77DIF MISINTERPRETATION #29: The Fed neither ‘has’ nor ‘doesn’t have’ dollars.
Fact: The Fed has dollars.
It’s comical to watch the MMT community twist and contort themselves while playing that fake MMT version of the game of Twister.
What part of those dollar signs on the Federal Reserve System Balance Sheet (Left Hand Blue!) or the Daily Treasury Statement account at the Federal Reserve Bank (Right Leg Yellow!) is confusing the MMTers who say ‘the Fed has no dollars’ (Right Hand Red!) or ‘there’s no such thing as dollars’ (Left Leg Green!) on the federal level?
Do MMTers using ‘the Fed neither has nor doesn’t have dollars’ logic forget why it’s called the federal RESERVE system? When banks transfer their required reserves to the Fed, do they think that’s not dollars (credits) being held at the Fed—because those dollars were ‘destroyed’ (just like they also think those federal tax dollars are ‘destroyed’) too?
This is just another MMT analogy (that it’s just ‘points on a scoreboard’) gone amok—to fit a politically-extreme ‘prescription’ MMT narrative.
“Of course the Fed has dollars. This is just more stupid s*** that pseudo-intellectuals come up with to sound smart.”—Jim ‘MineThis1’ Boukis
Agreed…The Fed sent 91 billion DOLLARS to the Treasury in 2016 and the Fed sent 80 billion DOLLARS to the Treasury in 2017. Derived from its bond holdings (like mortgage-backed securities) on their balance sheet, the Fed has handed over more than 700 billion DOLLARS since the 2008 financial crisis…
…and that’s the net amount, after, you know, all those ‘old’ bills, that were ‘shredded’, at the ‘IRS’ (as per that recently ‘modified’ yarn).
77DIF MISINTERPRETATION #30: “Printing is a word that goes back to the gold standard.”
Fact: Printing is a word that goes way, Way, WAY back BEFORE the gold standard.
In that grand arc of monetary history, the gold standard was just a short blip. MMT (the currency analysis, the ‘chartalism’ and the fiat currency) goes back before the gold-standard era.
“Printing is a word that goes back to the gold standard. It meant the ratio between the printed money and the gold supply, it’s no longer an applicable term. When you have a non-convertible currency and a floating exchange rate, the spending is operationally independent of the taxing, so all government spending is merely changing numbers in banking accounts—there’s no operational constraint by revenues.”—Center for Economic and Public Policy’s Warren Mosler on Fox Business News with Stuart Varney discussing further government spending to improve the economy, May 7, 2011
To be fair, anyone dismissing your pet ‘prescription’ MMT policy (like Stuart Varney did to Mr. Mosler) by uttering ‘Oh you just want to print more money’—instead of debating the merits of the proposal itself—isn’t making a good-faith effort to understand your perspective.
That said, anytime anyone in the MMT community says ‘Don’t say print money’, that is borderline fake MMT.
Anyone with a basic knowledge of American history knows that ‘printing money’ goes back before the gold standard (and why they won’t fall for that ‘Don’t say printing money’ meme as easily as the MMT community does). Those ‘Continentals’ were NOT backed by gold (they were backed by the ‘anticipation’ of tax revenues), nor were those original ‘Greenbacks’ (at first as an ’emergency’ war measure they had no convertibility to gold), so ‘printing money’ simply refers to the days before the computer age, before ‘keystrokes’.
We all still say ‘printing money’ just like we all still say how much ‘horsepower’ a car has, or how much ‘shipping’ charge we have to pay to the person driving that brown delivery truck. The words ‘printing money’ (if not used sarcastically) simply refers to ‘deficit spending’, aka an addition of net financial assets, that is increasing the amount of $$$ in circulation (that is expanding the money supply)—what Fed Chair Eccles referred to as ‘High Powered’ (which is another thing that the MMT community gets completely wrong).
Most people today (correctly) associate ‘printing money’ with conjuring up money out of thin air—as opposed to using existing $$$ (as opposed to ‘surplus spending’).
For example, if you are paying for a restaurant tab with money out of your pocket (paying with existing $$$), then that isn’t ‘printing money’ (isn’t adding dollar-denominated assets into the banking system); but if you are instead, paying with a credit card, if you are deficit spending, you are ‘printing money’ (adding dollar-denominated assets into the banking system). That newly-created little piece of paper, printed with $$$ signs on it, that you sign, that the restaurant retains, think of THAT as the financial asset, that you just created, which is a ‘notes receivable’, your ‘promise’, your ‘bond’, an ASSET, that increases NFAs; while in addition, that printed receipt, that you keep whenever paying on credit, whenever printing money, is the ‘notes payable’, the liability, that nets-out the creation.
The federal gov’t is of course not the same as a household using a credit card. The pure MMT insight is that, operationally, borrowing or tax collection is not needed to fund federal spending, BUT those formalities remain to maintain the Constitutionally-enshrined Power of the Purse of policymakers—only Congress can sign the ‘receipt’.
Furthermore, where the MMT community goes over the cliff is thinking that all spending is newly-created money (instead of knowing that all spending is newly-created money, yes; net additions of $$$ going into the banking system, no).
It’s pure MMT to explain that the newly-created (newly-printed) dollars (assets) that you just added into money-supply circulation to pay for that lunch at a diner probably won’t cause hyperinflation and destroy the economy; however, telling folks—especially the 2,000 employees at the Bureau of Engraving and Printing—not to say ‘printing money’, isn’t.
Fed Chair Bernanke: “It’s much more akin to printing money more than it is to borrowing.”
Scott Pelley: “You’ve been printing money?”
Fed Chair Bernanke: “Well, effectively, yes…we need to do that because our economy is very weak and inflation is very low.”
