77 Deadly Innocent Fraudulent Misinterpretations (#64-70)

Deadly Innocent Fraudulent Misinterpretation #64: “The Job Guarantee is a specific and intrinsic element of MMT rather than a policy choice that might reflect progressive Left values. The only efficient option for government is the use of a Job Guarantee…There really is no alternative in this context.”—Bill Mitchell, ‘Critics of the Job Guarantee miss the mark badly…again’, 04/26/18

Fact: Core MMT is the description (“MMT is descriptive and from there”) the Job Guarantee (“the Transition Job”) is a prescription (“is a base case for analysis”) which then you can change if you wish (“which you can do or not do”).

Don’t take my word for it. Here is the transcript (05/28/18 video @ 2:17) of Warren Mosler on Bloomberg TV with Bloomberg’s Joe Weisenthal and Romaine Bostick discussing the debate over MMT (over MMT academics that are ‘missing the mark badly…again’):

Bloomberg: Do you think that when people hear MMT, there is a ‘descriptive’ framework?

Warren Mosler: Yes.

Bloomberg: A ‘descriptive’ framework, like, ‘This is how monetary operations work in a country’….

Warren Mosler: Yeah.

Bloomberg:…that has its own currency…

Warren Mosler: Right.

Bloomberg:…and there’s the ‘prescription’ and often that includes a Job Guarantee (and these days a lot of the MMT advocates are pushing for a Green New Deal).

Warren Mosler: Yeah.

Bloomberg: Are they separable? Does MMT just refer to the ‘description’, or is it have to encompass all of that—including the ‘prescription’ as well?

Warren Molser: Core MMT is just a ‘prescription’ but it also shows you a base case for analysis…

[Note: That was a Freudian Slip. When later asked on Twitter if he misspoke there, Mr. Mosler confirmed that he meant to say core MMT is descriptive: “MMT is descriptive and from there I derive a ‘base case for analysis’ that includes a 0% policy rate and a JG.”—@wbmosler]

Bloomberg: Ok

Warren Mosler: … and when you’re at that base case you can then make changes, but you have to have a base case. When it becomes obvious once you understand the monetary system, is that what’s called the Job Guarantee—I call it the Transition Job—is a base case for analysis which then you can change if you wish. You can do it or not do it.

What Mr. Mosler is saying—without using the word ‘prescription’ because ‘prescription MMT’ is now (thanks to pure ‘description’ MMTers) a phrase like ‘printing money’ or ‘federal taxpayer dollars’ that political ‘prescription’ MMTers hate to hear—is that YES, OF COURSE the job guarantee is a ‘prescription’. The JG is an MMT prescription that Mr. Mosler wrote about in the policy proposal section at the end of his book (7DIF) that he believes is a good idea and should become part of the ‘description’ reality.

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Deadly Innocent Fraudulent Misinterpretation #65: “MMT should not be seen as a regime that you ‘apply’ or ‘switch to’ or ‘introduce’. Rather, it is a lens which allows us to see the true (intrinsic) workings of the fiat monetary system.”—Bill Mitchell, ‘Seize the Means of Production of Currency Part I‘, 06/11/19

Fact: MMT is the analysis of a dynamic currency.

When conflating (read: confusing) ‘description’ MMT with ‘prescription’ MMT, political MMTers like to say that MMT ‘is like gravity’ or MMT ‘is intrinsic’; however, unlike any rule of law (like gravity) or any true workings (anything intrinsic), the ability of a monetary sovereign to keep creating and spending its own fiat currency is always in flux—IT IS NOT a given.

Similar to that DriversEd manual that you get in high school, the ability to deficit spend (like driving) is a privilege, not a right. Furthermore, to get a driver’s license, in addition to just reading the manual, you also have to take a road test and prove that you have the skills needed to get the privilege. In other words, you don’t just ‘learnMMT’, you earn MMT.

Just like everybody else (any ‘user’ of currency), a monetary sovereign (any ‘issuer’ of currency), needs to earn the privilege to be able to deficit spend and also needs to work at keeping that privilege. Just like any company with an ‘unlimited’ amount of ‘fiat’ stock that it could ‘keystroke’ into existence to pay expenditures (that dilutes the outstanding float of shares), they can only keep that privilege as long as responsible policymakers are making disciplined decisions that grows the company (which serves the long-term interests of both their employees as well as their shareholders).

