“The chartalists and MMTers are correct to say that the state can create money, but the state cannot guarantee that this money has any value. Without a productive economy behind it, money is meaningless. Money is only a representation of value and real value is created in production. And yet chartalism (and also MMT) offers no analysis of value, or of commodity production and exchange. As a result, it misses the essence of capitalism, and of money’s role within it.”—Adam Booth, Marxist, 06 September 2019
AGREED…Central bankers, who have a mandate ‘to achieve full employment’ and who all agree that a lack of fiscal policy restrains economic growth (same as fake MMTers) are criticizing fake MMTers…
The Greens, who want things like ‘social justice and environmentalism that will create a foundation for world peace’ (same as fake MMTers) are criticizing fake MMTers…
Above is a Marxist, that wants to ‘abolish capitalism and liberate humanity’ (same as fake MMTers) criticizing fake MMTers…
Once again, the same reason why they (the Democrats, the Green Party, left-leaning economists, worldwide central bankers and now even Marxists who are all politically-aligned to fake MMTers) are criticizing fake MMTers—is because academic MMT ‘scholars’ KEEP GETTING THE ECON WRONG.
Funny that while trying so desperately hard to masquerade their ‘prescriptions’ (fake MMT) as the ‘description’ (pure MMT), it WASN’T the politics of fake MMTers that hurt their cause in 2019. On 09/23/19 in Brussels (four days before the 09/27/19 Third International Conference of MMT in NY), during a meeting of the Committee on Economic and Monetary Affairs (ECON), ECB President Mario Draghi said that “some of the new ideas about monetary policy like the MMT, like a recent paper presented by various authors, amongst which professor Fischer and others, would suggest different ways of channelling money to the economy.” In that August 2019 paper titled ‘MACRO AND MARKET PERSPECTIVES’, professor Stanley Fischer wrote that “our proposal stands in sharp contrast to the prescription from MMT proponents [because] they advocate the use of monetary financing in most circumstances and downplay any impact on inflation.” In other words—and to be fair to the MMT community—it’s not MMT’s politics (it’s not their good intentions) that Fischer’s whitepaper dislikes about ‘prescription’ MMT proponents, it’s some of MMT’s economics (it’s their lack of fully grasping the unintended consequences of their good intentions).
77 Deadly Innocent Misinterpretations (77 DIMs #64-77):
Deadly Innocent Misinterpretation #64: “The Job Guarantee is a specific and intrinsic element of MMT rather than a policy choice that might reflect progressive Left values.”—Bill Mitchell, ‘Critics of the Job Guarantee miss the mark badly…again’, 04/26/18
Fact: Core MMT is the description (“MMT is descriptive and from there”) the Job Guarantee (“the Transition Job”) is a prescription (“is a base case for analysis”) which then you can change if you wish (“which you can do or not do”).
Don’t take my word for it. Here is the transcript (05/28/18 video @ 2:17) of Warren Mosler on Bloomberg TV with Bloomberg’s Joe Weisenthal and Romaine Bostick discussing the debate over MMT (over MMT academics that are ‘missing the mark badly…again’):
Bloomberg: Do you think that when people hear MMT, there is a ‘descriptive’ framework?
Warren Mosler: Yes.
Bloomberg: A ‘descriptive’ framework, like, ‘This is how monetary operations work in a country’….
Warren Mosler: Yeah.
Bloomberg:…that has its own currency…
Warren Mosler: Right.
Bloomberg:…and there’s the ‘prescription’ and often that includes a Job Guarantee (and these days a lot of the MMT advocates are pushing for a Green New Deal).
Warren Mosler: Yeah.
Bloomberg: Are they separable? Does MMT just refer to the ‘description’, or is it have to encompass all of that—including the ‘prescription’ as well?
Warren Molser: Core MMT is just a ‘prescription’ but it also shows you a base case for analysis…
[NOTE: That was a Freudian Slip. When later asked on Twitter if he misspoke there, Mr. Mosler confirmed that he meant to say core MMT is descriptive: “MMT is descriptive and from there I derive a ‘base case for analysis’ that includes a 0% policy rate and a JG.”—@wbmosler]
Warren Mosler: … and when you’re at that base case you can then make changes, but you have to have a base case. When it becomes obvious once you understand the monetary system, is that what’s called the Job Guarantee—I call it the Transition Job—is a base case for analysis which then you can change if you wish. You can do it or not do it.
[NOTE: What Mr. Mosler is saying (almost) without using the word ‘prescription’—because ‘prescription MMT’ is now a phrase (a trigger word) like ‘printing money’ or ‘federal taxpayer dollars’ that fake MMTers hate to hear—is that *duh* of course the job guarantee is a ‘prescription’. The JG (employer of last resort) is an MMT prescription that Mr. Mosler wrote about in the policy proposal section at the end of his book ‘7DIF’ that he believes is a good idea and just like those other variations of a ‘federal job guarantee’ (i.e. the Military, the Civil Service), could also become the ‘description’ reality.]
Deadly Innocent Misinterpretation #65: “MMT should not be seen as a regime that you ‘apply’ or ‘switch to’ or ‘introduce’. Rather, it is a lens which allows us to see the true (intrinsic) workings of the fiat monetary system.”—Bill Mitchell, ‘Seize the Means of Production of Currency Part I‘, 06/11/19
Fact: MMT is the analysis of a dynamic currency.
When conflating (read: confusing) ‘description’ MMT with ‘prescription’ MMT, political MMTers like to say that MMT ‘is like gravity’ or MMT ‘is intrinsic’; however, unlike any rule of law (like gravity) or any true workings (anything intrinsic), the ability of a monetary sovereign to keep creating and spending its own fiat currency is always in flux—IT IS NOT a given.
Similar to that DriversEd manual that you get in high school, the ability to deficit spend (like driving) is a privilege, not a right. Furthermore, to get a driver’s license, in addition to just reading the manual, you also have to take a road test and prove that you have the skills needed to get the privilege. In other words, you don’t just ‘learnMMT’, you earn MMT.
Just like everybody else (any ‘user’ of currency), a monetary sovereign (any ‘issuer’ of currency), needs to earn the privilege to be able to deficit spend and also needs to work at keeping that privilege. Just like any company with an ‘unlimited’ amount of ‘fiat’ stock that it could ‘keystroke’ into existence to pay expenditures (that dilutes the outstanding float of shares), they can only keep that privilege as long as responsible policymakers are making disciplined decisions that grows the company (which serves the long-term interests of both their employees as well as their shareholders).
It should NOT be taken for granted that a country with its own fiat can keep deficit spending ‘because MMT’ since that ability is NOT a certainty (is not ‘intrinsic’ like ‘gravity’). A federal gov’t, especially of a wealthy nation, with a strong economy (like #1 US, #2 China, #3 Japan), will be able to keep deficit spending on any ‘prescriptions’, as much as it wants, it’ll be fine—UNTIL IT ISN’T. Just like if you jump out of a plane without a PRODUCTIVE parachute, you’ll think for a while that you’re fine (until gravity proves you wrong).
The MMT insight is that unlike a ‘user’ that can literally run out of currency, an ‘issuer’ of currency has more fiscal space to deficit spend (and they have even more latitude if they have the resources, low inflation, low interest rates and no danger of ‘bond vigilantes’). However, don’t get confused: MMT, that currency analysis—and the state of that currency—is not constant, it is constantly changing.
The US Constitution spells out exactly who is legally authorized to approve spending, but just like attaining world-reserve currency status, the ability of the US to keep deficit spending is not bestowed (is not a right). America only gets to keep the issuance privilege that creates more net additions going into the US dollar dominion as long as the US federal gov’t keeps making responsible spending decisions that keeps their citizens productive, that keeps their economy growing and keeps that ‘full faith & credit’ backing their currency as good as gold.
Deadly Innocent Misinterpretation #66: MMT is macroeconomics.
Fact: MMT is not macroeconomics.
As per Deadly Innocent Misinterpretation #65, Modern MONETARY Theory is the analysis of a dynamic currency. In other words, MMT is a ‘description’ of the MONEY. More specifically, the MMT insight is that—because there is a paradigm difference between yesteryear’s gold-backed dollar and today’s fiat dollar—the mainstream, including orthodox economists, are routinely confused about how the modern monetary system really works.
After ‘description’ MMT got hijacked (and MMT became the ‘prescription’), not a day goes by when some political MMTer somewhere gets bothered by some verbiage by someone. As a result, there are many trigger words that should never be said because these political MMTers feel that it disparages their ‘prescriptions’. You can’t even say the word ‘prescription’ anymore! For example, instead of saying that the federal Job Guarantee proposal is a ‘prescription’, the MMT community prefers that you say it’s a ‘base case for analysis’. The reason being that apparently (as per political MMTer logic) saying that is ‘a racist trope’ (or something like that). Adding to that growing MMT no-no list (along with saying ‘free lunch’, ‘printing money’, ‘federal taxpayer’, ‘taxpayer funded’, ‘student loan forgiveness’ etc, etc) is this latest rule in the MMT kiddie pool: NO SAYING ‘MMT IS MICRO’!
Deadly Innocent Misinterpretation #66 intentionally follows DIF#65 because it has the same symptoms of many other MMT misinterpretations—which is that most in the MMT community keep jumping the gun.
