“While Non-banks grant credit, it would be misleading to speak of ‘credit creation’ by Non-banks.”—Richard Werner
He wrote that because when the Non-Bank (short for ‘non-formal bank’ like a shadow bank) is lending (which by UK law must always—only—lend with existing money), the Non-Bank gives up the same amount of their cash (-$100) in exchange for the same amount of the borrower’s IOU (+$100).
Thus, as this logic goes, since there is no change in the Non-Bank lender’s balance-sheet totals at the end of the day then that means there’s no credit creation.
(Speaking of being ‘misleading’, what about the borrower’s balance sheet that expanded—that went up from $0 to +$100)?
Perhaps, in Mr. Werner’s view, when the opposite happens, when formal banks that are lending with newly-created money, that is a different (read: lower) ‘hierarchy’ of borrowing. He calls newly-created bank deposits ‘fictitious’ and ‘imaginary’. That implies that he thinks only a loan using already-existing money is ‘sound’.
Which is an ‘unsound’ argument because it makes no difference whether any money that was lent out was newly-created or already-existing—because it mostly has to do with the ‘soundness’ of the person the money was lent to.
As per Mr. Werner, it is only when lending is done using newly-created money is it a ‘credit creation’. Apparently, if just lending with already-existing money, that’s totally different, that’s not extending credit, that’s not credit-creation, that’s ‘fronting’ someone money (or something like that).
Which completely ignores the fact that when someone gives you cash out of their pocket for you to borrow, not only do you the borrower receive an asset, so does the lender—and THAT’S the expansion, that’s the creation (of credit). The lender receives a NEWLY-CREATED IOU that goes in the lender’s pocket. Even if there is no actual IOU written out and handed over—if it is just ‘fictitious’ and ‘imaginary’—rest assured, that IOU is a real and potent thing because it’s a damsel named Faith (hooking up with a stud called Creditworthiness).
The only difference is that, unlike a credit creation using already-existing money, a credit creation using newly-created dollars involves a middleman (an underwriter). Whether funded by newly-created money or not, it is that promise to pay back the money with interest, it’s that newly-created IOU, that ‘bond’—that you conjured up out of thin air—that makes ALL borrowing a credit creation. The added account receivable, that asset, that credit creation, is always happening with any bond issuance, with any borrowing—with any extension of credit. When you pay the money back (when you put the bond in the ‘shredder’), that is the destruction. Those bonds being newly-created and newly-destroyed expand and contract the balance sheets. This leveraging v. deleveraging is the ‘beating heart’ and understanding that allows you to feel the ‘pulse’ of the economy.
Since the days of credit creation using tally sticks in medieval England, the lender’s faith in the borrower’s ability to pay back the money is a pillar of the economy. That’s why even to this day, a fiat dollar bill which is not backed by gold is still very valuable and why we say it’s backed by the full faith and credit—because it’s backed by the full faith and credit of the person who printed that piece of paper.
When it comes to borrowing in the private sector, it is WE who ‘print’ that bond, not the Bank and not the Non-Bank—they are only facilitating YOUR ‘printing’ of credit. For example, VISA doesn’t contact you to let you know when they’re ready for you to go out to eat and pay on credit; and VISA doesn’t tell you whether to make the minimum monthly-balance payment, or tell you to pay the balance in full and destroy the credit creation—it’s the other way around.
“Is Minsky (1986) right and ‘everyone can issue money'”?—Richard Werner
That’s close. Everyone can extend (issue) credit and all borrowing is a credit creation (an expansion denominated in dollars). To believe otherwise is fictitious and imaginary.
No, I do not agree with anyone that says that the Fed (or any other central bank) is a private cartel. The Fed is part of the federal gov’t. As the Fed puts it on their website, the Fed is “independent within the federal gov’t”.
It was not a good February 2019 for political ‘prescription’ MMT (nor for their anti-central bank, anti-capitalist, gloom-and-doom choir).
On February 1st, Keith Weiner wrote a piece titled ‘Modern Monetary Theory Is A Cult’, referencing the real-life islander tribe known as the ‘cargo cult’. Just like a fake MMTer who doesn’t fully-understand concepts like ‘value’ or ‘productivity’, the cargo cult assumed that all they had to do was to build a runway (just ‘keyboard’ it in) and then airplanes full of cargo would come.
Nonfarm Payrolls (monthly unemployment figures) blew away expectations, meaning that the Longest Job Expansion In United States History—now 100 straight months strong—continued. Which (yet once again) kicked the ass of anyone still left that actually thinks a $500B federal ‘job’ guarantee program DURING A LABOR SHORTAGE is a good idea.
‘The Intercept’ dropped this on the gullible MMT community (who still didn’t get the hint after Democrats re-instituted PayGo and Speaker Nancy Pelosi frustrated Green New Deal proponents by not giving them the kind of committee they wanted): “Pelosi Aide Privately Tells Insurance Executives Not To Worry About Democrats Pushing Medicare For All”—Ryan Grim
Which didn’t go over too well with MMT academics: “Democrats, Do you deny that you are the PARTY OF SATAN?”—Bill Mitchell
If Professor Mitchell had fully-understood the article, he would have realized there were more reasons than just that gold-standard era “Monies are needed for other priorities” excuse. The Democrats had simply made the decision that M4A was a political loser and that for now policymakers should focus their messaging on lowering drug prices. “The comfort level with a broader base of the American people (for single payer) is not there yet,” as per Speaker Pelosi (read: She will be aligned with private insurers and will oppose Big Pharma).
When asked if the deficit will be mentioned in the SOTU Address, White House chief of staff Mulvaney said ‘no’ because ‘nobody cares’.
Is it because of that Progressive ‘revolution’ that nobody cares about deficits?
“Republicans…are the biggest MMT people we’ve seen in our lifetime.”—Logan Mohtashami
“One of the funny things that happened is that in a way, the Republicans…kind of advanced the MMT agenda.”—Stephanie Kelton
Then during the SOTU speech, after the president said “We were born free and we will stay free…The United States will never be a socialist nation,” even some over on the Democrat side of the aisle cheered (while Sen. Sanders fumed).
Meanwhile, another bullet hole (in ‘bulletproof’) #fakeMMT is that, just like the cargo cult, the MMT community has the blinders on when it comes to inflation. They think that consumer prices are the only thing to measure (that consumer price inflation is the risk) and refuse to see anything else (like asset price inflation being fed by deficits that is worsening wealth inequality). Fake MMTers just look at consumer price inflation and not at the asset price inflation (stocks, bonds, real estate, aka the ‘savings bubble’).
“They are fond of saying ‘deficit spending should be large enough to satisfy the desire of the private sector to save’ as if there is a limit on the price of financial assets.”—Charles Kondak
Bingo…Either the MMT community is not fully grasping how incomplete it is to say that it’s fine to deficit spend ‘as long as there is no (consumer) price inflation’, or they are just bullshitting everyone—again. H/T to Jim ‘MineThis1’ Boukis for being the first one to sound the alarm on the savings bubble imbalance and those deficits that feed it (those Gov’t Deficits that = THEIR Savings). To just say it’s fine to deficit spend ‘as long as (consumer price) inflation is low’ is not only fake mmt, it’s borderline dangerous for the stability of the nation to not include asset price inflation in that federal spending calculus (to not consider creative pen strokes instead of keystrokes). Instead of calling it wealth inequality, perhaps we should call it ‘wealth inflation’ and then maybe the MMT community would get it.
Which is unlikely because MMT was carjacked and the first thing the carjackers did was to throw that pure ‘description’ baby out the window. What the #fakemmt kiddie pool doesn’t like is that pesky political constraint to federal spending—they can’t stand knowing that we can afford any policy proposal, BUT it still has to be approved. To a fakeMMTer, it doesn’t matter if their ‘description’ is wrong, as long as all ‘prescription’ roads lead to the same place: More free ‘this’ and more free ‘that’ (without considering the unintended consequences of their supposedly good intentions). When saying that we should spend on whatever THEY want—and don’t worry about it—’because MMT’, fake MMTers keep showing their true ideals. Which is to usurp the Power of the Purse of Congress, take away the Fed’s ability to change interest rates as they see fit and dismantle capitalism (to replace it with a cradle-to-grave welfare state).
Finally, and perhaps one of the biggest whoppers overheard during February was that oft-repeated, wishful-thinking that ‘MMT is getting more mainstream’. In other words, while peddling their political ‘prescription’ (that has little chance of seeing the light of day) under the guise of promoting pure ‘description’ (that has a big chance of seeing the light of day), they keep pissing down people’s legs and telling them that it’s raining.
Here’s some more examples of the downpour:
FEB 07: Noah Smith (Bloomberg Opinion and former assistant professor of finance at Stony Brook University): “So until the Green New Deal proposal is substantially revamped, every Democrat’s answer to the question ‘Do you support the GND?’ should be NO.”
FEB 08: Tucker Carlson: Why would we ever pay people quote ‘unwilling to work’?
Robert Hockett: We never would. AOC has never said anything like that. I think you’re referring to some sort of doctored document that someone other than us has been circulating.
Tucker Carlson: That was from the backgrounder from her office.
Robert Hockett: No. She actually laughed at that, she just tweeted out that apparently some Republicans have put that out there.
Tucker Carlson: Ok, good, thank you for correcting me. That seems a little ridiculous. Almost as ridiculous as the idea that we’re going to build enough rail to make airplanes unnecessary which I think is actually from the plan.
Robert Hockett: I don’t know where you got that from either Tucker. I’m not clear on where that ‘airplane disappearance’ is coming from.
Tucker Carlson: This is the Frequently Asked Questions released by her office and I’m quoting from it. Maybe this is fraudulent and I hope you’ll correct me. It says, and I’m quoting, the Green New Deal will totally overhaul transportation, building out high-speed rail at a scale where air travel would stop becoming necessary. Hawaii Democrat Senator Mazie Keiko Hirono responded by saying that would be hard for Hawaii—so I don’t think that’s made up.
Robert Hockett: It’s being misunderstood. We are talking about expanding optionality, not getting rid of anything.
Tucker Carlson: I’m now being told that the ‘unwilling to work’ thing, that is absolutely confirmed, that was in the backgrounder that her office released.
Robert Hockett: No, no, definitely not.
Tucker Carlson: It was in the overview document.
Robert Hockett: It’s the wrong document.
Tucker Carlson: We’ll follow up on this next week. That ‘unwilling to work’ line that you are obviously embarrassed by, you should be embarrassed, it was in the document.
Robert Hockett: No Tucker, it’s not embarrassing, it wasn’t us. We’re not embarrassed by what’s not ours.
Tucker Carlson was right. It wasn’t a doctored document put out by the Republicans. The actual resolution (the legislation) submitted to Congress that outlined the Green New Deal didn’t include the ‘unwilling to work’ part; but the overview document (the accompanying FAQ document), released by New York Rep. Alexandria Ocasio-Cortez’s office, did include the ‘unwilling’ language…and they were embarrassed by it—AOC’s staff was forced to take the gaffe-riddled summary of the bill off their website. Robert Hockett later tweeted “Typo in a draft doc that went up by mistake and was taken down once noticed.”
Included in Ocasio-Cortez’s original FAQ document was the promise of “economic security to all who are unable or unwilling to work,” it called for a “build out of high-speed rail at a scale where air travel stops becoming necessary,” it said that we “plant lots of trees” to reduce emissions, it laid out the goal to “move America to 100% clean and renewable energy” within 10 years and it explained how the resolution submitted to Congress used the term “net-zero emissions, rather than zero emissions” because “we aren’t sure that we’ll be able to fully get rid of cow emissions and airplanes that fast.”
FEB 12: Bill Gates called modern monetary theory (MMT) – which asserts that because the government controls its own currency, there is no need to worry about balancing the budget some ‘crazy’ talk. “Well, that’s crazy. I mean, in the short run actually because of macroeconomic conditions, it’s absolutely true that you can get debt even to probably 150 percent of GDP in this environment without it becoming inflationary. But it will come and bite you.”
FEB 16: No question that things are NOT going well for political ‘prescription’ MMT when even Breitbart agrees with Mayor Bill de Blasio (about Rep. Alexandria Ocasio-Cortez being too far to the left).
FEB 26: In testimony before the Senate Banking Committee on Capitol Hill, Fed Chair Jay Powell said this:
“Let me say I haven’t seen a carefully worked out description by what is meant by MMT. It may exist but I haven’t seen it. I have heard some pretty extreme claims attributed to that framework and I don’t know whether that’s fair or not. I will say this. The idea that deficits don’t matter for countries that can borrow in their own currency, I think is just wrong. I think US debt is fairly high, at a level of GDP and much more importantly than that, it’s growing faster than GDP, significantly faster. We are not even close to ‘primary balance’, which means the deficit before interest payments. So we’re going to have to either spend less or raise more revenue. In addition, to the extent people are talking about using the Fed as a sort of [financing], our role is not to provide support for particular policies. That’s central banks everywhere. Our role is to achieve maximum employment and stable prices—that’s what it is. Decisions about spending, about controlling spending and about ‘paying for it’, are really, for you.” —Fed Chair Powell, 02/26/19
FEB 27: In the next day’s testimony before the House Financial Services Committee, Fed Chair Jay Powell pushed back on the MMT ‘prescription’ (on Mr. Mosler’s 7DIF Part III Public Purpose proposal) to anchor the federal funds rate to 0% (to completely take away the Fed’s ability to quickly respond to either an economic crisis or an approaching crisis like a dangerously overheating economy):
“There is a new sort of focus on modern monetary theory that says taxes can better fight inflation than monetary policy. Do you have a basic philosophical view on that?”—Rep. Steve Stivers (R-Ohio)
“That aspect of it would be a complete change. I would say the reason why the Fed does that is that we can move quickly with our tools (we can move immediately), and to give the legislature that responsibility—in principle you can do that—but we have a system, that’s got lots of checks and balances.”—Fed Chair Powell, 02/27/19
In conclusion, during the month of February when Econ Ph.D Stephanie Kelton was again tweeting that Gov’t Deficits = OUR Savings (that THEIR red ink is OUR black ink), Warren Buffett disclosed in his annual Shareholder Letter that Berkshire had $112B in US Treasury bills (which is almost 1% of the entire $15.5T US marketable Debt Held by the Public).
By the way, it’s fine if you think that we need a ‘JG’, a ‘GND’, ‘M4A’, +/or student debt forgiveness—the more policy suggestions the better. It’s even fine if you hate the president—everybody goes through that (just like we all went through that adolescent phase in sports when you think that ‘our’ team is ‘great’ and the ‘other’ team ‘sucks’).
Notice however that most of the criticism during the month was not questioning the politics of the proposals—they were mostly questioning the economics. Meaning that when talking to experts in the field, if you are getting the econ (the ‘description’) wrong, you are making it harder for everyone else to take your pet policies (your ‘prescription’) seriously.
Here’s some advise for the ‘ideological’ MMT community: If you mix your politics with your economics, you dilute your expertise in both at the same time—so stop naively buying into Every.Single.Dopey political ‘prescription’ #fakeMMT meme.
In an age of ‘fake news’, you need to go Beyond The Memes—you need to become your own journalist. Don’t be afraid to do some due diligence on your own about the veracity of the claims made by MMT academics (before you too sound like someone that spent their entire lives in a classroom).
P.S. On February 28th, former Fed Chair Alan Greenspan did not sound too enthused with the ‘prescription’ MMT proposal to curtail the Fed’s role as ‘price setter’ and the notion that we should leave all that up to fiscal policymakers because the Fed doesn’t know what they’re doing (because the Fed ‘has the pedals backwards’).
As per the Maestro, if you shut down the Fed’s ability to immediately respond to changing economic conditions (if you take away the Fed’s agility at influencing prices with changes in interest rates); then while you’re at it, to stop the stampede out of the US dollar, you should probably shut down our foreign exchange market as well—so that nobody will be able to dump their dollars (even after it’s too late for them to save themselves):
Bloomberg’s Mike McKee: There is a theory out there, modern monetary theory, MMT, a lot of people are debating it. It suggests that a country that prints money in its own currency doesn’t have to worry about deficits as long as inflation isn’t breaking out, if it does, then the fiscal agent comes in and raises taxes [+/or cuts federal spending]. What do you think of that idea because it’s being rooted as a way to spend more money, on infrastructure, on the Green New Deal, things like that?
Former Federal Reserve Chairman Alan Greenspan: You’d have to shut down your foreign exchange markets. How do you exchange (laughs)? People will be trying to fly out of your currency and if there’s no vehicle in which they can do it, it doesn’t happen.
It’s comical to watch the MMT community twist and contort themselves while playing that fake MMT version of the game of Twister.
What part of those dollar signs on the Federal Reserve System Balance Sheet (Left Hand Blue!) or the Daily Treasury Statement account at the Federal Reserve Bank (Right Leg Yellow!) is confusing the MMTers who say ‘the Fed has no dollars’ (Right Hand Red!) or ‘there’s no such thing as dollars’ (Left Leg Green!) on the federal level?
Do MMTers using ‘the Fed neither has nor doesn’t have dollars’ logic forget why it’s called the federal RESERVE system? When banks transfer their required reserves to the Fed, do they think that’s not dollars (credits) being held at the Fed—because those dollars were ‘destroyed’ (just like they also think those federal tax dollars are ‘destroyed’) too?
This is just another MMT analogy (that it’s just ‘points on a scoreboard’) gone amok—to fit a politically-extreme ‘prescription’ MMT narrative.
“Of course the Fed has dollars. This is just more stupid s*** that pseudo-intellectuals come up with to sound smart.”—Jim ‘MineThis1’ Boukis
Agreed…The Fed sent 91 billion DOLLARS to the Treasury in 2016 and the Fed sent 80 billion DOLLARS to the Treasury in 2017. Derived from its bond holdings (like mortgage-backed securities) on their balance sheet, the Fed has handed over more than 700 billion DOLLARS since the 2008 financial crisis…
…and that’s the net amount, after, you know, all those ‘old’ bills, that were ‘shredded’, at the ‘IRS’ (as per that recently ‘modified’ yarn).
77DIF MMT MISINTERPRETATIONS #30: “Printing is a word that goes back to the gold standard.”
Fact: Printing is a word that goes way, Way, WAY back BEFORE the gold standard.
In that grand arc of monetary history, the gold standard was just a short blip. MMT (the currency analysis, the ‘chartalism’ and the fiat currency) goes back before the gold-standard era.
“Printing is a word that goes back to the gold standard. It meant the ratio between the printed money and the gold supply, it’s no longer an applicable term. When you have a non-convertible currency and a floating exchange rate, the spending is operationally independent of the taxing, so all government spending is merely changing numbers in banking accounts—there’s no operational constraint by revenues.”—Center for Economic and Public Policy’s Warren Mosler on Fox Business News with Stuart Varney discussing further government spending to improve the economy, May 7, 2011
To be fair, anyone dismissing your pet ‘prescription’ MMT policy (like Stuart Varney did to Mr. Mosler) by uttering ‘Oh you just want to print more money’—instead of debating the merits of the proposal itself—isn’t making a good-faith effort to understand your perspective.
That said, anytime anyone in the MMT community says ‘Don’t say print money’, that is borderline fake MMT.
Anyone with a basic knowledge of American history knows that ‘printing money’ goes back before the gold standard (and why they won’t fall for that ‘Don’t say printing money’ meme as easily as the MMT community does). Those ‘Continentals’ were NOT backed by gold (they were backed by the ‘anticipation’ of tax revenues), nor were those original ‘Greenbacks’ (at first as an ’emergency’ war measure they had no convertibility to gold), so ‘printing money’ simply refers to the days before the computer age, before ‘keystrokes’.
We all still say ‘printing money’ just like we all still say how much ‘horsepower’ a car has, or how much ‘shipping’ charge we have to pay to the person driving that brown delivery truck. The words ‘printing money’ (if not used sarcastically) simply refers to ‘deficit spending’, aka an addition of net financial assets, that is increasing the amount of $$$ in circulation (that is expanding the money supply)—what Fed Chair Eccles referred to as ‘High Powered’ (which is another thing that the MMT community gets completely wrong).
Most people today (correctly) associate ‘printing money’ with conjuring up money out of thin air—as opposed to using existing $$$ (as opposed to ‘surplus spending’).
