“While Non-banks grant credit, it would be misleading to speak of ‘credit creation’ by Non-banks.”—Richard Werner
He wrote that because when the Non-Bank (short for ‘non-formal bank’ like a shadow bank) is lending (which by UK law must always—only—lend with existing money), the Non-Bank gives up the same amount of their cash (-$100) in exchange for the same amount of the borrower’s IOU (+$100).
Thus, as this logic goes, since there is no change in the Non-Bank lender’s balance-sheet totals at the end of the day then that means there’s no credit creation.
(Speaking of being ‘misleading’, what about the borrower’s balance sheet that expanded—that went up from $0 to +$100)?
Perhaps, in Mr. Werner’s view, when the opposite happens, when formal banks that are lending with newly-created money, that is a different (read: lower) ‘hierarchy’ of borrowing. He calls newly-created bank deposits ‘fictitious’ and ‘imaginary’. That implies that he thinks only a loan using already-existing money is ‘sound’.
Which is an ‘unsound’ argument because it makes no difference whether any money that was lent out was newly-created or already-existing—because it mostly has to do with the ‘soundness’ of the person the money was lent to.
As per Mr. Werner, it is only when lending is done using newly-created money is it a ‘credit creation’. Apparently, if just lending with already-existing money, that’s totally different, that’s not extending credit, that’s not credit-creation, that’s ‘fronting’ someone money (or something like that).
Which completely ignores the fact that when someone gives you cash out of their pocket for you to borrow, not only do you the borrower receive an asset, so does the lender—and THAT’S the expansion, that’s the creation (of credit). The lender receives a NEWLY-CREATED IOU that goes in the lender’s pocket. Even if there is no actual IOU written out and handed over—if it is just ‘fictitious’ and ‘imaginary’—rest assured, that IOU is a real and potent thing because it’s a damsel named Faith (hooking up with a stud called Creditworthiness).
The only difference is that, unlike a credit creation using already-existing money, a credit creation using newly-created dollars involves a middleman (an underwriter). Whether funded by newly-created money or not, it is that promise to pay back the money with interest, it’s that newly-created IOU, that ‘bond’—that you conjured up out of thin air—that makes ALL borrowing a credit creation. The added account receivable, that asset, that credit creation, is always happening with any bond issuance, with any borrowing—with any extension of credit. When you pay the money back (when you put the bond in the ‘shredder’), that is the destruction. Those bonds being newly-created and newly-destroyed expand and contract the balance sheets. This leveraging v. deleveraging is the ‘beating heart’ and understanding that allows you to feel the ‘pulse’ of the economy.
Since the days of credit creation using tally sticks in medieval England, the lender’s faith in the borrower’s ability to pay back the money is a pillar of the economy. That’s why even to this day, a fiat dollar bill which is not backed by gold is still very valuable and why we say it’s backed by the full faith and credit—because it’s backed by the full faith and credit of the person who printed that piece of paper.
When it comes to borrowing in the private sector, it is WE who ‘print’ that bond, not the Bank and not the Non-Bank—they are only facilitating YOUR ‘printing’ of credit. For example, VISA doesn’t contact you to let you know when they’re ready for you to go out to eat and pay on credit; and VISA doesn’t tell you whether to make the minimum monthly-balance payment, or tell you to pay the balance in full and destroy the credit creation—it’s the other way around.
“Is Minsky (1986) right and ‘everyone can issue money'”?—Richard Werner
That’s close. Everyone can extend (issue) credit and all borrowing is a credit creation (an expansion denominated in dollars). To believe otherwise is fictitious and imaginary.
No, I do not agree with anyone that says that the Fed (or any other central bank) is a private cartel. The Fed is part of the federal gov’t. As the Fed puts it on their website, the Fed is “independent within the federal gov’t”.
It was not a good February 2019 for political ‘prescription’ MMT (nor for their anti-central bank, anti-capitalist, gloom-and-doom choir).
On February 1st, Keith Weiner wrote a piece titled ‘Modern Monetary Theory Is A Cult’, referencing the real-life islander tribe known as the ‘cargo cult’. Just like a fake MMTer who doesn’t fully-understand concepts like ‘value’ or ‘productivity’, the cargo cult assumed that all they had to do was to build a runway (just ‘keyboard’ it in) and then airplanes full of cargo would come.