It was pure ‘description’ MMTers that first warned political ‘prescription’ MMTers to stop saying ‘federal taxes don’t fund spending’ because we’re not there yet. Taxes are NOT NEEDED to fund spending (because the federal gov’t spends its own fiat dollars now); BUT the modern monetary formality is that federal tax dollars do fund surplus spending because those pesky accounting rules and appropriations laws (albeit unnecessary) STILL EXISTS.
The day that a ‘federal Job Guarantee program’ becomes law of the land, maybe you can start saying that ‘MMT is macroeconomics’; however, until then, the MMT community is once again getting ahead of itself. Sure, the JG is an ‘intrinsic’ part of a ‘theoretical framework’ proposed by ‘prescription’ MMT, but these political MMTers shouldn’t commingle that with reality (with actual macroeconomics already in existence).
“MMT markets itself as Macro through ‘prescriptive’ applications. They latched onto Keynes and the aggregate demand-side part, but left out his focus on the investment part [his focus on production in the functional ‘real’ economy]. MMT is the flip-side reactionary response—Supply-siders tend to do it on the other side and there the inflation shows up in financial assets which feds unhealthy inequality [capital just producing more capital in the nonproductive ‘financial’ economy]. After inflation sets in, taxing money back out to suppress demand gets into a whole set of other areas as it relates to production and unemployment. Constructing a complete model of inflation is next to impossible. We need better models that get closer to approximating it and here MMT seriously misses the mark by only focusing on currency analysis. In short, MMT is actually one giant microeconomics course on Money and Banking while leaving out the fact that you can’t eat paper.”—Charles Kondak
“MMT is not macro. That’s why MMT keeps getting so much wrong and nothing they say jives. Austrians did the same thing—they used micro to call it macro with their bullschitt. When pandering for votes, political ‘prescription’ MMT is no different. They say things like ‘unemployment is proof that deficits are too small’ so just PRINT PRINT PRINT and all your worries will go away. Those good intentions all sound logical—that it would bring economic ‘justice’—but guess what, we DID exactly that and the global economy is slowing (with inequality getting worse BECAUSE of deficits). Look at Japan, the political MMT ‘poster child’. They printed their ass off and lost 4 decades. All MMT has is a bunch of excuses, caveats, silly misrepresentations or outright lies for every single dopey little thing they say. ‘There’s no financial crisis so deep that a sufficiently large fiscal adjustment cannot deal with it?’ If so, Venezuela, Argentina, and Turkey would be economic power houses instead of collapsing into the dark ages. Running a federal surplus is bad? Thailand, Australia, and the Philippines all ran surpluses with no recession. ‘Taxes value a currency’? Well, the Middle East doesn’t have a federal income tax and their currency value is just fine. Saying in 2016 that ‘it looks like the Fed hiked [started liftoff] during a recession’ or saying in 2018 that the American economy is a ‘junk economy’— during The Longest Economic Expansion In United States History? If MMT was macro, it would have predicting abilities (which it clearly doesn’t). Even MMT ‘description’ fails at macroeconomics because it does not describe what values a currency. If ‘description’ MMT could describe what values—what drives—a currency, it would quickly reveal that deficits only serve the top 5% via asset price inflation in their savings while putting the liabilities of those assets on the shoulders of the 95%. MMT has become nothing more than being about political rhetoric along with policy ‘prescriptions’—under the guise of being about the macroeconomic ‘description’. MMT has nothing to do with macroeconomics and everything to do with false promises of free stuff for a vote—disguised as macroeconomics. It’s that oldest trick in the political playbook—under the pretense of being ‘modern’.”—Jim ‘MineThis1’ Boukis
“MMT is just about money, its nature, creation and implications for economic policy.”—Stanley Mulaik, 08/07/19
“This is why political economic theory and economics DO NOT MIX. Politics and economics are not friends, they are like that ‘War of the Roses’. Politics needs votes, so politicians need to speak to get votes; while economics doesn’t need anything, because econ is a set of numbers that speaks for itself.”— Logan Mohtashami, 09/18/19
AGREED…’Description’ MMT is understanding the paradigm difference that taxes in fiat dollars still fund spending—no longer as a financing function, but instead to maintain price stability and to maintain political constraint on spending—which is how the post-gold standard, modern monetary system works. ‘Prescription’ MMT is marketing; or more specifically, it’s political hype—under the guise of being ‘macroeconomics’. Even Bernie Sanders, the MMT-advised candidate, knows the difference. When asked How Will He Pay For It (proposals like ‘M4A’), he says he’ll raise taxes to pay for it—not to FINANCE his proposals (because there is no financial constraint) but to get the votes to APPROVE his proposals (because there is still a political constraint). House Speaker Nancy Pelosi is even more blunt, saying “All these people have their public whatever and their Twitter world, but…they’re four people…and what’s important is that we have large numbers of votes on the floor of the House.” In other words, ‘prescription’ MMT is not even in the macro ballpark until all those ‘likes’, ‘hearts’, and ‘shares’ on social media translate into votes in the ballot box. Only AFTER the mainstream starts calling deficit spending something like ‘Net Spending Achievement’; AFTER everyone thinks of deficit spending as simply being how many dollars are ‘supplied’ to the banking system; AFTER we start calling the national debt something like ‘The National Savings’ or ‘The National Debit’; AFTER the ‘buffer stock of the unemployed’ is replaced by a ‘buffer stock of the employed’ in a federal Job Guarantee program, AFTER the non-accelerating inflation rate of unemployment (NIARU) is instead called the Non-Accelerating Inflation Buffer Employment Ratio (NAIBER), and AFTER political MMT ‘scholars’ stop saying dopey things like the American economy is a ‘junk economy’ (during the Longest Expansion In United States History), etc, etc—THAT’S when anyone can (accurately) say ‘MMT is macroeconomics’ (and be taken seriously). Until then, don’t confuse political economics with actual economics.
Deadly Innocent Misinterpretation #67: If you are a monetary sovereign, MMT is going to work.
Fact: Modern Monetary Theory is easier said than done for countries other than the US because the modern monetary reality is that the US has a much more complex and integrated banking system than the one that existed in the 20th century.
Nothing irks a fake ‘prescription’ MMTer more than when someone on ‘the left’ criticizes MMT; but these healthy doses of tough love make superb sources of insights for the pure ‘description’ MMTer.
In that 3rd June 2019 Tribune article titled ‘Against MMT’ written by James Meadway (former Economics Adviser to The Labour Party), he points out that in the UK ‘our huge, internationalised financial system is dependent, ultimately, on political support from elsewhere precisely because it is huge and internationalised.’
As per James Meadway, ‘If you can’t issue the dollar, MMT isn’t going to work’ (or as pure MMTer MineThis1 correctly warns, ‘It’s fine—until it isn’t’). MMT is ‘simplistic monetary solutions to complex problems of political power’ for any other nation because no other nation can issue US dollars (because all other nations are ‘users of dollars’).
For example, as Meadway explains, in the depths of the 2008 global financial crisis, British banks faced huge demand for dollars — the result of their massive dollar liabilities — that not only could they not meet, the Bank of England itself could not meet. Instead, central bank Swap Lines were opened from the Federal Reserve in the US to supply dollars at rock-bottom rates to financial systems in countries like the UK that were suddenly grossly overstretched. ‘This is a critical moment in the economic history of the previous ten years, since it reveals in dramatic fashion the real lines of power and command in the world economy today—the decision to provide that support was political and taken at the highest possible level in the US,’ he adds.
The point he’s making here is that while everybody understood what those Fed ‘bailouts’ did during the credit crisis; not too many were aware that the largest program of them all, BY FAR (which peaked in mid-December 2008 at $600 billion outstanding), was the Fed establishing these currency swap lines with 14 other central banks (with the BOE, the Swiss National Bank, the ECB, the Bank of Canada, BOJ and others worldwide) to support dollar-denominated funding markets in Europe, Asia, and Latin America (to prevent them from seizing up which could have resulted in a devastating collapse of the global financial system).
So not only was the Fed —the folks with ‘the pedals backwards’ as per the political MMT yarn—providing support to US Banks ($251B), to American International Group ($67B), to the US Automotive Industry ($148B), to US Housing ($45B) and US Credit markets($20B); the Fed was also reducing the scramble by foreign banks for dollar funding, as well as keeping credit flowing to foreign banks in the US by enabling them to borrow dollars directly from the Fed because even THEY couldn’t borrow from THEIR OWN home-country central banks (who didn’t want to be on the hook for any losses).
Modern Monetary Theory is easier said than done for countries other than the US because the modern monetary reality is that ‘the US has a much more complex and integrated banking system than the one that existed in the 20th century.’
In a deeper dive of the currency analysis, we can see a post-gold standard, post-globalization, modern monetary system ‘where in responding to a crisis, the Fed actions and the Fed backstop needed, go way beyond the borders of its own country.’
Deadly Innocent Misinterpretation #68: ‘The private sector will never provide jobs for everyone that wants them. With a Federal Job Guarantee program we can instead directly provide jobs for anyone the private sector does not want to employ so that those people can participate in our economy too.’
Fact: A federal Job Guarantee would lead to less productivity and a lower GDP because there will be less economic incentive to work.