For example, if you are paying for a restaurant tab with money out of your pocket (paying with existing $$$), then that isn’t ‘printing money’ (isn’t adding dollar-denominated assets into the banking system); but if you are instead, paying with a credit card, if you are deficit spending, you are ‘printing money’ (adding dollar-denominated assets into the banking system). That newly-created little piece of paper, printed with $$$ signs on it, that you sign, that the restaurant retains, think of THAT as the financial asset, that you just created, which is a ‘notes receivable’, your ‘promise’, your ‘bond’, an ASSET, that increases NFAs; while in addition, that printed receipt, that you keep whenever paying on credit, whenever printing money, is the ‘notes payable’, the liability, that nets-out the creation.
The federal gov’t is of course not the same as a household using a credit card. The pure MMT insight is that, operationally, borrowing or tax collection is not needed to fund federal spending, BUT those formalities remain to maintain the Constitutionally-enshrined Power of the Purse of policymakers—only Congress can sign the ‘receipt’.
Furthermore, where the MMT community goes over the cliff is thinking that all spending is newly-created money (instead of knowing that all spending is newly-created money, yes; net additions of $$$ going into the banking system, no).
It’s pure MMT to explain that the newly-created (newly-printed) dollars (assets) that you just added into money-supply circulation to pay for that lunch at a diner probably won’t cause hyperinflation and destroy the economy; however, telling folks—especially the 2,000 employees at the Bureau of Engraving and Printing—not to say ‘printing money’, isn’t.
Fed Chair Bernanke: “It’s much more akin to printing money more than it is to borrowing.”
Scott Pelley: “You’ve been printing money?”
Fed Chair Bernanke: “Well, effectively, yes…we need to do that because our economy is very weak and inflation is very low.”
NOTE: In that 60 Minutes interview, Chair Bernanke was referring to the initial bailouts, early in the credit crisis, where the Fed lent newly-created (newly-printed) money to troubled banks in exchange for their toxic subprime assets, for the so-called Maiden Lane loans. The Fed did this so that these banks, suffering from a liquidity problem, would have the $$$ to spend into money-supply circulation—to pay their bills—to stay in business. In a follow-up 60 Minutes interview in 2011, Chair Bernanke explained that QE wasn’t printing money because, unlike the bailouts, QE was not about toxic bonds / changing the money supply, QE was about AAA bonds / changing long-term interest rates. ____________________________
77DIF MMT MISINTERPRETATIONS #31: The Fed is the ‘scoreboard’.
Fact: The Fed is the excel spreadsheet.
“The federal gov’t spends money into existence … and deletes money out of existence when it taxes … the taxes don’t pay for anything, they are literally deleted. When you go to a baseball game … and a guy smacks a homer and they put a ‘1’, one run, on the scoreboard … but then on the replay they realize that the ball was foul, it was a foul ball, they take the ‘1’ off the scoreboard. Where did that ‘1’ go? Where did it come from? Did they have to tax somebody to get that run? Or did they just keystroke that run on the board? That’s how banking works.”—Steve Grumbine, Real Progressives broadcast, January 4 at 12:07 AM
No, that’s not how banking works.
That’s how folks (who take Mr. Mosler’s ‘scoreboard’ analogy too literally) pushing political ‘prescription’ MMT (under the guise of being about banking) works.
The person that hit that homer, that blood, that sweat, those tears that went into the effort (the production) to knock that ball out of the park, is what ‘funds’ that ‘1’ on the scoreboard.
If the ball was ruled foul, then that ‘1 Run’ (that ‘asset’) is ‘debited’ (‘drains’) from the ‘Run’ ledger, and then that ‘1’ is ‘credited’ (‘drains’) to the ‘Balls & Strikes’ ledger—that ‘1 Run’ becomes a ‘1 Strike’ instead. In other words, the ‘1’ goes from one part of the scoreboard to another, it doesn’t leave the scoreboard (it doesn’t leave the banking system).
That’s how banking works.
When explaining MMT to the MMT uninitiated, the 7DIF scoreboard analogy—a great analogy—should only be used as a simple example of the paradigm difference between ‘metalism’ (coins from precious metals in a gold-standard era) v. ‘chartalism’ (fiat currency from keystrokes in a computer era).
In other words, our monetary system went from mostly using a limited amount of ‘hard’ currency (kept in secure vaults) to mostly using an unlimited amount of ‘soft’ currency (kept in secure ledgers).
Of course the Fed ‘has’ dollars…More than just being electronic ‘points’, dollars are still ACTUAL Assets & Liabilities (credit & debit flows)—postings that reconcile those ledgers.
Of course dollars exist on the federal level…What part of those little dollars signs on the Fed’s balance sheet or on the Daily Treasury Statement is confusing MMTers who take the scoreboard analogy too literally and say that?
The very least that all MMTers should have taken away from The Longest Shutdown In US History was the pure MMT insight, which is that, those accounting constructs (those pesky funding rules & appropriations laws), albeit unnecessary, still exist—not as much as a ‘financing’ constraint but more as a ‘political’ constraint.
Despite the pillow-talk MMT promises that keeps getting whispered into your ear, you can’t have anything YOU want—‘because MMT’—that’s not how it works.
Do yourself (and the MMT cause) a favor and don’t confuse a scoreboard (an analogy) with an excel spreadsheet (the consolidated balance sheets of the United States federal government). _______________
77DIF MMT MISINTERPRETATIONS #32: Payment of federal taxes is a ‘destruction’ of dollars.
Fact: Payment of taxes is a drain of $$$ to the DTS (the same exact account where all federal spending is drawn).
The payment of federal taxes is a ‘destruction’ of the taxpayer’s federal tax liability, but not a destruction of $$$. The payment of those taxes is a ‘destruction’ of $$$ from the money supply (they are ‘deleted’ from your bank account), but not from the banking system.
Only Congress can ‘destroy’ $$$ (reduce the NFAs that Congress created).
Even if you burned a dollar bill to a crisp, you wouldn’t change the numbers on that ‘scoreboard’. However, same as Congress, if you burned your mortgage (your ‘bond’ that you previously created), THAT’S A DESTRUCTION.
Think about a pumping heart. The blood is flowing out of that heart—to somewhere else—it’s not getting ‘destroyed’. Rather than ‘keystrokes’ that fund surplus spending followed by the subsequent collection of federal taxes, what actually expands & contracts money supply circulation (the pumping heart of the economy) is the creation & destruction of bonds (aka leveraging v. deleveraging).
Rather than being ‘bulletproof’, political ‘prescription’ MMT is rendered with bullet holes—and they are all self-inflicted. Here’s some more holes:
MMTers (who are supposed to be good at being ‘chartalists’) are confusing credits & debits (‘postings’ that are consolidations of ledger charts) with creation & destruction (net ADDITIONS into the banking system v. the deleveraging of that leveraging).
When deficit spending, the Treasury is ‘fronting’ the ‘newly-created’ money via its Daily Treasury Statement account at its central banking agent, the Fed. For example, if deficit spending $1B today, the equal and opposite ledger entry to reconcile (to balance) that +$1B that is credited from the DTS to the accounts of whomever provisioned the gov’t is a debit of -$1B to the DTS. Next, the federal gov’t collects $1B in Treasury bond sales, meaning that tomorrow $1B is coming back out from money supply circulation—which is the main reason to sell the bonds (to maintain price stability by neutralizing the potentially inflationary-bias of deficit spending). That ‘newly-created’ $1B, credited to the DTS, brings both the DTS and the money supply back to where it was—meaning that so far it’s all a ‘wash’. The final step, the ADDITION, is when the federal gov’t keyboards $1B in ‘newly-created’ Treasury bonds to those investors who just paid for them. Those assets are the Net Financial Assets that are added (that are ADDITIONS) into the banking system.
Same goes for when a household deficit spends (wants to pay on credit), the financial intermediary (the bank) is ‘fronting’ the ‘newly-created’ money in exchange for your ‘newly-created’ promise to pay back the money with interest (your ‘bond’). Your newly-created bonds create loans create deposits.
MMTers shouldn’t confuse ALL these ‘newly-created’ assets flowing back & forth above as being ADDITIONS of NFAs.
Furthermore, it’s only a ‘destruction’ if Congress decides to pay off those federal bonds for good; and the same goes for a household, it’s only a ‘destruction’ if they pay off their ‘bond’—the opposite of the creation.
Just like all debts (household debt) are liabilities but not all liabilities (Treasury bonds) are debt; all destruction (paying off Treasury bonds) are debits but not all debits (federal tax / Treasury bond collections) are a destruction. ________________________
77DIF MMT MISINTERPRETATIONS #33: “The Fed has raised rates to try to keep unemployment from dropping below 4%”—MMTer with a Ph.D (name withheld to protect the gullible innocent)
Fact: “It would not be appropriate to specify a fixed goal for employment”—Federal Open Market Committee Statement on Longer-Run Goals and Monetary Policy Strategy, 01/29/19
Many Misery-loves-company folks of the fake MMT community are anti-Fed people, or doom-and-gloom perma-bears, or anti-capitalists (or all of the above). As a result, they routinely misinterpret basic economic concepts. For example, many fake MMTers (some with Ph.Ds) hear ‘The Fed’s Mandate Is Maximum Employment’ and conclude ‘The Fed is Intentionally Targeting Unemployment’.
The reason why, is because the FOMC Committee estimates the neutral (or ‘normal’ or ‘natural’) rate (aka ‘r star’) as the unemployment rate that ‘is neither increasing nor decreasing inflation’. The Fed posts this in their Summary of Economic Projections (aka the ‘dot plot’). Fake MMTers confuse that as meaning that the Fed is specifically ‘targeting’ that rate.
“We don’t look at the neutral rate of unemployment because it moves too slowly”—Fed Chair Powell, in Jackson Hole, Wyoming, 03/21/18
Rather than the fake MMT narrative that the Fed sets the unemployment rate, the Fed sets the ‘price’—or the interest rate—of money to attempt (to the best of its ability) to influence the rate of inflation (as mandated by Congress).
What the Fed is doing is inflation ‘targeting’ (setting interest rates to discourage price instability) and that is NOT to be confused with unemployment rate ‘targeting’ (setting unemployment rates to discourage more employment).
The pure MMT is that the Fed NEVER wants less employment. The Fed is ALWAYS trying to keep the jobs growth party going for as long as possible. Come this July, THE LONGEST JOBS GROWTH IN US HISTORY will officially become THE LONGEST ECONOMIC EXPANSION IN UNITED STATES HISTORY (which is more proof of just how brilliantly the Fed’s monetary-policy handling of the financial crisis has been).
Until that day, as usual, fake MMTers will keep ‘targeting’ gullible folks and will keep telling them that the reason why the masses are unemployed is all the government’s fault. They also ‘target’ those ‘evil’ fiscal policymakers, the ‘plotting’ Fed, and that ‘murdering-by-proxy’ Congress who is in on this ‘conspiracy’ to throw the person out of employment. As per the MMT ‘academics’ (who are better at politics than they are at teaching), unemployment is NEVER the fault of the person in the mirror.
The real reason why those lies are spread is because that person in the mirror that might not have a good job or any job at all will ALWAYS have a vote.
77DIF MMT MISINTERPRETATIONS #34: “Japan is our MMT poster child that keeps exposing the myths.”
Fact: Japan is a pure MMT case study why, from the very start of economic troubles, PEN STROKES, not more keystrokes, make much better solutions to grow an economy.
To be fair to Professor Bill Mitchell (where the above quote is derived) Japan first experimented with QE way before the US did, and that was good (that was a good step in the ‘Pure’ or ‘end-game’ MMT direction); but to paraphrase Jim ‘Minethis1’ Boukis, what political ‘prescription’ MMTers today aren’t grasping, is all that Debt / GDP in Japan, like many things, is fine—UNTIL IT ISN’T. To understand more about Debt / GDP, let’s take a step back into history.
Due to the inflationary measures undertaken to finance the US Civil War, it was too difficult to pay back debt in gold or silver, so the US gov’t suspended payments of obligations not legally specified in specie (gold bonds or gold certificates). This led banks to suspend the conversion of bank liabilities (bank notes and deposits) into specie. In 1862 paper money was made legal tender and as a fiat money (not convertible on demand at a fixed rate into specie) as a temporary ‘emergency’ war measure. These notes came to be called ‘greenbacks’. After the Civil War, Congress wanted to reestablish the metallic standard at pre-war rates; but, the market price of gold in greenbacks was above the pre-War fixed price ($20.67 per ounce of gold) requiring an intentional, gov’t-induced deflation to achieve the pre-War conversion price. This could be accomplished by growing the stock of money less rapidly than real output. The coinage act of 1873 (aka the Crime of ‘73) deflated the money supply. This act removed the 412.5 grain silver dollar from circulation leaving only silver coins worth less than $1 able to be used. It worked. By 1879 the market price matched the mint price of gold. With the resumption of convertibility on June 30, 1879 the gov’t went back to paying back its debts in gold and redeemed greenbacks on demand in gold. Greenbacks became perfect substitutes for gold coins.
Fast forward to today, as per MINETHIS1, a good way to predict currency appreciation / depreciation is to watch the stock of money (to watch the rate of money creations via federal ‘DEBT’), against the real output (to GDP).
Monetary policymakers today (who studied those monetary-policy actions taken in 1873) know that if you want deflation / currency appreciation, then grow the stock of money much less rapidly than real output: and conversely, if you want inflation / currency depreciation, then grow the stock of money much more rapidly than real output.
Japan is a ‘homogeneous’ nation (read: prefers racial ‘purity’—but not in a racist way, just in a way that cherishes & seeks to preserve its ancient customs & culture); which, like ‘anything’ (which like everything else) ‘is fine until it isn’t’. For example, as a result of wanting to embrace demographic purity, Japan today now has the most aged population among the G20.
Meaning that Japan’s labor force has been literally dying off which (among other moving pieces) has been causing deflationary forces, hurting the Japanese economy (suffering from ‘Lost Decades’). So Japan, which isn’t crazy about immigration (growing the ‘people stock’), has instead been fighting that deflation by growing the money stock (debt) more rapidly than real output (GDP). In other words, Japan’s monetary policymakers will keep trying to ‘keystroke’ their way out of a perilous economic situation (while blaming the Japanese citizens for having a ‘deflationary mindset’).
Rather than being an ‘MMT poster child’ and ridiculously saying ‘We Can Do That Too #learnmmt‘, Japan is a prime example of what NOT to do.
Here’s how political ‘prescription’ MMTers sound while whispering their sweet-nothings (their promises that you can have ‘anything’ because there is no financial constraint) in your ear (the pillow talk MMT):
“Japan has been a gem for demonstrating the neo-liberal myths about government deficits, debt and central bank debt purchases, inflation and bond yields. Japan is a living laboratory that should give you confidence that MMT is a much more robust explanation of what happens in a monetary economy where the government is sovereign (issues its own currency) than the mainstream economics approach.”—Bill Mitchell, ‘Our poster child keeps exposing the myths’, September 9, 2014
Here’s how they sound afterwards (after you-know-what-went-you-know-where) and it starts becoming more apparent that what Japan is doing is NOT working (is NOT ‘a gem’ / is NOT ‘a model’ / is NOT ‘a laboratory’ / is NOT ‘a poster child’): “Japan’s QE is a sideshow. While the Bank of Japan [BOJ] can accumulate Japanese Gov’t Bonds [JGBs] in whatever volumes they choose and can never go broke if the price of those bonds in the secondary markets create ‘losses’, the policy will not deliver the inflationary spike that the IMF and the Bank of Japan is seeking. Inflation will accelerate only if fiscal policy pushes the growth rate and the demand for real resources above the potential growth rate and the resource availability.”—Bill Mitchell, ‘Bank of Japan’s QE strategy is failing’, April 24, 2018
That’s wrong professor. Just like America’s QE was NOT a ‘sideshow’, Japan’s QE is NOT a ‘sideshow’. Perhaps MMTers should stop listening to the pillow talk and pick up a copy of ‘The Only Game in Town’ by Mohamed El-Erian, which correctly posited that if fiscal policymakers choose to ‘sequester’ (read: cower in foxholes and let others do the fighting against the enemy forces of deflation) then the central bank’s monetary policy—like QE—is the POLICY OF LAST RESORT.
Rather than the Bank of Japan’s QE strategy ‘failing’, right now QE is the only thing that is stopping the Japanese economy from falling into a deflationary death-spiral dive. Just like America’s monetary policymakers were able to successfully perform life-saving triage to the US banking system after the credit crisis struck; Japan’s monetary policymaker anesthesiologists are keeping the patient (the economy) in an induced coma—doing the best they can to buy time with QE & QQE—until fiscal policymaker surgeons show up and do the needed procedures that actually gets the patient back to strong health.
Instead, Japan keeps losing steam. Japan’s GDP last year ($5.17T) was less than it was in 1995 ($5.45T). Japan was passed as the world’s second-largest economy by China in 2010 and today China keeps passing Japan in other ways (larger UN contributor, larger importer of natural gas, etc). Keystrokes (the BOJ buying bonds / the BOJ buying stock funds / the BOJ keeping short-term rates negative and the 10yr rate at zero percent with ‘curve control’) is not enough to get Japan back on track. Japan needs creative pen strokes (simple adjustments to immigration laws / labor laws / corporate laws, etc).
Note: Don’t get me wrong, I’m rooting for Japan. After living in the paradise city of Tokyo while working for a ‘shoken kaisha’ for 14 years; and even better, meeting my wonderful wife of 25 years there, I would love to see Japan make a comeback. Until then, fellow MMTers, let’s not kid ourselves. Japan’s BOJ is at the point now where they have to save their economy by creating an illusion of financial (public) activity. After all these years, Japan’s BOJ is still doing QE. In addition, the BOJ has negative short-term rates…plus the BOJ is doing ‘curve control’ (the BOJ’s trading desk has kept the 10yr Japanese Gov’t Bond price trading at 0% yield)…plus the BOJ is buying stock funds. In other words, this is not just normal central bank ‘guidance’ in response to a financial crisis (like the Fed’s QE was)—this is literal control, or as per Jesper Koll, Japan head of U.S. asset manager WisdomTree puts it, this is more like “a new form of financial socialism”.
Rather than being a fake MMT poster child, Japan is a pure MMT case study of why, from the very start of economic troubles, PEN STROKES, not more keystrokes, are the needed solutions to grow an economy.
Don’t take my word for it. On 03/15/19, when asked about MMT, Japan’s central banker, BoJ Governor Kuroda said “I think it is an extreme argument that won’t be accepted widely.”
If you’re looking for a pure MMT ‘poster child’, here you go:
“I am going to say something that will offend both sides of this debate, but Trump is the most MMT-like-President ever elected.”—Kevin Muir, the MacroTourist, ‘TRUMP: THE FIRST MMT PRESIDENT’, Feb. 2019 (Mr. Mosler tweeted “Nice to see MMT articles like this.”)
“There’s no economic reason for raising taxes—and that’s been our position all along. To say you can’t do anything, because everything has to be ‘payed for’, or that ‘you are going to have to raise taxes’—meanwhile, these guys, are running the tables. They’re doing defense spending—no ‘pay fors’. They’re doing a trillion in tax cuts—no ‘pay fors’. They’re going to come along with a tax cut 2.0—no ‘pay fors’. They’re going to give money for a wall—no ‘pay fors’. They’re already there.” / “One of the funny things that happened is that in a way, the Republicans…kind of advanced the MMT agenda.”—Stephanie Kelton, The Second International Conference of MMT, Sept. 28, 2018 / Presidential Lecture Series Oct. 15, 2018 _________________________________
77DIF MMT MISINTERPRETATIONS #35: “US taxpayers do not fund the US government. The US government funds US taxpayers. All dollars used by the US private sector to pay federal taxes come from the US federal government.”
Fact: All dollars used by the private sector to pay federal taxes DO NOT necessarily come from the US federal government.
Unbeknownst to those in the MMT kiddie pool who wear those ‘all dollars used to pay taxes come from the government’ floaties, under the Taxpayer Relief Act of 1997, federal taxpayers can pay with a credit card.
The federal gov’t is the sole monopoly ‘issuer’ of dollars, but the MMT community often misinterprets that with meaning the federal gov’t is the sole monopoly ‘supplier’ of dollars.