Nonfarm Payrolls (monthly unemployment figures) blew away expectations, meaning that the Longest Job Expansion In United States History—now 100 straight months strong—continued. Which (yet once again) kicked the ass of anyone still left that actually thinks a $500B federal ‘job’ guarantee program DURING A LABOR SHORTAGE is a good idea.
‘The Intercept’ dropped this on the gullible MMT community (who still didn’t get the hint after Democrats re-instituted PayGo and Speaker Nancy Pelosi frustrated Green New Deal proponents by not giving them the kind of committee they wanted): “Pelosi Aide Privately Tells Insurance Executives Not To Worry About Democrats Pushing Medicare For All”—Ryan Grim
Which didn’t go over too well with MMT academics: “Democrats, Do you deny that you are the PARTY OF SATAN?”—Bill Mitchell
If Professor Mitchell had fully-understood the article, he would have realized there were more reasons than just that gold-standard era “Monies are needed for other priorities” excuse. The Democrats had simply made the decision that M4A was a political loser and that for now policymakers should focus their messaging on lowering drug prices. “The comfort level with a broader base of the American people (for single payer) is not there yet,” as per Speaker Pelosi (read: She will be aligned with private insurers and will oppose Big Pharma).
When asked if the deficit will be mentioned in the SOTU Address, White House chief of staff Mulvaney said ‘no’ because ‘nobody cares’.
Is it because of that Progressive ‘revolution’ that nobody cares about deficits?
“Republicans…are the biggest MMT people we’ve seen in our lifetime.”—Logan Mohtashami
“One of the funny things that happened is that in a way, the Republicans…kind of advanced the MMT agenda.”—Stephanie Kelton
Then during the SOTU speech, after the president said “We were born free and we will stay free…The United States will never be a socialist nation,” even some over on the Democrat side of the aisle cheered (while Sen. Sanders fumed).
Meanwhile, another bullet hole (in ‘bulletproof’) #fakeMMT is that, just like the cargo cult, the MMT community has the blinders on when it comes to inflation. They think that consumer prices are the only thing to measure (that consumer price inflation is the risk) and refuse to see anything else (like asset price inflation being fed by deficits that is worsening wealth inequality). Fake MMTers just look at consumer price inflation and not at the asset price inflation (stocks, bonds, real estate, aka the ‘savings bubble’).
“They are fond of saying ‘deficit spending should be large enough to satisfy the desire of the private sector to save’ as if there is a limit on the price of financial assets.”—Charles Kondak
Bingo…Either the MMT community is not fully grasping how incomplete it is to say that it’s fine to deficit spend ‘as long as there is no (consumer) price inflation’, or they are just bullshitting everyone—again. H/T to Jim ‘MineThis1’ Boukis for being the first one to sound the alarm on the savings bubble imbalance and those deficits that feed it (those Gov’t Deficits that = THEIR Savings). To just say it’s fine to deficit spend ‘as long as (consumer price) inflation is low’ is not only fake mmt, it’s borderline dangerous for the stability of the nation to not include asset price inflation in that federal spending calculus (to not consider creative pen strokes instead of keystrokes). Instead of calling it wealth inequality, perhaps we should call it ‘wealth inflation’ and then maybe the MMT community would get it.
Which is unlikely because MMT was carjacked and the first thing the carjackers did was to throw that pure ‘description’ baby out the window. What the #fakemmt kiddie pool doesn’t like is that pesky political constraint to federal spending—they can’t stand knowing that we can afford any policy proposal, BUT it still has to be approved. To a fakeMMTer, it doesn’t matter if their ‘description’ is wrong, as long as all ‘prescription’ roads lead to the same place: More free ‘this’ and more free ‘that’ (without considering the unintended consequences of their supposedly good intentions). When saying that we should spend on whatever THEY want—and don’t worry about it—’because MMT’, fake MMTers keep showing their true ideals. Which is to usurp the Power of the Purse of Congress, take away the Fed’s ability to change interest rates as they see fit and dismantle capitalism (to replace it with a cradle-to-grave welfare state).