It should NOT be taken for granted that a country with its own fiat can keep deficit spending ‘because MMT’ since that ability is NOT a certainty (is not ‘intrinsic’ like ‘gravity’). A federal gov’t, especially of a wealthy nation, with a strong economy (like #1 US, #2 China, #3 Japan), will be able to keep deficit spending on any ‘prescriptions’, as much as it wants, it’ll be fine—UNTIL IT ISN’T. Just like if you jump out of a plane without a PRODUCTIVE parachute, you’ll think for a while that you’re fine (until gravity proves you wrong).

The MMT insight is that unlike a ‘user’ that can literally run out of currency, an ‘issuer’ of currency has more fiscal space to deficit spend (and they have even more latitude if they have the resources, low inflation, low interest rates and no danger of ‘bond vigilantes’). However, don’t get confused: MMT, that currency analysis—and the state of that currency—is not constant, it is constantly changing.

The US Constitution spells out exactly who is legally authorized to approve spending, but just like attaining world-reserve currency status, the ability of the US to keep deficit spending is not bestowed (is not a right). America only gets to keep the issuance privilege that creates more net additions going into the US dollar dominion as long as the US federal gov’t keeps making responsible spending decisions that keeps their citizens productive, that keeps their economy growing and keeps that ‘full faith & credit’ backing their currency as good as gold.

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Deadly Innocent Fraudulent Misinterpretation #66: MMT is macroeconomics.

Fact: MMT is not macroeconomics.

As per Deadly Innocent Fraudulent Misinterpretation #65, Modern MONETARY Theory is the analysis of a dynamic currency. In other words, MMT is a ‘description’ of the MONEY. More specifically, the MMT insight is that—because there is a paradigm difference between yesteryear’s gold-backed dollar and today’s fiat dollar—the mainstream, including orthodox economists, are routinely confused about how the modern monetary system really works. 

After ‘description’ MMT got hijacked (and MMT became the ‘prescription’), not a day goes by when some political MMTer somewhere gets bothered by some verbiage by someone. As a result, there are many trigger words that should never be said because these political MMTers feel that it disparages their ‘prescriptions’. You can’t even say the word ‘prescription’ anymore! For example, instead of saying that the federal Job Guarantee proposal is a ‘prescription’, the MMT community prefers that you say it’s a ‘base case for analysis’. The reason being that apparently (as per political MMTer logic) saying that is ‘a racist trope’ (or something like that). Adding to that growing MMT no-no list (along with saying ‘printing money’, ‘federal taxpayer’, ‘taxpayer funded’, etc, etc) is this latest rule in the MMT kiddie pool: NO SAYING ‘MMT IS MICRO’! 

Deadly Innocent Fraudulent Misinterpretation #66 intentionally follows DIF#65 because it has the same symptom of many other MMT misinterpretations—which is that most in the MMT community keep jumping the gun. 

It was pure ‘description’ MMTers that first warned political ‘prescription’ MMTers to stop saying ‘federal taxes don’t fund spending’ because we’re not there yet. Taxes are NOT NEEDED to fund spending (because the federal gov’t spends its own fiat dollars now); BUT the modern monetary formality is that federal tax dollars do fund surplus spending because those pesky accounting rules and appropriations laws (albeit unnecessary) STILL EXISTS. 

The day that a ‘federal Job Guarantee program’ becomes law of the land, maybe you can start saying that ‘MMT is macroeconomics’; however, until then, the MMT community is once again getting ahead of itself. Sure, the JG is an ‘intrinsic’ part of a ‘theoretical framework’ proposed by ‘prescription’ MMT, but these political MMTers shouldn’t commingle that with reality (with actual macroeconomics already in existence).