Using their logic, if the total national ‘debt’ (all 22 trillion dollars that was created and entered into existence by the federal gov’t), was all completely ‘destroyed’ (taxed back), then there would be no money left to pay taxes. Which is nonsense—and why fake MMTers cannot get the ‘prescriptions’ taken seriously by experts in the field (because they can’t get the pure ‘description’ MMT right).
The pure MMT insight is that, when switching from a gold-backed currency to a fiat currency, the order of funding operations also switched. Unlike a ‘user’ of dollars, the monetary sovereign now doesn’t have to ‘collect’ (its own) money first. In fact, the federal gov’t doesn’t even have to collect any of its own dollars at all to fund spending; however, the paradigm difference is that the funding function took a back seat to other functions—like maintaining demand for the currency, maintaining price stability and the political functions.
The US government funds the US taxpayers first and then the US taxpayers fund the US government right back. That’s it—there’s no need to ‘create’ anymore MMT out of that.
77DIF MMT MISINTERPRETATIONS # 36: The Job Guarantee is like the WPA of yesteryear.
Fact: The Job Guarantee is NOT like the WPA of yesteryear.
To play along with fakeMMTers, not only do you have to pretend the federal ‘job’ guarantee is like the WPA, one must also ignore all facts, math & data. For example, you must close your eyes and ears to all those record-breaking jobs figures and only think about those depression-era black & white images of *actual* involuntarily unemployed people standing in soup lines. Just like the sad and discredited ideology of political extremism is deeply-rooted in the total ignorance of both human history and human nature; fakeMMTers are constantly making things up to fit their narrative.
“The proposed MMT Job Guarantee (JG) pays a fixed wage with benefits. The most quoted wage is $15/hr. All workers in the JG are paid the same in all areas of the country. Aficionados of the JG are fond of comparing it to New Deal style work programs. The Work Progress Administration (WPA) was the main program that was responsible for building the infrastructure, some of which is still in use today. Job Guarantee advocates will make sure to point that out to prove the overwhelming success of the New Deal 1930s Work Progress Administration. Yes, it did some excellent work in its time and place in history. Job Guarantee supporters leave out one small detail. The Work Progress Administration (WPA) did not set a fixed Nationwide wage and the wage varied based on skills of the worker. The WPA Division of Employment selected the worker’s placement to WPA projects based on previous experience or training. Worker pay was based on three factors: the region of the country, the degree of urbanization, and the individual’s skill. It varied from $19 per month to $94 per month, with the average wage being about $52.50—$934.00 in present-day terms. The goal was to pay the local prevailing wage. Basically, the Job Guarantee is not like the WPA of yesteryear…”—Charles ‘Kondy’ Kondak. ________________________
77DIF MMT MISINTERPRETATIONS # 37: “Spending & taxation are separate & independent operations.”
Fact: Spending and taxation are interdependent operations that are intentionally coordinated.
When debating Bloomberg columnist Noah Smith (who was mocking the fakeMMTer mantra that everything THEY want can be ‘paid for by MMT’), Pavlina Tcherneva tweeted on 02/07/19 that “spending & taxation are separate & independent gov’t operations.”
However (and as usual), one quote from one MMT academic doesn’t quite square with other quotes from other MMT academics:
“The gov’t chooses to coordinate spending & taxation in order to mitigate the impact on bank’s reserve positions and interest rates…This interdependence is not de facto ‘financing’ role for taxes.”—Stephanie Bell, ‘Can Taxes and Bonds Finance Government Spending?’ Jerome Levy Economics Institute Working Paper No. 2441998, July 1998
These mixed signals between the pure MMT (how capitalism works) and the fake MMT (how to dismantle capitalism)—that’s the ‘separate independent operations’.
77DIF MMT MISINTERPRETATIONS #38: “Don’t say ‘Federal taxes don’t fund federal spending’. Instead say, ‘Federal taxes do not need to fund federal spending’. Translation: Don’t tell me that I am an asshole. Instead say, I don’t need to be an asshole.”—Ellis Winningham, 09/06/18
Fact: “Don’t say that ‘federal taxes don’t fund federal spending’. It’s better to say that federal taxes are not needed to be able to spend, not that it doesn’t fund it.”—Warren Mosler, MMT conference closing remarks, 09/24/17
To be fair, Mr. Winningham is just not yet grasping the pure MMT insight and probably doesn’t think that Mr. Mosler is an asshole for (correctly) advising the MMT community that it’s better to say that federal taxes do not need to fund federal spending—not that they don’t at all.
77DIF MMT MISINTERPRETATIONS #39: “If the private sector wishes to run surpluses, the federal gov’t must run deficits.”
Fact: If the private sector wishes to run surpluses, the federal gov’t does NOT have to run deficits.
The above quote (a 02/14/19 tweet from Pavlina Tcherneva responding to Bloomberg columnist Noah Smith) is a common misinterpretation made by most of the MMT community. The real culprit is that Sectoral Balances chart which (correctly) shows that the amount of federal-gov’t deficits (the amount of money creation ‘debited’ out from the issuer of dollars) equals the amount of nonfederal-gov’t surplus (the amount of money creation ‘credited’ to the users of dollars). The problem is that the MMT choirs (as they often do) take that accounting identity of those Almighty federal-gov’t deficits as gospel—and call it a day.
The ‘federal gov’t must run deficits for the private sector to have a surplus’ is only correct if you ignore private-sector money creation. For example, it’s true in the Monopoly game because as per the Monopoly Game rules, ‘No Player may borrow Monopoly Money from another Player’—meaning that, unlike our actual monetary system, in the Monopoly Game there is no ‘horizontal’ private-sector money creation.
There are several reasons why the MMT community ignores private-sector money creation. Mostly it is because they are simply regurgitating the MMT academics, at best; or just confusing the federal gov’t as being the sole-monopoly ‘issuer’ of dollars with meaning that the federal gov’t is the sole-monopoly ‘supplier’ of dollars, at worst. MMTers still haven’t yet grasped the concept that Net Financial Assets CAN and DO come from the private sector as well—as Mr. Mosler, a former bank owner, attempted to explain to MMTers (but to no avail because it doesn’t fit the ‘more federal deficits to the rescue’ narrative). In order for political ‘prescription’ MMTers to reach their goal of dismantling capitalism and replacing it with a cradle-to-grave welfare state, they need people to believe that federal-gov’t money creation is the only solution for all the problems. MMTers even go as far as renaming money that is created in the private sector as ‘lookalike IOUs’ or even place private-sector money creation ‘lower’ in a ‘hierarchy’ of money. In short, ‘if the private sector wishes to run surpluses, the federal gov’t must run deficits’ becomes ‘true’ as long as it pushes for more federal deficits (which pushes the MMT community over a cliff).
Note that the same MMTers who believe that ‘if the private sector wishes to run surpluses, the federal gov’t must run deficits’ struggle to believe the opposite. For example, just like during the Clinton surplus years (when the private sector paid more in federal taxes than the federal gov’t spent), these same MMTers hide their Sectoral Balance charts and stop talking about accounting identities. What then becomes ‘true’ in the fake MMT kiddie pool is that during those years (when the private sector ran deficits) there was no federal-gov’t surplus of dollars because ‘Those tax dollars were destroyed’ / ‘There’s no such thing as tax dollars at the federal level’ / ‘The federal gov’t neither Has or Doesn’t Have dollars’. _________________________
77DIF MMT MISINTERPRETATIONS #40: Federal gov’t deficits do not ‘crowd-out’ investment.
Fact: Federal gov’t deficits do ‘crowd-out’ investment.
Abba Lerner developed the principles of Functional Finance (1941, 1943, 1944, 1948, 1951, 1961, 1973) which argued that government policy should be designed to obtain maximum employment and price stability regardless of whether it increased or decreased public debt by debunking the ‘burden of the debt’ and ‘crowding out’ arguments used against deficit spending. In Paul Krugman’s recent NYT’s OpEd piece he wrote “I am not a fan of MMT which is basically Abba Lerner’s ‘functional finance’, which while clever, missed some possibly important things”.
One of those important things Paul Krugman meant is that we shouldn’t buy into that ‘deficits do not crowd out investment’ part. “If you think that the magic of heterodox monetary thinking somehow means that deficit spending is never inflationary, or crowding out never happens, or something, you don’t understand the functional finance that MMT advocates themselves claim underlies their doctrine,” he added.
If interest rates go up (if the Fed is raising rates because the economy is getting stronger), more people are normally inclined to move their investment dollars from risk-on to risk-off to change portfolio weighting into safer bonds paying a satisfactory amount of fixed income—which is a kind of ‘crowding out’ (that is intentionally done by the Fed to lift its foot off the accelerator).
Another example is that as interest rates go up, more federal spending, which is budgeted (which is politically constrained) is diverted towards servicing the ‘debt’. In FY 2017 federal debt service was 7% ($275B) of total spending ($4T) and projected to be at least 10% ($500B) in 2020. Meaning that more dollars are going for less-productive uses (going to the 5%) and are potentially ‘crowding out’ federal spending for the functional economy (for the 95%).
“The Loanable Funds Model states that there is a fixed pool of money that federal gov’t deficits compete with for non-federal gov’t borrowing, which is the same as saying that federal gov’t deficits crowd out private-sector investment. In my estimation this is false as far as it goes. However, there are other forces at play that makes this whole line of thinking somewhat specious as federal gov’t deficits do affect private-sector borrowing once we take interest rates into account. When interest rates rise it compresses private-sector profit margins, such that companies begin to cut back on borrowing. This happens when the Federal Reserve is in a raising interest rate mode, usually because they see the incipient risk of inflation. The raising and lowering of interest rates by the Federal Reserve does affect the cost of borrowing (credit) in the economy. If the federal gov’t is pumping increasingly large deficits into an economy that is near or at full capacity it will add to inflationary pressure, at least to some degree. If the Federal Reserve raises rates some more, then profit margins compress even further. Meaning that the private sector is borrowing less as the public sector is borrowing more. Hence there is nothing left to call it, but the crowding out of private sector investment by running increasingly large deficits when the economy is doing well.”—Charles ‘Kondy’ Kondak ____________________
77DIF MMT MISINTERPRETATIONS #41: The deregulation of natural gas prices—not Paul Volcker’s rate hikes—broke the back of the 1970s inflation.
Fact: Paul Volcker’s rate hikes—not the deregulation of natural gas prices—broke the back of the 1970s inflation.
Nat Gas deregulation accounted for the breaking of the back of the 1970s inflation—and not Volcker’s rate hikes (?) I don’t seem to remember folks sending 2 x 4s to any natural gas companies (!)
“Most MMTers say that the deregulation of natural gas prices created a massive demand shock for oil (as U.S. utilities switched from oil to natural gas), which destroyed OPEC’s pricing power and broke the back of the 1970s inflation. They even go as far to say that then-Fed Chair Paul Volcker’s rate hikes were actually counterproductive; however, for that thesis to be correct, one would expect a surge in natural gas consumption. As per the facts, math & data, natural gas consumption fell from 22.1 million cubic feet in 1972 to 16.2 million cubic feet in 1986 (26% decline). Meanwhile, the inflation rate in 1980 was 13.5% and fell to 1.9% in 1986. Meaning that based on both the natural gas consumption and the inflation rate data, it can safely be said that natural gas deregulation did NOT play a role in breaking the back of OPECs oil pricing power nor the inflation of the 1970s.”—Charles ‘Kondy’ Kondak
Yet another deadly innocent fraudulent mmt misinterpretation—just another yarn to go along with ‘the Fed is counter-productive’ / ‘the Fed has the pedals backwards’ / ‘the Fed creates inflation by raising rates’ that fits the anti-central bank narrative that plays so well in the ‘modern’ MMT community during The Longest United States Economic Expansion In History (thanks to the Fed). _____________
Similar to the 20th century switch on Wall Street from ‘physical delivery’ of securities (when stock certificates & bearer bonds literally changed hands); to securities becoming electronically ‘registered’ (the present system where stocks & bonds only exist as ledger posting, aka ‘book entry’), the MMT analysis is that the same thing also happened to currency.
Once upon a time, all transactions were settled with cash on the barrel-head, using valuable coins made of gold or silver (‘metalism’); until the concept of extending credit (the ‘value’ of creditworthiness) came along, and then transactions were settled with postings on a centralized ledger (‘chartalism’).
One example of using credit was using ‘tally sticks’ in England during the Middle Ages, where transactions could be settled without any currency up front. The buyer’s indebtedness to the seller was recorded with markings on a tally stick—the precursor to today’s postings (‘points’) on a ledger (on a ‘scoreboard’). One could safely argue that the innovation of tally sticks was the beginning of the end of ‘metalism’.
In other words, to this day, instead of buyers & sellers needing to settle all transactions by physically handling dollars, those dollars can instead be transferred electronically as corresponding assets (+$) and liabilities (-$) being entered on a balanced spreadsheet, like ‘points on a scoreboard’. Today, when the federal gov’t deficit spends, it is recorded as a liability (-$) and since there’s no such thing as a ‘negative dollar’, that’s where the MMT refrain ‘The Fed doesn’t Have or Not Have dollars’ comes from.
However, the politically-extreme MMTers, also to this day, takes that analogy (that refrain) too literally and they fail to grasp that those ‘points on the scoreboard’ are denominated in dollars. Meaning that, just because those dollars went from a metal form (gold coin) into chart form (tally stick) doesn’t mean that there are no dollars involved ‘AT ALL’. These same folks who say ‘Taxes don’t fund spending AT ALL’ are now also regurgitating ‘There’s no such thing as tax dollars on the federal level AT ALL’—and have no idea how ridiculous they sound. Despite the evidence to the contrary, these deadly innocent fraudulent MMT misinterpretations are often repeated to fit their political ‘prescription’ narrative. It is also a form of character assassination because when trying to dismantle capitalism, one must first dismantle the ‘evil’ capitalist ‘notion’ that a federal ‘taxpayer’ exists (so that no one AT ALL can ever again have the audacity to question how federal tax dollars are spent).
Just like those tally sticks of yesteryear (and just like those newly-created ‘points on the scoreboard’ today), the pure MMT insight is that for both the federal gov’t and the non-federal gov’t (read: for absolutely everyone), all money creation begins at the moment that someone (someone with good credit) promises to pay someone else back. For example, your promise (your guarantee) to pay money to a vendor after a certain period of time (maturity term), at a certain cost (principal + interest rate), is your ‘bond’. Whenever deficit spending, that ‘bond’ is the origin of all money creation. Your ‘IOU’ is the asset that you are ‘selling’ in exchange for whatever asset the vendor is selling you. That IOU, that creation, denominated in dollars, represents the net addition of assets entering the banking system (aka ‘leveraging’); and the opposite, when that IOU is paid off, is the destruction of assets exiting the banking system (aka ‘deleveraging’). DO NOT confuse that *actual* expansion (creation) and that *actual* contraction (destruction) of the banking system with federal taxation (with SURPLUS spending)—which is only a transfer (which is only a ‘drain’) of previously-created dollars ebbing and flowing (to and from) money supply circulation.
Also note that any bank (whether it is the Federal Reserve Bank or a small community bank) is only acting as a financial-intermediary middleman (a broker) between the primary players (counterparties) involved in all money creation—the buyer & seller. In other words, to fully-understand how and when newly-created money is conceived, it is better to instead focus on that promise, that guarantee, that ‘bond’ creation, as the initial step. For the federal gov’t, once Congress authorizes more issuance of Treasury bonds to deficit spend on approved expenditures, Congress is ‘printing’ the money—not the Fed; and the same goes for the non-federal gov’t, when deficit spending, you and I are ‘printing’ the money when we sign off on it—not the private bank. The Fed and the private banks are only FACILITATING our ‘printing’ of money.
Unlike the federal gov’t, the rest of us in the private sector are users of dollars. So unlike the issuer of dollars, if we want to deficit spend, we still need to first get dollars from the issuer (or an agent of the issuer). The MMT insight is that in the post-gold standard, modern monetary system (using fiat dollars) whenever deficit spending, the private sector doesn’t borrow existing bank reserves, the dollars are newly-created.
Which is a money creation process that starts with our newly-created BONDS—conjured up out of thin air and backed not only by the full faith in the value of our creditworthiness but also by the confidence in the value of our future economic prospects—which next CREATE LOANS, which then CREATE DEPOSITS of dollars.
FROM DOWN UNDER here’s another seven MMT misinterpretations:
John Adams (Chief Economist at ‘As Good As Gold Australia’, an Adelaide based gold and silver dealership where he regularly contributes political, cultural and public policy commentary for the Daily Telegraph, the Spectator Australia, the Canberra Times and the Australian Business Executive): Some of the claims by the proponents of MMT are quite fanciful and why I recently wrote my OpEd titled ‘The Madness Of Modern Monetary Theory’.
Martin North (Principal of Digital Finance Analytics, a consulting firm providing advisory services, primary consumer research, industry modelling and economic analysis to companies in Australia and beyond): Let’s go through some of the claims by MMT proponents and the Australian members of parliament who are subscribing to the theory.
John Adams: The proponents of MMT—the biggest proponent of MMT here in Australia is Prof. Bill Mitchell—would have you believe that MMT is a comprehensive theory to address a specific problem.
Martin North: Let’s talk about Prof. Bill Mitchell’s claims in his presentations.
77DIF MMT MISINTERPRETATIONS # 43: The macroeconomics taught in Australian universities is ‘fake knowledge’—that academics are teaching ‘lies’ and the research produced by academic economists is neoliberal ideological ‘propaganda’.
Fact: “It’s not true. Sure, some things taught today are wrong and you need to unlearn them but the professor is asserting his theory to undermine the entire economics profession. He is trying to say that you’re all wrong and you need to think of something different.”—John Adams __________________
77DIF MMT MISINTERPRETATIONS # 44: A federal gov’t budget is not equivalent to a household budget.
Fact: “If the people see that the gov’t budget is not the same as a household budget (that there is no traditional constraints), then ultimately people won’t accept the unit of currency that the gov’t is paying (which is precisely what is happening in Venezuela). So in ‘theory’ the gov’t can continue to spend—until in reality it can’t.”—John Adams
77DIF MMT MISINTERPRETATIONS # 45: A currency issuing gov’t can never run out of money and never has to fund its spending.
Fact: “Saying that a currency issuing gov’t can never run out of money and that it never has to fund its spending is making the point to advance a different set of priorities. When you get a gov’t that keeps spending money, it can become a problem.”—John Adams ________________
77DIF MMT MISINTERPRETATIONS # 46: For the non-gov’t sector to save, the gov’t needs to run continual budget deficits; and continuous deficits won’t be inflationary, as long as if it maintains that proportional relationship between spending and productive capacity.
Fact: “The gov’t does not necessarily have to spend in order for the non-gov’t to save. Look at Singapore. What a unique story. Singapore went from a third-world country after gaining independence from the British in 1965, to a first-world country within a single generation. Part of the reason why Singapore’s private sector jumped to first-world status was the high (40%) rates of private-sector saving. Then they were able to reinvest their savings into productive investments, create competitive companies and create even more wealth. Singapore proves that public-sector spending has little to do with private-sector savings. Furthermore, that arbitrary rule that if the growth of spending keeps pace with the growth of production (the supply side of the economy), then you are not going to have any growth of inflation. Traditional Keynesian theory is that you will avoid inflation as long as resources that were previously underutilized are utilized, but that ignores the nature of inflation and the nature of money. Inflation is the growth of the money supply. When you finance deficit spending (when you ‘print’ the money), you devalue the currency and that’s where the inflation comes from. MMT doesn’t recognize that point at all.”—John Adams ____________________
77DIF MMT MISINTERPRETATIONS # 47: “The gov’t ultimately chooses the unemployment rate (because tomorrow the gov’t could engineer full employment by starting a federal Job Guarantee program but the gov’t chooses not to have full employment).
Fact: “There are a number of things that are wrong with the thinking that the gov’t can choose the rate of unemployment or reach full employment by spending willy-nilly. In ‘theory’, you could employ idle people to reach full employment in the short run; but, in the long run, you can’t square trading-off increasing debt just to hire idle people in unproductive jobs.”—John Adams ___________________
77DIF MMT MISINTERPRETATIONS # 48: Hyperinflation in Weimar and Zimbabwe was not caused because of excessive money printing but because of a fall in productive output.