Finally, and perhaps one of the biggest whoppers overheard during February was that oft-repeated, wishful-thinking that ‘MMT is getting more mainstream’. In other words, while peddling their political ‘prescription’ (that has little chance of seeing the light of day) under the guise of promoting pure ‘description’ (that has a big chance of seeing the light of day), they keep pissing down people’s legs and telling them that it’s raining.
Here’s some more examples of the downpour:
FEB 07: Noah Smith (Bloomberg Opinion and former assistant professor of finance at Stony Brook University): “So until the Green New Deal proposal is substantially revamped, every Democrat’s answer to the question ‘Do you support the GND?’ should be NO.”
FEB 08: Tucker Carlson: Why would we ever pay people quote ‘unwilling to work’?
Robert Hockett: We never would. AOC has never said anything like that. I think you’re referring to some sort of doctored document that someone other than us has been circulating.
Tucker Carlson: That was from the backgrounder from her office.
Robert Hockett: No. She actually laughed at that, she just tweeted out that apparently some Republicans have put that out there.
Tucker Carlson: Ok, good, thank you for correcting me. That seems a little ridiculous. Almost as ridiculous as the idea that we’re going to build enough rail to make airplanes unnecessary which I think is actually from the plan.
Robert Hockett: I don’t know where you got that from either Tucker. I’m not clear on where that ‘airplane disappearance’ is coming from.
Tucker Carlson: This is the Frequently Asked Questions released by her office and I’m quoting from it. Maybe this is fraudulent and I hope you’ll correct me. It says, and I’m quoting, the Green New Deal will totally overhaul transportation, building out high-speed rail at a scale where air travel would stop becoming necessary. Hawaii Democrat Senator Mazie Keiko Hirono responded by saying that would be hard for Hawaii—so I don’t think that’s made up.
Robert Hockett: It’s being misunderstood. We are talking about expanding optionality, not getting rid of anything.
Tucker Carlson: I’m now being told that the ‘unwilling to work’ thing, that is absolutely confirmed, that was in the backgrounder that her office released.
Robert Hockett: No, no, definitely not.
Tucker Carlson: It was in the overview document.
Robert Hockett: It’s the wrong document.
Tucker Carlson: We’ll follow up on this next week. That ‘unwilling to work’ line that you are obviously embarrassed by, you should be embarrassed, it was in the document.
Robert Hockett: No Tucker, it’s not embarrassing, it wasn’t us. We’re not embarrassed by what’s not ours.
Tucker Carlson was right. It wasn’t a doctored document put out by the Republicans. The actual resolution (the legislation) submitted to Congress that outlined the Green New Deal didn’t include the ‘unwilling to work’ part; but the overview document (the accompanying FAQ document), released by New York Rep. Alexandria Ocasio-Cortez’s office, did include the ‘unwilling’ language…and they were embarrassed by it—AOC’s staff was forced to take the gaffe-riddled summary of the bill off their website. Robert Hockett later tweeted “Typo in a draft doc that went up by mistake and was taken down once noticed.”
Included in Ocasio-Cortez’s original FAQ document was the promise of “economic security to all who are unable or unwilling to work,” it called for a “build out of high-speed rail at a scale where air travel stops becoming necessary,” it said that we “plant lots of trees” to reduce emissions, it laid out the goal to “move America to 100% clean and renewable energy” within 10 years and it explained how the resolution submitted to Congress used the term “net-zero emissions, rather than zero emissions” because “we aren’t sure that we’ll be able to fully get rid of cow emissions and airplanes that fast.”
FEB 12: Bill Gates called modern monetary theory (MMT) – which asserts that because the government controls its own currency, there is no need to worry about balancing the budget some ‘crazy’ talk. “Well, that’s crazy. I mean, in the short run actually because of macroeconomic conditions, it’s absolutely true that you can get debt even to probably 150 percent of GDP in this environment without it becoming inflationary. But it will come and bite you.”
FEB 16: No question that things are NOT going well for political ‘prescription’ MMT when even Breitbart agrees with Mayor Bill de Blasio (about Rep. Alexandria Ocasio-Cortez being too far to the left).