NOTE: In that 60 Minutes interview on 03/15/2009, Chair Bernanke was referring to the initial bailouts, early in the credit crisis, where the Fed lent newly-created (newly-printed) money to troubled banks in exchange for their toxic subprime assets, for the so-called Maiden Lane loans. The Fed did this so that these banks, suffering from a liquidity problem, would have the $$$ to spend into money-supply circulation—to pay their bills—to stay in business. In a follow-up 60 Minutes interview in 2011, Chair Bernanke explained that QE was not akin to printing money because, unlike the bailouts, which were about buying toxic bonds / changing the money supply*; QE was about buying AAA-rated bonds / changing long-term interest rates.
*(Bernanke tried but failed to get the media and markets to use the term ‘credit easing’ rather than ‘quantitative easing’ which was a term applied to unsuccessful Japanese programs earlier in the decade which differed from the Fed’s securities purchases in many respects. In particular, the Japanese QE programs were aimed at increasing the Japanese money supply to specifically cause a spike in inflation; while the Fed’s QE was only focused on reducing longer-term US interest rates).
77DIF MISINTERPRETATION #31: The Fed is the ‘scoreboard’.
Fact: The Fed is the excel spreadsheet.
“The federal gov’t spends money into existence … and deletes money out of existence when it taxes … the taxes don’t pay for anything, they are literally deleted. When you go to a baseball game … and a guy smacks a homer and they put a ‘1’, one run, on the scoreboard … but then on the replay they realize that the ball was foul, it was a foul ball, they take the ‘1’ off the scoreboard. Where did that ‘1’ go? Where did it come from? Did they have to tax somebody to get that run? Or did they just keystroke that run on the board? That’s how banking works.”—Steve Grumbine, Real Progressives broadcast, 01/04/19 (11:35 in the video)
No, that’s not how banking works.
That’s how folks (who take Mr. Mosler’s ‘scoreboard’ analogy too literally) pushing political ‘prescription’ MMT (under the guise of being about banking) works.
The person that hit that homer, that blood, that sweat, those tears that went into the effort (the production) to knock that ball out of the park, is what ‘funds’ that ‘1’ on the scoreboard.
If the ball was ruled foul, then that ‘1 Run’ (that ‘asset’) is ‘debited’ from the ‘Run’ ledger, and then that ‘1’ is ‘credited’ to the ‘Balls & Strikes’ ledger—that ‘1 Run’ becomes a ‘1 Strike’ instead. In other words, the ‘1’ goes from one part of the scoreboard to another (the ‘asset’ goes from one part of the banking system to another).
That’s how banking works.
When explaining MMT to the MMT uninitiated, the 7DIF scoreboard analogy—a great analogy—should only be used as a simple example of the paradigm difference between ‘metalism’ (coins from precious metals in a gold-standard era) v. ‘chartalism’ (fiat currency from keystrokes in a computer era).
In other words, our monetary system went from mostly using a limited amount of ‘hard’ currency (kept in secure vaults) to mostly using an unlimited amount of ‘soft’ currency (kept in secure ledgers).
Of course the Fed ‘has’ dollars…More than just being electronic ‘points’, dollars are still ACTUAL Assets & Liabilities (credit & debit flows)—postings that reconcile those ledgers.
Of course dollars exist on the federal level…What part of those little dollars signs on the Fed’s balance sheet or on the Daily Treasury Statement is confusing MMTers who take the scoreboard analogy too literally and say that?
The very least that all MMTers should have taken away from The Longest Shutdown In US History was the pure MMT insight, which is that, those accounting constructs (those pesky funding rules & appropriations laws), albeit unnecessary, still exist—not as much as a ‘financing’ constraint but more as a ‘political’ constraint.
Despite the pillow-talk MMT promises that keeps getting whispered into your ear, you can’t have anything YOU want—‘because MMT’—that’s not how it works.
Do yourself (and the MMT cause) a favor and don’t confuse a scoreboard (an analogy) with an excel spreadsheet (the consolidated balance sheets of the United States federal government).
77DIF MISINTERPRETATION #32: Payment of federal taxes is a ‘destruction’ of dollars.
Fact: Payment of taxes is a drain of $$$ to the DTS (the same exact account where all federal spending is drawn).
The payment of federal taxes is a ‘destruction’ of the taxpayer’s federal tax liability, but not a destruction of $$$. The payment of those taxes is a ‘destruction’ of $$$ from the money supply (they are ‘deleted’ from your bank account), but not from the banking system.
Only Congress can ‘destroy’ $$$ (reduce the NFAs that Congress created).
Even if you burned a dollar bill to a crisp, you wouldn’t change the numbers on that ‘scoreboard’. However, same as Congress, 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 tax / Treasury bond collections) are a destruction.
77DIF MISINTERPRETATION #33: “The Fed has raised rates to try to keep unemployment from dropping below 4%”—MMTer with a Ph.D (name withheld to protect the gullible innocent)
Fact: “It would not be appropriate to specify a fixed goal for employment”—Federal Open Market Committee Statement on Longer-Run Goals and Monetary Policy Strategy, 01/29/19
Many Misery-loves-company folks of the fake MMT community are anti-Fed people, or doom-and-gloom perma-bears, or anti-capitalists (or all of the above). As a result, they routinely misinterpret basic economic concepts. For example, many fake MMTers (some with Ph.Ds) hear ‘The Fed’s Mandate Is Maximum Employment’ and conclude ‘The Fed is Intentionally Targeting Unemployment’.
The reason why, is because the FOMC Committee estimates the neutral (or ‘normal’ or ‘natural’) rate (aka ‘r star’) as the unemployment rate that ‘is neither increasing nor decreasing inflation’. The Fed posts this in their Summary of Economic Projections (aka the ‘dot plot’). Fake MMTers confuse that as meaning that the Fed is specifically ‘targeting’ that rate.
“We don’t look at the neutral rate of unemployment because it moves too slowly”—Fed Chair Powell, in Jackson Hole, Wyoming, 03/21/18
Rather than the fake MMT narrative that the Fed sets the unemployment rate, the Fed sets the ‘price’—or the interest rate—of money to attempt (to the best of its ability) to influence the rate of inflation (as mandated by Congress).
