuclear’ (abandon Senate rules and allow a simple majority of 51 Republican senator votes to end a filibuster), which was an idea that McConnell rejected. President Trump had seemed to be willing to sign a ‘clean’ spending bill (with no wall funding) but sharply changed course and let the government shut down at midnight.
President Trump allowed the short-term funding to lapse and the shut down to begin just as he insisted in that December 12th Oval Office meeting (with then-incoming House Speaker Pelosi & Senate Minority Leader Schumer) that he would be ‘proud’ to shut the federal government down if he didn’t get the $5B he demands for a border wall with Mexico.
UPDATE (coincidentally just a few hours after this was posted) :
On January 25, 2019, President Trump announced a deal to reopen the federal gov’t for three weeks (until February 15th) ending a 35-day partial shutdown (now the longest in history) without securing any of the border wall money he had demanded.
“It’s not over. The GOP still controls the Senate. The Dems will make some serious concessions to border security before all is said and done. One thing the Left is conveniently ignoring is the Wall GoFundMe which collected 3 times the money that Sanders’ supporters contributed to his POTUS run in 2016.”—Mike Morris
Agreed Mike…Speaker Pelosi won that round impressively but like my dad used to say, ‘It’s a 12 round fight’.
Politics aside, for Pure MMTers, that GoFundMe which Mike Morris mentioned, is another perfect example of using creative pen strokes, not keystrokes, to unlock would-be unproductive savings dollars and looping them back into the functional economy—the modern monetary solution needed in an age of PayGo and rising wealth inequality fed by ‘more deficits’.
Another thing that the entire MMT community ignored or completely missed is that there has been NO DEBT LIMIT for almost a year. The ‘Current Statutory Debt Limit’ as of December 31, 2018 was ZERO DOLLARS—meaning that federal debt was NOT subject a limit AT ALL. This is yet another glimpse of the future, where the Modern Monetary ‘Formality’ of having a debt limit is disposed of and the Modern Monetary Theory enters the final stages to become the Modern Monetary Reality.
“Capitalism cannot be reformed. Best of luck.”—comment posted a viewer during a Real Progressives broadcast with Warren Mosler discussing progressive policies and fiat currencies, 05/19/17
Politics makes strange bedfellows (like when ‘description’ MMT hooks up with ‘prescription’ MMT).
Warren Mosler on a Real Progressives broadcast a year before the 2018 US gubernatorial (midterm) elections:
“How are Treasury securities paid off (?)—the Fed just shifts the dollars from securities accounts at the Fed to reserve accounts.”
NOTE: Mr. Mosler says that THOSE dollars are ‘shifted’. However, when talking about paying federal taxes, when talking about dollars that go to the Daily Treasury Statement account at the Fed—the same account where all federal spending is drawn—he says otherwise. In the case of taxes, Mr. Mosler prefers to say that those particular dollars are ‘shredded’.
“Paying off the debt is just a matter of shifting dollars from somebody’s savings account to their checking account, the Fed does that every month for like $50B when the bonds come due, and there are no grandchildren or taxpayers in the room when that happens.”
NOTE: Mr. Mosler is conflating ‘rolling over’ those Treasury bonds (aka ‘revolving’ the debt), where no taxpayers are involved, with ‘paying off’ the bonds for good, where taxpayers ARE MOST CERTAINLY involved (where prolonged budget surpluses are involved). Similar to the circuitous route of federal tax dollars, that redistribution of bonds from one bond investor to another bond investor, also doesn’t fit the political ‘prescription’ MMT narrative.
“Of course it couldn’t be a problem, that’s complete nonsense, I’ve been hearing that for 45 years, it’s just a reserve DRAIN at the Fed and everybody inside the Fed knows this, they know it’s not a funding operation.”
NOTE: So Mr. Mosler, a seasoned Main Street banker, a successful Wall Street trader and now a national political player, seemingly does know the difference between a dollar ‘drain’ (paying federal taxes / lowering of deficits) vs. a dollar ‘destruction’ (paying off Treasury bonds / lowering the national debt)—as well as everybody inside the Fed knows. Which is why, when convincingly explaining the ‘description’ (the Pure MMT), he can also seductively whisper those sweet nothings of ‘prescription’ (the pillow talk MMT).
The payment of federal taxes is not a ‘destruction’ of dollars.
The payment of taxes is a drain of $$$ to the Daily Treasury Statement (DTS)—the same exact account where all federal spending is drawn.
Only Congress can ‘destroy’ $$$—only Congress can reduce the Net Financial Assets (NFA) that Congress created.
Even if you burned a dollar bill to a crisp, you wouldn’t change the numbers on the ‘scoreboard’.
However, if you burned your mortgage (your ‘bond’ that you previously created), THAT’S A DESTRUCTION.
Think about a pumping heart. The blood is flowing out of that heart—to somewhere else—it’s not getting ‘destroyed’.
Rather than ‘keystrokes’ that fund surplus spending followed by the subsequent collection of federal taxes, what actually expands & contracts money supply circulation (the pumping heart of the economy) is the creation & destruction of bonds (aka leveraging v. deleveraging).