H/T Terry Flemming
“There are 7.5 million open jobs and 6 million unemployed. There are plenty of jobs to be had. Who is the magical ‘we’ that will provide the jobs to those that don’t want to work in the private sector? What will these people do? How will they be paid? Is this more magical MMT? As for your jobs guarantee, if a job is guaranteed, what do you feel is the quality of work you will receive from that employee? Where is the incentive? As for capitalism killing the environment, have you looked at what non-capitalist countries are doing to the environment? Do you think the environment in Russia is great? A federal Job Guarantee program will lead to less productivity and a lower GDP because there will be less economic incentive to work.”—Terry Fleming
AGREED…and everyone (even including magical ‘prescription’ MMTers) knows what happens to a monetary sovereign’s fiat currency when there is a collapse in production—or at least they do a good impersonation of someone who knows whenever ‘Zimbabwe’ is brought up.
Deadly Innocent Misinterpretation #69: (I – S) + (G – T) + (X – M) = 0
Fact: (I – S) + (G – T) + (X – M) – (Qm – Yd) = 0
Of all the silly catchphrases, perhaps nothing sent the MMT kiddie pool over the cliff quicker (as quickly as saying ‘Taxes Don’t Fund Spending’ because ‘Taxes Are a Destruction’) was when they all started regurgitating that dopey ‘FEDERAL DEFICITS (their red ink) = OUR SAVINGS (your black ink)’ meme.
That Sectoral Balances equation (Investment minus Savings) plus (Gov’t spending minus Taxation) plus (Exports – Imports) equals zero is ‘true’—just like it’s an ‘accounting identity’ that in The Monopoly Game, the only source of Monopoly Money that the Monopoly Players can get their hands on is from The Bank (‘exogenously’ from the federal gov’t). The reason being is that one of the Monopoly rules is that no Player may borrow money from another Player (no ‘endogenous’ private sector creation). In other words, unlike reality, in The Monopoly Game, THEIR DEFICITS (Monopoly dollars spent into existence from the Monopoly Bank) is OUR SAVINGS (is the Player’s black ink).
The implications of anyone accepting a simple three-sector model like (I – S) + (G – T) + (X – M) = 0 as gospel is that you will have a slight, but unsophisticated, grasp of economics at best; or that you will continue to be easily fooled by political MMTers pushing ‘prescriptions’, at worst.
Beyond the memes (beyond the board games), deficit spending by the federal gov’t initially goes to the 95% (the borrower) and eventually winds up with the 5% (the saver) AND THAT IS ONLY IF ANY OF THOSE DOLLARS EVEN REACHES the private-sector (the nonfederal gov’t / domestic) in the first place! If US trade deficits are bigger than US budget deficits, that means that federal gov’t deficits for that year equals the foreign sector’s (the nonfederal gov’t / international) savings. For example, for thirteen straight years prior to the financial crisis in 2008—The Worst Recession Since The Great Depression—federal gov’t deficits WERE NOT your savings. When looking at these sustained US private sector deficit figures below, keep in mind that all six depressions in US history were preceded by sustained federal gov’t surpluses (which is the same as saying that all six depressions in US history were preceded by sustained US private sector deficits):
(G – T) + (X – M) + (I – S) = 0
(G – T) = $107B ‘dollar add’ from the federal gov’t in 1996:
(X – M) = $170B surplus to the non federal gov’t / International
(I – S) = (-$63B) deficit from the non federal gov’t / Domestic
$22B ‘dollar add’ from the federal gov’t in 1997:
$181B surplus to the non federal gov’t / International
(-$159B) deficit from the non federal gov’t / Domestic
(-$70B) ‘dollar drain’ to the federal gov’t in 1998:
$230B surplus to the non federal gov’t / International
(-$300B) deficit from the non federal gov’t / Domestic
(-$126B) ‘dollar drain’ to the federal gov’t in 1999:
$329B surplus to the non federal gov’t / International
(-$455B) deficit from the non federal gov’t / Domestic
(-$235B) ‘dollar drain’ to the federal gov’t in 2000:
$439B surplus to the non federal gov’t / International
(-$674B) deficit from the non federal gov’t / Domestic
(-$128B) ‘dollar drain’ to the federal gov’t in 2001:
$539B surplus to the non federal gov’t / International
(-$411B) deficit from the non federal gov’t / Domestic
$157B ‘dollar add’ from the federal gov’t in 2002:
$532B surplus to non federal gov’t / International
(-$375B) deficit from the non federal gov’t / Domestic
$378B ‘dollar add’ from the federal gov’t in 2003:
$532B surplus to non federal gov’t / International
(-$154B) deficit from the non federal gov’t / Domestic
$412B ‘dollar add’ from the federal gov’t in 2004:
+$655B surplus to non federal gov’t / International
(-$243B) deficit from the non federal gov’t / Domestic
$318B ‘dollar add’ from the federal gov’t in 2005:
$772B surplus to non federal gov’t / International
(-$454B) deficit from the non federal gov’t / Domestic
$248B ‘dollar add’ from the federal gov’t in 2006:
$647B surplus to non federal gov’t / International
(-$399B) deficit from the non federal gov’t / Domestic
$161B ‘dollar add’ from the federal gov’t in 2007:
+$931B surplus to the non federal gov’t / International
(-$770B) deficit from the non federal gov’t / Domestic
$458B ‘dollar add’ from the federal gov’t in 2008:
+$817B surplus to the non federal gov’t / International
(-$359B) deficit from the non federal gov’t / Domestic
That is why the question that pure MMTers are (correctly) wondering every fiscal year is Their Deficits = WHOSE Savings?
“The axiomatically correct relationships are:
Qm = —Sm in the case of the pure production-consumption economy;
Qm = I — Sm in the case of the investment economy;
Qm = (I — Sm) + Yd + (G —T) + (X — M) in the general case.
Savings is NEVER equal to investment. Therefore, all I=S and IS-LM models are provable false. This includes Post Keynesianism and MMT. Warren Mosler, with MMT policy, has found a way to endorse full employment, healthcare and other social agendas, to increase at the same time the business sector’s profit with the help of the sovereign money-issuing state.”—Egmont Kakarot-Handtke
(Legend: Qm monetary profit, Sm monetary savings, I investment expenditures, Yd distributed profit, G government expenditures, T taxes, X export, M import)
“Some people use this chart [the sectoral balances chart] in a misleading manner. The worst abusers of this chart are the MMT people and they constantly use it to misrepresent how the monetary system works. The government’s spending is someone else’s income (‘this is accounting identity’). You could recreate a chart of this using any sectoral relationship. For instance, when I take out debt and spend the money, that becomes someone else’s income. The Cullen Roche deficit is the non Cullen Roche surplus. It’s not helpful or insightful to run around saying that my deficit is everyone else’s surplus without a lot more context. After all, if we did this then we could run around posting silly charts showing corporate debt [a chart showing non-corporate assets rising as corporate liabilities rise] and trying to imply that corporate debt is always good or always needs to be expanding. Sure, this might be partly true, but it’s not something we should lazily throw around. The worst part about this chart’s depiction in MMT circles (‘Their deficit is our financial surplus’) is the implication that the government is somehow an external entity. Who is ‘our’? We all save, borrow and grow our wealth against other sectors. There are literally millions of individual sectors in the economy. All of these sectoral assets and liabilities net to zero so it’s misleading to strip out one sector and imply that this is the sector supplying all the savings. That’s simply not how it works at an aggregate level.”—Cullen Roche, ‘Let’s Talk About Sectoral Balances’, 11/09/19
“To truly understand the ‘sectoral balances’ equation, the crucial point for people to understand is that instead of only three ‘balances’, in reality there are four ( household, business, federal government and the rest of the world); with Saving as the balance of the household sector and Profit as the balance of the business sector. By merging the household and the business balances—by reducing the four sectors to three—the macroeconomic aspect of profit (of capitalism) magically vanishes. This fraud is intentional (to fool unsuspecting people to gain political power/push radical policy ‘prescriptions’) and each time it is invoked, it invalidates MMT.”—Jim ‘MINETHIS1” Boukis
“Great points! Put another way in Econ-geek speak: Very simply, household Consumption (C) + business (I) + government (G) + the rest of the world (eXports – iMports) = Domestic Output [C + I + G + (X-M)= GDP]. To get their equation, MMT starts with factoring out consumption from that GDP equation to get the accounting identity of 0, which makes Government spending look like the sole driver of the economy. If we leave Consumption in and then factor out Government spending that sectoral balance approach also produces the accounting identity of 0, which makes it appear the private sector is the sole driver of the economy. Neither is in fact true. We’ve seen examples—of each approach—in history and both are unappealing.”—Charles ‘Kondy’ Kondak
Deadly Innocent Misinterpretation #70: “Right now, we got that tariff man, you know, ‘agent orange’ I call him. Look, we all know that when we go shopping, you win when you get a better price. If you can get the lowest possible price, you’re the best shopper. Meanwhile, he’s complaining to China because they’re not charging us enough for the stuff they’re selling to us. He is saying that China is taking advantage of us by not charging us enough!”—Warren Mosler, The MMT Podcast With Patricia Pino & Christian Reilly, 07/10/2019
Fact: “You can move your car factory south of the border, pay a dollar an hour for labor, don’t have health care—that’s the single most expensive element in making a car—have no environmental controls, no retirement plans, and you don’t care about anything except making money, there will be a giant sucking sound going south.”—Ross Perot, The Second Presidential Debate, 10/15/1992
In the 1992 US presidential election, Ross Perot of the Independent Party received 19% of the popular vote—making him the most successful third-party candidate since Progressive Party nominee Teddy Roosevelt’s 27% of the popular vote received in the 1912 election.