What the Fed is doing is inflation ‘targeting’ (setting interest rates to discourage price instability) and that is NOT to be confused with unemployment rate ‘targeting’ (setting unemployment rates to discourage more employment).
The pure MMT is that the Fed NEVER wants less employment. The Fed is ALWAYS trying to keep the jobs growth party going for as long as possible. Come this July, THE LONGEST JOBS GROWTH IN US HISTORY will officially become THE LONGEST ECONOMIC EXPANSION IN UNITED STATES HISTORY (which is more proof of just how brilliantly the Fed’s monetary-policy handling of the financial crisis has been).
Until that day, as usual, fake MMTers will keep ‘targeting’ gullible folks and will keep telling them that the reason why the masses are unemployed is all the government’s fault. They also ‘target’ those ‘evil’ fiscal policymakers, the ‘plotting’ Fed, and that ‘murdering-by-proxy’ Congress who is in on this ‘conspiracy’ to throw the person out of employment. As per the MMT ‘academics’ (who are better at politics than they are at teaching), unemployment is NEVER the fault of the person in the mirror.
The real reason why those lies are spread is because that person in the mirror that might not have a good job or any job at all will ALWAYS have a vote.
77DIF MISINTERPRETATION #34: “Japan is our MMT poster child that keeps exposing the myths.”
Fact: Japan is a pure MMT case study why, from the very start of economic troubles, PEN STROKES, not more keystrokes, make much better solutions to grow an economy.
To be fair to Professor Bill Mitchell (where the above quote is derived) Japan first experimented with QE way before the US did, and that was good (that was a good step in the ‘Pure’ or ‘end-game’ MMT direction); but to paraphrase Jim ‘Minethis1’ Boukis, what political ‘prescription’ MMTers today aren’t grasping, is all that Debt / GDP in Japan, like many things, is fine—UNTIL IT ISN’T. To understand more about Debt / GDP, let’s take a step back into history.
Due to the inflationary measures undertaken to finance the US Civil War, it was too difficult to pay back debt in gold or silver, so the US gov’t suspended payments of obligations not legally specified in specie (gold bonds or gold certificates). This led banks to suspend the conversion of bank liabilities (bank notes and deposits) into specie. In 1862 paper money was made legal tender and as a fiat money (not convertible on demand at a fixed rate into specie) as a temporary ‘emergency’ war measure. These notes came to be called ‘greenbacks’. After the Civil War, Congress wanted to reestablish the metallic standard at pre-war rates; but, the market price of gold in greenbacks was above the pre-War fixed price ($20.67 per ounce of gold) requiring an intentional, gov’t-induced deflation to achieve the pre-War conversion price. This could be accomplished by growing the stock of money less rapidly than real output. The coinage act of 1873 (aka the Crime of ‘73) deflated the money supply. This act removed the 412.5 grain silver dollar from circulation leaving only silver coins worth less than $1 able to be used. It worked. By 1879 the market price matched the mint price of gold. With the resumption of convertibility on June 30, 1879 the gov’t went back to paying back its debts in gold and redeemed greenbacks on demand in gold. Greenbacks became perfect substitutes for gold coins.
Fast forward to today, as per MINETHIS1, a good way to predict currency appreciation / depreciation is to watch the stock of money (to watch the rate of money creations via federal ‘DEBT’), against the real output (to GDP).
Monetary policymakers today (who studied those monetary-policy actions taken in 1873) know that if you want deflation / currency appreciation, then grow the stock of money much less rapidly than real output: and conversely, if you want inflation / currency depreciation, then grow the stock of money much more rapidly than real output.
Japan is a ‘homogeneous’ nation (read: prefers racial ‘purity’—but not in a racist way, just in a way that cherishes & seeks to preserve its ancient customs & culture); which, like ‘anything’ (which like everything else) ‘is fine until it isn’t’. For example, as a result of wanting to embrace demographic purity, Japan today now has the most aged population among the G20.
Meaning that Japan’s labor force has been literally dying off which (among other moving pieces) has been causing deflationary forces, hurting the Japanese economy (suffering from ‘Lost Decades’). So Japan, which isn’t crazy about immigration (growing the ‘people stock’), has instead been fighting that deflation by growing the money stock (debt) more rapidly than real output (GDP). In other words, Japan’s monetary policymakers will keep trying to ‘keystroke’ their way out of a perilous economic situation (while blaming the Japanese citizens for having a ‘deflationary mindset’).
Rather than being an ‘MMT poster child’ and ridiculously saying ‘We Can Do That Too #learnmmt‘, Japan is a prime example of what NOT to do.
Here’s how political ‘prescription’ MMTers sound while whispering their sweet-nothings (their promises that you can have ‘anything’ because there is no financial constraint) in your ear (the pillow talk MMT):
“Japan has been a gem for demonstrating the neo-liberal myths about government deficits, debt and central bank debt purchases, inflation and bond yields. Japan is a living laboratory that should give you confidence that MMT is a much more robust explanation of what happens in a monetary economy where the government is sovereign (issues its own currency) than the mainstream economics approach.”—Bill Mitchell, ‘Our poster child keeps exposing the myths’, September 9, 2014
Here’s how they sound afterwards (after you-know-what-went-you-know-where) and it starts becoming more apparent that what Japan is doing is NOT working (is NOT ‘a gem’ / is NOT ‘a model’ / is NOT ‘a laboratory’ / is NOT ‘a poster child’): “Japan’s QE is a sideshow. While the Bank of Japan [BOJ] can accumulate Japanese Gov’t Bonds [JGBs] in whatever volumes they choose and can never go broke if the price of those bonds in the secondary markets create ‘losses’, the policy will not deliver the inflationary spike that the IMF and the Bank of Japan is seeking. Inflation will accelerate only if fiscal policy pushes the growth rate and the demand for real resources above the potential growth rate and the resource availability.”—Bill Mitchell, ‘Bank of Japan’s QE strategy is failing’, April 24, 2018
That’s wrong professor. Just like America’s QE was NOT a ‘sideshow’, Japan’s QE is NOT a ‘sideshow’. Perhaps MMTers should stop listening to the pillow talk and pick up a copy of ‘The Only Game in Town’ by Mohamed El-Erian, which correctly posited that if fiscal policymakers choose to ‘sequester’ (read: cower in foxholes and let others do the fighting against the enemy forces of deflation) then the central bank’s monetary policy—like QE—is the POLICY OF LAST RESORT.
