(G-T) + (I-S) + (X-M) = 0

“I have been giving myself a headache thinking through that simple ‘Sectoral Balance’ equation which underpins the MMT Party’s (who are so fond of saying they are describing ‘operational reality’) assertions that Government Deficits = Private Sector Savings. The headache finally passed when I realized that for Government Deficits to equal Private Savings, the (I – S) part of the equation must net to 0, as if only Government Deficits can add to Private Savings. Sure, those Government Deficits do add to Private Savings and I do basically understand what the MMT Party is trying to say, but as the sole source of Savings (?) That’s where they go off the rails. The MMT Party is netting out the Private Sector’s ability to create money ex nihilo (‘out of nothing’) through the banking system (which can also add to Private Savings). The MMT Party maintains that bank-created money cannot add to Private Savings (and they will go to great lengths trying to prove it’s an illusion). Does anyone really believe that (I-S) must net to 0 in order to get to Government Deficits = Private Savings? If so, you are not describing the ‘operational reality’ of our capitalist economy and you do belong in the MMT party, comrade.”—Charles ‘Kondy’ Kondak

 

Agreed…Perhaps nothing has lead the MM T Party and their #FAKEMMTer followers off the cliff more than that ‘Sectoral Balances’ equation. It is another source of more deadly fraudulent innocent misinterpretations because just like the Monopoly Game (Monopoly rules state that no Player may borrow Monopoly Money from another Player), it is only talking about ‘vertical’ dollar adds (federal gov’t creation), not ‘horizontal’ dollar adds (bank creation).

 

While #FAKEMMTers are saying ‘Their deficits (their red ink) = Our savings’, Pure MMTers are asking ‘Their deficits = WHOSE savings’ (WHOSE black ink) because most of the deficits bypass the 95% (they get whacked up between the foreign sector and the 5%). Sure, IF (I – S) was equaling zero, IF all bank loans were ‘netting-to-zero’ and IF the US trade deficits were zero, Their deficits = Private Savings, but even then, those federal gov’t deficits would still eventually wind up with the 5% (in the savings bubble).

 

In addition, as per Egmont Kakarot-Handtke, creator of the AXEC New Foundations of Economics website, the sectoral balances equation is incomplete at best; or wrong, at worst. He posits that [‘G’ov’t spending – ‘T’axes] + [‘I’nvestment – ‘S’avings] + [e’X’ports – i’M’ports] DOESN’T EQUAL ZERO at all. He is saying that, albeit being an identity, the equation is useless because it ignores business profit (it deals with a neo-marxist zero-profit utopia). So to reflect reality, the sectoral balances equation should include profit (two more variables), ‘business monetary profit’ (Qm) and ‘distributed profit’ (Yd).

 

The Profit Law’ is expressed as (G – T) + (I – S) + (X – M) minus (business profit – distributed profit) = 0

 

Which reduces to Public Deficit = Private Profit.

 

Just like the Daily Treasury Statement proves that taxes are not ‘destroyed’, this Profit Law proves that deficits feed the savings bubble. Egmont is not a fan of fake ‘prescription’ MMTers. He notes (correctly) that MMTers’ (the ones pointing their fingers at ‘evil neoliberal murders-by-proxy’) policy guidance ultimately boils down to more deficit-spending / money-creation and since it is a macroeconomic fact that Public Deficit = Private Profit, “the MMT Party policy of ever-increasing public debt amounts to the permanent self-financing of the oligarchy.” In other words, they (#FAKEMMTers ‘prescriptions’) are money-makers for the one-percenters. “MMT is ALWAYS a bad deal for the ninety-nine-percent”, he adds.

 

“Investment is money that’s circulating in the economy and Savings is money which isn’t circulating in the economy, all in relation to the private sector.” —Damian Penston

 

Exactly…However, #FAKEMMTers don’t see it that way. The MM T Party fails to grasp that ‘Our Savings’ isn’t circulating in the economy; or they choose to ignore this fact that ‘Their Deficits’ detours the functional (real) economy and head to the nonfunctional (financial) economy because it doesn’t fit their virtuous marketing narrative.

 

The answer to economic problems (like wealth inequality, low wages or underemployment) is not the fake MMT ‘prescription’ fix-all of more ‘this’ and more ‘that’ (more federal deficits). As per Jim ‘MINETHIS1’ Boukis, the answer lies in organic solutions, that unlock nonproductive savings back into productive capital. “We need an eco-feedback loop that embraces human capital producing more useful output instead of continuing to increase gov’t deficits that results in just more capital producing more capital.”

 

Meanwhile, the MM T Party (pushing ideological fake ‘prescription’ MMT under the guise of promoting pure ‘description’ MMT) repeats mantras like ‘Their Deficits = Our Savings” to their choirs and call it a day (to avoid headaches).

 

Thanks for reading,

Follow Jim ‘MineThis1’ Boukis at IMMT – Investing Using Modern Monetary Theory https://www.facebook.com/InvestingMMT/

H/T Egmont Kakarot-Handtke (@AXECorg on twitter) https://axecorg.blogspot.com/2018/03/dsge-and-profit-forget-it-mmt-and.html

P.S. Why saying ‘THEIR DEFICITS = OUR SAVINGS’ (or ‘Their red ink is Our black ink’) is not entirely accurate:

For example, if Federal Gov’t Sector (G-T) + Non Federal Gov’t Domestic Sector (I-S) + Non Federal Gov’t Foreign Sector (X-M) = 0

…and in 2015 the US federal gov’t deficit (G – T) was $439B…

…and in 2015 the US trade deficit (X – M) was $500B (meaning a foreign sector SURPLUS of $500B)…

(-439) + (I-S) + (+500) = 0

So in 2015, that third component, the Non Federal Gov’t Domestic (private sector) SAVINGS WAS NEGATIVE $61B.

(-439) + (-61) + (+500) = 0

Their deficit = Whose savings?

Wait…There’s more.

$157B federal gov’t deficit in 2002:

$532B surplus to non federal gov’t / Foreign sector

(-$375B) deficit from the non federal gov’t / private sector

______________

$378B federal gov’t deficit in 2003:

$532B surplus to non federal gov’t / Foreign sector

(-$154B) deficit from the non federal gov’t / Private sector

______________

$412B federal gov’t deficit in 2004:

+$655B surplus to non federal gov’t / Foreign sector

(-$243B) deficit from the non federal gov’t / Private sector

______________

$318B federal gov’t deficit in 2005:

$772B surplus to non federal gov’t / Foreign sector

(-$454B) deficit from the non federal gov’t / Private sector

______________

$248B federal gov’t deficit in 2006:

$647B surplus to non federal gov’t / Foreign sector

(-$399B) deficit from the non federal gov’t / Private sector

_______________

$161B federal gov’t deficit in 2007:

+$931B surplus to the non federal gov’t / Foreign sector

(-$770B) deficit from the non federal gov’t / Private sector

_______________

$458B federal gov’t deficit in 2008:

+$817B surplus to the non federal gov’t / Foreign sector

(-$359B) deficit from the non federal gov’t / Private sector

 

We all remember what happened in 2008.

If you take a step back from the picture, in effect, all those years above, from the perspective of the US private sector, those years had the same debilitating consequences as if the federal gov’t, by proxy, ran sustained budget surpluses.

In other words, for seven straight years prior to the last recession, the worst economic crisis since the Great Depression, ‘Their red ink WAS NOT your black ink’.

 

 

 

 

OVERHEARD @ IMMT

“MMT ‘scholars’ mock Ben Bernanke for saying ‘public debt is a problem’.

While everyone laughs, he is right.

The national ‘debt’ is 170% of GDP, which would have been catastrophic 30 years ago, but today, it’s not. PE stock values of 28 today would have been extreme 30 years ago, but today, it’s not. It’s a ‘conundrum’ that the prices of bonds are so high as well (that the long term interest rates are so low).

Those high federal gov’t deficits, those high stock valuations and those high bond prices are not a coincidence, why?

A) The savings bubble

Deficits wind up in savings.
Fake MMTers say ‘Their deficits = Our savings’.
Pure MMTers ask ‘Their deficits = Whose savings?’
A) The 5%.

It can be seen everywhere.

Instead of GDP outperforming debt, the reverse is happening (because of the savings bubble).

Noninflation in the functional economies v. higher inflation in the nonfunctional economies.

Unproductive capital (production of capital with capital) without increases in production of goods (relative to the amount of dollars, pounds, euro, & yen being pumped into the economy).