Ross Perot (and incumbent Republican President George H. W. Bush) lost that election to Democrat Arkansas Governor Bill Clinton. As it turned out, the North American Free Trade Agreement, that US pivot towards globalization, then—echoing Mr. Mosler’s words today—was a successful move and the results prove it. President Clinton’s two terms in office included a great period of economic growth (the second-longest US expansion in history from the trough in March 1991 to a peak in March 2001).
In addition, by letting a large percentage of US manufacturing relocate to Mexico and overseas in the 1990s, the American economy not only became more of a ‘service’ economy—it also became more resistant to global downturns. For example, because US policy encouraged that development of ‘organic’ domestic-led growth, America recovered from the last financial crisis faster than the rest of the world (who depend mostly on export-led growth and who now still need more central bank accommodation).
So to be fair to Mr. Mosler, it’s partially true that “Imports are a benefit, because if you’re importing, and you have people that are unemployed, that’s a good thing, that’s an opportunity; since now you can use your fiscal policy by lowering taxes or increasing public services to redeploy them into higher value activity.”
HOWEVER, to be fair to Mr. Perot, in that second presidential debate, he (correctly) warned the country that NAFTA would hurt American workers if it wasn’t a ‘two-way street’. In other words, Imports Are a Benefit…UNTIL THEY’RE NOT. Imagine telling a US worker who just found out that their factory is closing—after China intentionally ‘dumped’ so much product that it forced them out of business—to stop complaining about ‘China not charging us enough.’
As it is now turning out, tweaking trade agreements (some simple ‘pen strokes’ AND NOT just more ‘keystrokes’) to change Free UNFAIR Trade back towards Free FAIR Trade has also been a successful move and the results are proving it. The longest US economic expansion (from the trough in June 2009 to today, July 2019, 121 months and counting), continues into its 11th year. Today we are at a 50-year-low unemployment rate (3.7%). As per Fed Chair Powell in his testimony to both chambers of Congress this week, “The labor market remains healthy. Job openings remain plentiful. Employers are increasingly willing to hire workers with fewer skills and train them. As a result, the benefits of a strong job market have been more widely shared in recent years. Indeed, wage gains have been greater for lower-skilled workers.”
We’re talking about Jobs, Jobs, Jobs; and REAL ONES that provide economic opportunity for unemployed workers, wealth-quintile mobility for employed workers, PLUS the fulfillment of getting an honest day’s pay for an honest day’s work—rather than pretending to in a FJG (Fake Job Guarantee).
RIP Ross Perot (June 27, 1930 – July 9, 2019)
“The pro-globalization consensus of the 1990s, which concluded that trade contributed little to rising inequality, relied on models that asked how the growth of trade had affected the incomes of broad classes of workers, such as those who didn’t go to college. This was, I now believe, a major mistake — one in which I shared a hand.” Economist Paul Krugman, longtime defender of global free trade, ‘What Economists (Including Me) Got Wrong About Globalization’, 10/10/19
Deadly Innocent Misinterpretation #71: “Under a state currency system with floating exchange rates, the natural, nominal, risk free rate of interest is zero.”
Fact: Under a state capitalist system with floating exchange rates, the natural, nominal, risk-free rate of interest (the prevailing ‘price’), is determined by supply & demand—just like any other price.
On February 17, 2005 during the Semiannual Monetary Policy Report to Congress, Fed Chair Alan Greenspan described the surprisingly low yields of US Treasury bonds as a “conundrum.”
Meaning that in 2005, the head of the Federal Reserve Board could not explain why, during the past year, long-term yields were dropping (why the 10yr yield went from 4.6% to 4%), while over that same past year the Fed was hiking (the Fed had raised the overnight Federal Funds Rate by 150 basis points). Furthermore, while Greenspan’s Fed was raising short-term rates, adding to that “broadly unanticipated behavior” of falling long-term rates (which threatened a yield-curve inversion), the US dollar was strengthening (which helped US trade deficits get larger). Sound familiar?
On March 10, 2005 in a lecture to the Virginia Association of Economists, then-Fed Governor Ben S. Bernanke argued that over the past decade a combination of diverse forces has created a “significant increase in the global supply of saving—a global saving glut—which helped to explain both the increase in the U.S. current account deficit and the relatively low level of long-term real interest rates in the world today.”
On April 14, 2005 Governor Bernanke presented similar remarks confirming his findings with updated data at the Homer Jones Lecture in St. Louis, Missouri. As per Bernanke, in the shift that transformed emerging-market East Asian countries from being net importers to net exporters (in some cases—notably China—to very large net exporters), their current account surpluses resulted in using their excess savings to acquire foreign assets. “An interesting aspect has been the remarkable reversal of international flows in the capital markets to these developing and emerging-market economies,” Bernanke added.
In other words, Bernanke was pointing out that countries running trade surpluses not only export the goods they make, but then they export the money they make—building up “war chests” of foreign reserves (foreign assets like US Treasury bonds).
In addition, in a process known as a ‘strategic devaluation’ done to keep their local currency weak (to maintain a trade advantage) countries also issue debt to their citizens, convert the proceeds into dollars and buy even more US Treasury bonds. Which effectively pushes down long-term interest rates even further by channeling domestic saving away from local uses (away from productive ‘real’ economies) and into international capital markets (into the global savings glut) where capital just creates more capital (in nonproductive ‘financial’ economies).
On June 2, 2005 ‘The Natural Rate of Interest Is Zero’ was published in the Journal of Economic Issues by Mathew Forstater (Associate Professor of Economics and Director, Center for Full Employment and Price Stability, Department of Economics, University of Missouri, Kansas City, USA) and Warren Mosler (Associate Fellow at the Cambridge Centre for Economic and Public Policy, Downing College, Cambridge, UK).
It concluded that “Under a state currency system with floating exchange rates, the natural, nominal, risk free rate of interest is zero…since…the conventional wisdom of a fixed exchange rate system does not apply to floating rates.” It suggests that we “allow the rate of interest to settle at its natural rate of zero to serve as a base rate in the economy…with markets determining the credit spreads through risk assessment.”
On December 15, 2005 the US yield curve inverted. “Look at what happened in the mid-2000s when Greenspan was trying to hike rates and the long rates wouldn’t budge. Part of the issue there was that, because the dollar and in particular, because our Treasury bond market is so deep and liquid, at a time when there was excess savings throughout the rest of the world, so much capital flowed to the US,” said Financial Times Alphaville’s Cardiff Garcia (@FTAlphaville). What also ended up happening, Garcia points out, was that capital was filtered into subprime mortgage-backed securities.
The financial crisis, of course, followed.
On August 5, 2019 the market value of the Bloomberg Barclays Global Negative Yielding Debt Index closed at a record $15 TRILLION! Why is that? It is ‘because MMT’ or ‘the natural rate of interest is
In a reply to a post by Bloomberg editor Joe Weisenthal (@TheStalwart) who posted “Imagine the level of privilege that is thinking you’re entitled to a positive real rate of return without taking any risk”, Mike Larson (@RealMikeLarson) Tweeted back “As an employee, your employer’s use of your labor entitles you to be compensated; so if you offer a bank your money, or lend it to a company that wants to use it to expand or whatever, how is it that you are not entitled to some form of compensation? It’s capitalism.”
Bingo…It’s not that (nowadays) ‘the natural rate is zero’—it’s simply because of supply and demand (as always). If there’s a low supply of savings dollars seeking yield, the ‘compensation’ rises; and if there’s a high supply, the ‘compensation’ heads down. Especially if individual buyers of bonds are now up against central banks that are also buyers of bonds.
To be fair to Mathew Forstater and Warren Mosler, since an issuer of currency is a different paradigm and no longer needs to ‘borrow’ its own fiat currency, it makes 100% sense (it’s a pure ‘description’ MMT insight) that the natural rate of interest for any federal gov’t bond, of any monetary sovereign, denominated in any free-floating currency, is naturally LOWER than the coupon of a bond issued by a ‘user’ of currency (because it is naturally less riskier than the coupon of a federal gov’t bond in a fixed-currency regime).
However, as Ben Bernanke (correctly) explained, the real reason for lower or zero or negative yields—of any bond—is that they are subject to those garden-variety economic forces which could be external to the currency, the central bank and even the country itself.