Fact: “Hyperinflation is when you print too much money. When you print too much money, you devalue that money; and how much you devalue that money depends on how much printed money is pushed into the system. If it’s pushed through the private banking system then you will have excessive private-sector debt levels—you’re going to have bubbles (like in the Australian housing sector now). Money printing can also be pushed through the public sector, like Japan’s QE, just look at the proportion of their gov’t debt vs. GDP—which is over 250%. China’s printing push is in their private financial sector and the US push is in their corporate sector, etc. As per MMT, that hyperinflation in Weimar Republic (WWI Treaty of Versailles imposed restrictions on rural manufactures in western Germany resulting in a massive drop of industrial production); and the country of Zimbabwe (Black Freedom Fighters in southern Africa breaking the yoke from British Colonialism getting rewarded with confiscated farms resulting in a 60% drop in farm output) was not caused by excessive money printing but instead by a fall in productive capacity in the economy. That argument is completely wrong and fallacious. For example, in 2006, Australia had a massive cyclone in Queensland (the nation’s largest growing region which produces 95% of Australia’s bananas) which wiped out about 80% of the banana crop (more than the productive drop of Zimbabwe). Before the cyclone, the price of bananas was about $2 / kilo and after the cyclone the price climbed above $14 / kilo. That’s a rate of inflation of 600% due to the drop in the production of bananas compared to Zimbabwe which suffered inflation of 231 MILLION percent (!) Granted that my Queensland banana example is just one crop, but if all of Australia had a 60% drop in production, would that result in 231,000,000.00 % inflation (?) The answer is no. That 1923 hyperinflation in Germany was over 300% PER MONTH; so again, if Australia had a similar drop of industrial production, just that productive output factor alone would certainly not result in that much inflation.”—John Adams ___________________
77DIF MMT MISINTERPRETATIONS # 49: Involuntary unemployment is a great economic evil and MMT solves that problem.
Fact: “Another specific problem that MMT is most concerned about is ‘involuntary’ unemployment, meaning people who want a job who can’t get a job (or ‘forced’ to be unemployed). MMT says that there are people who want a job and can’t find a job or want more hours. To solve that particular problem, MMT believes the federal gov’t that issues the currency should employ a Job Guarantee program to reach ‘full employment’. MMT then makes a series of claims (MMT skirts around the questions) of what exact jobs these will be or how you will maintain the value of the currency. This JG program is the biggest issue I have with the MMT theory.
What they don’t talk about, is that when you print all this money and employ all these people in a JG, what kind of structural imbalances do you create in the economy (?) They say nothing about what happens if you expand the money supply, if you employ idle labor, if you’re going to see some bubbles in parts of the economy, etc. They say nothing about the productivity of the work that’s being done for the gov’t or if the work by these newly-employed is useful to society. If you want full employment, rather than this massive gov’t program, how about just do something about private sector regulations—like adjusting labor laws and/or modifying the corporate laws, etc (?)
If you want to improve Australia, rather than looking at MMT, like I mentioned already, we should just instead look at Singapore. They have 2% unemployment with no minimum wage. They run with basically balanced budgets. They have little or no welfare state benefits. They have very low taxes. You don’t need MMT to reach this pathway. If we want to prepare for crisis in the coming years, instead of simply tweaking existing laws, should we just print more money and not worry about any consequences to our society—not worry about the value of our money (?)”—John Adams
Regarding hyperinflation: “The notion that no sovereign currency issuer fails to pay debts denominated in their own currency so deficits are never problematical ignores two realities. One, every hyperinflation has a deficit component. Two, when nobody wants your money you end up incurring debt in other nation’s money, which you can’t pay back.”—Mike Morris
Regarding crowding out: “Will Social Security go bankrupt unless we start effectively managing it (?) Let me say it this way. What happens over time is that we wind up spending more and more of our precious revenues to service the debt as opposed to investing in the things like education and the other things we need so we can compete in the global economy.”—Jerome H. Powell, Chairman, Board of Governors of the Federal Reserve System, Semiannual Monetary Policy Report to Congress and testimony to the Senate Banking Committee
The Total Public Debt Outstanding, aka ‘the national debt’ (approx $22 trillion) includes the total principal amount of marketable and non-marketable securities currently outstanding.
Marketable securities, aka ‘debt held by the public’ (approx $16 trillion) include Treasury bills, Treasury notes, Treasury bonds and Treasury Inflation-Protected Securities (TIPS), all of which are ‘commercial book-entry’ and can be bought and sold in the secondary market at prevailing prices.
Non-marketable securities, aka ‘intra-government holdings’ (approx $6 trillion) include savings bonds as well as special securities called Government Account Series (GAS) issued only to local governments, state governments and Federal trust funds (payable only to the persons or entities to whom they are registered such as Social Security).
The Total Public Debt Subject to Limit (the ‘debt ceiling’) is the maximum amount of money the federal government is allowed to ‘borrow’ (the amount of deficit spending allowed to be financed with net additions of $$$ into the banking system) under the authority granted by Congress.
In 1917, Congress, pursuant to the Second Liberty Bond Act, for the purpose of expediency, delegated authority to the Treasury Department to ‘borrow’ without needing to seek congressional authority—subject to a limit (ceiling) previously set by Congress.
“The debt ceiling law was a historical accident. At some point, it dawned on legislators that approval of the debt ceiling could be used as a bargaining chip. Debt ceiling deadlocks soon became much more dangerous.”—Ben Bernanke
The debt limit (debt ceiling) is the total amount of money that the federal government is authorized to deficit spend including Social Security checks, Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.
Congress imposes a debt ceiling on the ‘statutory debt’. The statutory debt is a little less than the total outstanding U.S. debt that is shown on the national debt ‘clock’ (it is the outstanding ‘debt’ after adjustments like unamortized discounts, old debt, guaranteed debt and debt held by the Federal Financing Bank).
The debt limit does not authorize new spending commitments—it simply allows the federal government to finance existing legal obligations that Congresses and presidents of both parties have already made in the past. Failing to increase the debt ceiling would be a ‘full’ government shut down (which has never happened in American history because it would cause the government to default on its legal obligations causing catastrophic economic consequences).
Rather than being a full shutdown, this shut down, like any other shutdown, is ‘partial’ because 75% of federal government funding has already been approved for the budget (fiscal) year that started in October 2018. Meaning that only 25% of government agencies no longer have the necessary funding to keep operating.
In a partial shutdown, federal agencies must discontinue all non-essential discretionary functions until new funding legislation is passed and signed into law. Essential services (i.e. related to public safety) continue to function, as do mandatory spending programs not subject to annual appropriations because those are already authorized either for multi-year periods or permanently (i.e. Social Security, Medicare and Medicaid payments).
A year ago, on February 9, 2018, as part of a two-year budget deal (that raised both defense and domestic spending), President Trump signed a bill suspending the debt ceiling until March 1, 2019 (and why the ‘Current Statutory Debt Limit’ on the enclosed graph says ‘$0’).
On March 2, 2019, the debt ceiling will be reinstated at whatever the debt level is at that time (likely around $22+ trillion).
Come March 2, same as in recent years, until the debt ceiling is raised again by Congress, the Treasury Department will delay any fiscal crisis by deploying so-called ‘extraordinary measures’ to continue paying the federal government’s bills after the debt ceiling has been reached using incoming cash flow (i.e. using federal tax revenues).
As for right now, this is the third time that the federal government has partially shut down since President Trump took office. The government partially shut down for three days in January 2018 after an impasse in the Senate over federal funding. The standoff ended when lawmakers passed a short-term spending bill. Less than three weeks later, the government partially shut down for a second time after Congress failed to pass a spending bill to keep the agencies running. That shutdown was the shortest one on record. It lasted less than six hours and ended when lawmakers passed a six-week spending bill. Congress passed a short-term funding bill in late September 2018 to give them time to finish their work.
Many federal government agencies and programs rely on annual funding appropriations made by Congress. Every year, Congress must pass and the President must sign budget legislation for the next fiscal year, consisting of 12 appropriations bills (discretionary funding), one for each Appropriations subcommittee.
When the last fiscal year ended on Sept. 30, 2018, Congress had passed just five out of 12 appropriations bills (setting discretionary spending levels). That short-term bill went through midnight December 7, but after former President Bush died – which led to a national day of mourning and a state funeral – President Trump and lawmakers agreed to extend the deadline through December 21.
Lawmakers had until midnight on December 21 to enact legislation to fund the programs covered by the remaining seven appropriations bills—the deadline specified in the most recent ‘continuing resolutions’ (which temporarily funds the federal government in the absence of full appropriations funding bills) that these programs had been running on.
Note that all this differs from a ‘sequestration’ which is reductions in caps constraining the total amount of funding for annually-appropriated programs.
On December 20, the Senate declined to even vote on a short-term spending package containing $5 billion of southern ‘border wall’ funding knowing it could not get the 60 votes needed (could not get some Democrat senators to support it). This type of legislation can be filibustered and requires 60 senators to end a filibuster—to overturn a procedural objection to a provision believed to be ‘extraneous’ (in this case, a border wall).
In a tweet sent on the morning of December 21, President Trump urged Senate Majority Leader Mitch McConnell to ‘go nuclear’ (abandon Senate rules and allow a simple majority of 51 Republican senator votes to end a filibuster), which was an idea that McConnell rejected. President Trump had seemed to be willing to sign a ‘clean’ spending bill (with no wall funding) but sharply changed course and let the government shut down at midnight.
President Trump allowed the short-term funding to lapse and the shut down to begin just as he insisted in that December 12th Oval Office meeting (with then-incoming House Speaker Pelosi & Senate Minority Leader Schumer) that he would be ‘proud’ to shut the federal government down if he didn’t get the $5B he demands for a border wall with Mexico.
UPDATE (coincidentally just a few hours after this was posted) :
On January 25, 2019, President Trump announced a deal to reopen the federal gov’t for three weeks (until February 15th) ending a 35-day partial shutdown (now the longest in history) without securing any of the border wall money he had demanded.
“It’s not over. The GOP still controls the Senate. The Dems will make some serious concessions to border security before all is said and done. One thing the Left is conveniently ignoring is the Wall GoFundMe which collected 3 times the money that Sanders’ supporters contributed to his POTUS run in 2016.”—Mike Morris
Agreed Mike…Speaker Pelosi won that round impressively but like my dad used to say, ‘It’s a 12 round fight’.
Politics aside, for Pure MMTers, that GoFundMe which Mike Morris mentioned, is another perfect example of using creative pen strokes, not keystrokes, to unlock would-be unproductive savings dollars and looping them back into the functional economy—the modern monetary solution needed in an age of PayGo and rising wealth inequality fed by ‘more deficits’.
Another thing that the entire MMT community ignored (or completely missed) is that there has been NO DEBT LIMIT for almost a year. This is yet another glimpse of the future, where the Modern Monetary ‘Formality’ of having a debt limit is disposed of and the Modern Monetary Theory enters the final stages to become the Modern Monetary Reality.
Politics makes strange bedfellows (like when ‘description’ MMT hooks up with ‘prescription’ MMT).
Warren Mosler on a Real Progressives broadcast a year before the 2018 US gubernatorial (midterm) elections:
“How are Treasury securities paid off (?)—the Fed just shifts the dollars from securities accounts at the Fed to reserve accounts.”
NOTE: Mr. Mosler says that THOSE dollars are ‘shifted’. However, when talking about paying federal taxes, when talking about dollars that go to the Daily Treasury Statement account at the Fed—the same account where all federal spending is drawn—he says otherwise. In the case of taxes, Mr. Mosler prefers to say that those particular dollars are ‘shredded’.
“Paying off the debt is just a matter of shifting dollars from somebody’s savings account to their checking account, the Fed does that every month for like $50B when the bonds come due, and there are no grandchildren or taxpayers in the room when that happens.”
NOTE: Mr. Mosler is conflating ‘rolling over’ those Treasury bonds (aka ‘revolving’ the debt), where no taxpayers are involved, with ‘paying off’ the bonds for good, where taxpayers ARE MOST CERTAINLY involved (where prolonged budget surpluses are involved). Similar to the circuitous route of federal tax dollars, that redistribution of bonds from one bond investor to another bond investor, also doesn’t fit the political ‘prescription’ MMT narrative.
“Of course it couldn’t be a problem, that’s complete nonsense, I’ve been hearing that for 45 years, it’s just a reserve DRAIN at the Fed and everybody inside the Fed knows this, they know it’s not a funding operation.”
NOTE: So Mr. Mosler, a seasoned Main Street banker, a successful Wall Street trader and now a national political player, seemingly does know the difference between a dollar ‘drain’ (paying federal taxes / lowering of deficits) vs. a dollar ‘destruction’ (paying off Treasury bonds / lowering the national debt)—as well as everybody inside the Fed knows. Which is why, when convincingly explaining the ‘description’ (the Pure MMT), he can also seductively whisper those sweet nothings of ‘prescription’ (the pillow talk MMT).
Floating above the muddy waters, the lotus flower is a symbol of PURITY. The lotus plant has several meanings in Buddhism. The main one is that a lotus grows in mud, rises through muddy waters, bypasses attachment, shuns any desire, and once it has risen above the murk, the lotus flower blooms (it achieves enlightenment).
2018, what a year, and it sure was one for the Modern Monetary Theory books.
The year began with one of the MMT PhDs, telling us that “America was a junk economy” (and that was coming from someone with their degree IN ECONOMICS while we were only 15 months shy of officially entering the Longest Economic Expansion In UNITED STATES HISTORY).
That was followed by other MMT econ scholars insisting that we needed a make-work ‘JG’ program, where the federal gov’t creates ‘jobs’ (during A LABOR SHORTAGE).
In Australia, we had another MMT academic lecturing us that “exports are ‘real’ costs” (while Australia, thanks to the ‘real’ benefits of exports, was entering its 27TH STRAIGHT YEAR WITHOUT A RECESSION).
In 2018 we had MMT admins saying that money in bank accounts is “only acting like money” because it’s “lookalike IOU” (and followers actually bought into that nonsense). We had an unemployed MMT evangelist going to Washington, D.C., explaining to federal policymakers how to run the country and after getting back home, setting up a GoFundMe page for handouts (because he couldn’t even run a household). We had MMT leadership telling us that job-CREATING exports “are a cost” (and that job-DESTROYING imports “are a benefit”). We had an MMT trader telling you to leverage out and go long on oil, go long on gold; to short the dollar, to short the 10yr (and if you actually did all of that, you now know what ‘getting mental game’ actually means). We had those adorable Real Progressives still wearing ‘taxes don’t fund spending’ floaties in their MMT kiddie pool (even though Warren Mosler scolded them at least 117 times not to say that). We had 15 midterm-election candidates: Seale, Bashore, Glover, Mimoun, Wylde, Smith, Ayers, Barragan, Hoffman, Ringelstein, Abrahamson, Baumel, Estrada, Canova and even including Mr. Mosler, who thought that appearing on a Real Progressives broadcast was a good idea (who all then lost their elections); and after those midterms, these Real Progressives goofballs kept reprimanding the rest of us to #learnmmt (when ironically it’s them that are still nowhere near the vicinity of grasping MMT).
In other words, 2018 was a year of peddling fake ‘prescription’ MMT (under the guise of promoting pure ‘description’ MMT); it was a year of waving bye-bye to facts (because it got in the way of pushing dopey narratives); and it was a year when folks mixed their politics with their economics (and diluted both at the same time). In short, 2018 was just more of the same.
You can expect, that in 2019, what you’ll be hearing from political ‘prescription’ MMTers will be them telling you (again) who to blame, and that we need to be deficit spending on more ‘this’, and on more ‘that’; because in their utopia, the Fix-All is always just a ‘keyboard stroke’ away (while here in reality no keyboard can stop a federal gov’t shutdown).
In 2019, rather than cursing and fighting the windmills, you can be silently observing and learning how to properly (read: PURELY) play the cards that are presently being dealt (even if they’re ancient cards from a bygone, gold-standard era).
You can be blooming above the muddy waters (above the MMT kiddie pool), relying solely on facts, math & data (relying on the Writings of God).
In the new year you could rise above the ideologies, bypass the pet theories, shun the narratives, and achieve pure MMT enlightenment.
Sure, those locals in 1800’s Ghana (where the ‘taxes create unemployment’ yarn is derived) became ‘unemployed’ the day a ‘Hut Tax’ was enforced on them, but that doesn’t mean that they were not working before that!
They weren’t just sitting around doing nothing before the British showed up—they were hunting and gathering the things they needed. All that hut tax did was give them another new thing they needed to hunt and gather (the money to pay the new tax).
Fast forward to the 20th century, before US federal income tax became the law of our land (with the ratification of the 16th Amendment in 1913), citizens were employed—because they had bills to pay—and after those taxes were imposed, the only change was just that citizens had another bill to pay.
‘Taxes create unemployment’ is a catchphrase, using easy-to-remember, bumper-sticker logic to help grasp a simple ‘description’ MMT insight; but once again, the political ‘prescription’ MMTers take yet another analogy or meme too literally.
We can read in ‘The Seven Deadly Innocent Frauds’ (7DIF Fraud #1 pg 25) why—even though the federal gov’t is the issuer of fiat dollars and spends in its own fiat dollars—the federal gov’t still needs to collect tax dollars from us, that “taxes create an ongoing need in the economy to get dollars”. Mr. Mosler (correctly) explains that the financing function of federal taxation took the backseat to more important functions. One of those functions, an MMT pillar, is that in the post-gold-standard, modern monetary system, the federal gov’t no longer needs to collect dollars to spend, but YOU still need to collect dollars to spend—and to pay taxes.
In other words, one function of federal taxes today is to maintain demand for the currency. The other function is to maintain price stability, or as Mr. Mosler puts it, “leaving room for the government to spend without causing inflation”.
The only reason ‘taxes create unemployment’ keeps getting regurgitated is to push a narrative that Thy Federal Gov’t Giveth You Unemployment And Thy Federal Gov’t Can Taketh Unemployment Away, so if in charge, that’s another thing the almighty ‘prescription’ MMTers will do—they’ll also get the federal gov’t to guarantee a ‘job’, for poor little mortal you.
In other words, when the political MMT Party folks distract you by pointing at those ‘Evil’, ‘Neoliberal’, ‘Racist Murderers By Proxy’, they pull the oldest trick in the book (the never-ending finger pointing) when they say that taxes (and other ‘intentional’ federal gov’t policies) ‘create’ unemployment.
Taxes don’t actually create unemployment, but saying it does create a ‘problem’ (that ‘prescription’ MMTers will always be gainfully employed at ‘solving’).
Deadly Innocent Fraudulent Misinterpretation #23: Taxes ‘value’ the currency.
Fact: Production, not taxes, values the currency.
“All Innes, an amateur journalist, was saying in his ‘Credit theory’, was the same point that Knapp was making in his ‘State theory’, which is, that in opposition to the ‘Metallic theory’, what gives money the value, is its acceptability for payment of taxes.”—Michael Hudson, American economist, professor of economics at the University of Missouri in Kansas City and a researcher at the Levy Economics Institute at Bard College
What Mr. Hudson is saying there is simply pointing out the obvious in those Credit / State / Circuit / Debt theories of money. Which is that the monetary sovereign’s taxing power is the magical reason why today’s ordinary pieces of paper that we call fiat currency, are valuable (compared to yesteryear’s hard currency that needed to be literally made out of, or backed by, a precious metal like gold or silver, in order to be valuable).
MMTers routinely misinterpret that quote as meaning ‘taxes value the currency’ without realizing that they are putting the cart before the horse. Today’s US dollar, a ‘soft’ currency, is still ‘valuable’, like a ‘hard’ currency used to be, because the dollar, like any legal-tender sovereign currency, can settle debts—with taxes being one of many debts. The fact that taxes must be paid in dollars gives dollars some initial ‘velocity’ (it kick-starts the currency into first gear), sure, but that only goes so far—and that’s exactly where MMTers who say ‘taxes value the currency’ stay stuck in first gear.