“MMT markets itself as Macro through ‘prescriptive’ applications. They latched onto Keynes and the aggregate demand-side part, but left out his focus on the investment part [his focus on production in the functional ‘real’ economy]. MMT is the flip-side reactionary response—Supply-siders tend to do it on the other side and there the inflation shows up in financial assets which feds unhealthy inequality [capital just producing more capital in the nonproductive ‘financial’ economy]. After inflation sets in, taxing money back out to suppress demand gets into a whole set of other areas as it relates to production and unemployment. Constructing a complete model of inflation is next to impossible. We need better models that get closer to approximating it and here MMT seriously misses the mark by only focusing on currency analysis. In short, MMT is actually one giant microeconomics course on Money and Banking while leaving out the fact that you can’t eat paper.”—Charles Kondak

“MMT is not macro. MMT is indeed micro. That’s why MMT keeps getting so much wrong and nothing they say jives. Austrians did the same thing—they used micro to call it macro with their bullschitt. When pandering for votes, political ‘prescription’ MMT is no different. They say things like ‘unemployment is proof that deficits are too small’ so just PRINT PRINT PRINT and all your worries will go away. Those good intentions all sound logical—that it would bring economic ‘justice’—but guess what, we DID exactly that and the global economy is slowing (with inequality getting worse BECAUSE of deficits). Look at Japan, the political MMT ‘poster child’, they printed their ass off and lost 4 decades. All MMT has is a bunch of excuses, caveats, silly misrepresentations or outright lies for every single dopey little thing they say. Running a federal surplus is bad? Thailand, Australia, and the Philippines all ran surpluses with no recession. Taxes ‘value a currency’? Well, the Middle East doesn’t have a federal income tax and their currency value is just fine. The American economy is a ‘junk economy’? If MMT was macro, it would have predicting abilities (which it clearly doesn’t).”—Jim ‘MineThis1’ Boukis

AGREED…’Description’ MMT is understanding the paradigm difference that taxes in fiat dollars still fund spending—no longer as a financing function, but instead to maintain price stability and to maintain political constraint on spending—which is how the post-gold standard, modern monetary system works. ‘Prescription’ MMT is marketing; or more specifically, it’s political hype—under the guise of being ‘macroeconomics’. Even Bernie Sanders, the MMT-advised candidate, knows the difference. When asked How Will He Pay For It (proposals like ‘M4A’), he says he’ll raise taxes to pay for it—not to FINANCE his proposals (because there is no financial constraint) but to get the votes to APPROVE his proposals (because there is still a political constraint). House Speaker Nancy Pelosi is even more blunt, saying “All these people have their public whatever and their Twitter world, but…they’re four people…and what’s important is that we have large numbers of votes on the floor of the House.” In other words, ‘prescription’ MMT is not even in the macro ballpark until all those ‘likes’, ‘hearts’, and ‘shares’ on social media translate into votes in the ballot box. Only AFTER the mainstream starts calling deficit spending something like ‘Net Spending Achievement’; AFTER everyone thinks of deficit spending as simply being how many dollars are ‘supplied’ to the banking system; AFTER we start calling the national debt something like ‘The National Savings’ or ‘The National Debit’; AFTER the ‘buffer stock of the unemployed’ is replaced by a ‘buffer stock of the employed’ in a federal Job Guarantee program, AFTER the non-accelerating inflation rate of unemployment (NIARU) is instead called the Non-Accelerating Inflation Buffer Employment Ratio (NAIBER), and AFTER political MMT ‘scholars’ stop saying dopey things like ‘The American economy is a junk economy’ (during the Longest Expansion In United States History), etc, etc—THAT’S when anyone can (accurately) say ‘MMT is macroeconomics’ (and be taken seriously).

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Deadly Innocent Fraudulent Misinterpretation #67: If you are a monetary sovereign, MMT is going to work.

Fact: Modern Monetary Theory is easier said than done for countries other than the US because the modern monetary reality is that the US has a much more complex and integrated banking system than the one that existed in the 20th century.

Nothing irks a fake ‘prescription’ MMTer more than when someone on ‘the left’ criticizes MMT; but these healthy doses of tough love make superb sources of insights for the pure ‘description’ MMTer.

In that 3rd June 2019 Tribune article titled ‘Against MMT’ written by James Meadway (former Economics Adviser to The Labour Party), he points out that in the UK ‘our huge, internationalised financial system is dependent, ultimately, on political support from elsewhere precisely because it is huge and internationalised.’