Rather than the Bank of Japan’s QE strategy ‘failing’, right now QE is the only thing that is stopping the Japanese economy from falling into a deflationary death-spiral dive. Just like America’s monetary policymakers were able to successfully perform life-saving triage to the US banking system after the credit crisis struck; Japan’s monetary policymaker anesthesiologists are keeping the patient (the economy) in an induced coma—doing the best they can to buy time with QE & QQE—until fiscal policymaker surgeons show up and do the needed procedures that actually gets the patient back to strong health.
Instead, Japan keeps losing steam. Japan’s GDP last year ($5.17T) was less than it was in 1995 ($5.45T). Japan was passed as the world’s second-largest economy by China in 2010 and today China keeps passing Japan in other ways (larger UN contributor, larger importer of natural gas, etc). Keystrokes (the BOJ buying bonds / the BOJ buying stock funds / the BOJ keeping short-term rates negative and the 10yr rate at zero percent with ‘curve control’) is not enough to get Japan back on track. Instead of more keystrokes, Japan needs creative pen strokes (simple adjustments to immigration laws / labor laws / corporate laws, etc). Until then, as Steve Keen writes in his 2017 book titled ‘Can We Avoid Another Financial Crisis?’, “Japan now features in popular culture as a cautionary tale about fading stars rather than rising suns”.
Note: Don’t get me wrong, I’m rooting for Japan. After living in the paradise city of Tokyo while working for a ‘shoken kaisha’ for 14 years; and even better, meeting my wonderful wife of 25 years there, I would love to see Japan make a comeback. Until then, fellow MMTers, let’s not kid ourselves. Japan’s BOJ is at the point now where they have to save their economy by creating an illusion of financial (public) activity. After all these years, Japan’s BOJ is still doing QE. In addition, the BOJ has negative short-term rates…plus the BOJ is doing ‘curve control’ (the BOJ’s trading desk has kept the 10yr Japanese Gov’t Bond price trading at 0% yield)…plus the BOJ is buying stock funds. In other words, this is not just normal central bank ‘guidance’ in response to a financial crisis (like the Fed’s QE was)—this is literal control, or as per Jesper Koll, Japan head of U.S. asset manager WisdomTree puts it, this is more like “a new form of financial socialism”.
Rather than being a fake MMT poster child, Japan is a pure MMT case study of why, from the very start of economic troubles, PEN STROKES, not more keystrokes, are the needed solutions to grow an economy.
Don’t take my word for it. On 03/15/19, when asked about MMT, Japan’s central banker, BoJ Governor Kuroda said “I think it is an extreme argument that won’t be accepted widely.”
If you’re looking for a pure MMT ‘poster child’, here you go:
“I am going to say something that will offend both sides of this debate, but Trump is the most MMT-like-President ever elected.”—Kevin Muir, the MacroTourist, ‘TRUMP: THE FIRST MMT PRESIDENT’, Feb. 2019 (Mr. Mosler tweeted “Nice to see MMT articles like this.”)
“There’s no economic reason for raising taxes—and that’s been our position all along. To say you can’t do anything, because everything has to be ‘payed for’, or that ‘you are going to have to raise taxes’—meanwhile, these guys, are running the tables.
They’re doing defense spending—no ‘pay fors’.
They’re doing a trillion in tax cuts—no ‘pay fors’.
They’re going to come along with a tax cut 2.0—no ‘pay fors’.
They’re going to give money for a wall—no ‘pay fors’.
They’re already there.” /
“One of the funny things that happened is that in a way, the Republicans…kind of advanced the MMT agenda.”—Stephanie Kelton, The Second International Conference of MMT, Sept. 28, 2018 / Presidential Lecture Series Oct. 15, 2018
77DIF MISINTERPRETATION #35: “US taxpayers do not fund the US government. The US government funds US taxpayers. All dollars used by the US private sector to pay federal taxes come from the US federal government.”
Fact: All dollars used by the private sector to pay federal taxes DO NOT necessarily come from the US federal government.
Unbeknownst to those in the MMT kiddie pool who wear those ‘all dollars used to pay taxes come from the government’ floaties, under the Taxpayer Relief Act of 1997, federal taxpayers can pay with a credit card.
The federal gov’t is the sole monopoly ‘issuer’ of dollars, but the MMT community often misinterprets that with meaning the federal gov’t is the sole monopoly ‘supplier’ of dollars.
Using their logic, if the total national ‘debt’ (all 22 trillion dollars that was created and entered into existence by the federal gov’t), was all completely ‘destroyed’ (taxed back), then there would be no money left to pay taxes. Which is nonsense—and why fake MMTers cannot get the ‘prescriptions’ taken seriously by experts in the field (because they can’t get the pure ‘description’ MMT right).
The pure MMT insight is that, when switching from a gold-backed currency to a fiat currency, the order of funding operations also switched. Unlike a ‘user’ of dollars, the monetary sovereign now doesn’t have to ‘collect’ (its own) money first. In fact, the federal gov’t doesn’t even have to collect any of its own dollars at all to fund spending; however, the paradigm difference is that the funding function took a back seat to other functions—like maintaining demand for the currency, maintaining price stability and the political functions.
The US government funds the US taxpayers first and then the US taxpayers fund the US government right back. That’s it—there’s no need to ‘create’ anymore MMT out of that.
Seventy Seven Deadly Innocent Fraudulent MMT Misinterpretations (#36-42)
77DIF MISINTERPRETATION # 36: The Job Guarantee is like the WPA of yesteryear.