As far as “allowing the rate of interest to settle [to be anchored] at its natural rate of zero” goes, the federal gov’t already does that. Those dollar bills in your wallet are Federal Reserve Notes—risk-free ‘perpetual bonds’ with a ‘0% coupon’. The federal gov’t swaps an unlimited amount of their currency (with a ‘natural’ rate of zero) for a limited amount of your time on earth spent provisioning the federal gov’t, and they—any monetary sovereign—will do that trade All.Day.Long. Cash currency and actual bonds both have a ‘face value’. Cash doesn’t have a price (because it changes hands at its face value), while bonds do have a price (that fluctuates around its face value). The price of actual bonds are not ‘natural’, they are ‘prevailing’. The Federal Reserve Bank—the price stabilizer—sets an overnight Federal Funds Rate (“that serves as a base rate”) and then all bond prices move according to the prevailing winds of the economy (“with markets determining the credit spreads through risk assessment”). Just like any other price in the economy, in the post-Gold standard, post-NAFTA globalization, post-QE, modern monetary system, under capitalism, with floating-exchange rates, the natural, nominal, risk-free rate of interest (the prevailing ‘price’) is subject to the worldwide Law of Supply & Demand.
Convexity, Algos, QE—OH MY!
In order to understand this next quote completely, one would need to ask a seasoned trader—to translate it into ordinary layman terms—however, it’s surprisingly simple: Too many savings dollars chasing too few bonds (a.k.a. garden-variety Supply & Demand).
H/T Gregor Samsa
“Enter the bizarro world of negative-yielding debt we now find ourselves, driven by a QE induced structural shortage of long-dated risk-free fixed income instruments, trend following, negative convexity chasing algos with no context that negative rates are a no-no, and traders front running expectations of a new round of QE, wrapped in a narrative of a coming deflationary collapse. More market nonsense, in our opinion, but we have to trade the hand the market has dealt us.”—Gregor Samsa (@macromon), ‘Modern Monetary Theory (MMT) Has An Argentina Problem’
Deadly Innocent Misinterpretation #72: The Green Party Chose Mainstream Economics Over MMT.
Fact: The Green Party chose Pure MMT over Fake MMT.
Political ‘prescription’ MMTer (Hector Danson): “I will argue that a small group of economic advisers (including Jon Bongeovanni, Howard Switzer, Sue Peters, and Rita Jacobs) have fundamentally misled the Green Party.”
Pure ‘description’ MMTer (Pure MMT for the 100%): I will argue that a small group of economic advisers (including all MMT ‘scholars’) have fundamentally misled ‘description’ MMT into becoming ‘prescription’ MMT.
Hector Danson: “In this article, I will focus on Rita Jabobs’ written request to ‘look beyond MMT.'”
Pure MMTer: In this post, I will focus on Rita Jabobs’ written request to ‘look beyond MMT’ as well as our own written request to ‘look Beyond The Memes’.
Hector Danson: “It is clear that the Green Party is generally opposed to MMT (currently), which was seen last year when MMT supporters proposed to amend a small section of the platform about the national debt. The proposal was shot down 63 – 15, providing a quantitative measure of how much the Green Party opposes MMT.”
Pure MMTer: It is clear that the Green Party—as well as the Democrat Party and most central bankers around the world—are generally opposed to radical ‘prescription’ MMT (currently), which was seen last year when US House Speaker-elect Nancy Pelosi and her 116th Congress would be reinstating the ‘pay-as-you-go’ provision (requiring all new spending to be offset with either budget cuts or tax increases), providing a quantitative measure of how much the Democrat Party opposes fake MMT.
Hector Danson: “This conspiracy – that MMT supporters are coordinating with elites – is baseless and insulting.”
Pure MMTer: This ‘conspiracy’ that fake MMT supporters are coordinating with elites is blatantly obvious—that political ‘prescription’ MMT is a neoliberal agenda (to gain power), at best; or a neomarxist agenda (to dismantle capitalism), at worst. Don’t take my word for it: “MMT is a scientific failure and a political fraud. Stephanie Kelton is just another clown in the political Circus Maximus. MMT’s social policy proposals ― the Job Guarantee in particular ― are political door-openers and friend-of-the-people signaling. MMT policy guidance ultimately boils down to deficit-spending / money-creation. It is a macroeconomic fact that Public Deficit = Private Profit, so MMT is money-making for the one-percenters. MMT is stealth taxation for the ninety-nine percenters. MMT is ALWAYS a bad deal for the ninety-nine-percenters. The MMT policy of ever-increasing public debt amounts to the permanent self-financing of the oligarchy.”—Egmont Kakarot-Handtke, AXEC Project
Hector Danson: “Rita then voices her fundamental disagreement with MMT, saying ‘the U.S. government would not be able to spend at all without taxing or borrowing’—this is incorrect at the most basic level. If the US government can only get US dollars by taxing us, or borrowing from us, then where does she think we get our US dollars from?”
Pure MMTer: Rita is right. Since the dollars collected from federal taxes wash with the dollars spent in ‘surplus’ and the dollars collected from Treasury bond sales wash with the dollars spent in ‘deficit’, the federal gov’t only ‘net’ adds more US Treasury bonds that only the savers (the top 5%) ‘gets’ when the federal gov’t deficit spends.
Hector Danson: “Helpfully, the right of the government to produce the currency is written into the Constitution.”
Pure MMTer: When in the course of human events it becomes necessary for fake MMTers to say that the Constitution gives Congress the power to create money to provide for the general welfare to substantiate deficit spending on their political ‘prescriptions’; they are not only misinterpreting ‘description’ MMT, they are misinterpreting the US Constitution as well. From Article I, Section 8, there is “Congress shall have Power…to coin Money, regulate the Value thereof, and of foreign Coin.” And from Section 10, “no state…shall make any Thing but gold and silver Coin a Tender in Payment of Debts.” In other words, the newly-created United States—which won independence but fell short in trying in their recent (disastrous) attempt to become a monetarily-sovereign issuer of newly-created fiat—was to continue as a ‘user’ of gold / gold-backed dollars for the time being. Every time a fake MMTer says that the Constitution gives the federal gov’t the power to create fiat for the public purpose they are unwittingly backing the ’Austrian’ argument for the return to ‘sound’ money.
Hector Danson: “Next, Rita confuses this money creation process with bank loans. Banks create loans that expand the money supply, but these loans must ultimately be paid back. In other words, banks do not net produce money. Only Congress does that.”
Pure MMTer: She’s right. She says ‘the government does not directly create new money [dollars], but delegated that function to the commercial banks when it passed the Federal Reserve Act of 1913.’ To reiterate, Rita is (correctly) saying that the gov’t gave banks permission to create NEW money—she didn’t say ‘net’ money (she didn’t say that the gov’t gave banks permission to create Net Financial Assets like Congress does with little or no intention of ever ‘netting-out’ (like Congress does with attached quote unquote ‘debt’ in the form of Treasury bonds with little or no intention of ever being ‘paid-back’). In other words, WE THE PEOPLE ‘print’ the dollars going into money supply circulation—the banks and the federal gov’t are only facilitating OUR ‘printing’ of dollars that have actual debt attached (that do routinely ‘net-out’). Private sector leveraging (when we ‘print’ money) and deleveraging (when we ‘unprint’ money) is the heartbeat of the economy. Furthermore, Congress does NOT produce net money. Just like every dollar entered into existence by private-sector deficit spending that ‘nets-out’ with an IOU to the bank (our ‘bond’), all federal-gov’t deficit spending also ‘nets-out’ with a newly-created IOU (their ‘bond’). The only difference is that those Treasury bonds, those financial assets that are denominated in dollars, that are newly-created with the approval of Congress, that are net additions going into the banking system, are not expected to be paid back—they are not expected to ‘net-out’—NOT that they DON’T.
Hector Danson: “This is beyond Rita’s scope—banks do not net produce money.”
Pure MMTer: Banks CAN and DO net produce money (money that will NEVER ‘net-out’). Perhaps you haven’t read all the MMT literature. Warren Mosler has pointed out that banks, on many occasions, actually produce net money (unintentionally) when they have negative capital (when a bank loan defaults). A bank loan default acts as ‘synthetic’ federal-gov’t deficit spending adding Net Financial Assets into the banking system because monies were lent out endogenously and will NEVER be paid back. In other words, banks occasionally go out of their lane and bank money is created without *actual* debt attached, as if it was created like the federal gov’t, the sole monopoly issuer of money, creates money—with very little intention of ever being paid back.
Hector Danson: “MMT supporters know that the sale of government debt is unnecessary for a currency-issuing government and would stop the process immediately. So this is another example of Rita accepting an artificial economic constraint that just so happens to harm the people.”
Pure MMTer: Fake MMT supporters have yet to grasp that even though there is no longer an artificial ‘financial’ constraint to federal gov’t spending, there still remains a ‘political’ constraint to federal gov’t spending—to prevent a policy that (albeit made with good intentions) happens to harm the people (has unintended consequences).
Hector Danson: “This unprofessional, presumptuous, foolhardy, libertarian-biased, conspiracy-laden attitude to economics is exactly why I cannot take the GP seriously at this time.”
Pure MMTer: This unprofessional, presumptuous, foolhardy, radical-biased, conspiracy-laden attitude to economics is exactly why very few folks are taking political ‘prescription’ MMT seriously at this time.
NOTE: This is not the first time that prescription MMTers pushing politics (under the guise of promoting economics) have called the Green Party ‘neoliberals’: “Green parties have developed a tendency to be ‘neo-liberals on bikes’ as a means of gaining power,”—Bill Mitchell, 05/14/18. Unlike fake MMTers who usually say that they want YOU to ride bikes and for all the Other People to be ‘green’, financed by Other People’s Money (read: Other People’s Productivity), at least the Green Party rides bikes—at least the Greens seem more sincere.