Rather than being ‘bulletproof’, political ‘prescription’ MMT is rendered with bullet holes—and they are all self-inflicted. Here’s some more holes:
MMTers (who are supposed to be good at being ‘chartalists’) are confusing credits & debits (‘postings’ that are consolidations of ledger charts) with creation & destruction (net ADDITIONS into the banking system v. the deleveraging of that leveraging).
When deficit spending, the Treasury is ‘fronting’ the ‘newly-created’ money via its Daily Treasury Statement account at its central banking agent, the Fed.
For example, if deficit spending $1B today, the equal and opposite ledger entry to reconcile (to balance) that +$1B that is credited from the DTS to the accounts of whomever provisioned the gov’t is a debit of -$1B to the DTS. Next, the federal gov’t collects $1B in Treasury bond sales, meaning that tomorrow $1B is coming back out from money supply circulation—which is the main reason to sell the bonds (to maintain price stability by neutralizing the potentially inflationary-bias of deficit spending). That ‘newly-created’ $1B, credited to the DTS, brings both the DTS and the money supply back to where it was—meaning that so far it’s all a ‘wash’. The final step, the ADDITION, is when the federal gov’t keyboards $1B in ‘newly-created’ Treasury bonds to those investors who just paid for them. Those assets are the Net Financial Assets that are added (that are ADDITIONS) into the banking system.
Same goes for when a household deficit spends (wants to pay on credit), the financial intermediary (the bank) is ‘fronting’ the ‘newly-created’ money in exchange for your ‘newly-created’ promise to pay back the money with interest (your ‘bond’). Your newly-created bonds create loans create deposits.
MMTers shouldn’t confuse ALL these ‘newly-created’ assets flowing back & forth above as being ADDITIONS of NFAs.
Furthermore, it’s only a ‘destruction’ if Congress decides to pay off those federal bonds for good; and the same goes for a household, it’s only a ‘destruction’ if they pay off their ‘bond’—the opposite of the creation.
Just like all debts (household debt) are liabilities but not all liabilities (Treasury bonds) are debt; all destruction (paying off Treasury bonds) are debits but not all debits (federal taxation / Treasury bond sale collection) are a destruction.
“The Treasury issues bonds, sells them to the private sector and those ‘loans’ (bonds) serve to fill Treasury’s account at the Fed—from which the government spends. The net number of dollars (both reserves and account balances) does not change; those dollars are just moved from savers (bond buyers) to whomever earned that government spending. The net result of Treasury bond issuance (of deficit spending) is a net addition of Treasury bonds to the private sector, plus the additional aggregate demand (from the spending) that stimulates the economy, of course.”—John Biesterfeldt, ‘Intro To Modern Monetary Theory’ Facebook page administrator, 11/13/19
AGREED…and let’s plug the US federal government’s annual budget figures from fiscal year 2017 to that:
Step #1) Federal gov’t keyboards $3.315T & spends $3.315T.
Step #2) Federal gov’t collects back $3.315T from taxpayers.
Step #3) Federal gov’t keyboards $.666T & spends another $.666T.
Step #4) Federal gov’t collects back $.666T from Treasury bond investors.
Note: So far it’s all a ‘wash’…
Step #5) Federal gov’t keyboards $.666T of Treasury bonds into existence and transfers those assets, denominated in $$$, to the bond investors.
Note: THAT is a CREATION which is ALSO an ADDITION of Net Financial A$$et$ (NFAs denominated in dollars), going into the banking system. Even better, as Jim ‘MineThis1’ Boukis (correctly) puts it, those Treasury bond sales—just like federal tax collections—are a FEEDBACK LOOP of dollars taken out from the nonfunctional ‘financial’ economy (where capital just creates more capital for the 5%) going back into the productive ‘real’ economy (where capital creates more goods & services for the 100%). Rather than being needed as a ‘financing’ function in the gold-standard era collecting gold-backed dollars; in the post-gold-standard era collecting fiat dollars, those feedback loops ‘stir the tanks’ to help maintain price stability. Furthermore, rather than being a ‘financial’ constraint, those Treasury bonds serve as a ‘political’ constraint—meaning that the federal gov’t can shut down if policymakers don’t agree on spending.
Or if you prefer, you can switch Step #3 with Step #5 and it would also be correct to say THAT is a CREATION which is ALSO an ADDITION of High Powered Money going into the banking system. In other words, you shouldn’t say “the gov’t finances all of its spending through the direct creation of new (high-powered) money.” * That’s not entirely accurate because there’s a difference between surplus spending (that is not adding high-powered money/NFAs) and deficit spending (that is).
Those tax & bond collections are just dollar ‘drains’, ebbs & flows, from different parts of the banking system and NOT a dollar ‘destruction’ from the entire banking system. Those collections are ‘deleted’ from money-supply circulation, yes; from the banking system, no.
Same as the private sector when ‘deleveraging’, for the federal gov’t it’s not a destruction until the opposite of the creation (the ADDITION), which means it’s a destruction only if those bonds are paid off for good (if the bonds are put in the ‘shredder’)—and the last time that happened was in 1957.
This is not rocket science, this is ACCT 101, BANKING 101 and CIVICS 101.