Fact: The Job Guarantee is NOT like the WPA of yesteryear.
To play along with fakeMMTers, not only do you have to pretend the federal ‘job’ guarantee is like the WPA, one must also ignore all facts, math & data. For example, you must close your eyes and ears to all those record-breaking jobs figures and only think about those depression-era black & white images of *actual* involuntarily unemployed people standing in soup lines. Just like the sad and discredited ideology of political extremism is deeply-rooted in the total ignorance of both human history and human nature; fakeMMTers are constantly making things up to fit their narrative.
“The proposed MMT Job Guarantee (JG) pays a fixed wage with benefits. The most quoted wage is $15/hr. All workers in the JG are paid the same in all areas of the country. Aficionados of the JG are fond of comparing it to New Deal style work programs. The Work Progress Administration (WPA) was the main program that was responsible for building the infrastructure, some of which is still in use today. Job Guarantee advocates will make sure to point that out to prove the overwhelming success of the New Deal 1930s Work Progress Administration. Yes, it did some excellent work in its time and place in history. Job Guarantee supporters leave out one small detail. The Work Progress Administration (WPA) did not set a fixed Nationwide wage and the wage varied based on skills of the worker. The WPA Division of Employment selected the worker’s placement to WPA projects based on previous experience or training. Worker pay was based on three factors: the region of the country, the degree of urbanization, and the individual’s skill. It varied from $19 per month to $94 per month, with the average wage being about $52.50—$934.00 in present-day terms. The goal was to pay the local prevailing wage. Basically, the Job Guarantee is not like the WPA of yesteryear…”—Charles ‘Kondy’ Kondak.
77DIF MISINTERPRETATION # 37: “Spending & taxation are separate & independent operations.”
Fact: Spending and taxation are interdependent operations that are intentionally coordinated.
When debating Bloomberg columnist Noah Smith (who was mocking the fakeMMTer mantra that everything THEY want can be ‘paid for by MMT’), Pavlina Tcherneva tweeted on 02/07/19 that “spending & taxation are separate & independent gov’t operations.”
However (and as usual), one quote from one MMT academic doesn’t quite square with other quotes from other MMT academics:
“The gov’t chooses to coordinate spending & taxation in order to mitigate the impact on bank’s reserve positions and interest rates…This interdependence is not de facto ‘financing’ role for taxes.”—Stephanie Bell, ‘Can Taxes and Bonds Finance Government Spending?’ Jerome Levy Economics Institute Working Paper No. 2441998, July 1998
These mixed signals between the pure MMT (how capitalism works) and the fake MMT (how to dismantle capitalism)—that’s the ‘separate independent operations’.
77DIF MISINTERPRETATION #38: “Don’t say ‘Federal taxes don’t fund federal spending’. Instead say, ‘Federal taxes do not need to fund federal spending’. Translation: Don’t tell me that I am an asshole. Instead say, I don’t need to be an asshole.”—Ellis Winningham, 09/06/18
Fact: “Don’t say that ‘federal taxes don’t fund federal spending’. It’s better to say that federal taxes are not needed to be able to spend, not that it doesn’t fund it.”—Warren Mosler, MMT conference closing remarks, 09/24/17
To be fair, Mr. Winningham is just not yet grasping the pure MMT insight and probably doesn’t think that Mr. Mosler is an asshole for (correctly) advising the MMT community that it’s better to say that federal taxes do not need to fund federal spending—not that they don’t at all.
77DIF MISINTERPRETATION #39: “If the private sector wishes to run surpluses, the federal gov’t must run deficits.”
Fact: If the private sector wishes to run surpluses, the federal gov’t does NOT have to run deficits.
The above quote (a 02/14/19 tweet from Pavlina Tcherneva responding to Bloomberg columnist Noah Smith) is a common misinterpretation made by most of the MMT community. The real culprit is that Sectoral Balances chart which (correctly) shows that the amount of federal-gov’t deficits (the amount of money creation ‘debited’ out from the issuer of dollars) equals the amount of nonfederal-gov’t surplus (the amount of money creation ‘credited’ to the users of dollars). The problem is that the MMT choirs (as they often do) take that accounting identity of those Almighty federal-gov’t deficits as gospel—and call it a day.
The ‘federal gov’t must run deficits for the private sector to have a surplus’ is only correct if you ignore private-sector money creation. For example, it’s true in the Monopoly game because as per the Monopoly Game rules, ‘No Player may borrow Monopoly Money from another Player’—meaning that, unlike our actual monetary system, in the Monopoly Game there is no ‘horizontal’ private-sector money creation.
There are several reasons why the MMT community ignores private-sector money creation. Mostly it is because they are simply regurgitating the MMT academics, at best; or just confusing the federal gov’t as being the sole-monopoly ‘issuer’ of dollars with meaning that the federal gov’t is the sole-monopoly ‘supplier’ of dollars, at worst. MMTers still haven’t yet grasped the concept that Net Financial Assets CAN and DO come from the private sector as well—as Mr. Mosler, a former bank owner, attempted to explain to MMTers (but to no avail because it doesn’t fit the ‘more federal deficits to the rescue’ narrative). In order for political ‘prescription’ MMTers to reach their goal of dismantling capitalism and replacing it with a cradle-to-grave welfare state, they need people to believe that federal-gov’t money creation is the only solution for all the problems. MMTers even go as far as renaming money that is created in the private sector as ‘lookalike IOUs’ or even place private-sector money creation ‘lower’ in a ‘hierarchy’ of money. In short, ‘if the private sector wishes to run surpluses, the federal gov’t must run deficits’ becomes ‘true’ as long as it pushes for more federal deficits (which pushes the MMT community over a cliff).