H/T GPAX Co-chair Rita Jacobs for not wanting fake MMT to try to hijack the GP (along with hijacking ‘description’ MMT too) and trying to keep it real, to keep it pure (to keep it green).
After posting this on the Pure MMT for the 100% page on Facebook, Hector Danson (who was obviously not thrilled with this critique) admitted that he left out a ‘minor caveat’ (about banks occasionally creating NFAs). To be fair, I’ll give him the last word: “I ended the article by saying ‘I am not an economist, which is why I don’t presume to advise a political party’. Which makes it clear that I’m not going to know all the ins and outs of the banking industry. Meanwhile, Rita…is misleading a political party that many people with good intentions rely on or would want to rely on. Thanks for the discussion.”—Hector Danson, Progressive Independent
Deadly Innocent Misinterpretation #73: When the federal gov’t spends money, they are actually creating the money that they’re spending. The very act of spending by governments is the primary source of money in the economy.
Fact: The primary source of money in the economy is the very act of DEFICIT spending by the PRIVATE sector.
The very act of spending by federal governments is A source of money in the economy—not the primary source. That is, of course, if you, along with the MMT community, consider federal (Treasury) bonds as also being money—which is the correct way to think about all federal gov’t securities (Treasury bills, notes and bonds). Those Treasury bonds are simply dollars with a coupon and a maturity date; however, deficit spending by the gov’t—which creates Treasury bonds—is not the primary source of money creation. Those Treasury bonds SUPPORT the actual primary source of money creation, yes; but those Treasury bonds are the primary source of money creation in the economy, no.
Sure, ‘when the federal gov’t is spending money they are actually creating the money they are spending’; but, there’s a difference between newly-created money v. newly-created money that is a net addition to the economy. For example, gov’t surplus spending is a wash with federal taxation and gov’t deficit spending is a wash with bond sale collections—no net additions there.
The net addition (the money creation) of federal deficit spending is the attached liability, the newly-created federal (Treasury) bond. That newly-created bond is a net add into the banking system, it is added to The National ‘Debt’— but it does not enter money-supply circulation. That’s why the gov’t doesn’t consider Treasury bonds as ‘money’—because they aren’t in the money supply (they aren’t part of what the gov’t calls ‘M1’). Another example, to pay for all those Treasury (and mortgage-backed securities) bonds the Federal Reserve Bank bought during ‘Quantitative Easing’, Ben Bernanke keyboarded over FOUR TRILLION DOLLARS into existence—and not a penny of that was intended to enter money-supply circulation (M1). Meaning that 4.2 trillion newly-created dollars (reserves denominated in dollars) were added into the banking system, yes; but the money supply, no (because QE was only done to accommodate borrowers in the economy by lowering long-term rates and not by changing the money supply).
The primary source of money in money supply circulation (in ‘the economy’) is the very act of DEFICIT spending by the PRIVATE sector—by OUR newly-created IOUs, by OUR promises to pay back the money with interest (our ‘bonds’) that trigger newly-created dollars.
In other words, the primary source of money creation (and destruction) is when We The People ‘print’ money, when we conjure up newly-created ‘bonds’, aka ‘leverage’ (and when we ‘unprint’ money, when we pay off our ‘bonds’, aka ‘deleverage’).
Sure, one can say that the banks are all agents of the federal gov’t (thus all money creation is from the gov’t); but, never lose sight of the fact that it is We The People and our PRODUCTION that supports that money creation. No gov’t, no monetary sovereign, by itself, can print PRODUCTION into the economy, nor print VALUE into their currency. OUR private sector newly-created bonds (conjured up out of thin air) creates loans and OUR loans create deposits.
The federal gov’t—and by extension the Fed and all the financial INTERMEDIARIES, aka ‘middlemen’—only FACILITATES our creations of money.
Deadly Innocent Misinterpretation #74: When you have 7 million unemployed as reported by the BLS, that’s a reserve army of unemployed that lowers wages below $31k/year, so that’s why you need to spend $500 billion on a federal Job Guarantee program to anchor wages at $31k/year.
Fact: When you have 7 million job openings (7M JOLTS as reported by the BLS), you have 7 million ‘sellers’ of jobs & wages (looking for ‘buyers’ of jobs & wages) acting as a ‘reserve army’ of job openings (acting as a buoy growing jobs & wages).
“Advocates of the Job Guarantee maintained that a reserve army of the unemployed was the way inflation was controlled. The Job Guarantee is/was to be used to control inflation through Labor Markets by tempering wage demands and increases by creating a buffer stock of workers employed in it. The Achilles heel of the Job Guarantee always has been the suppression of wages the mechanism by which it prevents inflation by penalizing one group of workers (those that would be getting wage increases) for another as the cost of controlling inflation. The need for a reserve army of the unemployed to anchor inflation is now unnecessary and the theoretical reason of anchoring wages to a fixed wage Job Guarantee buffer stock of the employed has vaporized before their eyes. Of course, Job Guarantee advocates will come up with another reason for it. They are like gun nuts saying ‘you’ll have to pry it from my cold dead hands’. They’ll yammer on about the Job Guarantee being a wage floor not understanding the real purpose behind it. The minimum wage is a floor the JG anchors wages to prevent inflation the same as the now defunct Phillips Curve was supposedly doing.”—Charles Kondak
AGREED…Advocates of the Job Guarantee maintained that a ‘reserve army of the unemployed’ was ‘the way inflation was controlled’, yet the Fed just agreed with Rep. Alexandria Ocasio-Cortez that it’s just not so—not anymore. More specifically, Fed Chair Powell testified to Congress last week that “The connection between slack in the economy—the unemployment levels—and inflation was very strong if you go back 50 years, back to the 1960s when we had a very different economy.” Also agreed that their need to have a FJG ‘to anchor inflation’ is unnecessary—it has vaporized before their eyes with the rest of Powell’s answer to AOC:
“I think we learned that downward pressure on inflation around the globe and here is stronger than we thought. One reason why there has been this decoupling of the unemployment and inflation rates is that inflation expectations are so settled…so you don’t see inflation reacting to unemployment the way it has because inflation just seems to be very anchored.”—Chair Jerome H. Powell, Semiannual Monetary Policy Report to the Congress before the Committee on Financial Services, U.S. House of Representatives, Washington, D.C., July 10, 2019
When there’s no inflation and no jobs shortage and no importance whatsoever to NAIRU modeling, you don’t go around saying that right now we need the federal gov’t to spend $500B to anchor ‘inflation’ and create ‘jobs’ and replace NAIRU with ‘NAIBER’ (if you want to be taken seriously).
Deadly Innocent Misinterpretation #75: The ‘crowding-out effect’ does not exist. The money to finance federal deficits and private sector investment comes from two different places.
Fact: When the federal gov’t spends there is a crowding-out effect of private sector labor, resources and productivity—which may ultimately crowd the value right out of the currency.
State & Local gov’t: “Eventually you run out of other people’s money.”—Margaret Thatcher
Federal gov’t: “Eventually you run out of other people’s productivity.”—Pure MMT for the 100%
H/T Charles Kondak, Pure MMT for the 100%: Aside from the money that is newly-created (which does not cause any ‘crowding-out effect’), the insight that mainstream ‘chalkboard’ MMTers have yet to grasp—or fails to admit to their unsuspecting students because it doesn’t fit the ‘prescription’ MMT narrative—is the ‘crowding-out effect’ of labor, resources and productivity during all that federal government deficit spending in the private sector (which of course causes a ‘crowding-out effect’). In other words, what you and I are provisioning to the federal gov’t (including our blood, sweat & tears) ‘crowds-out’ what we could have provisioned to the private sector (including what we could have provisioned to ourselves).
As previously covered (SEE DIM#66), MMT claims to be a breakthrough in macroeconomics, but once one strips away the esoteric language and candy-coating, MMT is just a microeconomic description of money and banking—with a bit of a civics lesson on how federal government spending occurs thrown in. MMT’s political appeal becomes the ability to seemingly answer the question ‘How Do We Pay For It?’ By condemning the role of the Evil Private Sector and worshipping the Almighty State, ‘prescription’ MMTers (poorly) attempt to imply some divine ability of the federal government to solve everything that ails all mortals.
If you say that aloud, these MMTers will of course scold you that MMT says nothing of the sort and you will get a booming earful, their responsorial psalm, which is that the federal government should only spend until all resources and labor are fully employed. They’ll tell you (with a straight face) that it is only at that point that inflation sets in and fiscal policymakers—not monetary policymakers at the Fed (who they tied up and blindfolded)—would cut spending or increase taxes to manage inflation. You read that right—these MMTers are asking you to take seriously the notion that Congress would responsibly impose ‘austerity’ in the face of inflation by tamping down demand and slowing the economy through tax increases or spending cuts. As if some group of 535 ‘technocrats’ can determine when we are near or at full capacity, set aside political concerns and together act quickly to tame inflation.