As per James Meadway, ‘If you can’t issue the dollar, MMT isn’t going to work’ (or as pure MMTer MineThis1 correctly warns, ‘It’s fine—until it isn’t’). MMT is ‘simplistic monetary solutions to complex problems of political power’ for any other nation because no other nation can issue US dollars (because all other nations are ‘users of dollars’).

For example, as Meadway explains, in the depths of the 2008 global financial crisis, British banks faced huge demand for dollars — the result of their massive dollar liabilities — that not only could they not meet, the Bank of England itself could not meet. Instead, central bank Swap Lines were opened from the Federal Reserve in the US to supply dollars at rock-bottom rates to financial systems in countries like the UK that were suddenly grossly overstretched. ‘This is a critical moment in the economic history of the previous ten years, since it reveals in dramatic fashion the real lines of power and command in the world economy today—the decision to provide that support was political and taken at the highest possible level in the US,’ he adds.

The point he’s making here is that while everybody understood what those Fed ‘bailouts’ did during the credit crisis; not too many were aware that the largest program of them all, BY FAR (which peaked in mid-December 2008 at $600 billion outstanding), was the Fed establishing these currency swap lines with 14 other central banks (with the BOE, the Swiss National Bank, the ECB, the Bank of Canada, BOJ and others worldwide) to support dollar-denominated funding markets in Europe, Asia, and Latin America (to prevent them from seizing up which could have resulted in a devastating collapse of the global financial system).

So not only was the Fed —the folks with ‘the pedals backwards’ as per the political MMT yarn—providing support to US Banks ($251B), to American International Group ($67B), to the US Automotive Industry ($148B), to US Housing ($45B) and US Credit markets($20B); the Fed was also reducing the scramble by foreign banks for dollar funding, as well as keeping credit flowing to foreign banks in the US by enabling them to borrow dollars directly from the Fed because even THEY couldn’t borrow from THEIR OWN home-country central banks (who didn’t want to be on the hook for any losses).

Modern Monetary Theory is easier said than done for countries other than the US because the modern monetary reality is that ‘the US has a much more complex and integrated banking system than the one that existed in the 20th century.’

In a deeper dive of the currency analysis, we can see a post-gold standard, post-globalization, modern monetary system ‘where in responding to a crisis, the Fed actions and the Fed backstop needed, go way beyond the borders of its own country.’


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Deadly Innocent Fraudulent Misinterpretation #68: ‘The private sector will never provide jobs for everyone that wants them. With a Federal Job Guarantee program we can instead directly provide jobs for anyone the private sector does not want to employ so that those people can participate in our economy too.’

Fact: A federal Job Guarantee would lead to less productivity and a lower GDP because there will be less economic incentive to work.

H/T Terry Flemming

“There are 7.5 million open jobs and 6 million unemployed. There are plenty of jobs to be had. Who is the magical ‘we’ that will provide the jobs to those that don’t want to work in the private sector? What will these people do? How will they be paid? Is this more magical MMT? As for your jobs guarantee, if a job is guaranteed, what do you feel is the quality of work you will receive from that employee? Where is the incentive? As for capitalism killing the environment, have you looked at what non-capitalist countries are doing to the environment? Do you think the environment in Russia is great? A federal Job Guarantee program will lead to less productivity and a lower GDP because there will be less economic incentive to work.”—Terry Fleming

AGREED…and everyone (even including magical ‘prescription’ MMTers) knows what happens to a monetary sovereign’s fiat currency when there is a collapse in production—or at least they do a good impersonation of someone who knows whenever ‘Zimbabwe’ is brought up.

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Deadly Innocent Fraudulent Misinterpretation #69: (I – S) + (G – T) + (X – M) = 0

Fact: (I – S) + (G – T) + (X – M) – (Qm – Yd) = 0 

Of all the silly catchphrases, perhaps nothing sent the MMT kiddie pool over the cliff (as quickly as the ones saying ‘Taxes Don’t Fund Spending’) was when they all started repeating that dopey ‘FEDERAL DEFICITS (their red ink) = OUR SAVINGS (your black ink)’ meme.