Note that the same MMTers who believe that ‘if the private sector wishes to run surpluses, the federal gov’t must run deficits’ struggle to believe the opposite. For example, just like during the Clinton surplus years (when the private sector paid more in federal taxes than the federal gov’t spent), these same MMTers hide their Sectoral Balance charts and stop talking about accounting identities. What then becomes ‘true’ in the fake MMT kiddie pool is that during those years (when the private sector ran deficits) there was no federal-gov’t surplus of dollars because ‘Those tax dollars were destroyed’ / ‘There’s no such thing as tax dollars at the federal level’ / ‘The federal gov’t neither Has or Doesn’t Have dollars’.
77DIF MISINTERPRETATION #40: Federal gov’t deficits do not ‘crowd-out’ investment.
Fact: Federal gov’t deficits do ‘crowd-out’ investment.
Abba Lerner developed the principles of Functional Finance (1941, 1943, 1944, 1948, 1951, 1961, 1973) which argued that government policy should be designed to obtain maximum employment and price stability regardless of whether it increased or decreased public debt by debunking the ‘burden of the debt’ and ‘crowding out’ arguments used against deficit spending. In Paul Krugman’s recent NYT’s OpEd piece he wrote “I am not a fan of MMT which is basically Abba Lerner’s ‘functional finance’, which while clever, missed some possibly important things”.
One of those important things Paul Krugman meant is that we shouldn’t buy into that ‘deficits do not crowd out investment’ part. “If you think that the magic of heterodox monetary thinking somehow means that deficit spending is never inflationary, or crowding out never happens, or something, you don’t understand the functional finance that MMT advocates themselves claim underlies their doctrine,” he added.
If interest rates go up (if the Fed is raising rates because the economy is getting stronger), more people are normally inclined to move their investment dollars from risk-on to risk-off to change portfolio weighting into safer bonds paying a satisfactory amount of fixed income—which is a kind of ‘crowding out’ (that is intentionally done by the Fed to lift its foot off the accelerator).
Another example is that as interest rates go up, more federal spending, which is budgeted (which is politically constrained) is diverted towards servicing the ‘debt’. In FY 2017 federal debt service was 7% ($275B) of total spending ($4T) and projected to be at least 10% ($500B) in 2020. Meaning that more dollars are going for less-productive uses (going to the 5%) and are potentially ‘crowding out’ federal spending for the functional economy (for the 95%).
“The Loanable Funds Model states that there is a fixed pool of money that federal gov’t deficits compete with for non-federal gov’t borrowing, which is the same as saying that federal gov’t deficits crowd out private-sector investment. In my estimation this is false as far as it goes. However, there are other forces at play that makes this whole line of thinking somewhat specious as federal gov’t deficits do affect private-sector borrowing once we take interest rates into account. When interest rates rise it compresses private-sector profit margins, such that companies begin to cut back on borrowing. This happens when the Federal Reserve is in a raising interest rate mode, usually because they see the incipient risk of inflation. The raising and lowering of interest rates by the Federal Reserve does affect the cost of borrowing (credit) in the economy. If the federal gov’t is pumping increasingly large deficits into an economy that is near or at full capacity it will add to inflationary pressure, at least to some degree. If the Federal Reserve raises rates some more, then profit margins compress even further. Meaning that the private sector is borrowing less as the public sector is borrowing more. Hence there is nothing left to call it, but the crowding out of private sector investment by running increasingly large deficits when the economy is doing well.”—Charles ‘Kondy’ Kondak
77DIF MISINTERPRETATION #41: The deregulation of natural gas prices—not Paul Volcker’s rate hikes—broke the back of the 1970s inflation.
Fact: Paul Volcker’s rate hikes—not the deregulation of natural gas prices—broke the back of the 1970s inflation.
Nat Gas deregulation accounted for the breaking of the back of the 1970s inflation—and not Volcker’s rate hikes (?) I don’t seem to remember folks sending 2 x 4s to any natural gas companies (!)
“Most MMTers say that the deregulation of natural gas prices created a massive demand shock for oil (as U.S. utilities switched from oil to natural gas), which destroyed OPEC’s pricing power and broke the back of the 1970s inflation. They even go as far to say that then-Fed Chair Paul Volcker’s rate hikes were actually counterproductive; however, for that thesis to be correct, one would expect a surge in natural gas consumption. As per the facts, math & data, natural gas consumption fell from 22.1 million cubic feet in 1972 to 16.2 million cubic feet in 1986 (26% decline). Meanwhile, the inflation rate in 1980 was 13.5% and fell to 1.9% in 1986. Meaning that based on both the natural gas consumption and the inflation rate data, it can safely be said that natural gas deregulation did NOT play a role in breaking the back of OPECs oil pricing power nor the inflation of the 1970s.”—Charles ‘Kondy’ Kondak
Yet another deadly innocent fraudulent mmt misinterpretation—just another yarn to go along with ‘the Fed is counter-productive’ / ‘the Fed has the pedals backwards’ / ‘the Fed creates inflation by raising rates’ that fits the anti-central bank narrative that plays so well in the ‘modern’ monetary community during The Longest United States Economic Expansion In History (thanks to the Fed).
77DIF MISINTERPRETATION #42: Loans create deposits.
Fact: Bonds create loans create deposits.
Similar to the 20th century switch on Wall Street from ‘physical delivery’ of securities (when stock certificates & bearer bonds literally changed hands); to securities becoming electronically ‘registered’ (the present system where stocks & bonds only exist as ledger posting, aka ‘book entry’), the MMT analysis is that the same thing also happened to currency.
Once upon a time, all transactions were settled with cash on the barrel-head, using valuable coins made of gold or silver (‘metalism’); until the concept of extending credit (the ‘value’ of creditworthiness) came along, and then transactions were settled with postings on a centralized ledger (‘chartalism’).
One example of using credit was using ‘tally sticks’ in England during the Middle Ages, where transactions could be settled without any currency up front. The buyer’s indebtedness to the seller was recorded with markings on a tally stick—the precursor to today’s postings (‘points’) on a ledger (on a ‘scoreboard’). One could safely argue that the innovation of tally sticks was the beginning of the end of ‘metalism’.