While laughing at the Fed, the MMT ‘scholars’ are suggesting a Soviet ‘Job Guarantee’ (spending $500B on having the gov’t create ‘jobs’ during a labor shortage) while having no idea that their ‘remedy’ (their #fakemmter ‘prescription’) of the problem only enhances it.”—Jim ‘MINETHIS1’ Boukis, creator of the Investing Modern Monetary Theory Facebook page

P.S. MINETHIS1 is right. When monetary policymakers (Ben Bernanke or Janet Yellen or Jerome Powell) say we need ‘to lower our federal debt’ because ‘our fiscal course is unsustainable’, they don’t mean in a financially-sustainable sense. The Fed knows that the US federal gov’t, the issuer of dollars, can’t ‘go broke’ or ‘run out of dollars’ (like anyone else, a user of dollars, can). The Fed knows that the US federal gov’t is not in ‘debt’, because they know that those Treasury bonds are now denominated in fiat dollars (unlike during a bygone era when those bonds were denominated in gold-backed dollars). There is no such thing as the issuer of US dollars being in debt in US dollars (just like IBM, the issuer of IBM stock, is never in ‘debt’ of IBM stock). However, 95% of The People don’t know this, so the Fed has to keep talking in code about the ‘debt’. Just like when fiscal policymakers talk in code and say things like ‘We can’t afford that’ or ‘How are you going to pay for that’, they are talking in code. For example, if you have to explain to a PhD in Economics WHY her proposal to spend $500B for the federal gov’t to create quote ‘jobs’ unquote during The Largest Jobs Growth in Human History, during a labor shortage, is an idiotic idea (is obviously another ‘free ponies for votes’ ploy that only attempts to solve a political problem—not an economic one), THAT’S why the busy policymakers just say ‘we can’t afford that’. It’s the same reason why a busy parent in the supermarket says ‘we can’t afford it’ to a child that wants more candy ‘this’ and more candy ‘that’ because that’s what you do (you tell white lies to those you can’t reason with).

Thanks for reading,

Pure MMT for the 100%

Follow us at https://www.facebook.com/PureMMT/

 

ENCL: IMMT Patreon page link to ‘IMMT Exposes FAKEMMT PARTY and Soviet Job Guarantee’.

https://www.patreon.com/posts/21536734

10 Years Ago Today: The Lehman Shock

45:36: “We (the Fed) had only one tool which was lending against collateral, we were unable to put capital in, that would only come later with TARP.”—Ben Bernanke, 09/12/18, Fed Chair in 2008

48:15: “There’s a lot of magical thinking about what central banks can do, can they provide artificial support to asset prices, can they levitate them, but these tools the Fed were given were designed to be limited.”— Tim Geithner, 09/12/18, President of the NY Fed in 2008

51:31: “There was so much dry tinder, even if BOA bought Lehman then Merrill would have gone down, so ultimately, it was going to take capital, from fiscal authorities, we were going to have to go to Congress.”—Henry Paulson, 09/12/18, United States Secretary of the Treasury in 2008

 

 

I’m not sure if many MMTers would agree with this, but here goes anyway.

All reserves are not ‘High Powered Money’.

‘High Powered Money’ (a term coined by former Fed Chair Marriner Eccles) means newly-created dollars that are additions of dollars to the banking system (that adds Net Financial Assets). In other words, ‘HPM’ is federal gov’t deficit spending.

MMTers say ‘HPM’ means ALL reserves meaning ALL newly-created dollars for ALL federal gov’t spending, including surplus spending, because the MMT pillar is that the function of federal taxation and Treasury bond sales is no longer a gold-standard-era financing function—that ALL federal spending now comes ‘first’—then afterwards both federal tax collections & federal bond sales are done as a ‘dollar drain’ out from the money supply to maintain fiat dollar demand and also to maintain price stability.

However, it’s hard to defend that ALL reserves (created by the Fed for all federal spending) are ‘HPM’.

Marriner Eccles had a fight with the Treasury Secretary because he didn’t want to follow an order to use ‘HPM’ to buy Treasury bonds. Eccles refused to use ‘HPM’—he wanted to use existing dollars (he wanted the public to pay for the bonds). Eccles (not wanting inflation) stopped the Treasury (wanting cheap financing) from forcing the Fed to create ‘HPM’ to pay for bonds (a fight that Eccles won and led to the Fed’s independence from the Treasury in the ’51 Accord).

Fast forward to recent years, would you consider all of the $4.2T in reserves that the Fed created to pay for bonds during QE as being ‘High Powered’? That answer is no, you shouldn’t have considered any of those newly-created reserves ‘High Powered’ because that $4.2T was a swap of bonds for reserves. Unlike any federal spending, that $4.2T in newly-created reserves were added to the banking system but were not added to the money supply. Would you consider all the newly-created reserves that went to pay for $3.98T of total federal spending in 2017, that were added to the money supply, as being ‘High Powered’? That answer is also no, you shouldn’t have either because even though that $3.98T was newly-created dollars (that came into the money supply), most of it ($3.315T) was a swap for tax dollars (that came out of the money supply). Only the amount of federal deficit spending in 2017 ($666B) was ‘High Powered’ because an already-existing $666B was swapped for Treasury bonds AND THEN ANOTHER $666B was ‘vertically’ added (unlike ‘horizontally’, another $666B was added WITHOUT attached bank debt), meaning like any fiscal year’s amount of deficit spending, that newly-created $666B was a net addition of dollars to the banking system that goes into the money supply (aka Net Financial Assets). Only those newly-created, ‘NEWLY-EXISTING’ dollars are ‘HPM’. Which is why deficit spending dollars are ‘High Powered’—because it has an inflationary bias; and why surplus spending dollars (or heaven-forbid running sustained federal budget surpluses) are not ‘High Powered’—because it has a deflationary bias.

Some reserves created by the Fed are ‘High Powered Money’ and some are not. When asked why ten years ago, on September 15, 2008 the Fed didn’t save Lehman Brothers, holding over $600,000,000,000 in assets, from filing for Chapter 11 bankruptcy protection, the largest bankruptcy filing in U.S. history, the answer was that, unlike Bear Stearns with a liquidity problem (low on cash BUT still with assets greater than liabilities), Lehman had a solvency problem (low on cash AND with liabilities greater than assets). The Fed can help with the former and not the latter because the Fed is “unable to put capital in”, the tools the Fed are given “were designed to be limited” and that “ultimately it was going to take capital from fiscal authorities”.

In other words, Congress must first authorize the Fed to create reserves that adds capital (like for TARP); and likewise, Congress must first authorize the Fed to create reserves that adds Net Financial Assets (like for deficit spending). All NFAs are ‘High Powered Money’ (and all reserves are not).

 

P.S. This is where the ‘reserves is HPM’ meme comes from.

 

The first sentence is perfect and why MMTers should say ‘taxes don’t *technically* finance spending’ (instead of saying ‘taxes don’t fund spending’).

The second sentence is close but no cigar (see the above difference between ‘newly-created’ money for federal surplus spending that doesn’t add Net Financial Assets v. ‘newly-existing’ money for federal deficit spending that does).

The second sentence should say that ‘modern governments actually finance all of their DEFICIT spending through the direct creation of high-powered money.’ If not, then Dr. Kelton is, at best, jumping the gun to that Pure MMT phase (after MMT has been accepted by the mainstream) when we don’t use terms like national ‘debt’ (we instead say national debit or national savings), when we don’t say trade ‘deficit’ (we instead say trade differential), when we don’t say ‘deficit’ spending (we instead say how many dollars that the issuer added to the banking system); or at worst, Dr. Kelton and her listeners are still not fully grasping that gap between the modern monetary theory and that pesky, albeit unnecessary, modern monetary formality.

 

Thanks for reading,

Follow us at Pure MMT for the 100% https://www.facebook.com/PureMMT/

Another Seven Deadly Innocent Fraudulent Misinterpretations (#15 – #21)

This is the next installment of ‘Another Seven Deadly Innocent Fraudulent Misinterpretations’ which talks about how some ‘prescription’ MMTers (using personal ‘feelings’ and anecdotal ‘stories’) are getting confused with pure ‘description’ MMT (which only uses facts, data & math).

Since then there have been more online examples from ‘prescription’ MMTers that are not fully grasping pure MMT, or even basic finance; or who do, but are instead promoting an ideological narrative (under the guise of promoting pure MMT). Once you filter out what they are getting wrong (or just making up) there are some good insights to be found.

 

Deadly Innocent Fraudulent Misinterpretation #15: “Banks create IOUs denominated in USD and function like lookalike dollars.”

Fact: All money, including private bank-created dollars (denominated in USD) as well as federal gov’t-created dollars (denominated in USD), are DOLLARS IN THE BANKING SYSTEM—PERIOD.

In an August 2018 piece titled ‘The Explicable Mystery of the National Debt’, J.D. Alt superbly pens an enlightened perspective of how the modern monetary system really works. Brilliant in its brevity, J.D. Alt once again shines his light on the current facade (that federal gov’t deficit spending is bond-financed by quote unquote ‘BORROWING’ dollars) to cleverly illuminate the reality (that federal gov’t deficit spending—same as private sector deficit spending—is actually cash-financed via CREATING dollars).

As explained nicely by J.D. Alt, the only difference between federal gov’t deficit spending and private sector deficit spending is that (obvious to the mainstream) dollars created and spent by the federal gov’t are not spent in the pursuit of personal or corporate financial profits but “to pursue the collective goals—and address the collective needs—of society at large”; BUT MORE IMPORTANTLY (not as obvious to the mainstream) is that unlike dollars that are created by the banking system and spent by the private sector, these fiat dollars created for federal gov’t deficit spending are not ‘borrowed’ (like gold-backed dollars were in that bygone gold-standard era). J.D. Alt correctly concludes that by continuing the federal gov’t ‘borrowing’ narrative; by labeling the cumulative amount of federal deficit spending our national ‘debt’; and worst of all, by the mainstream “falsely believing it…it is encumbering us”.