For example, let’s again take that analogy about the Ghana Hut Tax in #22 above. That tax ‘creates value’ at first, sure, but Ghana would then need PRODUCTION to keep the currency ‘valuable’. Ghana would need to start actually producing goods & services and making things of ‘value’ available for sale. In addition, they would also need to avoid severe economic shocks, like gov’t corruption, that would affect production, or else the actual value of the currency—regardless of taxation—goes poof. The MMT takeaway is that once you change from a fixed-currency regime to a floating-currency regime (once you take off those ‘golden training wheels’), the currency’s value changes from only being whatever it’s *literally* made of; over to many other moving pieces (over to multiple sophisticated variables), including the production of that country and the full faith (real and perceived) of that monetarily-sovereign issuer.
“Taxes do not ‘drive the currency’ / ‘value the currency’. Look at the Middle East countries that do not tax. Here in the US, which does tax, the Fed mandate is maximum employment, or how I see it, maximum PRODUCTION. That’s what mostly values the currency—not the taxes. No matter how much taxes you collect, if the production collapses to nothing, then what is the currency valuing? A) Nothing! The further an economy is from its full productive output, the less the currency is worth. Anytime there is a large collapse in production, the currency devalues, which causes mild inflation at best, or severe inflation with possible hyperinflation at worse. Take hyperinflation, which is very poorly understood by most traditional economists. The widely held belief is that an increase in government ‘debt’ (aka too much ‘money printing’) causes hyperinflation. But research shows that hyperinflation is not merely the result of ‘money printing’ (an expansion of the money supply). In fact, it tends to occur around very specific and very severe economic circumstances (too much foreign debt, loss of a war, rampant corruption, regime change, collapse in confidence) that resulted in a severe collapse in PRODUCTION, which led to ‘money printing’ (which led to an increase in the money supply)—which ultimately led to hyperinflation. The correlation of ‘money printing’ was not causation.”—Jim ‘MineThis1’ Boukis
“Saying ‘taxes gives value to money’ is sloppy language, sloppy thinking, and just plain wrong. What matters is the obligation against your productive capacity. It can be said that taxes are a predicate condition in order to require work / production to get the money to pay the tax. The corollary is that the value of money is defined as the amount of work / resources needed to produce goods & services for sale either to the Government or within the Private Economy. Then a portion of the money is returned as taxes to make sure you keep using the currency to buy the real goods & services available (which makes money relevant to the economy). Miss the distinction between the predicate and the corollary and all the money and all the taxes in the world will not give currency value if there is little or nothing produced available to purchase (which makes money irrelevant to the economy).”—Charles ‘Kondy’ Kondak
“What is money? It stores value, measured by productivity, at par. In other words, an airline pilot’s dollars aren’t worth more than a sidewalk gum-scraper’s dollars—the pilot just earns more dollars. Money exists in two frames at the same time: Liability = Asset, as well as, Debit = Credit. Analyzing money flows is as simple, and as complex, as tracing which balance sheet shrinks vs. which balance sheet expands. Understanding is found in the awareness of the productivity swap. You’re not trading paper or keystrokes, you’re trading productivity-based value. You’re investing in production. The value is the production in economies, in firms, and in people.”—Mike Morris
“There’s a reason why the MMT people are usually wrong and the technical, non-ideological people are usually right.”—Logan Mohtashami
Deadly Innocent Fraudulent Misinterpretation #24: The federal gov’t is the sole monopoly ‘supplier’ of dollars.
Fact: The federal gov’t is not the sole monopoly ‘supplier’ of dollars.
The federal gov’t is the sole monopoly ‘issuer’ of dollars (the origin source of dollars), yes; but the sole monopoly ‘supplier’ of dollars (the only source of dollars), no. The federal gov’t supplies dollars, and the federal gov’t also delegates the function of money creation to their banking agents (to also ‘supply’ dollars into the banking system).
When Warren Mosler uses the analogy (one of my favorites) that the federal gov’t is ‘The Center of the Universe’, what that means is that the federal gov’t, the issuer of dollars, has the sole monopoly POWER over dollars. One example, the federal gov’t (via the Fed) has power to manipulate, to literally set, the ‘price’ (the short-term interest rate), of money—to influence long-term rates, spending decisions, etc. Another example, the federal gov’t (via Congress) has the Power of the Purse to authorize federal-gov’t deficit spending (to create money). Furthermore, the federal gov’t delegates the banks (under strict federal-gov’t supervision and regulation) to also create money—or more specifically, to facilitate the rest of us in the private sector to create money.
MMTers routinely get this confused because they are less concerned with the monetary ‘description’ and more interested in pushing a political ‘prescription’. They need listeners to believe that ‘federal gov’t money’ is ‘higher’ in a ‘hierarchy’ of money—that only federal-gov’t deficits can solve the ‘problems’. Try not to let ‘prescription’ MMTers drag you down their ‘banks don’t create money’ rabbit hole, or up into their ivory-tower echo chambers to peddle their pseudo-intellectual ‘exogenous’ creation is ‘superior’ to ‘endogenous’ creation NONSENSE.
There is a reason why you will never, EVER, see any bill in your lifetime quoted in ‘exo’ or ‘endo’; or any statement quoted in ‘federal gov’t money’ or ‘bank credit’.
That’s because all money is money.
They are all DOLLARS IN THE BANKING SYSTEM.
Deadly Innocent Fraudulent Misinterpretation #25: Only bank money creation ‘nets-out’.
Fact: All money creation ‘nets-out’.
Just like you, me, any household, or any business can pay back their debt, so can the federal gov’t. However, MMTers routinely misinterpret that as there being some perceived differences between federal-gov’t-sector money creation and nonfederal-gov’t (private) sector money creation. They usually do this to propagate a narrative that only more federal-gov’t money creation—that only more federal deficits—is the Fix-all (to their perceived problems).
Those that are fully-grasping MMT know that issuer solvency is basically the main difference between any money creation. For example, you are more likely to get your dollars back if you gave it to the issuer of dollars—like when investing in an interest-bearing term deposit at the Federal Reserve Bank (aka ‘buying a Treasury bond’):
“If one wants to put the finest of points between the two, perhaps the only difference is default risk on the money created by each. In the end, the most overzealous exo/endo MMTers want to eliminate private bank credit. Forgive them for they know not what they say, comrade.”—Charles ‘Kondy’ Kondak
MMTers like to say that ‘bank credit’ (their pet name for private-sector money creation) ‘nets-out’ as if to imply that federal-gov’t money creation can’t. They are misinterpreting the difference between federal-gov’t money creation and private-sector money creation, which is, simply that, one creates ‘risk-free’ bonds, and the other, doesn’t.
The reason why MMTers (deadly and innocently) get so mixed up with all this is that they are confusing Assets with Capital. When thinking about private-sector money creation (deficit spending) that ‘nets-out’, keep in mind that, just like federal-gov’t money creation that adds Net Financial ASSETS, private-sector money creation is an addition of ASSETS going into the banking system—but neither is talking about an addition of CAPITAL. Assets minus liabilities equal capital. A newly-created private-sector ‘bond’ (your personal promise to pay back the money with interest) adds dollars (ADDS ASSETS) into the banking system (but NOT Capital). For example, when you buy a new car on credit, with no money down, your net worth (your Capital) doesn’t go up because that car (your Asset) and your ‘bond’ at the dealership (your Liability) ‘nets-out’, but the assets sitting in your driveway (the total assets posted on your balance sheet) absolutely do up.
The same goes for the federal gov’t. If a new battleship is built and paid for on credit, the amount of ASSETS (the amount of NFAs) goes up, but the amount of the federal government’s net worth (Capital) doesn’t go up because that brand-new USS BONDHOLDER (Asset) ‘nets-out’ with that brand-new Treasury bond (Liability).
When the federal gov’t creates money there is an attached quote ‘debt’ unquote that CAN (just like private-sector money creation) ‘net-zero’; however, another slight difference is that it’s not intended to:
“It is *technically* debt, but it’s a debt that is never expected to be repaid.”—Michael Hudson
The MMT insight is that unlike private-sector money creation, federal gov’t ‘debt’ is never expected to ‘net-out’—not that it doesn’t at all.
Deadly Innocent Fraudulent Misinterpretation #26: There is no such thing as a ‘Fractional Reserve System’—it does not exist.
Fact: There is such a thing as a fractional reserve system—it still does exist.
“On January 18, 2018, the Fed updated its reserve requirement table. It required that all banks with more than $122.3 million on deposit maintain a reserve of 10 percent of deposits. Banks with $16 million to $122.3 million must reserve 3 percent of all deposits. Banks with deposits of $16 million or less don’t have a reserve requirement. In order to give banks an incentive to grow, the Fed changes the deposit level that is subject to the different ratios each year.”—Reserve Requirement and How It Affects Interest Rates
In other words, here on planet earth, US banks are required to have a ‘fraction’ of their total deposits on ‘reserve’ (called the cash reserve ratio). These $$$ are deposited at the Fed (called ‘required reserves’). Banks also have $$$ on deposit at the Fed that is above the required amount (called ‘excess reserves’). Just like the financing function of federal taxation, the traditional function of the fractional reserve system is no longer needed—but it still exists. It’s still the Modern Monetary Formality, like those pesky accounting rules and appropriations laws that, albeit unnecessary, never cease to frustrate the political ‘prescription’ MMTers.
The pure MMT insight is that, operationally, the federal fractional-reserve system is NOT NEEDED to create deposits—not that there is no fractional reserve system at all. That’s fake MMT, and anyone saying ‘there is no fractional reserve system’ has no idea how ridiculous they sound to experts in the field. Good luck telling the person that just got a costly margin call, or had their f/x account blown out (because their losses exceeded their required fractional reserve), that ‘there is no fractional reserve system’.
H/T to Steven Witcher who was keeping the MMT pure in an online discussion over at the Intro To MMT site on Facebook. He nails it on the head here—that MMTers are confusing ‘unlimited’ fiat $ creation with ‘unrestricted’ fiat $ creation:
“Banks still use the fractional reserve system in the US as a holdover. The difference is, since ’71, there’s no limits on reserves [but there’s still restrictions]. The key dates are 1913 (end of wildcat banking & establishment of the Fed); 1934 (gold became reserves rather than money); and 1971 (gold then becomes just a market commodity & reserves then just become a number). We [the United States] didn’t have any semblance of federal fractional reserve [like other countries did] until the Federal Reserve Act [of 1913]. Exchanging money for gold [domestic convertibility] ended in the 30s. In essence, before 1934, we had a ‘floating’ [a ‘partial’ or ‘managed’] conversion rate and banks were limited in their lending based on reserves—that’s your traditional fractional reserve system. 1934 [The Gold Reserve Act of 1934 changed the convertibility from $20.67 to $35, a 41% devaluation, which also outlawed private possession of gold and ordered all gold held by the Fed to be surrendered then transferred to the Treasury; BUT] changed nothing about the fractional reserve system, it just added reserves. 1934 was a massive increase in that reserve part of the fractional reserve system [by design to ‘inflate’ the money supply to get more dollars into the hands of consumers]. We maintained a fixed exchange rate [international convertibility] to gold afterwards, but because of that, the money supply was still limited by gold until ’71. Post 1971, [private] banks have no limit on how much it can lend, and neither does the [federal] discount window, because the entire system is based on risk assessment—but with no limit [restrictions, yes; a limit ‘ceiling’, no]”—Steven Witcher
Deadly Innocent Fraudulent Misinterpretation #27: Paying federal taxes is a destruction of dollars.
Fact: Paying federal taxes has not been a destruction of dollars since 1957.
MMTers, even The Great Ones, are still not fully-grasping the subtle differences between a ‘dollar drain’ and a ‘dollar destruction’—and are misinterpreting these two main levers in our modern monetary system.
For example, in a debate about trade differentials, Professor Steve Keen was (incorrectly) saying a trade surplus was a “third source of money creation”. The reason why he was wrong is because, counter-intuitively, a trade ‘deficit’ does not mean a creation of dollars like a budget deficit would mean. A trade deficit only means a drain of dollars to the nonfederal gov’t / international (aka foreign sector) from your nonfederal gov’t / domestic (aka private sector). Rather than a trade ‘deficit’ being ‘financed’ with a ‘creation’ of dollars (as Mr. Keen thought), or being a ‘destruction’ of dollars (as many others think), the amount of the trade deficit is instead only telling you how many dollars that just DRAINED from one nonfederal gov’t sector to another.
In the modern monetary system, using a free-floating currency (using f/x markets), US dollars never ‘leave’ the US banking system in a US trade deficit; however, that trade deficit is telling you exactly how many dollars worth of potential aggregate-demand from factories, salaried employees, surrounding businesses, neighborhood real-estate values, etc etc, that just drained from the US private sector to a foreign country.
It was Warren Mosler who corrected Steve Keen in that 05/07/18 debate (who graciously walked back his ‘third source of money creation’ posit); yet recently, it was Mr. Mosler himself, saying ‘old tax dollars are shredded’ who is now seemingly not seeing that subtle difference between a ‘dollar drain’ and a ‘dollar destruction’. This was overheard in a 12/20/18 post at the Intro to MMT site on Facebook (asking if anyone has worked at the IRS and has first-hand experience with shredding cash tax-payments):
“Warren Mosler, your language here is quite misleading. It’s old cash which is shredded, not tax payments. You probably mean this symbolically, but it’s quite misleading to the lay people we are trying to educate.”—Ken Otwell
“Ken Otwell, any payments made to Gov with old cash, including tax payments, etc., are shredded.”—Warren Mosler
Even the great ones swing and miss sometimes. Ken Otwell is correct. Saying that ‘tax dollars are shredded’ (no matter whether it is meant to be taken literally or metaphorically) is quite misleading and is causing deadly and innocent misinterpretations throughout the MMT community. Can we pinpoint to where this misrepresentation of taxes being ‘destroyed’ is happening? Yes we can, and let’s call it a subset to #27:
Deadly Innocent Fraudulent Misinterpretation #27a: “Federal tax remittance is subtracted from the US national debt on that big spreadsheet the gov’t runs.”
Fact: Federal tax remittance has NOT subtracted US national debt on the consolidated balance sheets of the federal gov’t since 1957.
“In recent years, as federal budget deficits have narrowed and even disappeared…they tend to be short-lived. When the federal government’s fiscal condition improves…do budget surpluses induce increases in federal spending? Or…reductions in taxes? Or, some combination with other possibilities, e.g., reducing the national debt? Consequently, only a small portion of surpluses in the modern era typically goes for debt reduction.”—Budget Surpluses, Deficits and Gov’t Spending, prepared by Vedder & Gallaway, Professors of Economics, for the Chairman of the Joint Economic Committee, December 1998
In other words, what these economists knew two decades ago is what many in the MMT community today haven’t yet grasped—that Congress not only has to approve federal-gov’t money creation (addition of NFAs), but its destruction (subtraction of NFAs) as well. MMTers, especially the ones talking from the political ‘prescription’ side of their mouths, are either letting facts get in the way of a good ‘taxes are a destruction’ story, at best; OR these MMTers are confusing the payment of federal taxes lowering the budget DEFICIT, with taxes lowering the national DEBT, at worst. Federal taxation does pay for debt SERVICE, yes; but do taxes pay for debt REDUCTION, no—not since 1957—the last time the national debt decreased. Political MMTers (that want their ‘prescriptions’ to be taken seriously) need to stop getting their ‘descriptions’ wrong.
Stephanie Kelton once replied “No” to the question “Do taxes fund federal spending.” As a result of that SINGLE Tweet, her entire choir instantly accepted that as gospel and started saying ‘federal taxes don’t fund spending because federal taxes are a destruction’ (sending them over a cliff).
Warren Mosler implies that federal ‘taxes are a destruction’ in 7DIF, based on a SINGLE fact that old cash bills are being shredded by the federal gov’t—but he left out the part where those tax amounts are credited to the Daily Treasury Statement account because he doesn’t consider that asset (that ‘soft currency’) in the DTS, as the Treasury getting, quote, a ‘thing’, unquote—YIKES (try telling the federal taxpayer—who votes—that just sent a check payable to the ‘US Department of the Treasury‘ for federal taxes due that ‘the Treasury isn’t getting a *thing*’)!
Just like Mr. Mosler, Randy Wray also argues that federal ‘taxes are a destruction’ based on a SINGLE instance from 260 years ago. In this case, a time in US colonial history that tax receipts were, indeed, destroyed—but causation is not correlation. Professor Wray (deadly and innocently) misinterprets the ‘burning’ of tax receipts by the Commonwealth of Virginia in the eighteenth century as meaning ‘taxes are a destruction’ today. What actually happened then, was akin to what we now call an Open Market Operation (that executes a dollar add or a dollar drain to maintain price stability). During The Seven Years War (1756–63), Virginia colonists needed to pay more taxes to help finance our then-mother-country’s war effort. Paying more taxes to Britain meant more ‘hard-currency’ dollars leaving Virginia and being shipped to England. In order to counter the deflationary effects of this decrease in the Virginia money supply, the Virginia Commonwealth would (wisely) introduce legal-tender ‘notes’ (do a ‘dollar add’). When the war ended, and the notes had served their purpose and were no longer needed (because the overseas war was no longer needed to be funded), Virginia would simply burn any of these notes received as tax payments (do a ‘dollar drain’) until the notes were out of circulation.
Note that this misinterpretation is similar to any other garden-variety ‘financial helper’ on the airwaves today, who easily (but not as innocently) snake-charms folks by constantly pointing to the tiniest part, to the SINGLE instance and saying ‘See, look right there, I told you so’. Rather than heed any of that ‘financial advice’, you should instead be standing way back from the picture, watching all the moving pieces and tuning out the noise. Which is again the reason why I loved Mr. Mosler’s ‘Center of the Universe’ analogy, because it personally helped me to bypass attachment—meaning to not consider MMT as being chiseled (attached) in stone—and attain pure MMT enlightenment.
What the ‘taxes are a destruction’ mentality is still not (deadly and innocently) grasping is the ever-so-slight difference between a ‘drain’ of dollars (a SWAP of dollars), like paying federal gov’t taxes / like federal gov’t surplus spending / like trade differentials; and a ‘destruction’ of dollars, like when Treasury bonds are paid off / like when corporate bonds are paid off / like when credit-card balances (a personal ‘bond’) are paid off in full. When you pay off your entire credit-card balance at the end of the month, you destroy dollars that you previously created (that you previously ‘conjured up’ during the month). Even more complex, is a Fed operation, where you can have a dollar drain (from savers to borrowers) with a simultaneous dollar creation into the banking system (to buy bonds on credit), and then followed by a dollar destruction (to return back to ‘normal’)—both a $$$ drain and a $$$ destruction happening discreetly out of money-supply-circulation sight (like QE and QE unwind).
It’s better to think of all money creation as being the newly-created BOND being created—and not the ‘money’ being created—because sometimes the ‘money’ being created is something you can’t always see. That’s a big reason why many MMTers keep struggling with putting different labels on the ‘money’ that the private sector creates (instead of just calling them $$$)—because they’re trying to wrap their hands around something you can’t always see. Rather than getting sidetracked concentrating on different ‘kinds’ of money, different ‘kinds’ of money creation, and different ‘kinds’ of money hierarchies, MMTers should instead be pinpointing the paramount part of all money creation—the bond creation. Whether the federal gov’t is deficit spending (creating a bond) to put a rover on Mars; or you are deficit spending (created a bond) to drink a cup of Starbucks, that is the exact moment it becomes a net creation of assets.
That newly-created bond is first and foremost. That bond represents the net addition of newly-created $$$ into the banking system (as opposed to not paying on credit and using already-existing $$$ in your pocket). If there is only a single thing that readers takeaway from this entire post, let it be this: Newly-created bonds create loans create deposits.
Here’s a quick story that is both relevant and quite interesting. In medieval England days, when you wanted to pay on credit, a notched tally stick was created (‘dollar creation’). To represent the newly-created asset with an attached liability of debt incurred, the stick was broken in two and the distinct grain-structure of the wood made the pieces ‘carbon copies’. The creditor (let’s say the King of England) got the asset side, the larger piece; and the debtor (let’s say a poor English subject) got the liability side, the shorter piece (and that’s where the phrase ‘getting the short end of the stick’ comes from). When the debt was paid back (when the subject paid the King back), the sticks were destroyed (‘dollar destruction’ aka ‘net-zero’).