In other words, to this day, instead of buyers & sellers needing to settle all transactions by physically handling dollars, those dollars can instead be transferred electronically as corresponding assets (+$) and liabilities (-$) being entered on a balanced spreadsheet, like ‘points on a scoreboard’. Today, when the federal gov’t deficit spends, it is recorded as a liability (-$) and since there’s no such thing as a ‘negative dollar’, that’s where the MMT refrain ‘The Fed doesn’t Have or Not Have dollars’ comes from.
However, the politically-extreme MMTers, also to this day, takes that analogy (that refrain) too literally and they fail to grasp that those ‘points on the scoreboard’ are denominated in dollars. Meaning that, just because those dollars went from a metal form (gold coin) into chart form (tally stick) doesn’t mean that there are no dollars involved ‘AT ALL’. These same folks who say ‘Taxes don’t fund spending AT ALL’ are now also regurgitating ‘There’s no such thing as tax dollars on the federal level AT ALL’—and have no idea how ridiculous they sound. Despite the evidence to the contrary, these deadly innocent fraudulent MMT misinterpretations are often repeated to fit their political ‘prescription’ narrative. It is also a form of character assassination because when trying to dismantle capitalism, one must first dismantle the ‘evil’ capitalist ‘notion’ that a federal ‘taxpayer’ exists (so that no one AT ALL can ever again have the audacity to question how federal tax dollars are spent).
Just like those tally sticks of yesteryear (and just like those newly-created ‘points on the scoreboard’ today), the pure MMT insight is that for both the federal gov’t and the non-federal gov’t (read: for absolutely everyone), all money creation begins at the moment that someone (someone with good credit) promises to pay someone else back. For example, your promise (your guarantee) to pay money to a vendor after a certain period of time (maturity term), at a certain cost (principal + interest rate), is your ‘bond’. Whenever deficit spending, that ‘bond’ is the origin of all money creation. Your ‘IOU’ is the asset that you are ‘selling’ in exchange for whatever asset the vendor is selling you. That IOU, that creation, denominated in dollars, represents the net addition of assets entering the banking system (aka ‘leveraging’); and the opposite, when that IOU is paid off, is the destruction of assets exiting the banking system (aka ‘deleveraging’). DO NOT confuse that *actual* expansion (creation) and that *actual* contraction (destruction) of the banking system with federal taxation (with SURPLUS spending)—which is only a transfer (which is only a ‘drain’) of previously-created dollars ebbing and flowing (to and from) money supply circulation.
Also note that any bank (whether it is the Federal Reserve Bank or a small community bank) is only acting as a financial-intermediary middleman (a broker) between the primary players (counterparties) involved in all money creation—the buyer & seller. In other words, to fully-understand how and when newly-created money is conceived, it is better to instead focus on that promise, that guarantee, that ‘bond’ creation, as the initial step. For the federal gov’t, once Congress authorizes more issuance of Treasury bonds to deficit spend on approved expenditures, Congress is ‘printing’ the money—not the Fed; and the same goes for the non-federal gov’t, when deficit spending, you and I are ‘printing’ the money when we sign off on it—not the private bank. The Fed and the private banks are only FACILITATING our ‘printing’ of money.
Unlike the federal gov’t, the rest of us in the private sector are users of dollars. So unlike the issuer of dollars, if we want to deficit spend, we still need to first get dollars from the issuer (or an agent of the issuer). The MMT insight is that in the post-gold standard, modern monetary system (using fiat dollars) whenever deficit spending, the private sector doesn’t borrow existing bank reserves, the dollars are newly-created.
Which is a money creation process that starts with our newly-created BONDS—conjured up out of thin air and backed not only by the full faith in the value of our creditworthiness but also by the confidence in the value of our future economic prospects—which next CREATE LOANS, which then CREATE DEPOSITS of dollars.
FROM DOWN UNDER here’s another seven MMT misinterpretations:
John Adams (Chief Economist at ‘As Good As Gold Australia’, an Adelaide based gold and silver dealership where he regularly contributes political, cultural and public policy commentary for the Daily Telegraph, the Spectator Australia, the Canberra Times and the Australian Business Executive): Some of the claims by the proponents of MMT are quite fanciful and why I recently wrote my OpEd titled ‘The Madness Of Modern Monetary Theory’.
Martin North (Principal of Digital Finance Analytics, a consulting firm providing advisory services, primary consumer research, industry modelling and economic analysis to companies in Australia and beyond): Let’s go through some of the claims by MMT proponents and the Australian members of parliament who are subscribing to the theory.
John Adams: The proponents of MMT—the biggest proponent of MMT here in Australia is Prof. Bill Mitchell—would have you believe that MMT is a comprehensive theory to address a specific problem.
Martin North: Let’s talk about Prof. Bill Mitchell’s claims in his presentations.
Seventy Seven Deadly Innocent Fraudulent MMT Misinterpretations (#43-49)
77DIF MISINTERPRETATION # 43: The macroeconomics taught in Australian universities is ‘fake knowledge’—that academics are teaching ‘lies’ and the research produced by academic economists is neoliberal ideological ‘propaganda’.
Fact: “It’s not true. Sure, some things taught today are wrong and you need to unlearn them but the professor is asserting his theory to undermine the entire economics profession. He is trying to say that you’re all wrong and you need to think of something different.”—John Adams
77DIF MISINTERPRETATION # 44: A federal gov’t budget is not equivalent to a household budget.
Fact: “If the people see that the gov’t budget is not the same as a household budget (that there is no traditional constraints), then ultimately people won’t accept the unit of currency that the gov’t is paying (which is precisely what is happening in Venezuela). So in ‘theory’ the gov’t can continue to spend—until in reality it can’t.”—John Adams
77DIF MISINTERPRETATION # 45: A currency issuing gov’t can never run out of money and never has to fund its spending.