Charles Hayden, an ‘MMT Admin’ (another lifeguard at the MMT kiddie pool) took issue on his Facebook page with J.D. Alt saying “banks create dollars”. When asked why Charles had a problem with ‘banks create dollars’, his reply was that unlike ‘government money’, “they (bank money) are not ‘US dollars’ but functionally lookalike IOUs”. Yes, you read that right folks and wait, there’s more.

“Neither bank deposits nor cash are US dollars, but IOUs for US dollars…and money is inherently a hierarchy of securities that together have varying degrees of moneyness,” Charles posited.

There are two main reasons for this deadly innocent fraudulent misinterpretation that is routinely regurgitated. The first is an attempt, a fake-out (a continuing narrative by fake ‘prescription’ MMTers) to denigrate private sector money creation as being ‘lower’ in a ‘hierarchy’; and that federal spending is of the utmost importance, that federal gov’t creation (and by extension any creation for ‘prescriptions’) is ‘superior’. The second reason is simply a lack of basic understanding of money (+/or knowing your choir lacks a basic understanding of money), so like a Benihana chef putting on a performance to a captive audience, better to baffle them with bullshit while you sell the ‘prescription’ sizzle and not the ‘description’ steak.

John Terrence, who understands money and is fully grasping MMT, threw a lifeline to Charles and offered this compromise: “Government only deals in the money it creates…It doesn’t accept bank IOUs, it only accepts its own IOUs…So, yeah, except for that difference, they are all the same.”

In other words, except for the difference that dollars can be at the Federal Reserve Bank, or at your own bank, or wherever, they (because ‘they’ are all denominated in DOLLARS) are all the same.

“$1000 treasury bond is the same ‘thing’ as 1000 dollars —only better, because it earns interest! “—J.D. Alt

In a letter written “to correct the inaccuracies in the description of the settlement process that is passed along MMT website discussions”, Deputy Director James Clouse at the Board of Governors of the Federal Reserve System in Washington, D.C. wrote this: “The Federal Reserve acts as a ‘banker’ for depository institutions, the federal government, and selected other financial institutions. Just as households and businesses maintain transaction accounts at commercial banks, these institutions maintain transaction accounts at the Federal Reserve. These accounts are typically called ‘reserve accounts’ and the balances held in these accounts at the Federal Reserve are commonly referred to as ‘reserve balances’. During any settlement (like the purchase of a Treasury bond for example) banks that have received a debit to their reserve account at the Federal Reserve then pass a corresponding debit to the deposit accounts of their customers (that have purchased new Treasury securities).”

That’s it folks. It’s as simple as that and this is not MMT, this is basic understanding of money. There is no need for MMTers to change the names of dollars that are in their pockets, in their Treasury bonds, in their own checking & savings accounts, or are even in the Fed’s checking & savings accounts (in M1, 2, 3, 4), whatever, wherever, they are ALL DOLLARS IN THE BANKING SYSTEM.

Have you (or anyone you have ever known) EVER seen an account balance statement or a stat of US national debt or a graph of US GDP or a chart of US Household Net Worth that had the dollar amounts broken down into ‘bank IOUs’ vs. ‘gov’t IOUs’ or by ‘degree of moneyness’?

No, of course not, because there’s no such thing. Except if you are a tourist being treated to a dazzling Benihana show by a fake (‘lookalike’) MMTer.

 

 

____

 

Deadly Innocent Fraudulent Misinterpretation #16: “All money is debt by its very nature.”

Fact: All money is a unit of measure that measures debt.

The ‘all money is debt by its very nature’ narrative in the MMT world (which contradicts the nature of money since the Babylonian days) comes from Alfred Mitchell-Innes (a top British diplomat to America at the time the Fed was being established) and his ‘Credit theory of money’. In opposition to the ‘Metallic theory’, the ‘Credit theory’ says that when “a credit on the public treasury is opened, a public debt incurred”. However, that was written in 1914 when the federal national debt (denominated in gold-back dollars) was an actual debt. Post-Keynesians default to the ‘Monetary circuit theory’ which holds that all money is created endogenously by banking-sector lending (with attached debt) and NOT exogenously by central-bank creation (without attached debt). As per the narrative, for every creditor (extending credit) and creating money, there must be a debtor (incurring debt), so proponents of these ‘debt theories of money’ (depending on which point of view), money & credit, +/or MONEY & DEBT, are the same thing.

To be fair to the MMT ‘money is debt’ narrative, if you (like many economists) do not consider Treasury bonds that are being created and added (that are increasing Net Financial Assets) into the banking system by the federal gov’t during deficit spending as being ‘money’ (that only the dollars created by banks with attached debt that are entering M1—the money supply—are ‘money’), then the ‘all money is debt’ logic holds.

It’s no secret that a rift exists between MMT progressives (who typically embrace ‘tactical’ democratic-socialism) and Green Party socialists (who typically embrace ‘practical’ social-democracy). Since the Green Party hierarchy supports the American Monetary Institute, there’s also a rift-by-proxy between AMI and MMT. In an online critique of MMT titled ‘Evaluation of MMT’ posted on the home page of the American Monetary Institute website, AMI is critical of MMT’s insistence on calling money ‘debt’ (or even calling money a liability), because as per AMI, “people think of debt or liability as being something owed and due.” As per AMI, the MMT mis-definition of money as ‘debt’ is incompatible with the chartal (legal) nature of money that MMT espouses.

AMI is right.
All money is not debt.
All money is a unit of measure.
What does it measure?
It measures debt.
Money and debt are two different things. When you ask somebody ‘How much?’, you are asking for a measurement. After you agree to that price (that measurement),THEN you are in debt. Money is what we use to pay something owed and due. We pay our debts with money (money springs from debt) and that’s why we have different words for them. “For those of you struggling with the concept that all money is inherently debt, ask yourselves why money is created? Money doesn’t just pop into existence of its own accord. Money is created to satisfy a transaction.”—Mike Morris. All transactions are swaps, of two components, of a debit and a credit, between two counter-parties. Money represents both the debits (liabilities) and the credits (assets) at the same time. In other words, ‘money is debt’ (or a liability of the gov’t that created it) and ‘money is a tax credit’ (to you), at the same time. Of course your mileage may vary because of the fundamental differences that EVERYONE (myself included—as per the title of this post) has regarding the ‘definition of money’.

Q) (to 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) “Money is debt or money is not debt, so what? Who cares? Why not merge with these people (MMTers)?”

A) “Exactly, and of course, all money, the money in your pocket, is *technically* debt, but it’s a debt that is never expected to be repaid. Why fight over terminology, declare war on your friends, and isolate yourselves? This AMI argument is about how many angels can sit on a pin, except this argument makes it personal against Innes, Knapp, Occupy Wall Street, the Kansas City group (MMT), and against all your closest associates. AMI has made us cultish, it has made it impossible for you to work with academia and I’m one of the MMT leaders, I can speak with authority of the group. We have a travesty when AMI singles out that Innes article. The historical analysis of money is that money came into being as a means of paying debts. Not as a means of paying off loans (from borrowing), but as a means of paying off tax debts (money owed) to the temples, to the palaces, for public services, for water, for armies, etc. and there had to be a way of denominating this (of measuring this). So when the kings of Mesopotamia would come to office, the first thing they would do is to announce a price schedule for gov’t services (for taxes). For example, one litter of grain (or a certain amount of cotton, copper, or animal) equaled one shekel of silver (was ‘legal tender’ like silver) so that poorer people (who had no silver) could pay the tax in what they produced. All Innes, an amateur journalist, was saying, was the point that Knapp was making, the ‘State theory’ of money, that what gives money the value, is its acceptability for payment of taxes.”—Michael Hudson

What Michael Hudson may not be realizing however, is that AMI’s differences with MMT could have less to do with Innes; and more to do with the political-ideological shift that MMT took with academics like anti-capitalist Michael Hudson (a godson of Marxist Leon Trotsky) or L. Randall Wray (whose ‘taxes are destroyed’ thought processes and other writings can be logically obtuse and disjointed). Fast forward to today and AMI might also be getting disenfranchised with MMT when listening to Stephanie Kelton and Pavlina R. Tcherneva (who wish they got their Ph.Ds in politics instead of economics) pushing a soviet-style ‘job guarantee’, as if the US had a jobs shortage problem (as if we needed the federal gov’t to create jobs during The Longest Jobs Growth In US History). Perhaps another reason AMI moved away from MMT is because MMT moved away from being ‘the Description and not the Prescription’. That adage officially went out the window when Dr. Bill Mitchell, who, (because he feels the Green Party ISN’T far Left enough calls them ‘neoliberals on bikes’ or even calls his own fellow progressives that aren’t progressive enough ‘neoliberals in disguise’) said “I note that various social media discussions still don’t quite grasp the idea that the Job Guarantee is a specific and intrinsic element of MMT…”

Conversely, perhaps the reason why MMT has moved away from AMI also goes beyond Innes. AMI too can come off sounding a bit kooky (as extreme as MMT) when saying things like the ‘federal gov’t doesn’t create money’, or that the Treasury and the Fed combined, ‘are not the government’, are not the ‘public sector’. AMI doesn’t trust the federal gov’t to control society’s monetary mechanism because ‘they only misuse it to dominate credit (the banks) and create bubbles, until the whole system crashes’. AMI’s ‘prescription’ is HR 2990, a bill in Congress, that proposes to explicitly takes the ‘money-power’ back to Congress, ‘to where it belongs’. That sounds a lot like what MMTers are saying too, which isn’t lost on AMI, who makes their case for HR 2990 with MMTers in mind: “HR 2990 enables government to spend money without taxing or borrowing; plus it requires non-inflationary results and provides funds to improve our infrastructure and education at all levels, the functional approach MMT espouses. HR 2990 is the missing link that makes what MMT says happens really happen, by treating money as money, not debt. MMT needs HR 2990 for the things they say they want to become a reality. MMT can then be about calling for more money instead of more debt – a more reasonable position and a much easier sell politically.”—AMI’s evaluation of ‘Modern Monetary Theory’

The only flaw with AMI’s proposal is that it all may ‘sound’ good (to go back in time to a ‘sound’ money policy) but what this bill calls for is that private banks have a 100% reserve requirement (that deposits create loans). Which makes AMI sound like a giant group of goldbugs. So rather than this being an argument about ‘all money is debt’, what is really bothering MMT about AMI, is that AMI can’t be serious (or be taken seriously).