Scenario #1) ‘Printing Money’: Deficit spending is ‘Printing money’ which adds Net Financial Assets (newly-created promissory notes/IOUs called Treasury bonds denominated in dollars).
Scenario #2) ‘Unprinting Money’: Collecting enough federal taxes to balance the federal budget/run a federal budget surplus AND THEN PAYING OFF Treasury bonds (subtracting the newly-created bonds that went hand in hand with previous year’s deficit spending) is ‘Unprinting money’—the opposite of ‘Printing money’ (which added those bonds).
Scenario #3) ‘Not Printing Money’: Collecting federal taxes AND NOT PAYING OFF Treasury bonds (not paying down the national ‘debt’) is NEITHER ‘Printing money’ NOR ‘Unprinting Money’ BUT IN BETWEEN ‘printing’ and ‘unprinting’.
The pure ‘description’ MMT insight is that, operationally, federal taxes and Treasury bond sales ARE NOT NEEDED to fund spending—not that they don’t at all. Political ‘prescription’ MMTers saying ‘taxes don’t fund spending’ because ‘taxes are destroyed’ so “one of the things that MMT economists have advocated for a very long time is finding a way to take the fingerprints of Congress off of the decision making” ** are trying to usurp the Constitutionally-enshrined Power of the Purse.
Those pesky appropriations laws, those accounting rules, that modern monetary formality (where there’s a ‘political’ constraint to spending) keeps getting in the way of the modern monetary theory (where there’s no ‘financial’ constraint to spending). As a result of their frustration, ideological MMTers have become their own worst enemy. If these MMTers can’t get the ‘description’ right, then how can they expect constituents to trust that they are getting their ‘prescription’ right? How can they expect policymakers to fund—read: APPROVE—their pet proposals?
There’s a paradigm difference between a scoreboard (used for political MMT metaphors to pretend taxes are ‘destroyed’) and an excel spreadsheet (used by the consolidated balance sheets of the United States federal gov’t to reconcile where taxes ‘drain’). Which is why it is INCORRECT to say “The national debt is the historical record of all the dollars that were spent into the economy and not taxed back that are held in the form of Treasury bonds”*** because it’s one thing if the federal gov’t is collecting taxes (which DOES NOT make the national ‘debt’ decrease) and quite another thing if the federal gov’t is collecting taxes and then using them to pay off Treasury bonds for good—instead of rolling them over (which DOES make the national ‘debt’ decrease).
“The ‘keystroke to every need’ crowd are nothing more than populists offering free candy to children that in the end rots their teeth. Resorting to a ‘keystroke-first’ approach shows a lack of thought and creativity. There are ways to get at the underlying problems with pen strokes not keystrokes.”—Charles ‘Kondy’ Kondak
*SOURCE: Stephanie Bell, Sept 2000, ‘Do Taxes and Bonds Finance Government Spending?’
To be fair, even The Great Ones swing and miss sometimes.
Thanks for reading,
Pure MMT for the 100%
Real Macro Trading for the 100%
In a Tweet to Stephanie Kelton (who also wants the federal gov’t to forgive student loans), Warren Mosler advised her that it…
“Seems student debt forgiveness advocates would be best served by working to relax/reform bankruptcy laws which were recently made creditor friendly.”—Warren Mosler reply to Stephanie Kelton, 02/20/18
In other words, knowing that debt forgiveness will never happen, Mr. Mosler was pragmatically suggesting to put the ‘key-stroking’ hammer down and try promoting a ‘pen-stroking’ tweak to student-loan legislation instead.
Sometimes more creative pen strokes, and not just more keystrokes (especially if trying to address modern monetary problems) makes better solutions. Not to take sides in this twitter feud between Stephanie Kelton and Paul Krugman, but note that same insight in this particular tweet:
The economic problem of wealth inequality will never be solved by ‘taxing the rich’ more—because those cows already left the barn—but saying you will ‘tax the rich’ more will always be used as a way to solve a political problem.
Furthermore, wealth inequality will never be solved with more deficits (more ‘keystrokes’) because rather than Federal Deficits = Our Savings, the reality is that deficits initially go to the 95% and eventually rise to the 5%—those deficits equal THEIR savings.
One of the great MineThis1 insights is the concept of ‘economic feedback loops’ (federal taxation and federal bond sales being the most glaring examples) where nonproductive $$$ (stuck in the nonfunctional part of the economy) ‘drain’ / ‘redistribute’ / ’recycle’ / ‘transmute’ (whichever word you are most comfortable with) back into the functional ‘real’ economy to become productive $$$.
The Investment Act of 1940 began the mutual fund industry, which opened investment choices to everyone (who previously could only save money in a local bank +/or give it to an insurance company). The establishment by federal legislation of IRA accounts in 1974 offered Main Street savers a ‘tax shelter’ (previously offered only to the ‘elite’ who could afford to do that). The 1978 provision that was added to the Internal Revenue Code —Section 401(k)—creating the Traditional 401k account and then the Roth 401k account in 2001 allowed everyone to take even more ‘ownership’ of these retirement savings (with even more tax advantages).