Think about how innovative that was. This tally stick basically worked like money (one side was effectively a note-receivable; and the other side was the offsetting note-payable). As Real Macro instructor Mike Morris likes to say about money, the tally stick was ‘liquid production’—and in multiple ways: 1) People could now easily buy on credit (meaning more purchasing power in the hands of consumers); 2) the creditor side of the stick was essentially a note-receivable in bearer form (what we today call a ‘bearer-bond’) so shop owners holding the asset side of the tally stick could make capital with capital along with making money on their sales; 3) when other shops heard about that innovation (shop owners with excess cash, that only needed more sales rather than more cash), they jumped in on this credit action; 4) the more tally sticks created, the more competitive borrowing rates got; and 5) just like the taxing authority today can ‘pump the prime’ and deficit spend to stimulate the economy, the King could do the same by simply spending more ‘legal-tender’ tally sticks, which adds more financial assets into the monetary supply.
If the King was deficit spending (if an English subject provisioned the King on credit), the tally sticks were newly-created with the King as the debtor (the King had the short end of the stick). Here’s why I mentioned tally sticks in the first place: One way to settle that debt that the King owed to that English subject, the King could accept the offsetting piece of the stick as settlement of taxes due to England—and then those particular tally sticks were destroyed. Meaning in that one SINGLE instance of a payment of taxes, yes, that was a destruction, sure; but not to be misinterpreted and to be concluded that ‘tax payments are a destruction’. You can trust me on this, the English subject next in line settling his ‘federal’ taxes due by paying with gold, with bales of tobacco or cotton, with animals or their fur, or whatever else was legal tender—those weren’t ‘shredded’ (those taxes weren’t ‘destroyed’).
Just like deficit spending then, deficit spending today is a dual creation (two pieces). A creation of a newly-created bond (a newly-created Asset); PLUS, what ‘nets-out’ that asset, that other piece, the debt (the Liability). Even to this day, if you use a credit card, you are creating a tally stick, which is your promise to pay the vendor back (which is your ‘bond’). The seller (the creditor) keeps one part of that little piece of wood that you marked (that little piece of paper that you signed); and you the buyer-on-credit (the debtor) gets handed the other piece of wood (the paper receipt)—just like 500 years ago.
In other words, when you borrow / deficit spend / pay for something on credit today, you are creating both an asset and a liability (that ‘nets-out’ the asset). For instance, if you buy a new car on credit / no cash down / borrow the full price, then you are creating the ‘bond’ (your promise to pay back the money with interest) that the dealership gets. The car dealership (creditor) swaps out of a car on the lot and into your newly-created bond (asset). You (debtor) get that car, which doesn’t increase your net worth (capital) because it ‘nets-out’ with other half of the tally stick (liability) that you also get. (Note: The dealership’s net worth doesn’t change either, not until you, or a third counter party, makes good on your loan and only then the dealership collects the mark up, aka ‘profit’—otherwise the dealership’s net worth goes down if you default on your loan). The insight is that unlike an all-cash deal where you hand the dealership money from your pocket (with existing assets in the banking system), you instead, OUT OF THIN AIR, CONJURED UP and entered your ‘bond’, a newly-created financial asset denominated in dollars (a net addition of $$$) into the banking system.
Warren Mosler writes in 7DIF that tax dollars paid in ‘old’ bills are ‘shredded’ by the federal gov’t, so now MMTers (taking that SINGLE analogy too literally) are saying ‘taxes are a destruction’ (wrong), ‘taxes don’t fund anything’ (wrong), and ‘blah blah blah’ (wrong wrong wrong).
The proper interpretation of the 7DIF ‘tax dollars are shredded’ thing is that it’s just an example of one of the many paradigm differences between the issuer of dollars and the user of dollars. The issuer can shred an old $20 bill received, and replace it with a new one; while a user uses the $20 bill received no matter how old and worn it is. That’s all. If you want to take the shredder thing to mean that ‘taxes are a destruction’ to push your preferred politics and peddle your pet prescriptions, that’s fine, then go ahead, and good luck with all that—because you’re going to need it.
Paying federal taxes is not a destruction of dollars. Running a federal gov’t surplus is not a destruction of dollars, either. Taxes are a drain of dollars from the 5% (approx) that drain to the 95% (approx)—an example of Jim ‘MineThis1’ Boukis’s “eco-feedback loop” insight from unproductive capital (from the ‘financial’ economy) draining to productive capital (to the ‘functional’ economy). The payment of federal taxes nor the federal gov’t running a surplus DOES NOT reduce the national ‘debt’. The national ‘debt’ DID NOT go down during the Clinton Administration surpluses. The national ‘debt’ has never gone down since President Nixon severed the final link between the US dollar and gold (when closing the gold window for good) in 1971. The last time the national debt went down was in 1957; and that’s why tons of anti-central bank loons love to say that the Clinton surpluses ‘were a myth’—because they too are also misinterpreting and confusing a dollar drain (collecting taxes / running a surplus) with a dollar destruction (collecting taxes / running a surplus / PLUS paying off debt).
Paying federal taxes is just a series of dollar drains. Draining from one person (from the money supply), to the Treasury Daily Statement account at the Fed (not the money supply), and then right back to another person (back into the money supply).
Think about a circle, call that circle ‘the money supply circulation’; and then picture that circle is inside another bigger circle called ‘the entire banking system’. Paying federal taxes is only a dollar drain to and from the money supply circle (but still within the banking system circle). Since 1958, taxes have never been both a dollar drain PLUS a dollar destruction from the entire banking system:
Scenario #1) Fiscal year ending with a federal-budget surplus but does NOT pay off any Treasury bonds (does NOT lower the national ‘debt’): In this scenario the federal gov’t spent $$$ (dollar add) and collected a bigger amount of $$$ back in taxation (dollar drain). The private sector ended the year in deficit (which equals the amount of the gov’t surplus which is the same amount left unspent—still remaining—in the Daily Treasury Statement account). NOTE: No dollar creation or destruction.
Scenario #2) Fiscal year ending with a federal-budget surplus but also DOES pay off some Treasury bonds (also DOES lower the national ‘debt’): In this scenario the federal gov’t spent $$$ (dollar add) and collected a bigger amount of $$$ back in taxation (dollar drain). The private sector ended the year in deficit (which equals the amount of the gov’t surplus that was then spent on paying off some Treasury bonds—for good—meaning those bonds are not rolled over (the gov’t surplus was also ‘spent’ on lowering some of the national ‘debt’). NOTE: This is dollar destruction.
Scenario #3) Fiscal year ending with a balanced budget: In this scenario the federal gov’t spent $$$ (dollar add) and also collected the EXACT same amount of $$$ in taxation back (dollar drain). The private sector ended the year balanced. NOTE: No dollar creation or destruction.
Scenario #4) Fiscal year ending with a federal-budget deficit which adds newly-created Treasury bonds (which adds to the national ‘debt’): In this scenario, the federal gov’t spent $$$ (dollar add) and collected the exact same amount of $$$ in taxation back (dollar drain). The federal gov’t then spent even more $$$ (dollar add) and collected that exact same amount of $$$ back in Treasury bond sales (dollar drain). The federal gov’t then ALSO issued newly-created bonds, which raises the national ‘debt’, which is a net addition of financial assets (additions of NFAs), going into the banking system. The private sector ended the year in surplus (which equals the amount of the added bonds denominated in dollars). NOTE: This is dollar creation.
Scenario #1) All of the Clinton Administration surplus years…
Scenario #2) The last time that happened (the last time ‘taxes were a destruction’), was in 1957…
Scenario #3) There were moments when expenditures were exactly equal to receipts during all the Clinton Administration surplus years…
Simply put, the opposite of dollar creation is destruction. Federal gov’t deficit spending is an example of dollar creation, of newly-created Treasury bonds, a net addition of financial assets, denominated in $$$, being added into the banking system. Paying off those Treasury bonds for good is the dollar destruction—and the same goes for the private sector when we destroy any personal debts (when we pay off any ‘bonds’ that we created).
To summarize, We The People paying federal taxes (and the federal gov’t running a surplus) are dollar drains, are ebbs & flows, from parts of the banking system, yes; but out from the banking system, out from the entire dollar dominion, no. However, continuing to collect federal taxes and running sustained budget-surpluses to the point where $$$ are also being ‘spent’ on paying off bonds—on CANCELLING DEBT—meaning that surpluses are given to people that are bondholders instead of people that are provisioning the gov’t, THAT IS THE DESTRUCTION OF $$$ (the opposite of the creation of $$$).
In other words, dollar creation for both the federal gov’t and the nonfederal gov’t sectors is when the bonds (promises to pay a counter party the money back with interest) is newly-created out of thin air; and dollar destruction is when the bonds are paid off.
It is only a destruction when putting those bonds in the shredder.
Deadly Innocent Fraudulent Misinterpretation #28: “The public debt is nothing more than the $ spent by gov’t that haven’t yet been used to pay taxes, sitting in the economy as cash, as $ in reserve accounts and as securities accounts…It functions as the net money supply.”
Fact: The public debt is nothing more than the $ spent by gov’t that haven’t yet been used to PAY OFF THAT PUBLIC DEBT, sitting in the economy as cash, as $ in reserve accounts and as securities accounts…It functions as the net money supply.
In addition to modifying the part in 7DIF to say that the federal gov’t is destroying ‘old’ cash bills, Warren Mosler may consider also modifying “the public debt is nothing more than the $ spent by gov’t that haven’t yet been used to pay taxes” for the same reason: It also doesn’t make sense because paying federal taxes is only a dollar drain and not a ‘net’ change to anything—unless taxes are both draining dollars AND destroying dollars (paying off public debt).
MMTers understand that federal gov’t deficit-spending creates dollars, but MMTers (deadly and innocently) misinterpret federal taxation as destroying dollars—and that’s why they (incorrectly) believe that taxes ‘don’t pay for anything’:
“So please stop accepting the bullshit that your taxes are paying for something – they aren’t. In fact the only time your taxes are paying for something is when the government’s budget is in surplus. Think about it – they are in surplus because they are taxing you MORE than they are spending. You are being overcharged!”—Ric Testori, AIM Network, ‘Hey, it’s not Taxpayers’ Money!’
Anyone that grasps the concept of being overcharged can see the contradiction there. You can’t say to a taxpayer that during a gov’t-budget surplus ‘You Are Being Overcharged’ (You are paying too much for something) while positing that the taxpayer’s taxes Aren’t Paying For Anything.
‘Taxes don’t pay for anything’ is fake MMT ‘political’ economics. The actual econ, the pure MMT insight, is that, operationally, the taxes are NOT NEEDED to pay for anything—not that they don’t at all.
Rather than misinterpreting the MMT (or more specifically, rather than confusing the modern monetary theory with the modern monetary formality), MMTers would be well-advised to tune out the dopey ‘taxes don’t pay for anything’ noise (ESPECIALLY during a gov’t shutdown that no ‘keyboard stroke’ can stop).
Federal taxes aren’t a net change in the money supply because dollars collected for federal taxes drain right back into circulation—to the penny—from whence they came (aka ‘surplus spending’). The spending, and the subsequent collection of taxes, is a wash.
In addition, dollars collected for Treasury bond sales also drain right back into circulation (aka ‘deficit spending’). That spending, and the subsequent collection of dollars in bond sales, is also a wash. The creation of the Treasury bond is the net creation of financial assets (is the addition of NFAs). The opposite of the creation is the destruction of the bond. So, rather than thinking that taxes are changing the ‘net money supply’, better to know what actually changes it are the expansions and contractions of leveraging and deleveraging (of creation and destruction).
To be fair, Mr. Mosler says “the public debt is nothing more than the $ spent by gov’t that haven’t yet been used to pay taxes” often because he (correctly) thinks that all economists should consider US Treasury bonds (the federal ‘debt’ held by the public) as being included in the definition of ‘money’.
Everybody considers their private money as being the amount of $$$ that is in both their checking account AND their savings account at their bank (not just the checking account)—so why not do the same thing when talking about our public money? As Mr. Mosler explains in 7DIF, $$$ are sitting in a Fed ‘checking account’ (aka the Fed’s Reserve Account) and also in a Fed ‘savings account’ (aka the Fed’s Securities Account). So why does the federal gov’t only consider the ‘checking account’ as being money and not the ‘savings account’?
“Why do they do that, because back in 1933, the reserve accounts were convertible to gold, and the securities accounts were not.”—Warren Mosler
So my interpretation of what Mr. Mosler is saying, is that, what is called ‘money’ (what is called the ‘money supply’), should include the Securities Account (aka Treasury bonds) and the ‘Net Money Supply’ would be the money supply minus those T-bonds.
That’s a great idea—it’s a superb ‘prescription’. What is considered being the money supply should be updated as per Mr. Mosler’s suggestion because ‘it’s about price, not quantity’. Policymakers should have done this the day that money supply figures became useless information on Wall Street trading floors in the mid 1980s. Which was around the same time Milton Friedman’s ‘Quantity Theory’ of money was debunked—when folks starting grasping that it’s more about the Fed controlling interest rates and less about the Fed controlling the money supply. I vividly remember those days, I was working for a brokerage called RMJ Securities near Wall Street in the mid 80s. As a junior Treasury bond broker, I would get pencils throw at my head if I input bond Bid and Ask prices incorrectly after money supply figures were announced every Thursday morning at 8:30AM sharp. A couple years later, ‘the street’ didn’t care about the money supply figures at all (and I would instead get pencils thrown at me when I entered bad prices on FOMC rate decision days).
Mr. Mosler’s idea could be one of the many steps (desperately needed to be taken) by policymakers to help wean the mainstream off that unnecessary fear of federal ‘debt’. Then everyone could start to relax about all those Treasury bonds—because all they really are, is just the part of the ‘money’ in existence that is earning more interest in the ‘savings account’ than the ‘money’ in the ‘checking account’, that’s all.
The national ‘debt’ is nothing more than the newly-created fiat $$$ spent into the banking system by the gov’t that haven’t yet been used to pay off the outstanding Treasury bonds.
The Net Money Supply (the checking account) is the Gross Money Supply (the checking & the savings account) minus the T-bonds (the savings account) that haven’t been paid off (that haven’t been destroyed).
Said another way, Treasury bonds are just an accounting entry of the $$$ that were deficit spent into existence by the gov’t that haven’t yet ‘net-out’ (that haven’t yet been ‘shredded’).
Thanks for reading and HAPPY NEW YEAR to the 100%,
Fake MMT: “The national government creates money every time it spends. It never spends your ‘tax dollars’, because ‘tax dollars’ do not exist at the national level.”
Pure MMT: What part of those dollar signs and the word ‘taxes’ on yesterday’s DTS is confusing you?
P.S.S. Fake MMT: “Show me incontrovertible evidence that a dollar, once deleted from a reserve account in the banking system, is the very same dollar that appears in Treasury’s spending account at the central bank afterwards.” Pure MMT: Here you go:
FAKE MMT: “Yeah, when the national government taxes, treasury uses a very delicate instrument designed based on quantum mechanics to isolate the photons that make up the number 100 on the computer screen so they cannot escape. Then treasury spends the very same photons by using the rubber mallet to hammer them into some bank’s computer monitor where they appear in someone’s account. This ensures that they are your tax dollars being spent. The government doesn’t need to do this, but it does anyway.”
PURE MMT: Your last sentence is perfect, you’re getting closer. The pure ‘description’ MMT insight is that, operationally, the federal gov’t DOESN’T NEED taxes to fund spending in its own fiat $$$—not that they don’t at all (because those pesky accounting rules and appropriations laws, albeit unnecessary, still exist). Regarding the rest, that’s funny, but that’s your problem, this is where you and all the fake MMT academics fail, because you are all trying (unsuccessfully) to take basic ACCT 101—to take simple credits & debits to and from the Daily Treasury Statement (the same account where all federal spending is drawn)—and make it into quantum mechanics.
Do try to understand, whenever there is a gov’t shutdown, it’s ALWAYS for the same reason—because there’s not enough revenues (taxes) to cover (fund) expenditures (surplus spending) so policymakers have to agree on raising the debt limit, meaning give authorization for further deficit spending (the spending that taxes don’t fund); and until then, no keyboard can stop a gov’t shutdown.
FAKE MMT: “Nuh uh, US taxpayers do not fund the US government. The US government funds US taxpayers. All dollars used by the US private sector to pay federal taxes come from the US federal government.”
PURE MMT: Deadly Innocent Fraudulent Misinterpretation #29: Under the Taxpayer Relief Act of 1997, federal taxpayers can pay with a credit card (meaning ALL dollars used by the private sector to pay federal taxes DO NOT necessarily come from federal-gov’t money creation).
The MMT insight is that the order of operations switched. The US government now funds the US taxpayers first and then the US taxpayers fund the US government back.
As the issuer of dollars, the federal gov’t doesn’t actually have to get those tax dollars—not that it doesn’t get those dollars at all.
FAKE MMT: “Nuh uh, you pay your federal taxes, then your bank account is debited and reserves are deleted from your bank’s reserve account. Deletion means destruction. The reserves exit the banking system for good. The Treasury’s spending account is held at the Fed, it sits outside of the banking system.”
PURE MMT: You started well and then your wheels came off (which is ok, we were all there once). You pay your taxes & your $$$ are debited from your bank account, that’s correct; however, debited means a ‘$ drain’ not a ‘$ destruction’. Only Congress can approve federal creation of $$$ and only Congress can destroy those $$$ (federal taxation has not been a ‘$ destruction’ since before you were born). Taxation only means $$$ exiting money supply circulation (NOT the banking system).
Treasury’s spending account (the DTS) is held at the Fed, it is outside of money supply circulation, YES; but outside of the banking system (outside of the US dollar dominion), No.
Flustered Fake MMTer to bank teller: Show me incontrovertible evidence that this $20 bill that I just withdrew from the ATM is the very same dollar that I deposited into my account last week. I dare you to do this.
Bank Teller: I won’t.
Fake MMTer: You won’t because you can’t (Storms out of bank).
Bank Teller to co-worker: They’re so adorable when they’re going through their MMT phase.
This analysis (it may turn out to be the first of my own series) will be based on the latest Proposal from the Levy Institute (4/18/18) entitled: “Public Service Employment: A Path to Full Employment” (PSE) which is linked below.
Let me begin with a little background. The “Public Service Employment: A Path to Full Employment” is the third rebranding of the Job Guarantee (JG) of which I’m aware. I have seen some formal academic work on it dating back to the mid-90s and beyond, chiefly by Paul Davidson of the University of Tenneesee.
The first popularization of a guaranteed Federally funded job I saw was in 2011 during the depths of the Great Recession. It was called the Federal Government as the “Employer of Last Resesort (ELR)”. It had a more transitional and temporary flavor to it. The suggested wage for the ELR was a very modest $8/hr in 2011, with some minimal benefits. At $8/hr most would likely have qualified for existing Federal Social Safety Net Programs, like Medicaid. We could have loosened the income restrictions for other Federal programs like food assistance, and increased the amount, but in my opinion we should be doing that anyway.
For a 40hr work week $8/hr amounts to Gross Earnings of $320/wk and would not be a huge threat to the current Unemployment Insurance program as the ELR wage is quite substantially lower than the maximum unemployment benefit in my State ($400/wk).
Actually, this incarnation is quite good and doesn’t come with many of drawbacks of the later more robust Job Guarantee proposal, especially if the temporary nature of the ELR is emphasized. This ELR proposal actually augments the current Social Safety Net, not threaten it. One has to wonder if the author who wrote the proposal, Warren Mosler, had this in mind when outlining his ELR proposal.
The next incarnation was a massive expansion of the ELR. It became known as the Job Guarantee. I won’t get into much detail as the link to the new rebranding of the JG called: “Public Service Employment: A Path to Full Employment (PSE)” report covers it. Briefly though, the JG wage is set at a “living wage” with liberal benefits. A person could stay in the Job Guarantee Program as long as they wanted, selecting from a smorgasbord of jobs at the one stop Employment Office. To quote the Eagles, “You could check in and never leave”. And if you didn’t like your JG assignment or grew tired of it you could select another.
This brings us to the first contradiction of the study. It begins right off the bat with the title: “”Public Service Employment: A Path to Full Employment (PSE)”. I spent almost my entire career working in State Government in Public Service Employment, it’s called a Civil job. Why are we talking about creating a second sub-class of Civil Service Worker with the PSE. A sub-class second rate Civil Servant. Current Civil Servants get little or no respect by some already. Who wants to be a clerk at the DMV? A job funded by Government is a Civil Service job, period!