“AMI is proposing a solution to a scarcity of money within the economy by binding the money supply, as we’ve already experienced. Commodity money is inherently unstable because the lack of elasticity cannot meet the demands of a fluid (I like to use organic) economy. Even a full reserve (100% reserve requirement that the ‘positive money’ folks want) model relies upon debt because those customer deposits must originate from a transaction which motivated the creation of the money which filled the deposit.”—Mike Morris

“None of it is valid…What I told AMI people over the years is that they don’t need to make any institutional changes to the monetary system to achieve the fiscal ‘policies’ they propose. We have a Fed that fully regulates and supervises bank lending as per the Fed Reserve Act passed by Congress and subject to change by Congress, so it’s all already there for Gov’t to directly control lending to its liking.”—Warren Mosler

 

 

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Deadly Innocent Fraudulent Misinterpretation #17: “The Fed is the price setter.”
 
Fact: The Fed is the price ‘stabilizer’.
 
Money has a price.
The price of money is the interest rate.
When you are ‘buying’ money (when you are the debtor) you pay an interest rate; and when you are ‘selling’ money (when you are the creditor) you receive a interest rate. The Fed sets the price of money by targeting the overnight interest rate known as the Fed Funds Rate (FFR). That’s not MMT, that’s just keeping it simple, and to keep it simple, MMTers should not take the ‘Fed is the price setter’ too literally. Unless of course you want to overseason your MMT and put on a Benihana show for your captive audience: “Jamie Dimon said he expects the 10 year Treasury yield to go to 5% from just under 3% now…He gets it or maybe he’s reading my stuff…It’s not only Fed rate setting but the fact that every time they raise rates, they raise the inflation rate because rate setting is price setting HIGHER. We see that. Look at any chart of inflation, go back to December 15, 2015, at the Fed liftoff, and all those things started to go up, even gold started to go up, gold was $1043/oz and it’s at $1220 now.”—Mike Norman, YouTube video 08/08/18
 
In Mike Norman’s case, he has not only taken ‘the Fed is the price setter’ meme too literally, but in order to dazzle his ‘all profits’ subscribers, he actually gets it backwards. Yes, the Fed is the ‘price setter’, but better to think of the Fed as the ‘price stabilizer’.
 
The Fed changed policy in 2015 and began liftoff because they saw inflation ALREADY coming.
 
The correlation of higher inflation to Fed hikes is NOT causation.
 
The purpose of Fed hikes is to slow down the rate of inflation, not to cause inflation. When the Fed wants to cause inflation in the functional economy (on the 95%) they lower rates. The CEO of JPMorgan Chase predicts that the 10 year Treasury yield is going to 5% because that’s how confident he is in the economy’s strength causing more inflation.
 
In other words, Jamie Dimon is expecting, that in order to maintain price stability, the ‘price stabilizer’ will be hiking that much more.
___
Deadly Innocent Fraudulent Misinterpretation #18: “The Fed has the pedals backwards—The Fed hiking rates is expansionary.”
Fact: The Fed hiking rates is expansionary for the financial economy (the 5%) but not for the functional economy (the 95%).
The reason why Mike Norman gets rates hikes by the Fed backwards (‘Deadly Innocent Fraudulent Misinterpretation #17’) is the Deadly Innocent Fraudulent Misinterpretation #18.
Where Mike gets “the Fed hiking rates is expansionary” (is inflationary) from is Warren Mosler, who often likes to say that the Fed “gets the pedals backwards” because Fed hiking rates means higher interest income is being “paid by the state to the economy.”
Which is true if you are talking about WHO is being ‘paid by the state’—and that answer is the creditors in the FINANCIAL economy, aka the ‘savings bubble’ participants (the 5%); however, not true if you are talking about WHO ISN’T being paid—and that answer of course is the debtors in the FUNCTIONAL economy (the 95%).
As per Jim ‘MineThis1’ Boukis, where this misinterpretation stems from is when #FAKEMMTers say “their deficits = our savings” (and call it a day). His Pure MMT ‘savings bubble’ insight is that the meme, although technically true (the math works on the Sectoral Balance Charts), misrepresents economic reality.
In a deeper dive, the question that should be asked is ‘their deficits = WHOSE savings’? Only the top 5% ultimately receive all the benefits from gov’t deficits (and not the 95% who keep very little if any).
What Mike Norman is not grasping yet is that federal deficits (and Fed policy) is not a 1:1 proposition. In other words, Fed hikes (or ‘their deficits’) = expansionary (or ‘savings’) for the 5% only. When rates rise the 95% get screwed because the 95% are the debtors. This is not MMT, same as Deadly Innocent Fraudulent Misinterpretation #17 above, this is basic stuff.
The ‘their deficits = our savings ‘ meme is cheap marketing to fool folks into thinking that they are all equal beneficiaries of gov’t deficits (and to distract them from how dopey the ‘prescription’ being sold is). Higher rates is Universal Basic Income for the top 5% who save (who don’t spend the money) and because savings are a drain in the economy, higher rates are not inflationary at all.
Furthermore, using the word ‘income’ is correct when talking about higher rates is more ‘income’ but is also misleading because the savers (top 5%) who will receive any PASSIVE income will usually NOT go out to spend most of it (unlike the 95% who will spend most of any EARNED income). The 5% will take their passive income and save it (thus higher rates are inflationary to the financial economy as the asset prices in that ‘savings bubble’ rises). Meanwhile the 95% have to pay more to service debt (thus deflationary to the functional economy as spenders have less left over to spend).
To be fair, Mike Norman likes to use the early ’80s as an example of higher rates ‘being expansionary’. As the largest line-item federal gov’t spending of that period, those high interest rates that Fed Chair Volcker imposed on the economy to battle inflation were indeed throwing off higher interest income into the economy and could be argued were ‘expansionary’—AT FIRST. That part of the story Mike likes to cherrypick to fit the ‘Fed hiking rates is expansionary’ narrative.
The part of the story left out however, is if you remember those 2 x 4’s that furious construction workers were mailing to the Fed, what EVENTUALLY happened was that those higher rates started to hurt the 95%. By raising rates, yes, the Fed helps the 5%, but the Fed isn’t raising rates to help the 5%, the Fed is raising rates to tap the brakes on the 95%.
95% of the people are borrowers (they have car, student, credit card +/or mortgage debts that are punished by higher rates). Only 5% are lenders, only 5% own Treasury bonds, only 5% are helped by rising rates (because they earn more interest income off the 95%). So if just talking about them (5% of the economy), then the Fed’s pedals are ‘backwards’, BUT, not so, not for the borrowers (95% of the economy).
Again, this is basic stuff.
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Deadly Innocent Fraudulent Misinterpretation #19: “Government deficits = Non government savings”
 
Fact: Federal Government deficits = Non federal government savings’
 
Take these three entities:
 
A) Federal gov’t B) State & Local gov’t C) Private sector households & businesses
 
Of the entities above, A), B), & C), which one, or two, and/or maybe all three all together, match these following scenarios:
 
1) This entity has the AUTHORITY TO TAX.
2) The taxation by this entity MUST be done to finance its spending.
3) Once all revenue inflow (no matter what source) is exhausted, this entity MUST then borrow dollars to spend.
4) In order to borrow, dollars must be LENT to this entity (this entity must ‘get’ dollars from someone else).
5) When borrowing dollars, this entity goes into actual DEBT.
6) All of this entity’s debt must be ‘PAID BACK’.
7) This entity is the ‘ISSUER’ of dollars.
8) This entity is a ‘USER’ of dollars.
9) In the game of Monopoly, this entity is more like ‘BANKER’.
10) In the game of Monopoly, this entity is more like ‘PLAYER’.
11) This entity IS NOT revenue constrained (it always has unlimited dollars).
12) This entity IS revenue constrained (it only has limited dollars).
13) This entity needs to BALANCE THE ECONOMY because it will never run out of dollars.
14) This entity needs to BALANCE THEIR BUDGET or else they will run out of dollars.
15) This entity acts for the greater good and a common cause for ALL people.
16) This entity acts as either a ‘non-profit’ or a ‘for-profit’ only for CERTAIN people.
17) This entity IS the ‘Lender-of-last-resort’.
18) This entity IS NOT the ‘Lender-of-last-resort’.
19) This entity has NEVER experienced a missed interest payment, a debt restructuring, or actual default of their debt (this entity has very little ‘leverage vulnerability’).
20) This entity MAY have in the past experienced a missed interest payment, a debt restructuring, or actual default of their debt (this entity has some ‘leverage vulnerability’.
 
