77 Deadly Innocent Misinterpretations (77 DIMs #64-71)

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. The only efficient option for government is the use of a Job Guarantee…There really is no alternative in this context.”—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]

Bloomberg: Ok

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.

What Mr. Mosler is saying—without using the word ‘prescription’ because ‘prescription MMT’ is now (thanks to pure ‘description’ MMTers) a phrase like ‘printing money’ or ‘federal taxpayer dollars’ that political ‘prescription’ MMTers hate to hear—is that YES, OF COURSE the job guarantee is a ‘prescription’. The JG 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 should become part of 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 symptom 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. MMT is indeed micro. 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. 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. The American economy is a ‘junk economy’? If MMT was macro, it would have predicting abilities (which it clearly doesn’t).”—Jim ‘MineThis1’ Boukis

“MMT is just about money, its nature, creation and implications for economic policy.”—Stanley Mulaik, 08/07/19

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)


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)


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 zero negative?’

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.


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