FEB 26: In testimony before the Senate Banking Committee on Capitol Hill, Fed Chair Jay Powell said this:
“Let me say I haven’t seen a carefully worked out description by what is meant by MMT. It may exist but I haven’t seen it. I have heard some pretty extreme claims attributed to that framework and I don’t know whether that’s fair or not. I will say this. The idea that deficits don’t matter for countries that can borrow in their own currency, I think is just wrong. I think US debt is fairly high, at a level of GDP and much more importantly than that, it’s growing faster than GDP, significantly faster. We are not even close to ‘primary balance’, which means the deficit before interest payments. So we’re going to have to either spend less or raise more revenue. In addition, to the extent people are talking about using the Fed as a sort of [financing], our role is not to provide support for particular policies. That’s central banks everywhere. Our role is to achieve maximum employment and stable prices—that’s what it is. Decisions about spending, about controlling spending and about ‘paying for it’, are really, for you.” —Fed Chair Powell, 02/26/19
FEB 27: In the next day’s testimony before the House Financial Services Committee, Fed Chair Jay Powell pushed back on the MMT ‘prescription’ (on Mr. Mosler’s 7DIF Part III Public Purpose proposal) to anchor the federal funds rate to 0% (to completely take away the Fed’s ability to quickly respond to either an economic crisis or an approaching crisis like a dangerously overheating economy):
“There is a new sort of focus on modern monetary theory that says taxes can better fight inflation than monetary policy. Do you have a basic philosophical view on that?”—Rep. Steve Stivers (R-Ohio)
“That aspect of it would be a complete change. I would say the reason why the Fed does that is that we can move quickly with our tools (we can move immediately), and to give the legislature that responsibility—in principle you can do that—but we have a system, that’s got lots of checks and balances.”—Fed Chair Powell, 02/27/19
In conclusion, during the month of February when Econ Ph.D Stephanie Kelton was again tweeting that Gov’t Deficits = OUR Savings (that THEIR red ink is OUR black ink), Warren Buffett disclosed in his annual Shareholder Letter that Berkshire had $112B in US Treasury bills (which is almost 1% of the entire $15.5T US marketable Debt Held by the Public).
By the way, it’s fine if you think that we need a ‘JG’, a ‘GND’, ‘M4A’, +/or student debt forgiveness—the more policy suggestions the better. It’s even fine if you hate the president—everybody goes through that (just like we all went through that adolescent phase in sports when you think that ‘our’ team is ‘great’ and the ‘other’ team ‘sucks’).
Notice however that most of the criticism during the month was not questioning the politics of the proposals—they were mostly questioning the economics. Meaning that when talking to experts in the field, if you are getting the econ (the ‘description’) wrong, you are making it harder for everyone else to take your pet policies (your ‘prescription’) seriously.
Here’s some advise for the ‘ideological’ MMT community: If you mix your politics with your economics, you dilute your expertise in both at the same time—so stop naively buying into Every.Single.Dopey political ‘prescription’ #fakeMMT meme.
In an age of ‘fake news’, you need to go Beyond The Memes—you need to become your own journalist. Don’t be afraid to do some due diligence on your own about the veracity of the claims made by MMT academics (before you too sound like someone that spent their entire lives in a classroom).
P.S. On February 28th, former Fed Chair Alan Greenspan did not sound too enthused with the ‘prescription’ MMT proposal to curtail the Fed’s role as ‘price setter’ and the notion that we should leave all that up to fiscal policymakers because the Fed doesn’t know what they’re doing (because the Fed ‘has the pedals backwards’).
As per the Maestro, if you shut down the Fed’s ability to immediately respond to changing economic conditions (if you take away the Fed’s agility at influencing prices with changes in interest rates); then while you’re at it, to stop the stampede out of the US dollar, you should probably shut down our foreign exchange market as well—so that nobody will be able to dump their dollars (even after it’s too late for them to save themselves):
Bloomberg’s Mike McKee: There is a theory out there, modern monetary theory, MMT, a lot of people are debating it. It suggests that a country that prints money in its own currency doesn’t have to worry about deficits as long as inflation isn’t breaking out, if it does, then the fiscal agent comes in and raises taxes [+/or cuts federal spending]. What do you think of that idea because it’s being rooted as a way to spend more money, on infrastructure, on the Green New Deal, things like that?
Former Federal Reserve Chairman Alan Greenspan: You’d have to shut down your foreign exchange markets. How do you exchange (laughs)? People will be trying to fly out of your currency and if there’s no vehicle in which they can do it, it doesn’t happen.