Anyone hired temporarily or not should be hired into the existing Civil Service System at the current wage scale. That is to say a Civil Engineer hired temporarily should be paid the existing the wage scale for that position. The State does have some Temporary CE positions left, but not nearly as many as in the past. Goodness knows my State and the country could use Temporary Civil Engineers working for the Public Purpose. This goes all the way down the Civil Service job skill and pay scale, like teacher aides. Don’t freaking insult Private sector workers Civil Workers with your 15/hr, $600/wk JG job. Which by the way is higher than the maximum Unemployment Benefit in my State. Say Good-bye to the Unemployment Insurance Program so don’t claim the PSE will not replace the current Social Safety Net, but be an add-on.
“The ability of the Job Guarantee as a permanent program to control inflation is often misinterpreted as having no downside to workers. There are serious downsides as I will explain.
In the advent of inflation, without the Job Guarantee people drop from employment to unemployment thereby reducing demand and inflationary pressure, simple enough. With the buffer stock Job Guarantee idea, people will drop from employment to buffer stock employment. Consider the case where the Job Guarantee wage is higher than that of current automatic stabilizers such as unemployment insurance. This means that more people will have to fall into the Job Guarantee buffer stock to achieve the same inflation reduction as currently the case. The results of a Job Guarantee buffer stock results in more workers losing their jobs and suffering a reduction in pay to allow demand to fall the same amount to control inflation. In essence you’ve penalized one group of workers to benefit another.
Is this something I see as a knock on the Job Guarantee? Yes! Of course, and the cry from the #FakeMMT ‘Keystroke To Every Need’ crowd is: ‘You’re saying let some people starve so other people can keep their jobs!’ No, what I propose is bringing the PureMMT for the 100% prescriptive pen. Currently, unemployment and inflation are low—all we have to do is increase the automatic stabilizers now such that they would equal the proposed income from a Job Guarantee. Increasing automatic stabilizers now would add 0 inflationary pressure and then under the Job Guarantee we wouldn’t be issuing $500 billion into the Economy to set up a program that would trigger at least some garbage inflation.”—Charles ‘Kondy’ Kondak
“Recently, I outlined an aggressive series of proposals to reduce hours worked to die-hard members of the Job Guarantee cult as something we could do for workers without pumping $500 billion into the Economy that comes with the risk of at least some inflation. I went with every worker earning 1 hour paid time off for every 8 hours worked, lowering the OT threshold to 35 hrs, and requiring Employers to provide 90 days of paid Family Medical leave.
The JG cultists replied that big business could do it more easily but that would drive out small businesses. Oh, so a guaranteed job at $31K / yr with benefits wouldn’t be even worse in that regard? Then they shifted the ground yammering on about non-profits like Habitat for Humanity as a solution to affordable housing. Don’t they understand how many income based affordable housing units we could build with $500 billion in Govt seed money, we could even outfit the units with state of the art ‘Greener’ technology. No matter how one moves these folks around the chess board they sound like Charlton Heston, ‘You’ll have to pry the JG out of my cold dead hands.’ The JG is an endless loop of ‘capitalism relies on a reserve army of the unemployed to survive’.
Instead of let’s actually roll up our sleeves, get to work, and actually use the power of Government-directed MMT spending into the Private Sector to produce things that actually make a difference, like affordable housing. Of course, we’ll need a boatload of skilled trades people which we are short of right now (and that inconvenient truth really jolts their reality).”—Charles ‘Kondy’ Kondak
“One has to ask several questions about this Government sponsored Job Guarantee, as outlined in the announcement below. Who is eligible to participate? The 16 million unemployed/underemployed or wherever they conjured up that number Job Guarantee advocates cite? Why only 16 million? How many privately employed workers will resign into the ranks of the Job Guarantee?
Wages for 40% of the workforce are below $15/hr, and the benefit package almost certainly far more spartan. Likely we would see about 50% of the workforce migrate into the Job Guarantee right off the bat, until Private business sorted out the “micro-economic” effects and what it took to lure workers out of the Job Guarantee. That’s around 75 million workers, which makes sense if one considers the current Median Household income is around $62K/year. A two income Household working in the Job Guarantee Full Time puts them at the current Median Income.
Please don’t tell me that will only marginally add to inflation. Proponents of a Job Guarantee say the Private Sector would have to offer better to attract workers. How much better? If a worker can make $15/hr. with liberal benefits picking from a smorgasbord of jobs located in their community how much would it take to lure a worker to be a roofer sweating in the hot sun?
Of course, now I’ll be called a Neo-liberal bastard. There are other prescriptive approaches to lift wages and the living standards for workers without some Employer of first resort Government Job Guarantee where the money would be ‘pried’ out of the Private Sector and leave it intact.” —Charles ‘Kondy’ Kondak
OVERHEARD: During a discussion on the Libertarians + MMT page on Facebook:
Charles Kondak: Employers are somewhat hesitant to hire the unemployed when labor is plentiful. As labor markets tighten, they begin to become less picky. Using various fiscal levers to foster increased employment can be of great help to stabilize employment levels. Beyond that, use federal funding—at all levels of government (federal, state and municipal)—according to economic conditions; and hire those wanting to be temporarily or permanently hired into the existing Civil Service system at the wage/benefit set by the relevant Civil Service system that would provide a reasonable alternative to involuntary unemployment. Would it not be better for the worker to list a bona-fide Civil Service job on their work history rather than a Job Guarantee ‘job’ (which likely would be viewed as inferior by employers)?
Warren Mosler: Charles Kondak The employed transition buffer stock is a lot more ‘liquid’ than today’s unemployment, which means it functions as a superior price anchor, and likewise the transition job pool can be kept much smaller than the pool of unemployed for any given level of price stability, which is another way of saying that private sector employment can be that much larger. Just saying its a superior price anchor vs unemployment and a lot of the negative ‘externalities’ of unemployment are avoided as well. In a sense, the state has damaged the workers by creating excess unemployed by overly tight fiscal, and a transition job helps repair that damage as it facilitates a return to private sector employment.
Charles Kondak: Civil Servants are already government-paid employees working for the public purpose and hiring ‘excess’ workers into existing civil service systems as needed with federal dollars to get at involuntary unemployment does not require creating a second sub-class of government-paid employee working for the public purpose.
This was also overheard:
“Right now I see approx $3T spent on healthcare and out of that approx $1T is private-sector administration, meaning people who are like, digging one hole and filling in another. What they are doing, the administrative work, is valuable in its context, but the context has no value, that pretty much goes away if we go M4A.”—Warren Mosler, Discussion of Progressive Resource Allocation during a 2017 Real Progressives broadcast, explaining why the implementation of Medicare For All would be a highly deflationary event.
So right there, in Mr. Mosler’s very own words, is yet another problem with a federal Job Guarantee program. By design, the JG does not compete with the private sector (by design the federal program initially spends $500B to create ‘jobs’ that are unproductive and ‘have no value in context’).
Meaning that the same garbage inflation (that caused a $1T increase in medical costs) will also happen with other prices in the economy once a JG (that has people ‘digging one hole and filling in another’), is implemented.
Which will punish the very people who listened to all that MMT pillow talk (that ‘guaranteed’ them job security with a ‘living’ wage and are now stuck in a Job Gulag watching the world go by).
Not to worry though, because when that day comes, the political ‘prescription’ MMTers will whisper more sweet nothings into their ears and ‘solve’ that problem too.
“The proposed MMT Job Guarantee (JG) pays a fixed wage with benefits. The most quoted wage is $15/hr.. All workers in the JG are paid the same in all areas of the country. Aficionados of the JG are fond of comparing it to New Deal style work programs.
The Work Progress Administration (WPA) was the main program that was responsible for building the infrastructure, some of which is still in use today. Job Guarantee advocates will make sure to point that out to prove the overwhelming success of the New Deal 1930s Work Progress Administration. Yes, it did some excellent work in its time and place in history.
Job Guarantee supporters leave out one small detail. The Work Progress Administration (WPA) did not set a fixed Nationwide wage and the wage varied based on skills of the worker. The WPA Division of Employment selected the worker’s placement to WPA projects based on previous experience or training. Worker pay was based on three factors: the region of the country, the degree of urbanization, and the individual’s skill. It varied from $19 per month to $94 per month, with the average wage being about $52.50—$934.00 in present-day terms. The goal was to pay the local prevailing wage. Basically, the Job Guarantee is not like the WPA of yesteryear.”—Charles ‘Kondy’ Kondak
Agreed…To play along with proponents of the $500B federal Job Guarantee program, not only do you have to pretend that these fake ‘jobs’ would be like the WPA, one must also ignore all facts, math & data regarding record-breaking jobs figures (and only see 1930’s depression-era black & white images of *actual* involuntarily unemployed people standing in soup lines).
P.S.S.S.S.S.S.S. “Bad news for MMT’s Job Guarantee: The future is not more working hours, but fewer. People want happy lives. Minimum wage jobs are not the road to happy lives. Working for money seldom is a goal. The real goal is money and what money can buy. Ask any retired person.”—Rodger Malcolm Mitchell
“The battle rages on between Political Populist MMTers on the merits of a Job Guarantee (JG) as opposed to an Universal Basic Income. Some propose an unholy marriage of the two – the Job Guarantee and a Basic Income. Putting aside the fact that the Economy is in the midst of the longest Job expansion in our history, let’s take a look at the mechanics of each and how each scheme have more in common than each side realizes.
JGers are very fond of saying that an UBI is inflationary and provides no check on inflation should it arise and the JG is far superior in curbing inflation. Really? OK, let’s assume the Job Guarantee (JG) wage and the Universal Basic Income (UBI) stipend are equal. If inflation surfaces consumers begin to cut back on consumption and employment declines. Simple enough.
Under a JG workers fall into “buffer stock” warehouse Employment at a fixed wage as Employment in the Private Sector declines. With an UBI displaced workers lose their Employment Income and fall back on their UBI “fixed benefit” Government stipend. Since the fixed JG wage equals the fixed UBI stipend, inflation would be controlled to the same degree. You guys are arguing about identities.
I get no rebuttal on the Economic analysis from the Political Populist MMTers, only “guru” links, and some goobly-gook about we need a JG, the Green New Deal and the WPA (all of which has been covered here in various other posts). I’m pretty certain at least one or two of the Political Populist MMT gurus have seen it or been notified. Either I’m being dismissed as a crackpot or my Economic argument has at least some teeth in it.
As far as one being more inflationary than the other at the outset of the respective Programs the inflationary impact is larger with a UBI since it is a far larger injection of money into the Economy on the demand side than a JG. The benefit of an UBI is that as one travels up the Income distribution some of it might be saved, the JG has no such meaningful benefit in this area.
The main criticism of the JG faithful of the UBI is that the UBI produces nothing directly. However, the JG is subject to the same criticism, only it’s less obvious (likely because it contains the word JOB). A JG job produces no goods or services that are not currently being offered for consumption by the Private Sector or Public Service Employees beyond some ill defined Public Purpose (this is where the Green New Deal is brought up, like Mr Davis Bacon or the IBEW doesn’t exist). Inflation wise under a JG there is a distinct possibility we’d end up near or at the same place as we would with an UBI, only it might take a bit longer.
I hear the term “one time price adjustment” thrown around a lot. Why would it be a one time adjustment? Public pressure to increase the UBI or the JG wage would be immense. Looking at the JG inflation effect JG experts say the maximum inflation premium of the JG would peak somewhere between .63% to .74% in 2020 and decline over 7 years to around .1%). Of course, Politicians would run around pledging to raise the UBI or the JG wage, promising us the sun, moon and the stars along with it such that Politics almost certainly would add a greater inflation premium to the JG than expert forecasts predict, the same holds true for the UBI.
This would be especially true if the General Public accepts the simplified Political Populist MMT mantra that Federal Government is not constrained by anything except the very inflation which is devastating them. Might the overriding temptation be to print (OK keystroke) money into the teeth of inflation. After all poor people are dying in the street because of the lack of keystrokes that a Monetary Sovereign can create at will. History does indicate that this is more likely than increasing taxes or cutting spending in the face of inflation.
The JG looks back to the political heyday of the 1930s Democratic Party. The UBI is a bit newer. It was born in the backwaters of libertarian free market thought in the 50s and 60s and has seeped more into Republican solutions (Earned Income Tax Credit (EITC) – Negative Income Tax was Milton Friedman’s term). IMO, the EITC is a rather elegant application of the Negative Income Tax). Now I’m a Koch Brother Fascist in the eyes of Political Populist MMTers. I just call it like I see it. It doesn’t mean I vote a certain way.
How about we do something a bit different this time? Increase paid time off, preferably in a way that has Employers pay for it (or at least part of it). If this technological takeover of the Economy really does occur this time making jobs scarcer (one of the big reasons both JGers and UBIers cite for their need) everybody works fewer hours at the remaining jobs, with no loss of pay (balances the scales of work and leisure).
Hell, machines were perceived as a threat to jobs all the way back to the very early 19th Century (Luddites), perhaps further back. I was told by my Elementary School teachers back in the mid-60s that when we got older the biggest “problem” we’d have is how to spend our leisure time, because the robots are coming. I’m still waiting…”—Charles ‘Kondy’ Kondak
“On CNBC (3/1/19) Stephanie Kelton certainly ‘tailored’ the Job Guarantee message to fit the audience. However, her interview finally outlines the true impact of a Job Guarantee on the entire workforce. This is one aspect where the JG benefits one group of workers while penalizing another.
Kelton argues that ‘what MMT would do is actually use full employment to fight inflation’ by giving companies that want to hire a better option. ‘They don’t have to bid wages up trying compete with one another for employed workers. They can hire from this pool, this ready-pool of skilled workers who are employed in public service jobs,’ she adds. That sounds awful neo-liberal to me.
The quote describes wage suppression to benefit Employers anchoring the price of the entire labor force wage scale downwards towards the lower bound of $15/hr. I have said it many times, here and elsewhere, that the JG is one giant Temp Agency that will be used to suppress wages. Now one of the ‘gurus’ says it.
Further, the JG sets up the Government as ‘chief negotiator’ of wage/benefit packages nationwide, and will likely have a chilling effect on the existence of remaining Unions.
Can’t these #FakeMMTists read and understand what she is actually saying. The #FakeMMTist followers are goose-stepping their way back into the 1930s!”— Charles ‘Kondy’ Kondak
Agreed Kondy…they are goose-stepping their way back into the 1930s:
“First they came for the socialists,* and I did not speak out— Because I was not a socialist. Then they came for the trade unionists,** and I did not speak out— Because I was not a trade unionist. Then they came for the Jews,*** and I did not speak out— Because I was not a Jew. Then they came for me and there was no one left to speak for me.”—German Lutheran pastor Martin Niemöller on his opposition of the Nazi Party during the 1930s
*Under the guise of promoting pure MMT, the reason why Professor Mitchell ‘billy-blogged’ that ‘Progressives Are Neoliberals In Disguise’ and called The Greens ‘neoliberals on bikes’ is because he feels that progressives (left-leaning socialists) aren’t Far Left (radical extremist) enough…
**The advocates of a fake ‘job’ guarantee program suggest creating more ‘Public Service Employee’ jobs (like Division of Motor Vehicle positions that are already permanent Civil Service jobs) to achieve utopian ‘full employment’…
***Using the same-old class-warfare tactic in a different bottle, fake MMTers want to pitchfork the rich while insisting that it’s not ‘to pay for anything’ but only because the rich ‘have way too much money’ and that we need to make the rich ‘pay their fair share’ to ‘solve’ wealth inequality.
When I first encountered the Job Guarantee (JG) in 2011 my first response to it was quite favorable. The proposed wage was $8/hour with “some benefits”. I immediately saw that at this wage level many participants in the Job Guarantee (JG) would still qualify for current Social Safety Net Programs and if we adjusted the notoriously low Poverty level definition just a bit from $11,000/year to $16,000/year the rest of the workers in the JG would also be covered. At this level the Job Guarantee would be an add on not a subtraction to current Social Safety Net Programs, not like the current incarnation of the Job Guarantee.
Even with two people working Full-Time in Job Guarantee at $8/hour their combined income would be $32,000/year which was substantially below the Median Household Income in 2011 of $50,054/year. Today, two people working in the JG at $8.00/hour ($32,000/year) would put them just a touch below the Median Household Income of $63,688 in January 2019 . Paying a JG wage of $8.00/hour would become the effective minimum wage which is not a steep increase from $7.25 and should have been done at the time anyway. Of course, some States and Municipalities have since increased the minimum wage above the Federal minimum wage and the Job Guarantee would have to be higher. Basically, the JG wage should track the Minimum wage not set it.
The 2011 version of the JG listed the benefits as getting people used to show up on time, take a shower, learn how to work well with others, and remedial Education. Job Guarantee participants would join the ranks of workers at the bottom of the wage scale and it would be up to them to use these basic work skills to take it from there. Those benefits of a Job Guarantee are enough for me and any “productive” work a bonus, not the goal. The aforementioned benefits of the scaled back 2011 JG would be targeting at the proper portion of the population, those who have dropped out of the workforce, deteriorated into such a state that they have given up, many of whom are functionally illiterate. I could live, even support this type of Job Guarantee as it is clearly a transitional work program targeted at those who could be termed as unemployable.
I still don’t like the Federal Government effectively setting up a one stop Temporary Agency. Setting up a one stop Temp Agency concentrates workers into one place where Employers would have “perfect knowledge” to recruit the person willing to work at the lowest wage above the Job Guarantee wage, but that downside is manageable and very easy to greatly mitigate by increasing Unemployment Insurance benefits upwards when the Economy is doing well, like it is now. For example, in my State the maximum benefit is $400/week, and if we increased the maximum Unemployment Insurance Benefit a bit there would be few if any, higher skilled workers in the JG for Employers to poach as very few, if any, would take such a cut in Income by participating in the JG willing and give up their Unemployment Benefit Income. In this case the Job Guarantee would not compete with current Unemployment Benefits for higher wage more skilled workers. The temptation and very real risk of the elimination of Unemployment Benefits would not exist as with the current $15/hour “living wage” proposal.
The more robust Job Guarantee is something far different. It sets a wage floor and a price anchor. When I heard Professor Randall Wray say the phrase “wage floor and price anchor” coupled with the application of the buffer stock idea from Agricultural Economics I interpreted price anchor to mean a way to suppress and compress the price of labor wages. After all that is what an Agricultural buffer stock does. The concept of the Agricultual buffer stock is If there is a good harvest the Government buys up the “excess” of an agricultural product to keep the price artificially high that allows farmers to stay in business and when there is a bad crop the buffer stock is released to the market to prevent shortages and prices lower than they would have been otherwise. An agricultural buffer stock smooths out the price of commodities. In agricultural Economics it’s a solution to what is called “The Farm Problem”.
A robust Job Guarantee at the proposed wage/benefit package would almost certainty cause Unemployment Insurance to be abolished and higher skilled workers would fall into buffer stock Job Guarantee employment and be able to be poached by Employers at a flatter wage scale than would otherwise be the case (remember the effect on farm prices of an Agricultural buffer stock). Further, why wouldn’t Employers avail themselves of the JG option to find the worker that would accept the lowest wage above the JG wage? For example, might the owner of an apartment building scour the JG for a doorman willing to work for $43,000/year rather than the current $49,000/year.
Proponents of the current Job Guarantee incarnation might be able to bamboozle most people by saying: “No, the phrase price anchor as it concerns the Job Guarantee refers to the price of goods and services in response to inflation”. We here at Pure MMT for the 100% aren’t as stupid as not to ask questions. Why would Employers only hire from the Job Guarantee worker pool when there is inflation? Why would a buffer stock of workers work any different than an Agricultural buffer stock? How does a JG control inflation? I’ll tell you by suppressing/compressing wages.
The Job Guarantee is a wolf in sheeps clothing that shears workers not empowers them, but try to warn brain washed #FakeMMTers. I’ve been accused of using twisted logic quite a few times. They have no knowledge and don’t understand the the true implications of using the Agricultural buffer stock concept in labor markets. They cannot begin the fathom the following quote buried under the flowery language of a JG :
On 3/1/19 on CNBC Professor Stephanie Kelton argued that MMT would use ‘full employment to fight inflation’ by giving companies that want to hire a better option. ‘They don’t have to bid wages up trying compete with one another for employed workers. They can hire from this pool, this ready-pool of skilled workers who are employed in public service jobs.’