How many times did you choose A) Federal gov’t AND B) State & Local gov’t together at the same time…once or twice (?)
 
How many times did you choose B) State & Local govt AND C) Private sector together at the same time…more than that (?)
 
If B & C together walk like a duck….and B & C together sound like a duck…perhaps start calling them a ‘Non federal government’ duck (?)
 
Deadly Innocent Fraudulent Misinterpretation #18 explains why we should be diving deeper and asking ‘gov’t deficits equals whose non gov’t savings’; but even better, when explaining MMT we should be saying ‘FEDERAL Government deficits = NON FEDERAL government savings’.
 
MMTers understand that ‘Government’ means the federal gov’t and they understand that ‘Non government’ means the private sector and the foreign sector; but are you sure that people who are uninitiated to MMT understand that’s what it means?
 
What MMTers (who are interesting in explaining ‘description’ MMT to listeners) should be saying is Federal gov’t deficits = Non federal gov’t savings. Otherwise the MMT gets further blurred with that Gov’t Deficits = Non Gov’t Savings meme and as a result you get more deadly misinterpretations.
 
For example, on a given day, if the federal government deficit spent (which was a net increase of added dollars to the banking system) that ONLY went to state & local gov’t, then this gov’t dollar drain / non gov’t dollar add isn’t easily grasped by just saying Gov’t v. Non Gov’t. Meaning that if the federal gov’t deficit spent only to state & local gov’t (for grants, infrastructure, workforce development, or medicare/medicaid reimbursement), many people will be confused when you say to them that money went from the Gov’t to the Non Gov’t (because the state & local gov’t is gov’t). In reverse, in another scenario where ONLY the state & local governments cutting spending and creating a federal gov’t surplus, again the Gov’t = Non Gov’t meme is confusing (because again, everybody knows that the state & local gov’t is gov’t).
 
In a Tweet to Stephanie Kelton, I asked her how does she expect her students to easily grasp whether she is talking about the local Kansas City gov’t or the Missouri state gov’t or the federal gov’t whenever MMTers say Gov’t v. Non gov’t? She didn’t reply (because she is now more interested in explaining ‘prescription’ MMT to listeners).
 
For those that are more interested in explaining ‘description’ MMT, by saying ‘federal gov’t deficits = Non federal gov’t savings’ the uninitiated (including many of your fellow MMTers) will better understand and more easily accept the concepts of MMT; the ‘issuer’ of dollars v. the ‘users’ of dollars will start to make more sense; folks will no longer commingle federal gov’t with state & local gov’t; and they will more easily get what ‘the-federal-gov’t-is-not-the-same-as-a-household’ (‘the-federal-gov’t-is-not-the-same-as-a-state-&-local-govt’) really means.
 
Saying it correctly also appeals to the ‘fiscally conservative deficit hawks’ who can continue to fight their good fight for keeping the non federal government’s fiscal houses in order, while at the same time becoming less suspicious of MMT proponents who (properly) see the federal gov’t as a separate paradigm.
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Deadly Innocent Fraudulent Misinterpretation #20: “Trade deficits are a third source of money creation.”
Fact: Trade deficits are not a third source of money creation for monetary sovereigns using free-floating non-convertible currency.
A few years back, Professor Steve Keen loved saying silly things like the ‘coming crisis’ of the ‘Walking Dead of Debt’ (like the USA) or the ‘coming crises’ of ‘Zombies-To-Be’ (like China) to rile up that always-plentiful, ridiculously-gullible, doom-and-gloom-loving folk.
 
As the world economy started gaining more strength however, it eventually dawned on him that debt was also the ‘smoking gun’ of strong economies too.
 
So the good professor piped down on ‘the end is nigh’ stuff and went back to his blackboard to work on those ‘dynamic techniques’ of his ‘mathematical models’.
 
In a 05/07/18 RealProgressives broadcast, after Steve Keen proclaimed to Warren Mosler that ‘trade deficits are a third source of money creation’, it quickly escalated into quite the kerfuffle.
It was soon apparent in this battle of the network MMT stars that even Steve Keen himself, like many in the mainstream, is getting (understandably) confused with the word ‘deficit’ in Trade Deficit (like so many get confused with the word ‘debt’ in National Debt).
As Warren Mosler explained (correctly) to Steve Keen, a trade ‘deficit’ does NOT mean that the currency ‘leaves’ and ‘goes overseas’.
Like the word ‘debt’ in the national debt, the word ‘deficit’ in trade deficit is a throwback to that bygone era when ‘hard’ currency (gold, silver, tobacco, cotton, wampum or whatever was legal tender at the time to settle debts for imports) was loaded aboard a foreign merchant ship (and that money literally left the country).
 
Today, when a foreign importer sells an import, thanks to the modern foreign-exchange market (the biggest market in the world), no country, using ‘soft’ currency (fiat), running a trade deficit with another country also using ‘soft’ currency, does any of the local currency ‘go’ anywhere.
“I have received many E-mails and direct twitter messages overnight and today following the ‘debate’ on Real Progressives yesterday. I concluded that only one of the guests knew what happened when nations exported and imported. Net export surpluses [trade differentials] do not increase currency balances [is not money creation], they just change the ownership.” —Bill Mitchell
What Bill Mitchell (who agreed with Warren Mosler) meant was that a US trade deficit only means a TRANSFER of currency from one owner in the nonfederal gov’t/ domestic (private sector) to another owner in the nonfederal gov’t / international (foreign sector).
The middleman between the private sector and the foreign sector in that transfer of ownership is a currency exchange intermediary (an f/x broker), and NOT a central bank.
For example (and without using the USA in this example as per Steve’s request to Warren) let’s say that you are in London, England (who is running a trade deficit with the European Union) and buying a Mercedes Benz (an EU import). After you pay for the car in British pounds, that local Benz dealership will do one of two things with those pounds: It will (more likely) leave those pounds as pounds deposited in their local London bank account and use them to pay salaries, rent, utilities plus all other expenses (denominated in pounds) incurred at that London dealership; or (less likely), the Benz dealership in London will convert the pounds to euros with a local currency-exchange broker (as a financial-intermediary middleman in the private sector) and the Benz Dealership will transfer the euros to their HQ in Germany.
Unlike the central bank (as a financial-intermediary middleman in the federal gov’t) using fiat (free-floating non-convertible) currency that MUST be involved with a federal BUDGET deficit, the central bank isn’t involved with a federal TRADE deficit in fiat currency.
When that Londoner buys the Benz (when the UK has a trade deficit with Germany), British pounds never leave the British banking system (British pounds don’t ‘go’ to Germany and wind up at the ECB); and thus no ‘creation’ of euros by the ECB because of the UK trade deficit (nor does any trade deficit cause any creation of fiat currency by any central bank).
That said, it doesn’t mean that a UK trade deficit has nothing to do with euro creation at the ECB.
If someone in Germany decided to try to get in on the action selling cars in London, then the domestic loans, CREATING MORE EUROS, taken out in Germany (to finance that new start-up car operation), there’s your ‘3rd source’ of money creation (but that’s separate from all that Benz-buying in London causing UK trade deficits).
Another for instance, let’s say that Mario Draghi decided to keep EU-made cars priced cheap in London by intentionally weakening the value of the euro against pounds to maintain Mercedes-Benz market share. The ECB would pull out their keyboard, CREATING MORE EUROS (to dump them in the f/x market for pounds) and presto, there’s yet another source of money creation (but again that’s separate from the UK trade deficits).
In the post-gold standard, modern monetary system, all that ever happens in any trade differential, is a simple transfer of ownership, of two different fiat currencies, between a local currency-exchange broker and an overseas seller of goods & services.
Instead of gold coins ‘going’ overseas (and here’s the main point of this post), a trade deficit today means that it’s that company that could have made products in your country (and all that additional organic growth, all those added sales, all that aggregate demand that it would have locally generated), that has ‘gone’ overseas.
Meaning less US workers, less US managers, less US secretaries, less US janitors, less US lawyers, less US accountants, are needed; and less sales from less workers means less paying customers for nearby businesses like stores, delis, restaurants, and medical facilities, are needed; nor any new housing developments are needed, so less real estate development construction workers and less real estate professionals are needed.
Every time a company leaves the US to produce overseas, you can literally hear it (the sound of silence). That’s what Ross Perot, the 1992 Reform Party presidential candidate meant by a “Giant sucking sound going South (of the border)” if candidate Bill Clinton were to get elected and pass NAFTA. Which no doubt resonated with citizen Trump (along with 19% of the US popular vote that voted for Perot).
Other than the fact that trade deficits dangerously depletes your manufacturing base wiping out millions and millions of middle class jobs, free trade can morph into unfair trade.
More specifically, unfair trade practices that pressures the transfer of sensitive intellectual property to overseas governments, undermines your proprietary technology by depriving you of the ability to license it at full value and weakens your global competitiveness.
After watching the US trade deficit go from $115B in 1993 (the year before NAFTA implementation), to $800B in 2017, you get to the point (US manufacturing less than 12% of GDP) when somebody has to say ‘enough is enough’. President Trump, after watching enough US factories close, after watching enough US jobs exported, said ‘that’s enough’, and just renegotiated our trade deal with Mexico to include new ‘rules of origin’ requirements that will ‘encourage billions a year in vehicle and automobile parts production in the United States, supporting high-wage jobs across the USA’.
So when hearing about a US trade ‘deficit’, which is a dollar drain from the private sector to the foreign sector on those sectorial balances charts, rather than thinking that DOLLARS are draining overseas, it’s better for Pure MMTers to be thinking that DEMAND is draining overseas.
In other words, unlike a budget deficit, a US trade ‘deficit’ is not a shortfall of money to the USA (that must be immediately reconciled with a creation of money); a US trade ‘deficit’ is a shortfall of aggregate demand to the US private sector (that must be eventually addressed in other ways).
P.S.
 