Another example of a feedback loop is the Required Minimum Distribution (RMD). Rather than allowing savings $$$ to accumulate any further (rather than allowing capital to just keep producing capital in the nonfunctional economy); the federal gov’t instead forces savers, at age 70.5, to start withdrawing $$$ from tax-advantaged retirement accounts. The idea is that savers will spend those $$$—that those $$$ will feed back into the functional economy before they die.
Perhaps a simple solution (a creative ‘pen stroke’) would be more feedback loops.
For example, a pure ‘prescription’ MMT proposal could call for legislation that tweaked this RMD rule so that in addition to anyone reaching age 70.5, any account reaching a certain amount would also be required to start withdrawing $$$. Meaning that large amounts of savings $$$ would then, regardless of age, be subjected to the ordinary-income tax (the feedback loop) plus the after-tax income would also be spent into the real economy (the feedback loop).
“This ‘low inflation’ myth is a meme that is absolutely everywhere now. It’s causing economists to demand that interest rates stay low, for too long, even as asset prices are bubbling up to the moon. Economists are completely ignoring asset bubbles.”—Jesse Colombo (@TheBubbleBubble)
“If your bread or milk goes up it’s inflation; but if your mortgage payment doubles it’s called investment growth and not ‘inflation’ (even though what you pay for shelter is proportionally many times more important).”—ctindale (@ctindale) Replying to Jesse Colombo’s Blog
“Inflation is so not dead. Health Care, Housing, College and you have said it, asset prices.”—Bill Simpson (@bsimpson45) Replying to Jesse Colombo’s Blog
BINGO…Look at Health Care, Housing, and College in the ‘real’ economy—what do they all have in common?
The gov’t subsidizes them (allows you to make pre-tax deductions for health insurance / allows mortgage interest tax deductions / allows 0% student loans) to encourage everyone to get those things.
The inflation in those prices is the unintended consequences of good intentions (the unintended consequences of DEFICITS).
The same goes for asset prices like stocks, bonds, real estate and commodities in the ‘financial’ economy—the gov’t also subsidizes our purchases of those as well (allows tax-free interest / tax-free dividends / tax-free capital gains in investment vehicles like index funds, ETFs, and REITs in tax-sheltered retirement accounts) to encourage savings habits during our working years.
Again, the ‘inflation’ in those prices, plus the increasing wealth inequality, is the unintended consequences of good intentions (the unintended consequences of DEFICITS).
Instead of more ‘keystrokes’ (more federal deficits that initially go to the 95% but eventually wind up with the 5%); perhaps more ‘pen strokes’ creating feedback loops ($$$ going out from the non-functional ‘financial’ economy back into the productive ‘real’ economy), so that the current feedback loops (like federal taxation & Treasury bonds sales) are no longer outnumbered.
Recently there has been bipartisan concern about companies buying their own shares in the stock market and holding them on their own balance sheet (aka ‘Treasury stock’). Senator Marco Rubio (R-FL) plans to offer legislation to curb share repurchases. Senator Chris Van Hollen (D-MD) argued that company insiders should be prohibited from selling their own shares for a period of time after their firms announce buybacks. Senator Tammy Baldwin (D-WI) introduced a bill that would ban open-market buybacks. Simply put, buybacks allow companies to distribute money to the shareholders. Most companies do that by paying dividends. What does the person who probably knows more about stock buybacks than anyone have to say? Warren Buffett, chairman and CEO of Berkshire Hathaway (who has pledged to give away 99% of his $83B fortune to philanthropic causes via the Bill & Melinda Gates Foundation), acknowledged that some people will misbehave in any activity. “American business should distribute money to its owners, occasionally…but we don’t do it through dividends…we do it through buybacks. We’ve done some,” he said. “We will buy Berkshire shares when we have lots of excess cash, AFTER all the needs of the business are taken care of. We spent $14 billion on property plant and equipment last year…then we have excess cash…[If] I think the stock — and my partner Charlie Munger thinks the stock — is selling below intrinsic business value, we will buy-in [buyback] stock,” Buffett told Yahoo Finance on 04/19/19. What does Warren Mosler have to say? On 10/11/17 he said that “Once a company decides it has ‘excess cash’ the options are dividend payments or share buybacks. After a dividend payment, the company has that much less cash and shares outstanding remain the same. After a share buyback, the company has that much less cash and shares outstanding [the supply of shares available to buy in the secondary market] are reduced. Now consider that after a reverse-stock split [done when a company simply wants to intentionally increase the price of shares], the company has the same cash and shares outstanding are reduced.” What Mr. Mosler was getting at—an excellent insight—was that “for executive compensation related calculations”, a stock dividend payment or a reverse-stock split doesn’t change the executive’s current ownership nor doesn’t change the executive’s chances of more ownership with a stock-option strike which is recalculated higher after a reverse split (so it isn’t advantageous to the executive); while buybacks also doesn’t change the executive’s current ownership but DOES increase the executive’s chances of more ownership with a stock-option strike which isn’t recalculated after a buyback (so it IS advantageous for the executive). The more stock options that the company’s executives have been given under contract as an incentive to increase the stock price, the more advantageous that buybacks become. As per Mr. Mosler, “it seems the accounting process should disclose any increases in executive compensation due to share buybacks, make those adjustments to compensation agreements, and claw back any excesses previously paid?” Finally, the MINETHIS1 insight is that federal deficits are feeding the ‘savings bubble’. He (correctly) points out that deficits, which initially go to the 95% but eventually wind up with the 5%, have created ‘inflation’, in assets prices in the nonproductive (‘financial’) economy—albeit not the traditional kind in the functional (‘real’) economy that shows up in Headline CPI data. So are stock buybacks resulting in unintended consequences, like outnumbering the economy’s built-in feedback loops (like federal taxation and Treasury bond sales), at best; or are stock buybacks egregiously advantageous forms of financial engineering that are worsening wealth inequality and exacerbating the saving bubble, at worst? Just like many of the economy’s problems today that could be easily solved with ‘pen strokes’ (and not just more ‘keystrokes’), perhaps policymakers could tweak the current buyback rules. Perhaps with some simple ‘pen strokes’ we can level the playing field (by curbing the use of buybacks to game executive compensation); and create another feedback loop of dollars going back into the functional economy (spreading out to all parts of the balance sheet), instead of capital just creating more capital (instead of heading to only one part of the balance sheet).