That Sectoral Balances equation (Investment minus Savings) plus (Gov’t spending minus Taxation) plus (Exports – Imports) equals zero is ‘true’—just like it’s an ‘accounting identity’ that in The Monopoly Game, the only source of Monopoly Money that the Monopoly Players can get their hands on is from The Bank (‘exogenously’ from the federal gov’t). The reason being is that one of the Monopoly rules is that no Player may borrow money from another Player (no ‘endogenous’ private sector creation). In other words, unlike reality, in The Monopoly Game, THEIR DEFICITS (Monopoly dollars spent into existence from the Monopoly Bank) is OUR SAVINGS (is the Player’s black ink). 

The implications of anyone accepting a simple three-sector model like (I – S) + (G – T) + (X – M) = 0 as gospel is that you will have a slight, but unsophisticated, grasp of economics at best, or that you will continue to be easily fooled by political MMTers pushing ‘prescriptions’, at worst.

Beyond the memes (beyond the board games), deficit spending by the federal gov’t initially goes to the 95% (the borrower) and eventually winds up with the 5% (the saver) AND THAT IS ONLY IF ANY OF THOSE DOLLARS EVEN REACHES the private-sector (the nonfederal gov’t / domestic) in the first place! If US trade deficits are bigger than US budget deficits, that means that federal gov’t deficits for that year equals the foreign sector’s (the nonfederal gov’t / international) savings. For example, for thirteen straight years prior to the financial crisis in 2008—The Worst Recession Since The Great Depression—federal gov’t deficits WERE NOT your savings. When looking at these sustained US private sector deficit figures below, keep in mind that all six depressions in US history were preceded by sustained federal gov’t surpluses (which is the same as saying that all six depressions in US history were preceded by sustained US private sector deficits):

$107B ‘dollar add’ from the federal gov’t in 1996:

$170B surplus to the non federal gov’t / International

(-$63B) deficit from the non federal gov’t / Domestic

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$22B ‘dollar add’ from the federal gov’t in 1997:

$181B surplus to the non federal gov’t / International

(-$159B) deficit from the non federal gov’t / Domestic

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(-$70B) ‘dollar drain’ to the federal gov’t in 1998:

$230B surplus to the non federal gov’t / International

(-$300B) deficit from the non federal gov’t / Domestic

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(-$126B) ‘dollar drain’ to the federal gov’t in 1999:

$329B surplus to the non federal gov’t / International

(-$455B) deficit from the non federal gov’t / Domestic

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(-$235B) ‘dollar drain’ to the federal gov’t in 2000:

$439B surplus to the non federal gov’t / International

(-$674B) deficit from the non federal gov’t / Domestic

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(-$128B) ‘dollar drain’ to the federal gov’t in 2001:

$539B surplus to the non federal gov’t / International

(-$411B) deficit from the non federal gov’t / Domestic

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$157B ‘dollar add’ from the federal gov’t in 2002:

$532B surplus to non federal gov’t / International

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

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$378B ‘dollar add’ from the federal gov’t in 2003:

$532B surplus to non federal gov’t / International

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

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$412B ‘dollar add’ from the federal gov’t in 2004:

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

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

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$318B ‘dollar add’ from the federal gov’t in 2005:

$772B surplus to non federal gov’t / International

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

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$248B ‘dollar add’ from the federal gov’t in 2006:

$647B surplus to non federal gov’t / International

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

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$161B ‘dollar add’ from the federal gov’t in 2007:

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

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

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$458B ‘dollar add’ from the federal gov’t in 2008:

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

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

That is why the question that pure MMTers are (correctly) wondering every fiscal year is Their Deficits = WHOSE Savings?  

“The axiomatically correct relationships are:

Qm =  —Sm in the case of the pure production-consumption economy; 

Qm =  I — Sm in the case of the investment economy; 

Qm =  (I — Sm) + Yd + (G —T) + (X — M) in the general case.