Fact: “Saying that a currency issuing gov’t can never run out of money and that it never has to fund its spending is making the point to advance a different set of priorities. When you get a gov’t that keeps spending money, it can become a problem.”—John Adams
77DIF MISINTERPRETATION # 46: For the non-gov’t sector to save, the gov’t needs to run continual budget deficits; and continuous deficits won’t be inflationary, as long as if it maintains that proportional relationship between spending and productive capacity.
Fact: “The gov’t does not necessarily have to spend in order for the non-gov’t to save. Look at Singapore. What a unique story. Singapore went from a third-world country after gaining independence from the British in 1965, to a first-world country within a single generation. Part of the reason why Singapore’s private sector jumped to first-world status was the high (40%) rates of private-sector saving. Then they were able to reinvest their savings into productive investments, create competitive companies and create even more wealth. Singapore proves that public-sector spending has little to do with private-sector savings. Furthermore, that arbitrary rule that if the growth of spending keeps pace with the growth of production (the supply side of the economy), then you are not going to have any growth of inflation. Traditional Keynesian theory is that you will avoid inflation as long as resources that were previously underutilized are utilized, but that ignores the nature of inflation and the nature of money. Inflation is the growth of the money supply. When you finance deficit spending (when you ‘print’ the money), you devalue the currency and that’s where the inflation comes from. MMT doesn’t recognize that point at all.”—John Adams
77DIF MISINTERPRETATION # 47: “The gov’t ultimately chooses the unemployment rate (because tomorrow the gov’t could engineer full employment by starting a federal Job Guarantee program but the gov’t chooses not to have full employment).
Fact: “There are a number of things that are wrong with the thinking that the gov’t can choose the rate of unemployment or reach full employment by spending willy-nilly. In ‘theory’, you could employ idle people to reach full employment in the short run; but, in the long run, you can’t square trading-off increasing debt just to hire idle people in unproductive jobs.”—John Adams
77DIF MISINTERPRETATION # 48: Hyperinflation in Weimar and Zimbabwe was not caused because of excessive money printing but because of a fall in productive output.
Fact: “Hyperinflation is when you print too much money. When you print too much money, you devalue that money; and how much you devalue that money depends on how much printed money is pushed into the system. If it’s pushed through the private banking system then you will have excessive private-sector debt levels—you’re going to have bubbles (like in the Australian housing sector now). Money printing can also be pushed through the public sector, like Japan’s QE, just look at the proportion of their gov’t debt vs. GDP—which is over 250%. China’s printing push is in their private financial sector and the US push is in their corporate sector, etc. As per MMT, that hyperinflation in Weimar Republic (WWI Treaty of Versailles imposed restrictions on rural manufactures in western Germany resulting in a massive drop of industrial production); and the country of Zimbabwe (Black Freedom Fighters in southern Africa breaking the yoke from British Colonialism getting rewarded with confiscated farms resulting in a 60% drop in farm output) was not caused by excessive money printing but instead by a fall in productive capacity in the economy. That argument is completely wrong and fallacious. For example, in 2006, Australia had a massive cyclone in Queensland (the nation’s largest growing region which produces 95% of Australia’s bananas) which wiped out about 80% of the banana crop (more than the productive drop of Zimbabwe). Before the cyclone, the price of bananas was about $2 / kilo and after the cyclone the price climbed above $14 / kilo. That’s a rate of inflation of 600% due to the drop in the production of bananas compared to Zimbabwe which suffered inflation of 231 MILLION percent (!) Granted that my Queensland banana example is just one crop, but if all of Australia had a 60% drop in production, would that result in 231,000,000.00 % inflation (?) The answer is no. That 1923 hyperinflation in Germany was over 300% PER MONTH; so again, if Australia had a similar drop of industrial production, just that productive output factor alone would certainly not result in that much inflation.”—John Adams
77DIF MISINTERPRETATION # 49: Involuntary unemployment is a great economic evil and MMT solves that problem.
Fact: “Another specific problem that MMT is most concerned about is ‘involuntary’ unemployment, meaning people who want a job who can’t get a job (or ‘forced’ to be unemployed). MMT says that there are people who want a job and can’t find a job or want more hours. To solve that particular problem, MMT believes the federal gov’t that issues the currency should employ a Job Guarantee program to reach ‘full employment’. MMT then makes a series of claims (MMT skirts around the questions) of what exact jobs these will be or how you will maintain the value of the currency. This JG program is the biggest issue I have with the MMT theory.
What they don’t talk about, is that when you print all this money and employ all these people in a JG, what kind of structural imbalances do you create in the economy (?) They say nothing about what happens if you expand the money supply, if you employ idle labor, if you’re going to see some bubbles in parts of the economy, etc. They say nothing about the productivity of the work that’s being done for the gov’t or if the work by these newly-employed is useful to society. If you want full employment, rather than this massive gov’t program, how about just do something about private sector regulations—like adjusting labor laws and/or modifying the corporate laws, etc (?)
If you want to improve Australia, rather than looking at MMT, like I mentioned already, we should just instead look at Singapore. They have 2% unemployment with no minimum wage. They run with basically balanced budgets. They have little or no welfare state benefits. They have very low taxes. You don’t need MMT to reach this pathway. If we want to prepare for crisis in the coming years, instead of simply tweaking existing laws, should we just print more money and not worry about any consequences to our society—not worry about the value of our money (?)”—John Adams
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Fellow MMTers: Be an MMT user, not an MMT issuer.
Regarding hyperinflation: “The notion that no sovereign currency issuer fails to pay debts denominated in their own currency so deficits are never problematical ignores two realities. One, every hyperinflation has a deficit component. Two, when nobody wants your money you end up incurring debt in other nation’s money, which you can’t pay back.”—Mike Morris
Regarding crowding out: “Will Social Security go bankrupt unless we start effectively managing it (?) Let me say it this way. What happens over time is that we wind up spending more and more of our precious revenues to service the debt as opposed to investing in the things like education and the other things we need so we can compete in the global economy.”—Jerome H. Powell, Chairman, Board of Governors of the Federal Reserve System, Semiannual Monetary Policy Report to Congress and testimony to the Senate Banking Committee