H/T Charles ‘Kondy’ Kondak
“The Federal Job Guarantee (FJG) is considered by most in the Modern Monetary Theory (MMT) community to be an integral part of MMT. The Federal Job Guarantee is said to provide ‘Price Stability at Full Employment’.
One favorite throwaway line of #FakeMMT is that the Federal Job Guarantee will improve the ‘well-being of all workers’ by providing a wage/benefit floor such that Employers would have to offer better wages to lure workers away from Government Employment.
Some prominent Economists disagree on that effect of a Federal Job Guarantee and argue it will have a dampening effect on wages for workers higher up the Income ladder. One Economist says MMT would use ‘full employment [FJG] to fight inflation’ by giving companies that want to hire a better option:
‘They don’t have to bid wages up trying compete with one another for employed workers. They can hire from this pool, this ready-pool of skilled workers who are employed in public service jobs.’ (MMT Economist Professor Stephanie Kelton).
Based on this statement we’ve established the wage suppression effect of a FJG, at least for skilled workers—with Kelton’s commentary. Two other Economists write:
‘Would the incumbent workers use the decreased threat of unemployment to pursue higher wage demands? That is unlikely. … [T]here might be little perceived difference between unemployment and a JG job for a highly-paid worker, which means that they will still be cautious in making wage demands.’ (MMT Economists Professors L. Randall Wray and William Mitchell).
Who are these highly-paid workers that would still be cautious in making wage demands?
We are not only talking about a highly-paid (higher educated and higher-skilled) worker, but also a highly-paid (but not so higher-educated nor higher-skilled) worker like a doorman in NYC making $49K. To hire a NYC doorman, Employers ‘would not have to bid wages up trying to compete with one another’ according to Kelton; and the employed doorman on Union scale ‘would still be cautious in making wage demands’ according to Wray and Mitchell.
In other words, according to Kelton, the FJG compresses wages towards the FJG wage (rather than having ‘to bid wages up’ an employer simply combs the FJG pool for a person willing to work at $45K as a NYC doorman); and in addition, according to Mitchell/Wray, to at least some degree, the FJG compresses wages immediately above the FJG wage (the NYC doorman making $49K ‘will still be cautious in making wage demands’) as well.
Simply put, there is no other way to describe the effects of a Federal Job Guarantee as alluded to here: Wage suppression further up the Income ladder. The part the macroeconomic role the FJG plays here is more in the interest of price stability and less in the interest of worker well-being. Now I can see how some early MMT advocates broke from the herd based on this issue.
Further, it is also said by #FakeMMT that the Federal Job Guarantee would be ‘Federally Funded but Locally Administered’. Here at this juncture, one group of MMT Economists describe their proposal this way:
‘The PSE [Public Service Employment Program, aka FJG] would be under the jurisdiction of the DOL [Department of Labor], as UI [Unemployment Insurance] is today. Similar to UI, states will participate in the program’s administration. Congress would appropriate funding for the PSE program through the DOL. The DOL budget would fluctuate countercyclically in a manner consistent with hiring anyone who wants work over the course of the business cycle. The DOL would supply the general guidelines for the kinds of projects authorized under the PSE program. Municipalities would conduct assessment surveys, cataloguing community needs and available resources. In consultation with the DOL, states, and municipalities, One-Stop Job Centers (discussed below) create Community Jobs Banks—a repository of work projects and employers that offer employment opportunities.’
Thus, without the flowery language of serving the priorities of the State (sic Public Purpose), it sure does sound like the FJG is marshalling labor.
In conclusion, it is my contention that only with very strong trade unions can the Federal Job Guarantee system be given some consideration but this is certainly not the case in the USA.
Perhaps the beginning point could become changing US Labor Laws that gives workers countervailing power (like in Northern Europe), another possible Pure MMT for the 100% PRESCRIPTIVE proposal? Meaning that unlike the current FJG proposal, this would be a proposal that would be taken seriously by policymakers because it doesn’t need a single deficit-money keystroke.”—Charles Kondak
Their Deficits = WHOSE savings?