Now pay attention and keep your eyes on the chalkboard because here comes the miraculous part. It is at this point when the austerity and spending cuts and tax increases to combat inflation that their pet prescriptive proposal, the ‘Federal Job Guarantee’ (where they had the federal gov’t deficit-spend $500B—DURING A LABOR SHORTAGE—to create make-work ‘jobs’) kicks-in. As per the chalkboard, the FJG acts as an ‘anchor’ that provides ‘price stability’ by absorbing laid-off workers as the economy slows—rather than using a ‘buffer stock of the unemployed’ like those childish monetary policymakers (with their toy steering wheel and their backwards pedals) did before we dragged them away kicking and screaming.
Remember, we were just talking about slowing the economy to combat inflation. However, these MMT Job Guarantee adherents simultaneously make the claim that the purpose of the Job Guarantee is to prop up demand when the economy slows. The Job Guarantee will prop up demand while at the same time you’re also trying to decrease demand to cool inflation!
You may conclude that ‘prescription’ MMT works in strange and mysterious ways, or that their theory of inflation is incomplete (that their politics are fine, but their economics are not). More to the point, their econ does not compute; but keep that to yourself, otherwise you will again be reprimanded for making a ‘straw man’ argument and ‘you haven’t read the literature’ (so repent and sin no more).
The temptation of chalkboard MMT is to use MMT politically—to be all things to all people. So the problem is that in the real world, MMT underestimates the political constraints of the implementation of chalkboard MMT. The ability of a monetary sovereign to issue its own currency and to keep spending on resources, labor and productivity in the private sector will almost certainly be abused.
Sooner or later, after these ‘prescription’ MMTers have soured you on those evil billionaires in the private sector (and you are instead fully-dependent on the kindness of strangers in Washington D.C.), the economy will snap like a twig.
Next goes the value of the currency—another snap.
To be fair, it is true enough that there is no ‘crowding out effect’ caused by federal government spending and money available for private sector investment; IF, one only focuses on their microeconomic analysis of money and banking, coupled with the modern federal-spending mechanism.
However, there is another type of crowding-out effect that occurs when the federal government provisions itself from the private sector; which is the crowding-out effect for resources, labor and productivity in the private economy caused by federal gov’t spending. You know, the real stuff. It will be fine…until it isn’t.
Sure a bowling alley can’t run out of points, but if there are no pins to knock down then the points on the scoreboard are meaningless.
Deadly Innocent Misinterpretation #76: The FJG is countercyclical. The UBI is not.
Fact: The FJG is a UBI with a make-work requirement and both move people to the same countercyclical degree.
“The FJG is countercyclical. The UBI is not. The Universal Basic Income (UBI) is a neoliberal scam. And too many self-identified progressives are falling for it, due to a lack of basic macroeconomic literacy. The Federal Job Guarantee (FJG) is far superior in every conceivable way.“
H/T Charles Kondak, Pure MMT for the 100%: This above quote was taken from a hardcore Federal Job Guarantee (FJG) adherent from their Facebook page. It was the first of eleven supposed advantages of a Federal Job Guarantee vs. a Universal Basic Income (UBI). However, since the differences between a FJG and a UBI are minimal, at best, FJG & UBI proponents are in fact arguing against themselves by opposing one policy over the other. At this point it is well to note it is not my purpose to advocate for one over the other, in fact I’m against both as a Public Policy prescription.
Using the assumption that the Federal Job Guarantee and Universal Basic Income remuneration is set at the same level of income to sustain the most basic living standards society deems appropriate, the countercyclical difference vanishes.
The reason being is that when the economy contracts, some people go out from private-sector employment and then fall into lower-paying FJG employment (they go out from private sector ‘buffer-stock unemployed’ into ‘buffer-stock employed’ in a FJG). Resembling that, under the Universal Basic Income, when the economy contracts, other people lose their private-sector employment income and fall back on the UBI—the same level of income one would get working in the FJG.
In other words, it’s quite obvious that when the economy slows, the FJG people and the UBI people are the same. They both will move back and forth, out from getting private sector income and into getting public sector income (out of private-sector independence and into public-sector dependence) to the same countercyclical degree. The FJG is a UBI with a make-work requirement. Don’t take my word for it:
“The Employer of Last Resort (ELR) alternative at one level resembles workfare…”—Mosler Economics, ‘The Center of the Universe / mandatory reading / Full-employment and price stability’.
Source (AND RECOMMENDED READING): ‘The Job Guarantee: A Series of Contradictions’ by Charles Kondak http://thenationaldebit.com/wordpress/2018/12/19/the-job-guarantee-a-series-of-contradictions/
Deadly Innocent Misinterpretation #77: There is ‘The Deficit Myth’.
Fact: There is the pure ‘description’ deficit myth and the political ‘prescription’ deficit myth.
H/T Jim ‘MineThis1’ Boukis, Pure MMT (and REAL MACRO) for the 100%: Dr. Stephanie Kelton’s ‘The Deficit Myth’ is a political ‘prescription’ MMT deficit myth. In the real world (outside classrooms), federal deficits are made possible by good-old fashioned hard work by the private sector. Federal deficits are predicated on the private sector to innovate and invest (using foreign or domestic savings—on existing wealth—that is assessed and collateralized into loans by bankers seeking to make a profit). That leads to the growing production of future wealth, which the federal gov’t can tax and ‘borrow’ from its citizen’s wealth (which enables every Uncle Sam to deficit spend).
This is how America—with only $23 trillion of all federal deficits combined a.k.a. the public ‘debt’—yet with only 5% of the total global population produces 25% of global GDP. Once you consider that US total national assets are about $150 trillion—almost a 6:1 ratio—it should become clear that federal deficits were not the driver of the creation of that wealth.
In fact, the complete opposite is true. It is private-sector PRODUCTIVITY that enables private-sector deficit spending (private-sector money creation) that enables those ‘almighty’ federal gov’t deficits and NOT the other way around—as political ‘prescription’ MMTers desperately try to get everyone to believe.
If you don’t have that private sector productivity, your economy is toast. For example, the cause of hyperinflation is always and everywhere a collapse in private sector productivity. Syria, Iran, Iraq, Turkey, Egypt, Cuba, Tunisia, the Soviet Union, Ukraine, Venezuela, Argentina, Zimbabwe are all fine examples. Whether it was war, civil war, gov’t corruption, or natural disaster, the cause of hyperinflation was a hindrance of the private sector to produce. NONE of these economies ended up hyperinflating because the federal gov’t wasn’t deficit spending enough on ‘prescriptions’ like gov’t subsidies or social programs and NONE couldn’t prevent hyperinflation with more federal taxation—both which are claims made by #FakeMMT that a US economy serving the ‘common good’ and ‘functionally financing’ the ‘public purpose’ would do. Lastly, what about those other deficits, the TRADE deficits? #FakeMMT tells you that ‘imports are a benefit’ and so it’s a ‘myth’ to worry about trade deficits too. Yet NONE of those economies ended up hyperinflating because they didn’t have enough imports. The problem was that their citizens didn’t have enough money to pay for them (because their local currency was becoming worthless).
Excessive federal-gov’t budget deficit growth (‘debt’) to production growth (to GDP) is what diminishes—is what devalues—the currency. It ‘crowds out’ the private sector’s appetite to invest and lend in that currency. If deficits are not excessive / if ‘Debt’ to GDP isn’t rising excessively / if production is keeping up with deficits, it’s fine…until it isn’t. Until you’ve reached a danger zone where inflation only reflects monetary growth (where capital just creates more capital which only coddles the 5%) rather than reflecting economic growth (where capital creates more production which benefits the 95%).
#FakeMMT skips the part where a nation first trashed the currency and points at private-sector borrowing as the root cause of all the economic problems—a huge mistake. In addition, another deadly innocent misinterpretation is that when the IMF steps in to implement changes (to discipline) a country’s excessive public-sector ‘printing’ and ‘borrowing’, it’s called ‘Neo-Liberal’ by #FakeMMT. But that is what got the country in trouble in the first place—so returning to sound economics is a must! There is no other way.
#FakeMMT puts the cart before their trojan horse (their Free Pony For All). They are cleverly (deceivingly) using marketing strategy (political economics) to push dogma (ideological narratives) to indoctrinate unsuspecting economically illiterate people (voters). If you disagree, then you don’t care about global warming, you are against humanity, you haven’t read the literature, you’re a racist—or some other circular logical fallacy. As my friend Edward Delzio rightly says, MMTer’s politics are just fine, it’s the economics behind it that sometimes makes little sense. I agree. In politics, lying, cheating, kicking and scratching is the norm. In actual economics, math, facts and data are cold, hard truths that most people do not like to hear, so most would rather listen to political economics (aka pandering) without realizing the dire implications.
The private sector drives the economy and the value of a currency—period. Free Stuff For All is always voodoo economics because all deficit spending initially goes to the borrowers (the 95%) in the productive ‘real’ economy, but eventually winds up with the savers (the 5%) in the non-functional ‘financial’ economy. Deficits don’t equal ‘our’ savings, their deficits = profit for the top 5%. No profit can ever exist without household dissavings, so it is crucial that funding of income for the 95% come via investment from that top 5%—NOT from federal gov’t deficits. If you want to maintain an ecosystem feedback loop ‘balance’ between the productive (95%) and non-functional (5%) sectoral balances within the private sector, what is needed in the US now (during an economic expansion) are federal policy proposals that maintains current economic growth without requiring deficits. Today, you need more pen strokes, not keystrokes.