“Comparing countries with a free floating currency and one that is pegged may have been the source of Keen’s confusion.”—Charles ‘Kondy’ Kondak
“If talking about a fixed currency regime (i.e. Middle East countries), then our trade deficits are a money creation by their central bank.”—Jim ‘MineThis1’ Boukis
Both are correct. Steve Keen was saying to Warren Mosler that ‘your country’s trade deficit results in a central bank somewhere acquiring your money’. Which isn’t entirely accurate, as Mr. Mosler explained to Mr. Keen, there is only one definitive way that a central bank acquires foreign reserves, and that is if they go into the f/x marketplace and buy them.
The exception to that rule would be an oil-exporting nation, a net-exporter, that is running trade surpluses, and selling oil from their state-owned enterprise (a business enterprise where the gov’t has significant control through full, majority, or significant minority ownership).
Examples of such nations would be Saudi Arabia (the second-largest oil producing country in the world after the USA), the United Arab Emirates (the eighth largest) and Kuwait (the tenth largest). All three of those nation’s currencies are pegged and all three of those nations ran trade surpluses in 2017. Meaning that, because oil is priced in dollars, that oil-exporter’s central bank is acquiring dollars, from nations around the world (some of which are running trade deficits).
So in the case of the US, our US trade deficits do provide a source of money creation for those central banks because those particular countries using a fixed currency that is pegged to the USD (similar to the US using a ‘gold-backed’ currency), as their central bank acquires more dollars (as they hold more USD in reserve), it results in more creation of their own ‘USD-backed’ currency. Which is a good thing since those US trade deficits are functionally ‘backing’ global economic growth and encouraging economic expansion (that lifts all boats).
Furthermore, countries with ever-growing USD +/or foreign-denominated private debt need their central banks to constantly acquire and hold even more USD in reserve to hedge that exposure, to avoid, for example, what happened in Thailand in 1997 and what is happening right now in Turkey, both suffering from the same consequence (of their central banks having insufficient foreign reserves to come to their rescue).
In order to properly manage the modern international ‘USD standard’ (that replaced the gold standard), US trade deficits are necessary to ‘supply’ the world economy with dollars (with the world’s reserve currency) that are needed by the global economy (that are used in 50% of the world’s daily transactions), for the exact same reason why a car needs constant injections of oil to keep all those parts moving (so those parts don’t seize up). Otherwise we repeat the mistakes made by the US & France prior to the Great Depression (we repeat the worldwide deflation caused by our hoarding of gold in the 1920s).
However, Steve Keen wasn’t talking about a fixed regime or a pegged currency, he was talking about the Eurozone and the euro currency. The example he cited (living in the UK and buying software from a vendor in Italy) seemed like he was confusing the Eurozone’s Italy (a ‘fixed’ currency ‘regime’ like any single one of the 50 US states because they have no monetary sovereignty) with the Eurozone itself (which has monetary sovereignty).
“He realized he was struggling with the balance sheets.”—Mike Morris
Agreed, and to avoid confusion, when we stop calling it the national ‘debt’ (perhaps we should call it the national debit instead), we should stop calling it trade ‘deficit’ (perhaps we should call it the trade ‘differential’ instead).
To be fair, Steve Keen wisely and gracefully backpedaled in a comment later on (in a follow-up tweet) saying that trade deficits “may be transfers” (and not money creations).
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Deadly Innocent Fraudulent Misinterpretation #21: “Imports are real benefits and exports are real costs.”
Fact: Imports and exports are both a benefit and a cost; however, imports are the position of strength.
Like Sly Stallone in the original Rocky movie, at the end of the fight (the 05/07/18 RealProgressives broadcast), Professor Steve Keen did rise from the canvas and scored some punishing body blows to Apollo Creed.
“Imports are a benefit and exports are a cost” first appeared in 7DIF to get the mainstream to stop seeing trade deficits as being ‘bad’ (which was fine), but then that meme went wildly off course. When Warren Mosler threw his trusty ‘there-is-only-a-nominal-payment-for-trade-deficits’ roundhouse (meaning that it’s ‘only pieces of paper’ in exchange for ‘real’ goods), Steve Keen, who was expecting it, weaved and counter-punched brilliantly:
Mosler: “Having a trade deficit doesn’t constrain investment.”
Keen: “(When Australia runs a trade defict, it means) a lot of our (Australian) assets have gone overseas…it is going to foreigners.”
Mosler: “Assets are not going overseas by running trade deficits…If you sold your Australian Opera house, are they going to dig it up and take it away?”
Keen: “I’m talking about the financial transactions paying for imports that lead to the foreign sector then buying our assets…They have claims on our assets. You are saying that is good and that exports are the real costs, that by being a net exporter (running a trade surplus), that sending real goods for receiving credit balances at the central banks is bad.”
Mosler: “There is a only nominal payment for trade deficits.”
Keen: “There is nothing ‘nominal’ about foreigners owning our assets…In every trade transaction, both parties PERCEIVE a benefit, otherwise the trade would not take place.”
Why Steve Keen was able to nicely counterattack there is because ‘exports are a cost’ is a weak punch (that only cherrypicks one of many moving parts). The 7DIF insight is that a monetary sovereign is able keep handing over pieces of paper off a printing press all day long (unlike being able to keep handing over ‘real’ tangible goods all day long).
So it’s one thing to argue (in 7DIF) that Americans shouldn’t be played into thinking that ‘trade deficits are bad’ (for the exact same reason that they shouldn’t buy into the narrative that the ‘national debt is bad’). That’s fine, however, it’s another thing to limit people into only thinking that ‘trade deficits (IMPORTS) are a benefit (ARE GOOD) and trade surpluses (AND EXPORTS) are a cost (ARE BAD)’. That’s simply wrong. Don’t buy it. Keep in mind that the same folks nonsensically saying exporting (that creates real jobs during a jobs shortage) ‘is a cost’ also think their $500B federal ‘job guarantee’ proposal (that creates fake jobs during a labor shortage) makes sense.
‘Imports are a benefit, exports are a cost’ oversimplifies the many other moving parts involved in trade differentials. Here are the seesaws (the ‘whole truth and nothing but the truth’) and depending on the country your mileage may vary: 
Country running trade surplus: Raw materials and the sweat equity needed to produce the goods & services are a COST; the added aggregate demand to your private sector is a BENEFIT.
Country running trade deficit: Imported goods & services received are a BENEFIT; the aggregate demand drain from your private sector is a COST.
Country running trade surplus: A strong manufacturing base that is creating jobs is GOOD; International (export)-led growth that makes you very susceptible to economic downturns +/or vulnerable to commodity price decreases is BAD.
Country running trade deficit: Organic, domestic (consumption)-led growth makes you less susceptible to economic downturns +/or less vulnerable to commodity price decreases is GOOD; a weak manufacturing base that is losing jobs is BAD.
What did Dr. Bill Mitchell, who also loves to say ‘exports are a real cost’ have to say afterwards? “I might not write about trade for a while”—Bill Mitchell, ‘Last Word’ BillyBlog post 05/25/18
Fair enough, since it was a bit of a testy and grueling discussion—but quite the teaching moment (that we all sharpened our blades with).
“Mosler’s refusal to acknowledge the impact of the production aspect of trade made him wrong. He knows what Keen is saying but refuses to budge on his ‘pieces of paper for production’. Keen got that part right.”—Mike Morris
Agreed…and ‘last word’, who would you rather be, the guy (the country running a trade surplus) making things and getting the paycheck, or the guy (the country running a trade deficit) paying someone else to make things for you (?)
The position of strength is the guy paying others to do the manual labor.
The country running trade deficits has simply delegated the assembly-line work to others (because they are too busy making even more money doing other more important things).
The countries running trade surpluses are on the factory room floor while the countries running trade deficits are in the executive R&D suites innovating the products of the future.
Rather than thinking that exports are NOT a benefit (which isn’t true), since there are BOTH costs & benefits, both bad & good, for both importer & exporter, in both trade deficit & surplus, thanks to Professor Steve Keen, Pure MMTers would be better off thinking that ‘imports are the position of strength’.
Imports are the position of strength and that’s why (if you are running trade deficits) it’s easier to win trade wars with vendors —because The Customer Is Always Right.
Thanks for reading,
Follow us at Pure MMT for the 100% https://www.facebook.com/PureMMT
P.S. “If the EU was doing their part to import, the global economy would soar. Emerging markets would crap themselves with so many jobs. As they would grow so would all. One could argue that this is what the trade war is all about: The US is telling the world to screw themselves, because the US cannot be the only job creators for the world (by importing so much of their goods). When we import so much, we are starving our US domestic sector (of job-creating demand). The powers that be (overseas) better start playing (trading) fair or else we will starve the world of $$$ (of job-creating demand).”—Jim ‘MineThis1’ Boukis, 09/16/2018