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 fairer trade that lowers US trade deficits and bring some manufacturing jobs back to the USA is a good idea (because ‘Imports are a benefit’—until they’re not).
The choice for federal policymakers is to either keep ‘key-stroking’ to overpower the trade imbalance (which keeps worsening wealth inequality and repeats ‘boom/bust’ cycles); or ‘pen-stroking’ a fairer trade deal with China—that moves both budget & trade back towards ‘balance’.
The Pure MMT insight is that federal taxation and Treasury bond sales are a feedback loop from the nonproductive ‘financial’ economy (from the 5%) where capital ONLY just produces more capital; to the functional ‘real’ economy (to the 95%) where capital produces capital, goods, AND services.
Many problems today—like the worsening wealth inequality—are the result of these feedback loops to the 95% now being outnumbered by feedback loops to the 5% (SEE P.S.S. 04/02/19 ABOVE).
Rather than the typical ‘keystroke’ solutions of more deficit spending on more free this and on more free that, a good example of ‘pen stroke’ prescriptions would be policy that eliminates ways where $$$ wind up stuck in the savings bubble. In other words, create more feedback loops of $$$ going out from the 5% back into the 95%.
The SECURE Act was passed out of the Democrat-controlled U.S. House of Representatives yesterday (05/24/19) by near-unanimous vote (by 417 to 3) and it is expected to move forward in the Senate. This retirement-savings bill eliminates the so-called ‘Stretch IRA’ tax loophole which is estimated to raise $15.7B in federal revenues over 10 years (Pure ‘prescription’ MMT translation: which is estimated to create a feedback loop of $15.7B from the 5% to the 95%).
Charles Kondak: Sanders ran into the salaried worker dilemma often found in retail management / supervision. He was paying his organizers as salaried employees at $36K/year (which is well north of $15/hr for a 40 hour work week); but as salaried employees, his campaign was not required to pay more if his staffers worked in excess of 40/hrs per week, which could likely take them below $15/hr if they worked 50 or 60 hours in a week. This happens all the time, especially in retail with those who are classified as salaried management personnel. In retail, when an employee gets in a management role, the employer can ‘choose’ not to provide extra pay for any hours above 40/hrs (and not be bound to the Fair Labor Standards Act to pay overtime). This whole Bernie brouhaha could have been avoided with some ‘bonus pay’ arrangement (not even necessarily as much as the OT rate) for hours worked above 40 hours. Someone in the Sanders campaign should have known about this salaried worker distinction contained in the Fair Labor Standards Act from the start. Once again, we are seeing the ‘free stuff’ MMT enthusiasts being so wrapped up in plans that pander to populist positions, that they are rather ignorant of the legal constraints of their own proposals. If the definition of salaried worker kicked in (as high as the last administration wanted which was over $47K roughly doubling the current level in place) you’ve used simple enforceable pen strokes to lift wages in many cases AND increased time off without loss of pay in others. In addition, you get the scarcity effect on wages by keeping labor markets tight by transferring people from the salaried worker pool to the entitled OT worker pool.
Jim ‘MineThis1’ Boukis: I think Charles answered it very well. Just give a bonus to the staffers to meet the $15 hr and they would have STFU. Instead, it all just blew up in their face. Now you see how the conservatives are spinning it? You see the damage it already has and will continue to do for the minimum wage, right? Instead of a ‘pen stroke’ solution, like running on limiting hours with the same pay to create job scarcity (to push up wages); they are running on raising the min wage, saying that ‘It won’t hurt the economy’, that ‘It’s what is best for all’ and ‘It’s economic justice’. Now try to explain to 330 millions Americans that raising the min wage means employers will hire more—after Bernie fucked it all up by saying they will limit staffer’s hours to reach $15—and see how that goes. Good Luck!
PURE ‘PRESCRIPTION’ MMT: Infrastructure and Green New Deal (GND) bonds
After the 2yr/10yr officially inverted (sounding the ‘recession’ alarm) and US stocks closed down 3% (the DOW’s biggest one-day loss of the year), Jim Cramer tweeted that “We need a $500 billion infrastructure bond right now!!!”
“With infrastructure (or ‘GND’) bonds, ‘Can the Fed simply use keystrokes to mark up the bank accounts that have an account at the Fed?’ Yes!
‘Have we answered the question How Do We Pay For It?’ Yes!
‘Is there any risk of default?’ No!
‘Does it get more people working and get us closer to max employment?’ Yes!
‘Are they productive jobs?’ Yes!
‘So they wouldn’t cause garbage inflation (like a Fake Job Guarantee would)? No!
Here comes the Pure MMT (keeping it real): ‘Do we currently have enough trades people (that are skilled enough) for large scale infrastructure projects?’ Not likely, but it might get more people working in our Civil Service and/or as Army engineers (that *actual* federal job guarantee program that pays a living wage + benefits).
‘What if next, the Fed does another QE—and instead of buying Treasury bonds the Fed buys infrastructure bonds?’ The money could have gone to build bridges, airports, and the like (in the functional ‘real’ economy), instead of making it ‘easy’ (instead of making interest rates lower to accommodate more borrowing) for corporations to buy back stock and borrow (in the nonproductive ‘financial’ economy).