The pure ‘description’ MMT ‘deficit myth’ is that federal ‘debt’—denominated in its own fiat currency—is not an actual debt like a household debt. However, that doesn’t mean the federal gov’t can spend willy nilly. Just because there are no ‘financial constraints’ for a monetary sovereign, you still have those ‘political constraints’ when it comes to spending—same as a household. Meaning that you need to take the hint when Congress with the Power of the Purse (or your household spouse) doesn’t approve of your ‘prescription’; not because of the ‘cost’, but because fiscal policymakers are also concerned about the unintended consequences of your good intentions—and don’t want to risk throwing that golden baby goose (that private sector productivity) out with the bathwater. So in order to get Congress to approve any proposals for federal gov’t spending that increases deficits, it’s important to make sure that there will also be corresponding productive growth. That’s why surplus spending doesn’t need approval—because that spending is offset (is approved) by some taxes (by some production). Those are the pesky accounting rules & appropriations laws (the ‘operational reality’) enshrined in the US Constitution. The pure ‘description’ MMT insight is that unlike any user of fiat currency, rather than worry if you can ‘pay for it’ (if you can keep your budget in balance); the concern for any issuer of fiat currency is if you can ‘deliver it’ (if you can keep your ‘debt’/GDP in balance).
All I’m saying (especially to the people having a romance with radicalism now ‘liking’ and ‘hearting’ #FakeMMT), is just be careful about the free candy that you wish for. When you have been led to believe by POLITICAL ‘prescription’ MMT that The State can pay for it—but we cannot produce it—that is a recipe for ‘too many dollars chasing too few goods’. Look at the Lebanese crisis now. Those poor people have no clue that it was years and years of print, borrow and import (and of course corruption) that got them to their economy’s ‘snap’ moment. They just think it’s ONLY corruption and not their lack of productivity relative to the free candy. So what you have now in Lebanon (same as Venezuela and all the other basket cases) is everybody blaming ‘the corrupt guy’ when it snaps, but it’s their fault too—they got what they asked for (for free).
Just because an economy starts using a free-floating non-convertible currency, that doesn’t mean tomorrow you can print, borrow and import as long as it isn’t causing headline inflation today—that’s THE DEFICIT MYTH of political ‘prescription’ MMT!— Jim ‘MineThis1’ Boukis, Pure MMT (and REAL MACRO) for the 100%
P.S. Agreed…To be fair, Dr. Stephanie Kelton gets a lot of credit for all the work she puts in promoting MMT over the airwaves, but there’s a difference between promoting the pure ‘description’ and pushing the political ‘prescriptions’. For example, policymakers on one side of the political aisle criticizing policymakers over on the other side by saying their policies would increase federal gov’t deficits/debts—and that’s ‘bad’—is a Deficit Myth. However, saying it’s not bad because ‘Their Deficits = ‘OUR Savings’ may help the political ‘prescription’ MMT cause but hurts the pure ‘description’ MMT cause. Perhaps calling ‘Their’ deficits (Their quote unquote ‘debt’) something like ‘bondholder’s equity’ which shouldn’t be considered ‘debt’ (shouldn’t be booked as debt on the balance sheet)—which is very similar to a company issuing and selling shares of stocks or perpetual bonds that are not intended to ever be ‘repaid’ (ever be ‘destroyed’). That’s a pure ‘description’ MMT way to put it, which kills two birds with one stone because it’s obvious that 1) you have to be a Treasury bondholder to see federal deficits/debt as ‘OUR Savings’; and 2) it dispels any fears about issuance by the ‘issuer of currency’ of Treasury bonds denominated in the exact same currency as being any kind of a financial constraint—unlike Our deficits (Our *actual* debt) like the plain-vanilla bonds issued by ‘users of currency’ like households and businesses when we deficit spend.
Eddie Delzio: Once upon a time, MMTers would (correctly) say that ‘MMT is the description not the prescription’ because they were (properly) warning everyone. They were (understandably) worried that the MMT community would get too political (that MMT would become less about education and more about indoctrination). Fast forward to today, you’ll never hear anyone say ‘MMT is not the prescription’, since there’s no need to say it (because it’s so blatantly obvious that—just like that gold standard—it’s a bygone era).
In September 2017, after several months of some vigorous debate among many MMTers over the contentious phrase and that deadly innocent MMT misinterpretation ‘Taxes Don’t Fund Spending’, we started the ‘Pure MMT for the 100%’ page on Facebook. What began on this new page as a thread of comments—as suggestions—for the MMT community to ‘go beyond the memes’ and improve on (read: correct) some of the facts/math/data MMTers were using, became a post called ‘Seven Deadly Innocent Misinterpretations.’ We assumed that MMTers would get the joke that the title was a tongue-in-cheek reference to Warren Mosler’s classic book 7DIF and that we were simply trying to help the MMT community from getting their ‘descriptions’ (read: their econ) wrong.
However, it was Pure MMT for the 100% that wasn’t getting the joke. More specifically, it was WE who were making a deadly innocent misinterpretation—that MMT was (still) the description and not the prescription. Unbeknownst to us, Mr. Mosler and his fellow academic MMT ‘scholars’—now also with political aspirations—were taking MMT out for an ideological spin and started throwing the ‘descriptions’ (the facts/math/data) out the window because ‘prescriptions’ (stories/feelings/narratives) get more votes. You could even pinpoint the exact moment when MMT was no longer ‘the description not the prescription.’ That would soon officially happen when Professor Bill Mitchell, in a post called ‘Critics of the Job Guarantee Miss The Mark Badly Again’ wrote that “I note that various social media discussions still don’t quite grasp the idea that the Job Guarantee is a specific and intrinsic element of Modern Monetary Theory rather than a policy choice that might reflect progressive Left values.”
On multiple occasions (including in his final speech at the September 2017 MMT Conference), Mr. Mosler tried to discourage the MMT community from regurgitating ‘taxes don’t fund spending’, but those efforts merely foreshadowed a losing cause. Just as he did then, Mr. Mosler would later (during a Bloomberg TV interview and follow-up Tweets) push back against the notion that the Job Guarantee—actually his very own policy proposal mentioned in the ‘prescription’ section of his book 7DIF—as being the ‘description’; however, just like those previous attempts to talk sense into MMTers, it wouldn’t matter. It was too late. Modern Monetary Theory used to be ‘the description not the prescription’, has since been reshuffled, and the new deal is a political ‘prescription’ MMT that pushes policy—under the guise of promoting pure ‘description’ MMT.
It’s ironic (it’s a tragic comedy) watching today’s political ‘prescription’ MMT community keep trying to disguise their politics with their economics—even though it’s their economics (even though it’s what they keep getting wrong/making up) that hurts their cause (that hurts the chances of ever seeing their ‘prescriptions’ become reality). Which is why our first rule at Pure MMT for the 100% is that folks should NEVER mix their politics with their economics (because when they do, they dilute their expertise in both at the same time).
Pure MMT for the 100% has no problem at all with anyone’s politics/proposals for federal policymakers. It’s your civic duty to speak up about whatever programs you feel that federal gov’t dollars should be spent on. The more ‘prescription’ ideas, the merrier; and the more debate over those proposals on that battlefield of ideals, the better. May the best proposals win (be approved by Congress).
In other words, MMTer’s politics are fine; it’s only MMTer’s economics that is their problem. Which is exactly why it was not a surprise to pure ‘description’ MMTers (while writing the Seventy Seven Deadly Innocent Misinterpretations) that things would soon start to go poorly for political ‘prescription’ MMTers. The only surprise was just how much, how much beyond expectations, that so many folks—from ALL political persuasions—would be critical of MMT.
As Pure MMT for the 100% has always suggested to today’s MMTers, if you want your ‘prescriptions’ to be taken seriously by experts in the field, you have to get the ‘description’ right. For example, if you’re in the MMT kiddie pool wearing ‘taxes don’t fund spending’ floaties, pontificating during a labor shortage about the benefits of having the federal gov’t deficit spend $500B for a Fake Job Guarantee, someone (who might have been a federal civil servant for 25+ years) may someday clue you in on labor unions, the Davis/Bacon Act and the unintended consequences of your good intentions. If you are pushing cute stories and dopey catchphrases about it looking like ‘the Fed started lift-off during a recession’ because ‘the Fed has the pedals backwards’ while America is in The Longest Economic Expansion in United States History, don’t be surprised if someone, someday (who might be an Airbus 321 Captain that also knows how money works because he knows how money trades) fills you in on how ridiculous you sound. If you’re an academic ‘scholar’ in front of your MMT chalkboard lecturing about how the post-gold standard, modern monetary system really works, someone (who is a former federal gov’t securities / Treasury bond broker that might have written a free book—not a ‘paper’ written by students or teachers in a school—about ‘how the post-gold standard, modern monetary system really works’) may someday let you know what you’re getting wrong.
We hope that these 77DIMs will help future generations of MMTers keep it pure.
Thanks for reading,
Pure MMT for the 100% https://www.facebook.com/PureMMT/
Real Macro for the 100% https://www.facebook.com/InvestingMMT