The Inverted Yield Curve With An Asterisk

In 2006, Capital Advisers (correctly) wrote that “Compared to past periods, the yield curve inversion we are experiencing is quite benign, so there need not be profound concerns that an economic recession will automatically derive from this phenomenon”. It wasn’t a hunch that made Capital Advisers write this, it was historical Facts, Math & Data:

“The yield curve inverted (negative 2yr & 10yr yield differential) eight times, for at least one month at a time, in the last 30 years…

The average duration of an inversion was seven months…

The average negative spread was 0.33% (33 bps)…

Dispersion of severity exist, for example, a mild one started June 1998 with an inversion lasting one month of 3 bps; and an inversion beginning Aug 1978 lasting 21 months getting to as much as 202 bps.

Conclusion: Not all inversions lead to recessions, there is ONLY a correlation between severe inversions leading to recessions.

Furthermore, not all recessions were preceded by inversions—between 1954 and 1966 there were three recessions but no inversions.”—Capital Advisers, 03/01/2006

One other point that should also ease concerns about any near-future yield-curve inversion is that if it does happen, this would be the inverted yield curve with an asterisk because this would be the first time that there was a yield curve inversion while the Fed was sitting on $4.2T of long-term bonds ($2.4T in Treasury bonds and $1.8T in mortgage-backed bonds) on its balance sheet (that it removed from the bond market).

Meaning that if the yield curve inverts, it has an asterisk because of Bonds (Treasury & MBS Bonds), similar to that baseball that has an asterisk because of Bonds (Barry Bonds).

Remember, the whole point of the Large Scale Asset Purchases (so-called ‘QE’) was to drive long-term bond yields lower. So while nobody knows where long-term bond yields *should* be right now, we can all safely assume that long-term bond yields would be higher right now if the Fed never bought those long-term bonds (if the Fed wasn’t still engorged with those bonds).

Which is why Fed Chair Powell isn’t too concerned if this yield curve (with that asterisk) inverts.

Of the $2.4T of the SOMA (the Fed balance sheet) Treasury bond holdings, approximately 92% have a 10-year maturity or more.

By merely hinting that the Fed was even considering selling some of those an intra-meeting move (‘dumping’ them back on the ‘street’ into the bond market), that yield curve inversion is gone in 15 nanoseconds.

 

Thanks for reading,

 

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THE ‘DIAGONAL’ MONEY CREATION (THAT IS NEITHER HORIZONTAL NOR VERTICAL)

     “It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank, so, to lend to a bank, we simply use the
computer to mark up the size of the account that they have with the Fed.”—Chair Ben Bernanke, 03/15/2009, answering Scott Pelley’s (60 Minutes) question “Is that tax money that the Fed is spending?”
 
What Fed Chair Bernanke WAS NOT talking about right there was federal gov’t deficit spending (aka vertical money creation) and he WAS NOT talking about non-federal gov’t deficit spending (aka horizontal money creation) either. Ben Bernanke was talking about the Fed’s emergency rescue lending to banks (support for auto loans, student loans, money market funds, mortgages, short-term lending for small business loans)—the first $1T of Fed money creation undertaken early in the credit crisis.
 
There’s a big difference between a vertical money creation during federal gov’t ‘borrowing’, plus a horizontal money creation by the non-federal gov’t (by our own actual borrowing); vs. a money creation by the Fed for that kind of emergency lending in 2009, or just like for the Large Scale Asset Purchases soon afterwards (for so-called QE). To help explain the difference, let’s call any money creation by the Fed a ‘diagonal’ money creation.
 
First, let’s do a hypothetical…
 
Imagine an Authority of Roads and their agent, an Emergency Towing Department, in their bid to maintain traffic flow by employing one four measures:
 
1) If traffic flow is balanced, the Authority doesn’t need to do anything except observe how many small cars are being organically added on the road.
2) If traffic flow builds up in concentrated places, the Authority takes small cars from those places and redistributes them to places that don’t have as many cars at all (which doesn’t add to the total amount of cars on the road).
3) If traffic flow is getting too light, then the Authority again takes action and distributes newly-created big cars (which intentionally adds to the amount of cars on the road).
4) If traffic flow has completely seized up due to an infrastructure crisis, then the towing department of the Authority clears the damaged roads by removing big cars off the road, reimbursing the big car owners, impounding the cars inside the towing agent’s parking lot (which adds the exact same amount to the assets & liabilities on the Authority’s balance sheet, while also changing by the exact same amount, the composition of the assets of the former, big car owner’s balance sheet); until the infrastructure crisis is resolved, after which the compounded big cars are sold back and return on the road (which reverts the amount of cars on the road back to the original amount before the crisis, while both the Fed’s balance sheet and the big car owner’s balance sheet reverts back to exactly where it was before the crisis…as if it all never happened).
 
Authority of Roads = Federal gov’t fiscal policymakers
Emergency Towing department = Central bank
Traffic Flow = Economic growth
1) = Private sector deficit spending facilitated by banks (horizontal money creation)
Small cars = Dollars
On the road = Into the private sector
2) = Federal gov’t surplus spending
3) = Federal gov’t deficit spending (vertical money creation)
Big cars = Treasury bonds (dollars with a coupon)
4) = QE & unwind
Infrastructure crisis = Financial crisis
Emergency Towing department’s parking lot = Central bank’s balance sheet
 
  …and then next, here’s the actual:
 During any ‘horizontal’ (endogenous) creation of dollars when the non-federal gov’t is deficit spending or ‘vertical’ (exogenous) creation of dollars when the federal gov’t is deficit spending, in both instances, dollars are being added to the banking system.
 
Furthermore (and this is the major point of the post), those ‘endo’ and ‘exo’ creations of dollars are always going into the NON-FEDERAL GOV’T (either into the non-federal gov’t / Domestic, aka private sector; or into the non federal gov’t /International, aka foreign sector).
 
QE was the exception…QE is an example of money creation where the dollars are being added to the banking system WITHOUT those dollars going into the non-federal gov’t.
 
The Fed created $4.2T to pay for all those bonds that the Fed bought during QE, which was federal gov’t money creation of $4.2T (that added $4.2T to the banking system) BUT THOSE DOLLARS STAYED IN THE FEDERAL GOV’T SECTOR.
 
Like many others, the bond ‘kings’ and hedge fund ‘stars’ thought that QE looked like vertical money creation, quacked like horizontal money creation, so they figured it probably was money creation going into the private sector (which would cause inflation, a bond sell-off, yada yada), and they placed their bets accordingly.
 
What everybody got wrong there, was that the $4.2T in money creation by the Fed for QE (unlike ‘exo’ money creation by Congress for deficit spending or unlike ‘endo’ money creation by banks for private sector deficit spending), DID NOT get injected into the non-federal gov’t (private or foreign sectors) like all deficit spending does.
 
QE was NOT a money creation for deficit spending, QE was money creation for a glorified swap. The $4.2T created by the Fed during QE added dollars to the banking system BUT ONLY added dollars to the Fed’s balance sheet AND DID NOT add dollars to the balance sheets of the non-federal gov’t private / foreign sectors.
 
During QE, the total amounts of assets on the balance sheets of those bondholders in the private / foreign sectors never changed. For the private / foreign sectors, QE was just a wash, just a swap, just a change in the composition of dollars (from dollars with a high interest-rate coupon to dollars without a coupon), and NOT a change in the total amount of dollars in the private / foreign sectors (and why QE didn’t cause any inflation). After QE is fully unwound, both the bondholder’s balance sheet and the Fed’s balance sheet revert back to where they were before QE, as if it all never happened. In addition, if you think about it, because the Fed bought those high-coupon (high-interest paying) bonds from the banks, meaning that the Fed started collecting the interest payments (instead of the banks), that $4.2T that the Fed created and added to the banking system was actually, counter-intuitively, a dollar DRAIN from the non-federal gov’t private / foreign sectors. Which is another reason why QE ‘monetary stimulus’, didn’t (nor will ever), cause much inflation, nor much stimulus (a sugar high to stock prices as dollars seeking yield get pushed off the curve, yes; but a stimulus, no).
You (monetary policymakers) can lead the horse (aggregate demand) to water (cheaper liquid financing) but you can’t make it drink. Fiscal stimulus is a job done only by fiscal policymakers in the Authority (and not to be confused with the monetary policymakers driving the tow trucks).
Thanks for reading,

P.S.