‘With a Fed buying back private infrastructure bonds are the top 5% (are the savers) being stuffed with more federal-deficit money like it was during QE?’ No!
“If we got the nose through the door with the purchase of infrastructure bonds by the Fed, I’d say we have gotten the mainstream closer to last stage Pure MMT. The thing is, I wouldn’t overplay the hand. The initial infrastructure bond issuance shouldn’t come with a ‘sticker shock’ price. I’d go with $50 billion and I could make a strong all around argument for it if a lot of the money was to be spent on water delivery systems.”—Charles ‘Kondy’ Kondak, 08/15/19
AGREED…and Logan Mohtashami would echo those same sentiments in a Facebook post on 11/03/19: “Here’s the thing about MMT. It’s not about borrowing as much as you want. MMT is about the economy not running at full capacity; so to get the economy running at full capacity, you can borrow unlimited if you have your own currency. Then they put in the Green New Deal (which is never going to get passed) and they lose the argument. The MMT people should take a realistic approach. Try for some deficit financing. Get a $200B infrastructure package. Don’t pay for it. See how that goes. Take it slowly.”
“The issuance of private infrastructure bonds, backed by the Fed—to ‘pay for it’—(or have the federal gov’t just issue public infrastructure bonds and then the Fed buys them back in a QE, whatever) has a Pure ‘Prescription’ MMT element to it because you are draining excessive private-sector wealth (profit/savings) back into the functional economy in an ecosystem feedback loop.”—Jim ‘MINETHIS1’ Boukis, 08/16/19
AGREED…Well said, and prophetic too—since two months later, incoming ECB President Christine Lagarde (replacing Mario Draghi) hinted about buying GND bonds during QE!
G4 central banks have liquified a staggering $35 trillion in Bonds to cash reserves. #SAVINGSBUBBLE alive and well!
What does that mean? When the federal gov’t wishes to deficit spend, it issues bonds, collects cash savings and spends it back into the productive private sector economy—which eventually makes it’s way back to the unproductive savings part of the private sector. Think of dollars like this:
private sector 1 = the productive dis-savings (the 95%) private sector 2 = the unproductive savings (the 5%)
Thus Gov’t issues newly-created ‘debt’ and ‘borrows’ from Pvt 2 that ‘lends’ to Gov’t with savings; then Gov’t spends in Pvt 1 that dis-saves to Pvt 2 and the cycle is repeated.
Rather than looking at all that federal gov’t debt/deficit spending as printing money (that expands the money supply), better to see it as the federal gov’t printing bonds (that expands the ‘bond supply’). So one more time, federal debt and deficits are an expansion of the federal bond supply and not the money supply—that most think of when they hear the words debt and deficits.
Gurus like MMTards and Austrian gold bugs like to confuse people with various definitions of what money is to push their crazy ideology. All you need to know (to never be fooled again) is that all money is money. Meaning a bond is $$$ that comes with a coupon attached to it. Bonds, just like reserves, may not be in money-supply circulation like bank demand deposits and paper dollar bills are; but just like ice and steam are all water in different forms, all those bonds, reserves, bank deposits and cash are denominated in $$$—they are all $$$ in the banking system whether it’s in electronic or paper form. Think of those bonds as a ‘solid’ (being in a solid state like ice). Think of those reserves at the Fed as ‘liquids’ (being in a liquid state). Think of those credits at your bank plus those paper bills in your wallet—that can move anywhere, anytime, to any place on the planet to purchase anything—as ‘steam’. This is important to understand because for example, you cannot buy a stock with a solid bond but you can with liquid reserves or steam credit in Germany, Japan, India, Brazil etc…
Now that we understand all dollars are dollars (and are much like water existing as ice, liquid or steam), let’s put it all together and better understand central bank Quantitative Easing and its effects.
As I mentioned prior, federal deficits/debt expand the federal bond issuance/supply. Again, the bond supply means those bonds (those $$$) with a coupon rate to be paid to savers who previously gave up holding their liquid state savings in unproductive Pvt 2 to hold solid state bonds in unproductive Pvt 2 instead. Although still water being held in unproductive Pvt 2, something happens when that water changes from liquid to solid (buying bonds) and back from solid to liquid again (Fed QE). The buying of bonds by the Fed (the QE) effected prevailing long-term interest rates (effected the yields of the remaining solid bonds in the secondary market).
For example, if a $100 face value 10-year bond with a 5% interest-rate coupon is initially issued in the primary market to an investor (to you) and is sold to you at ‘par’ (for $100), that means your bond yields 5% because you are collecting $5/yr for ten years (50 divided by 100). If fear about the stock market causes a lot of selling of stocks, money would flow out from stocks and into bonds—increasing the demand of all bonds. Let’s say that demand pushes the secondary market price of your 5% 10-year bond to $103, then that pushes your bond’s yield down from 5% to 4.85% (SOURCE: http://www.moneychimp.com/calcula…/bond_yield_calculator.htm). Note that is talking about the current ‘prevailing’ yield (not your yield if you keep holding your bond). In other words, if you were to sell that bond that day then the buyer’s yield is 4.85% (Since unlike you paying $100 to collect $50 over ten years, the buyer is paying $103 to collect $50 over ten years).