Perhaps, #FakeMMTist are not fake and want to have people to slowly turn to the Government for their sustenance as the Government can print (OK, keystroke) to every basic need. Basic need? Is that like everybody gets a Voltswagen, the Peoples electric car.”— Charles ‘Kondy’ Kondak
Meanwhile, outside of the MMT academic lecture halls, a federal job-apprentice guarantee program, that actually solves the nation’s current jobs problem (addressing a skills mismatch so that unemployed Americans can get trained and then get hired at one those record-breaking amounts of available job openings) continues to take shape:
In an attempt for the Political FAKEMMT Party to promise people free stuff from gov’t for a vote, these ‘academics’ take that 7DIF ‘Gov’t Deficit = Private Surplus’ (or private assets or private savings which all mean the same) and twist it in such a way so as to fool people into believing that we can just print print print, which will stuff us all with savings.
Maybe these economists went to university, jumped through hoops, got a Masters, or even a PhD, but they never understood a damn thing of what they were supposed to learn. For example, I have never once seen any of these PhDs ever forecasting the economy properly other than just to say it is a “junk economy” and something bad will happen eventually. In other words, the typical Useless Information like the Peter Schiff, Max Kieser bullschit.
That is like a fireman not knowing how to put out a fire but telling people how to put out a fire. A very strange bunch of people these MMT ‘scholars’, who were trained to forecast the economy and can’t do it but can tell you something bad will happen or is happening and can offer you the Fix All solution. How can that be? It can’t! Because that’s Twilight zone schitt! A dimension of their imagination where they still confuse their political economics with the actual economics; and peddle their fake ‘prescription’ MMT under the guise of promoting the pure ‘description’ MMT. Then they get all pissed off when exposed for the con artists that they are.
Federal gov’t deficits, if not productive, devalues the currency. Ie Venezuela.
The only time printing is valuable is during a crisis which caused fear in the economy and the govt has to step in for a period of time until the economy gets going again. But not forever and the economy has to be strong enough prior to the crisis to be able to afford such deficits. If not, deficits are a problem. Ie Argentina.
If deficits create productivity, then debt to GDP should not be rising, debt to GDP should be falling. If debt to GDP is rising either we are in a crisis or we are stuffing the top 5% with more $ savings with no production.
70% of GDP is consumption, 20% is gov’t and 10% is investment.
Consumption is households spending 100% of income plus credit to produce profit/savings for businesses. Vast majority of those savings end up in asset speculation stocks bonds commodities real estate.
In a perfect economy those profits would be invested back into the functional economy in a feedback loop within the private sector of the sectoral balances (pvt sector = households & businesses) and produce income/savings or income/debt reduction for the 95%. This real wealth would increase GDP, unemployment would be at it’s natural rate 2 to 3%, wages would be growing, deficits would be appropriate to economic growth and no monetary inflation would follow. If anything a strong currency for the 100% would be the problem relative to other currencies and trade would be effected as a result. In other words a rich mans problem that can be easily remedied. This is the goal that MMT and all economists should be striving for. Instead we get incoherent PhDs telling people just PRINT PRINT PRINT, we can all be rich, have free ponies, and vote for us. Laughable voodoo economics.
The FAKETMMT Party fix all ideological solution is that we increase gov’t from 20% of GDP, while shrinking or even removing all the burden of business investment currently at 10% of GDP. This voodoo economic trickery will provide a ‘Neo Liberal’ solution to the top 5% with infinite Profit/savings to businesses. In other words the same old tired trickle down economics flipped on its head to make it seem it’s for the 95%. Trickle up economics. That is why they always appeal to morality and compassion to push this agenda, because it cannot hold its weight with pure economics alone.
Lastly the quote [the Tweet above] is idiotic for the following reasons. Money flows one way with deficits starting from Govt, then private bank $ creation, = Household income/debt, = household dissavings, = profit/savings for Businesses & the Top 5%, = inflation, = higher asset prices like for stocks, bonds, real estate and commodities. Essentially, savings is the graveyard of $$$, never to see the light of day in the functional economy (the 95%). Thus…
Gov’t Deficits = private profit/savings for the top 5%
Now lets run it backwards.
Gov’t Surpluses = private deficits
Just like gov’t deficits only help the top 5%, gov’t surpluses only hurt the 95% (‘Heads’ the top 5% wins; ‘Tails’, the 95% loses). The top 5%, the savers, they have savings. Savings which can be easily moved out of assets denominated in local currency and reinvested into other global investments with more favorable tax benefits (and better prospects for those other currencies). The 95%, the borrowers, they pay taxes, they need tax breaks too, they are worried about their currency too, but they don’t enjoy that luxury, they don’t have a savings cushion because they live paycheck to paycheck relying on income/debt to survive every month.
The results are very clear in the EU in economies such as Greece, Cypress where the 95% got stuck paying for their gov’t surpluses from their € savings and the 5% not only took the 95%’s €, the 5% also sold their own € bonds, converted out of the € currency and bought German bonds…American bonds…etc etc…resulting in a collapsing € economy. Even if these countries could print their own currency and not force govt surpluses as in the case we are talking about now, the massive printing would collapse the value of the currency. Except the top 5%’s savings of course, which would be invested elsewhere prior.
Thus Steven Hail saying yeah Govt surplus = private deficits. Meaning that just like he thinks Gov’t Deficits = Our Savings, he also thinks Gov’t Surplus = Our Deficits, the 100%, equally. That is fallacy too.
The reality is that Gov’t Surpluses = the 95%’s Deficits. The 95%, the borrowers, the one with debt burdens (unlike the 5%) will have to pay off their debt with no excess savings (with no ‘dollar add’ from gov’t deficits). To make matters worse, the foreign sector keeps getting theirs while the 95% fall further behind and then the 95% (unlike the 5%) start getting cut off from credit. Welcome to a collapsing economy thx to MMT.
Why MMT? because MMT is very clear that we must print to inflation. When inflation hits then what? What is the MMT solution? Not an economic solution but rather a political one. Which is, to solve the problem, just do austerity. Meaning raise taxes, run gov’t surpluses and pitch fork the already-fled-out-the-barn-doors top 5%. In short Voodoo Economics. By FAKEMMT logic, Venezuela, Argentina, Egypt, all they have to do is increase taxes, cut & govt spending, pitch fork the none existing top 5% and problems solved. Clearly a laughable, ridiculous economic political assertion.
Richard Feynman hated pseudo-intellectual philosophers trying to do physics. In the same way, I hate pseudo-intellectual philosophers trying to do economics.
We can achieve most if not all economic goals without without a ‘Neo Liberal’ agenda (printing and stuffing the top 5% with endless $ savings). Don’t be fooled by #FAKEMMTERS promising you a world of free stuff under the guise of being a ‘prescription’ MMT agenda.
Keep MMT pure. See it as what it is. The ‘description’ that CAN be used as an economic tool LIKE IT HAS BEEN USED for decades now!
Thanks for reading,
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Logan: THE BOND MARKET IS SAYING THAT THE FED DOESN’T HAVE TO WORRY ABOUT INFLATION
(…and Logan’s take on why the ‘prescription’ MMT people keep getting the economy wrong):
“The yield on the 5-year Treasury note fell below the yield on the 3-year note today [12/03/18] the first yield inversion of this cycle [of this economic expansion]. We are only 15 basis points away from a 2yr/10yr inversion and also another major one [with as much recession-predictive power as the 2yr/10yr] is the 1yr/10yr [or the 3MO /10yr] inversion, but that doesn’t get as much media play.
So this inversion [this inflation-expectation drop—even though it is not an entire full-curve inversion like a 2yr/10yr inversion] is the third signal [out of a total of six recession signals] that has happened so far. Only 3 of my 6 recession flags are up—and we have never once had a recession post 1960 until all 6 are up. So the 3 recession flags that are already up are, #1) the Fed started raising rates, and #2) was when lower unemployment rates reached a certain ratio, and #3) is this inversion.
The other three signals that haven’t happened yet are: #4 Over-Investment like tech in 90s, housing in the 00s and then all those oil rigs [in 2014 that preceded a manufacturing slowdown]. Student debt is NOT over-investment. Average student debt is 9k. That is not over-investment, that is just another ideological extreme-left theory like the extreme-right’s trade deficit theory.
#5 is when Housing Starts fall and the sixth recession signal, this is the simplest signal, it’s when Leading Economic Indicators fall. LEI historically fall for 4 – 6 months before recessions.
I am shocked that MMT people with Econ PhDs were calling for a recession while LEI was rising. They just don’t know how to read data. They still don’t realize that understanding actual economics comes from outputs on a much higher level than ideological beliefs and their political economics.
For example, they actually thought that the Labor Force Participation rates were bad, but they were not bad, they looked perfectly normal. They were just reflecting a demographic shift, not people ‘sitting at home because there are no jobs’—or only ‘crappy jobs’.
If these recession bears, using their political economics, only knew how to read data they would understand that people age 23-29 are the biggest labor group right now so 2019 will be the first Prime Age Labor Force growth (25- to 54-year-old) we’ve had since 2007.
So we are on track for continued economic expansion.
Remember that job growth numbers come down due to wage growth inflation and we are still nowhere near that. This year has been the best job creation in my 22 years following the data. We have seen 97 straight months of job growth, the lowest unemployment rates, the lowest civilian labor force unemployment claims, the highest job openings, and our job growth is THREE TIMES more than our population growth.
America has never done this before.
Regarding the Fed, when job creation starts to fall, it’s not because there are no jobs opportunities out there, it’s because of wage growth pressures. That’s what the Fed is seeing, they see full employment, they see wage growth rising, so only until you see wage growth pressures lowering job growth, that’s when (and why) you’ll see the Fed wanting to start hiking more.”—Logan Mohtashami
P.S. Also note that there’s a difference between (Monday’s 3yr Treasury note / 5yr Treasury note) “discrete part” yield curve inversion (what spooked the markets Tuesday) and “the most closely watched” yield curve inversion. A 3s/5s inversion is the ‘short-end’ and the ‘belly’ of the curve, but if it’s an inversion of 2s/10s, meaning if it is including the ‘long-end’, then it’s an ‘entire’ yield curve inversion, “thought to be the best predictors of recession.”
Whenever MMTers (proponents of Modern Monetary Theory) say that the ‘gov’t deficit equals our non gov’t savings’, or ‘the gov’t red ink is our black ink’, the technical term for that ‘black ink’, those ‘savings’, is Net Financial Assets (NFA). Those that are uninitiated to MMT don’t use the term NFA—whenever the mainstream talks about the cumulative amount of all federal gov’t deficit spending-to-date, their technical term for it is ‘The National Debt’.
Net Financial Assets (NFA) are USUALLY created ONLY by the federal gov’t (‘exogenously’ / ‘vertically’) when deficit spending, and not by banks (‘endogenously’ / ‘horizontally’); BUT, there is an exception. In a 03/25/17 RP broadcast, Warren Mosler pointed out that banks CAN and DO, on many occasions, actually add Net Financial Assets (unintentionally) when they have negative capital (when a bank loan, +/or a bank itself, defaults). A bank loan default or an outright bank failure acts as ‘synthetic’ federal gov’t deficit spending adding NFA 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 (unintentionally) created without *actual* debt attached, as if it was created like the federal gov’t, the sole monopoly ‘supplier’ of money, creates money—with very little intention of ever being paid back.
The Bush economic ‘expansion’ was fueled by ‘synthetic federal gov’t deficit spending’ (questionable private sector subprime loans and financial derivatives that all defaulted).
The Clinton ‘boom’ was fueled by ‘synthetic federal gov’t deficit spending’ (private sector loans that defaulted because of the dot-com bust).
The Reagan ‘miracle’ was fueled by ‘synthetic federal gov’t deficit spending’ (almost a trillion dollars in defaulted private sector loans during the S&L debacle, THE ENTIRE SIZE OF THE TOTAL NATIONAL DEBT AT THAT TIME).
The ‘roaring’ twenties was fueled by ‘synthetic federal gov’t spending’ (private sector loans using leverage that financed stock speculation with minuscule margin requirements that all went bust).
Mr. Mosler muses that he “can’t think of a single boom year that WASN’T attributable to either out of control or outright fraudulent bank lending to the private sector that would never have been allowed with proper hindsight!”
In other words, instead of ‘synthetic’ federal gov’t deficit spending (additions of ‘synthetic’ NFAs into the banking system), “we could have had those economic booms legally, easily, and simply, by just increasing federal gov’t deficit spending with proper foresight,” Mr. Mosler added.
MMTers can go beyond the ‘NFAs can only be created by the federal government’ meme if MMTers can accept that synthetic NFAs like in the examples above are possible.
Nick “MineThis1” Hionas, a co-creator of Pure MMT for the 100% (along with co-contributor Charles “Kondy” Kondak), makes an interesting posit that synthetic NFAs, or as he calls them, ‘Net Debt Financial Assets’ (NDFA) are created in the non federal gov’t, by the rest of us, when we borrow dollars (when we deficit spend). The default instances mentioned above, since they were all horizontally created by the non federal gov’t (by the banks in the private sector), are all great examples of ‘NDFA’ (or, ‘permanent NDFA’) that, just like actual NFAs created vertically by the federal gov’t, are dollars permanently existing in the banking system today because they weren’t paid back (nor will they ever be paid back).
Just to make sure readers are following all that, let’s take a step back. If you want to buy anything, you must use dollars, but what must you use if you want to buy dollars?
Whenever the federal gov’t deficit spends, it’s a two-part creation of newly-created IOUs, aka Treasury bonds, (created and given to those that bought the bonds) AND newly-created $$$ (created and given to those who provisioned the gov’t). Note that it is the same entity that created both. In other words, in the post-gold standard, modern monetary system, it is not an actual debt for the federal gov’t because the IOU is denominated in fiat $$$ (and it is easy for the ‘issuer’ to get more $$$). Also note that the par amount of the bond is the exact amount of the addition of NFA (Net Financial Assets) going into the banking system—to the penny.
The same goes for the nonfederal gov’t. Whenever you deficit spend and need to get a loan from a bank, or any other financial institution (whether it is to get a jumbo mortgage to buy a home or just to pay for a quick lunch with a credit card), it’s a two-part creation—you are getting newly-created $$$ in exchange for your newly-created IOU. Your IOU (your guarantee) is a promise, in writing (your signature on a 50-page mortgage document or on a tiny credit card receipt) to pay the loan back, with interest, aka ‘your bond’. If you don’t have any dollars and you want some dollars (if you want to ‘buy’ dollars), then you need to ‘sell’ your ‘bond’, to an entity, to a financial intermediary, that will ‘sell’ you dollars (if they want to ‘buy’ your ‘bond’). Your bond is the asset, the collateral, that you just newly created, that you just conjured up ‘out of thin air’ and handed over in exchange for the newly-created $$$. The borrower creates the IOU for the lender and the lender creates the $$$ for the borrower (to reconcile both sides of both counterparty’s balance sheets). In other words, also FOCUS ON THE BOND CREATION when thinking about any money creation by both the federal gov’t and the nonfederal gov’t that are net additions of $$$ into the banking system. Whether it’s the federal gov’t deficit spending (for a new Mars rover) or it’s the nonfederal gov’t deficit spending (for a fresh cup of Starbucks), both are creating a bond (an IOU that guarantees to pay the $$$ back with interest), and selling it, in exchange for money—aka ‘debt monetization’. Loans create deposits (creations of $$$), yes; however, don’t forget the part where YOUR creations of BONDS CREATE LOANS. When YOU (the nonfederal gov’t) create the IOU (the ‘bond’), that’s the creation—the financial institution, the mortgage bank, the Visa card company, etc, is not creating the $$$, THEY ARE FACILITATING YOUR creation of $$$. When you pay back the IOU, your creation is destroyed. So the takeaway is that rather than seeing all (federal gov’t & nonfederal gov’t) deficit spending as just money creation, remember to also see it as a bond creation, or quite simply, as just another bond trade; except that this bond trade is settled with newly-created bonds & newly-created $$$ that unlike all (federal gov’t & nonfederal gov’t) surplus spending, are net additions of financial assets going into the banking system. The difference between federal gov’t (vertically-created) NFA and nonfederal gov’t (horizontally-created) NDFA is that nonfederal gov’t attached debt—an *actual* debt—which is an actual problem for the nonfederal gov’t because it isn’t as easy for the nonfederal gov’t (user) to get more $$$ as the federal gov’t (issuer) that has attached quote ‘debt’ unquote.
When we are talking about either NFA or NDFA, remember that we are talking about an addition of Net Financial ASSETS or Net Debt Financial ASSETS into the banking system (and not talking about an addition of CAPITAL). The newly-created bond does not add capital. Your net worth doesn’t go up when you create money in exchange for your newly-created bond because any newly-created bond ‘nets-out’ with the newly-created money (assets minus liabilities equal capital). Although it is fact that nonfederal gov’t borrowing has actual debt attached to the loans (that all nonfederal gov’t loans ‘net-out’), the MineThis1 insight here is that the moment bank loans create those dollars—as soon as those dollars go into circulation—they are ‘NDFA’. More specifically, the instant those nonfederal gov’t dollars are newly-created, they are ‘temporary’ NDFA; and as soon as the loan is paid off, they are not NDFA anymore, those dollars are newly-destroyed. The key takeaway here is that while NDFA technically ‘nets-out’, that could take awhile (and in the meantime, those newly-created $$$, those ASSETS, are circulating in the economy).
If in the event, as Mr. Mosler described above, that the borrower, or the lender, defaults (negative capital), then they are never destroyed, they become ‘permanent’ NDFA.
Keep in mind that similar to the nonperforming loan that defaults (becomes permanent NDFA), even the healthy loans that do not default (temporary NDFA) are usually not paid off for quite awhile. These assets are ‘pumping the economic prime’ for a very long time. Just like a consumer 30-year mortgage on Main Street in the hundreds of thousands of dollars, or an institutional debt obligation on Wall Street that is perpetually rolling over in the hundreds of millions of dollars, many healthy loans take many years to ‘net-out’.
In the meantime, along with NFAs created by the federal gov’t, these NDFAs created in the non federal gov’t, they are also working their long-term magic (they are the ‘smoking gun’ of good economies too), which is helping the bottom line of US households—that at last count have over $100T in net worth.
Note that is a “T” as in TRILLION and that is a NET amount. That is the amount that US households have AFTER all their loans ‘net-out’ (which is a far greater amount than the current running total of NFAs created by the federal gov’t).
P.S. The sooner folks get Nick’s ‘NDFA’ insight, the better they will see the moving pieces. Here’s another way of explaining ‘NDFA’: Unlike SURPLUS spending (where $$$ received are a wash with $$$ spent), when both the federal gov’t and the nonfederal gov’t DEFICIT spends, they are creating a bond AND creating money. The creation of the federal gov’t bond is the NFA added to the banking system and the creation of the nonfederal gov’t ‘bond’ is the ‘NDFA’ added to the banking system. The crucial difference is that when the federal gov’t creates the bond and the money, it’s the same entity doing both; when the nonfederal gov’t creates the bond and the money, it’s separate entities (the ‘seller’ of the bond is creating the bond and the ‘seller’ of the money is creating the money). Meaning that, since the federal gov’t (Monopoly Bank) issues both the bond and the fiat $$$ (Monopoly Money)—that the federal gov’t Treasury bond is denominated in—it’s not an actual ‘debt’; versus the nonfederal gov’t (Monopoly Players), who do NOT issue the money, so any nonfederal gov’t bond (IOU, mortgage, loan, credit card balance, etc) is an actual debt. That the federal gov’t (or any monetary sovereign spending their own fiat money) is never in actual ‘debt’ nor ever ‘goes broke’ is what MMTers know today (and what Charles Darrow knew in 1933 when he wrote the rules for his version of The Monopoly Game). For example, servicing debt is an actual problem for the nonfederal gov’t (the Monopoly Players). The Monopoly Game doesn’t end because The Monopoly Bank (the ‘issuer’) runs out of money, the Monopoly Game ends because The Monopoly Players (the ‘users’) run out of money.