Savings is NEVER equal to investment. Therefore, all I=S and IS-LM models are provable false. This includes Post Keynesianism and MMT. Warren Mosler, with MMT policy, has found a way to endorse full employment, healthcare and other social agendas, to increase at the same time the business sector’s profit with the help of the sovereign money-issuing state.”—Egmont Kakarot-Handtke

(Legend: Qm monetary profit, Sm monetary savings, I investment expenditures, Yd distributed profit, G government expenditures, T taxes, X export, M import)


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Deadly Innocent Fraudulent Misinterpretation #70: “Right now, we got that tariff man, you know, ‘agent orange’ I call him. Look, we all know that when we go shopping, you win when you get a better price. If you can get the lowest possible price, you’re the best shopper. Meanwhile, he’s complaining to China because they’re not charging us enough for the stuff they’re selling to us. He is saying that China is taking advantage of us by not charging us enough!”—Warren Mosler, The MMT Podcast With Patricia Pino & Christian Reilly, 07/10/2019

Fact: “You can move your car factory south of the border, pay a dollar an hour for labor, don’t have health care—that’s the single most expensive element in making a car—have no environmental controls, no retirement plans, and you don’t care about anything except making money, there will be a giant sucking sound going south.”—Ross Perot, The Second Presidential Debate, 10/15/1992

In the 1992 US presidential election, Ross Perot of the Independent Party received 19% of the popular vote—making him the most successful third-party candidate since Progressive Party nominee Teddy Roosevelt’s 27% of the popular vote received in the 1912 election.

Ross Perot (and incumbent Republican President George H. W. Bush) lost that election to Democrat Arkansas Governor Bill Clinton. As it turned out, the North American Free Trade Agreement, that US pivot towards globalization, then—echoing Mr. Mosler’s words today—was a successful move and the results prove it. President Clinton’s two terms in office included a great period of economic growth (the second-longest US expansion in history from the trough in March 1991 to a peak in March 2001).

In addition, by letting a large percentage of US manufacturing relocate to Mexico and overseas in the 1990s, the American economy not only became more of a ‘service’ economy—it also became more resistant to global downturns. For example, because US policy encouraged that development of ‘organic’ domestic-led growth, America recovered from the last financial crisis faster than the rest of the world (who depend mostly on export-led growth and who now still need more central bank accommodation).

So to be fair to Mr. Mosler, it’s partially true that “Imports are a benefit, because if you’re importing, and you have people that are unemployed, that’s a good thing, that’s an opportunity; since now you can use your fiscal policy by lowering taxes or increasing public services to redeploy them into higher value activity.”

HOWEVER, to be fair to Mr. Perot, in that second presidential debate, he (correctly) warned the country that NAFTA would hurt American workers if it wasn’t a ‘two-way street’. In other words, Imports Are a Benefit…UNTIL THEY’RE NOT. Imagine telling a US worker who just found out that their factory is closing—after China intentionally ‘dumped’ so much product that it forced them out of business—to stop complaining about ‘China not charging us enough.’

As it is now turning out, tweaking trade agreements (some simple ‘pen strokes’ AND NOT just more ‘keystrokes’) to change Free UNFAIR Trade back towards Free FAIR Trade has also been a successful move and the results are proving it. The longest US economic expansion (from the trough in June 2009 to today, July 2019, 121 months and counting), continues into its 11th year. Today we are at a 50-year-low unemployment rate (3.7%). As per Fed Chair Powell in his testimony to both chambers of Congress this week, “The labor market remains healthy. Job openings remain plentiful. Employers are increasingly willing to hire workers with fewer skills and train them. As a result, the benefits of a strong job market have been more widely shared in recent years. Indeed, wage gains have been greater for lower-skilled workers.”

We’re talking about Jobs, Jobs, Jobs; and REAL ONES that provide economic opportunity for unemployed workers, wealth-quintile mobility for employed workers, PLUS the fulfillment of getting an honest day’s pay for an honest day’s work—rather than pretending to in a FJG (Fake Job Guarantee).

RIP Ross Perot (June 27, 1930 – July 9, 2019)


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Political ‘prescription’ MMT Plan B: Go West Young Man

Years ago (before 2017), were you one of those idiots that totally missed out on buying Facebook or Bitcoin? If so, join the club—so was I!

One lesson I learned from these ‘disrupters’ is that I will never underestimate anything in the mobile-service or crypto-commodity space again—and especially if something some day combining both comes along.