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.”

Another #FAKEMMTer goes 0 – 4

 

1) “Taxes don’t fund spending.”

Swing and a miss…The MMT pillar is that, operationally, “Taxes ARE NOT NEEDED to fund spending (not that they don’t.)”—Warren Mosler, final comments, MMT Conference, Sept 2017

2) “Taxation destroys money. Physical notes are shredded, and in accounting terms, the liability represented on paper is cancelled (-100 + 100 = 0).”

Swing and a miss…When paying taxes, physical cash is shredded, checks for federal taxes due made payable to the US TREASURY are cancelled, any other dollars used to pay federal taxes are debited from the money supply; AND, at the same time, an equal & opposite amount is credited (is ‘created’) into the Daily Treasury Statement (the exact same account where all federal gov’t spending is drawn).

3) “I’ll let Ben Bernanke explain it.”

Swing and a miss…In that clip Ben Bernanke was talking about dollar creation for the Fed’s Large Scale Asset Program (aka QE) to ‘buyback’ (read: ‘unprint’) bonds to lower long-term interest rates (a swap that doesn’t add dollars to the private sector); and NOT talking about dollar creation for federal gov’t deficit spending (an outright addition of dollars into the private sector)—two totally separate things that the MMT kiddie pool routinely conflates; and why, even though there is no financial ‘funding’ constraint, #FAKEMMTers in the MMT Party continue to be frustrated by the modern monetary formality (the political ‘funding’ constraint) that, albeit unnecessary, still gets in the way of the modern monetary theory.

4) “That taxes don’t fund spending was one of the lessons learned by the FDR administration which lead one former chairman to publish a paper with the title ‘taxes for revenue are obsolete.'”

Swing and a miss…In that brilliant 1946 article, NY Fed Chair Beardsley Ruml wrote that the federal gov’t is “free of money worries and NEED NO LONGER levy taxes for the purpose of providing itself with revenue”. SEE #1

 

P.S. Beardsley Ruml, the guy that wrote ‘Taxes For Revenue Are Obsolete’ in 1946 which is quoted by every single ‘prescription’ MMT ‘academic’ from Pavlina Tcherneva to Bill Mitchell, also said this: “The corporation income tax must go, taxes on corporation profits have three principal consequences and all of them are bad.” As chairman of the Federal Reserve in New York, Mr. Ruml insisted that the case for ending the corporate tax was overwhelming. “It is evil…it should be abolished,” he said.

Which begs the question: Why don’t the same MMT ‘scholars’ that love to quote Beardsley Ruml, ever mention that, or ever give the current administration any credit for dropping the corporate tax rate to 21% from 35% which Beardsley Ruml would have approved of (?)

…because they are #FAKEMMTERS (!)

 

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“Not Worth A Continental”

 

No, that’s not quite exactly how they did it in the late 18th century.

Our own central government issued paper money ($241,552,780 in Continental currency) when the Continental Congress printed Continental Dollars from May 10, 1775 to January 14, 1779 during the Revolution.

By the end of the war, they had become worthless (“not worth a continental”) which left the colonists with a searing memory (read: a legitimate fear) of ‘printing money’.

Price stability depends less on whether money is issued by fiat (‘created out of thin air’) or fixed (with a convertibility rate ‘created out of thin air’) and more on the credibility of the fiscal and monetary authorities to manage the price stability of the economy’s money supply in a responsible manner.

To explain price instability leading to hyperinflation, you don’t need to go all the way to Wiemar, or Zimbabwe. Nor do you need to go all the way back in time, just look at what is happening right now in Turkey (a monetary sovereign, a net-importer, using a free-floating, non-convertible currency).

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Pure MMT For The 100%…Beyond The Memes

It was interesting to see that at the end of the same week when many had (yet again) gotten all excited about a brand-new, easy-to-remember, catchy meme that smugly checkmates fiat ‘money printing’ (deficit spending) causing higher inflation; or fiat money printing causing bond vigilantes (speculative short selling) driving interest rates up; or fiat money printing causing losing confidence in the currency; can now all be pooh-poohed by the (fake) ‘academic’ MMT community, by simply saying “JAPAN”…which…like most of the dopey memes always regurgitated…is not necessarily accurate…and why…(?)…because….”TURKEY”.

There are many moving pieces that have caused Japan’s lost decades (mainly demographics), so it’s disingenuous for #FAKEMMTers to say that what is happening (or more specifically, what ISN’T happening) in Japan is ‘because MMT’ (or that Fed rate hikes will cause the dollar index to weaken ‘because MMT’).

Similar to the U.S., Turkey is a monetary sovereign. Similar to the U.S., Turkey is an importer. Similar to the U.S. Dollar (USD), the Turkish Lira (TRY) is a free floating, non-convertible currency (Turkey adopted the free-floating exchange-rate regime between 2002 and 2007). Once a currency is no longer backed by gold (or fixed to another currency), then the currency, just like the USD or just like the TRY, is now ‘only’ backed by the full faith and credit of the gov’t that issues it.

In other words, once you change from a fixed-currency regime to a floating-currency regime, the ‘value’ of the currency changes from whatever it was backed by, to other moving pieces like the ‘value’ (real and perceived) of the federal gov’t, the issuer of the currency. Note that this is just one, of many, fundamental BIASes, meaning one of many moving pieces that affects floating-currency valuations that shouldn’t be ignored (which is presently costing USD short sellers like Mike Norman and his subscribers dearly).

MineThis1 (correctly) reminds his followers over at IMMT that it is important for Pure MMTers to remember that just because a monetary sovereign can never ‘run out of money’, you can run out of something else, so MMT doesn’t mean you can print print print…because “JAPAN” (…because ‘MMT’).

So, what are they (Turkey) going to do now?

That’s a good question.

The answer (and fully grasping MMT) goes beyond the memes.

Thanks for reading,

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Deficit Owls (that lost their glasses)

Accounting 101 was never a strong suit over at the ‘Deficit Owls’ (that lost their glasses), nor for their followers, and here’s yet another demo:

“All money created has two parts: Asset & Liability”

Accounting (reality) translation: All transactions (including all money created) have two parts: Credit & Debit.

“Federal spending: Recipient gets asset, Gov’t keeps liability.”

Better: ‘Federal spending: Recipient gets asset (tax credit), Recipient gets liability (federal tax liability).

“When returned, both liability and asset are destroyed.”

Better: ‘When returned (when the Recipient pays federal taxes) both liability and asset, OF THE RECIPIENT (on the Recipient’s balance sheet), are destroyed; but only those who are fully grasping MMT know that the amount of dollars in the banking system (the amount of net financial assets) are unchanged.

Fake MMT: ‘Taxes don’t fund federal spending.’

Pure MMT: Operationally, taxes are NOT NEEDED to fund federal spending (not that they don’t at all).

Fake MMT: When Recipients pay federal taxes, those dollars are ‘destroyed’.

Pure MMT: When Recipients pay federal taxes (when Recipient’s dollars are debited) there is NO CHANGE in the amount of dollars in the banking system because those federal tax dollars ‘drain’ (are credited) to the Daily Treasury Statement, the exact same account where all federal spending is drawn.

(Don’t take our word for it, ask any plumber, and they will confirm, that the water, after it goes down a drain, is not ‘destroyed’.)

Thankfully, most folks are now seeing that these silly ‘deficit owls’ (just like the dopey ‘REalproGRESSIVES’) are pushing fake ideological ‘prescription’ mmt under the guise of promoting Pure ‘description’ MMT. It’s becoming more obvious by the day that these kids are not happy that the American economy is strong and would rather dismantle capitalism (to replace it with a post-modern neo-marxist cradle-to-grave welfare state).

It’s a good thing that these #FAKEMMTers have no idea how ridiculous they sound when they tell the person looking at a brand new dollar bill (or one of the 2000 employees of the Bureau of Engraving and Printing) that ‘we don’t print money anymore’; or when they tell the football player that he doesn’t know how the game is played (that his touchdown didn’t put the 7 points on the ‘scoreboard’); or when they tell a lawyer who wrote the US appropriations law that ‘federal taxes don’t fund spending’ (because ‘there’s no such thing as a taxpayer or taxpayer dollars on the federal level’); or when they tell the bookkeeper that a debit is a ‘destruction’ (without a simultaneous creation, aka credit, on another ledger). Hopefully they’ll remain as clueless to how ridiculous they sound to anyone outside their choirs (to the accountants, to the lawyers, to the bankers, to the policymakers, and to the hard-working, patriotic, law-abiding American constituents) as they are about PURE MMT.

#UNLEARNFAKEMMT

P.S. Although the gold-standard era ended and the financing function of federal gov’t revenue took a back seat to other, more important, functions (mostly to maintain price stability and to maintain demand for the currency); the pure MMT enlightenment is that, operationally, any monetary sovereign, issuing its own fiat currency, no longer needs to collect federal taxes or sell Treasury bonds to fund spending (not that they don’t at all). That modern monetary ‘formality’ (albeit unnecessary) is still getting in the way of the modern monetary theory (is still frustrating the Deficit Owls). MMTers would be able to follow those seesaws (debits & credits) much easier if they just tried to keep it simple (to keep it pure).

Thanks for reading,

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