The opposite occurs when no one wants the bonds because the economy is booming and inflation fears (+/or greed) pushes money out bonds and into riskier investments like stocks.
Under the new QE world where central banks buy bonds in the secondary market in exchange for newly-created dollars, the otherwise solid-state bonds that would have remained as such are now converted to highly liquid-state reserves that can flow anywhere. Even back to bonds—but remember—there is now a distortion that took place. More supply of liquid dollars with reduced supply of solid-state dollars.
The point being, that unlike the normal price action that comes with market fluctuations, QE (federal gov’t intervention) comes along and causes distortions in the bond market that has a number of side effects:
Liquid-state dollar supply up ($4.2T newly-created into the banking system). Solid-state dollar supply down ($4.2T bonds out of the secondary market) Bond prices up Prevailing long-term rates down Bonds paying interest to Pvt 2 down*
Some dollars may end up back in bonds to push prices up. Some may have remained as reserves in the banking system. The remaining liquid dollars will flow to other asset classes like stocks and push prices higher.
The lower rates spur on more loans which creates even more liquid dollars that also flow to Pvt 2 as savings (that also flow to asset classes like stocks). You see how the distortion is playing out right?
*While one can make a misleading yet factual argument that reduced interest rates = less interest payments to Pvt 2 (‘so the Fed has the pedals backwards when they lower rates’), they fool their listeners by not mentioning the extra $3 to Pvt 2 (the gain in value of the $100 bond to a $103 bond) that only happened because of QE. Not to mention that QE also pushes up the value of other riskier assets held by Pvt 2. That effect multiples, which creates is a massive spike in liquidity—which increases asset-price INFLATION (the other thing that never gets mentioned when fooling unsophisticated listeners).
So take a step back for a minute. Reread it all and take a good hard look at the chart below and think about it. Total federal gov’t ‘debt’ worldwide is $66 trillion and G4 Central banks own $35 trillion of solid state bonds that has converted solid $€£¥ to liquid form.
Wait! It gets better! On top of the $35 trillion of liquid dollars that would have never existed prior to QE, the lower long-term interest rates made it even more profitable to for companies to buy back their stock! How much stock was converted to liquid dollars? A) $6 trillion since the crisis of 2008.
I almost forgot, the recent ‘repo madness’ is due to BANKS SUDDENLY CLAIMING THAT THEY DON’T HAVE ENOUGH LIQUIDITY?! Really? We are told that this federal-gov’t intervention is ‘not QE’? Yeah sure right, it’s just ‘providing liquidity’ to the banks—that’s like the Fed helping a man waving frantically in the middle of the ocean and telling us he just needed a glass of salt water!
Along with this new QE (that ‘not QE’), lower interest rates, $1 trillion deficits, record-low unemployment with stocks at all-time record highs—yet still the global economy and US is slowing (Real GDP was only 1.9 percent in Q3 according to the latest estimate released by the Bureau of Economic Analysis). Then you have economic Perma Bulls like Logan Mohtashami claiming to be an economic guru with his ridiculous ‘back-tested model’ telling people how the U.S. ‘REAL ECONOMY’ (Good God!!) is beating up the bears! While on the other side of the spectrum you have Perma Bears like #MMT‘s Warren Mosler with his theories saying we have a CASH FAMINE! That right now we need the federal gov’t intervening with a $500B #fakejobguarantee program to create jobs in the middle of a LABOR SHORTAGE! Talk about disinformation being pushed on unsuspecting people of the world! I mean it is complete and utter insanity. Regrettably, it is the new norm. Over the airwaves today, Facts, Math & Data have been completely replaced by Feelings, Stories & Narratives. The sane educated people are now the outcasts—those who truly understand how the modern monetary system works are the 3rd class untouchables India style!
So if you are sitting there wondering why lately—during this 11th-year of the bull run—I have been jumping up and down pounding the table talking about a #SAVINGSBUBBLE and #MMT would only make things blow up much faster, look no further than this post.
In conclusion (the one last thing I ask of you),
1. Think of what the economy stocks bonds etc.. would look like today without QE.
2. Think of what it will take if and when we enter an recession to get out of it.
3. Think of how an economy/stocks/bonds etc.. will look like with an exponential growth of QE.
Don’t waste your time fighting it! Don’t be a MEATHEAD! Until that day of reckoning comes (when Then and ONLY then will we short that living schitt out of it) EMBRACE IT! Be comfortable with it! Then Profit from it! Go and take what is yours and bathe in Glorious Victory drinking fine wine and singing songs of valor!—Jim “mineThis1′ Boukis
AGREED…BRAVO and well done Jim ‘MineThis1’ Boukis…In order to grasp what is actually pumping the heart of the economy, MMTers need to wade a little deeper out from the Intro level and also see their Almighty federal-gov’t deficit spending from another perspective—as net additions into the banking system that is only adding to the ‘bond supply’. I really like the ice / water / steam analogy which is way better than the ‘gov’t dollars’ v. ‘lookalike dollars’ or whatnot that gets thrown around when MMTers routinely confuse reserves (Fed-created dollars) as being hermetically sealed / not fungible with the rest of those dollars in the banking system.