Remember that guy testifying in front of Congress in February 2019 dismissing the ‘ideas’ of MMT? Here’s what he recently said about Facebook’s Libra: “Libra is a new thing. We’re looking at it very carefully. The authority for overseeing it is going to be in a number of places. Given the possible scale of it, I think that our expectations from a consumer-protection standpoint and from a regulatory standpoint, are going to be very, VERY high.”—Fed Chair Powell, at the Council on Foreign Relations in NY, 06/25/2019

In other words, the central banker of the largest economy on earth isn’t taking political ‘prescription’ MMT (aka #FakeMMT) seriously; but he is taking people combining mobile-service & crypto-commodities seriously.

My understanding so far, Libra is a work in progress. Rather than detail any specific technical design, its whitepaper describes ‘aspirations’ that will be ‘modified’ along the way ‘to satisfy regulators, resolve conflicts, attract users, please investors and deal with anticipated users’. Meaning that all of the following is subject to change:

For now, for those that like their digital assets being ‘sound money’, Libra will be a ‘stablecoin’, which means it will have a 100% ‘reserve requirement’ (it will be 100% pegged, however not pegged 1:1 to the US dollar but fully-backed by the value of a basket of worldwide currencies in cash +/or invested in worldwide gov’t bonds).

For now, for those that like their digital assets being ‘decentralized’, Libra, unlike credit cards that are partnered with banks that are heavily regulated by gov’t, will not be partnered with banks (because Libra will live on smartphones in securely stored in digital wallets—and only ‘linked’ to bank accounts).

For now, for those that like their digital assets being ‘monetized’, Libra will be an open ecosystem, meaning it will be open to any financial service (not just for making payments but also including financial institutions offering credit or loans denominated in Libra).

“Facebook is building a digital wallet called Calibra for Apple and Android-powered smartphones that will integrate with Facebook’s Messenger and WhatsApp mobile services which are now used by over a BILLION people. Over time, as the system grows and it is built into more products and services, there will be more things you can do with Libra,” Calibra VP Kevin Weil says.

Perhaps MMT academics and the rest of the MMT community are barking up the wrong tree?

The political ‘prescription’ MMT mentality today is not much different than any other garden-variety charity (with the only exception being that MMTers aren’t talking about giving THEIR money away of course).

My guess, once Libra becomes firmly established, it’s not a matter of if, but a matter of when, Libra gets cut loose from that ‘peg’. Then who knows, as a marketing promotion, Libra could announce that they will create an additional issuance for the sole purpose of, let’s say, to be spent on free college scholarships around the globe. If the ‘value’ of Libra were to continue to remain steady (meaning the ‘users’ continued to approve), then just like any ‘unlimited’ fiat, the sky’s the limit for what other progressive initiatives that crypto-commodities could fund.

So, in the not-too-distant future, if MMTers had the ears of the ‘issuers’ of a nonconvertible free-floating Libra, these MMTers could become influential ‘policymakers’ that sway decisions on how to spend Libra for the public purpose and the general welfare. Which may appeal to both worldwide Libra users, along with the Libra issuers at Facebook—who are politically-aligned to MMTers.

Very similar to fiscal policy-making in the public sector, positioning yourself as an organization in the private sector that directs where charitable dollars go, that’s where the action is too. For example, the folks at Real Progressives—who see the writing on the 2020 election result wall—have already started the process of forming a tax-exempt nonprofit organization.

Maybe a ‘Mosler Institute for Functional Finance’ (that reinvents itself as an MMT-savvy force to reckon with on Boards of Directors instead of in Halls of Congress) would be taken seriously enough to reach critical mass?

Besides, that’s where the (newly-printed) money is.

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77 Deadly Innocent Fraudulent Misinterpretations (#57-63)

Deadly Innocent Fraudulent Misinterpretation #57: “Actually, we can [‘print’ $100 trillion]. We did it last year and the year before and the year before, etc. Check the Daily Treasury Statement. Over $100 TRILLION redeemed last year. The nation didn’t blow up.”

Fact: Over $100 trillion of federal bonds are redeemed every year but the NET CHANGE—how much was ‘printed’ (newly-created and added into existence)—was under $1 trillion last year.

It was Mike Norman who wrote this (during an April 2019 Twitter discussion with MineThis1) after being told that even though there is no ‘financial constraint’, the federal gov’t can’t just ‘print’ over $90T (for something like a Green New Deal) without consequences.

Mike included a screenshot of the Daily Treasury Statement (DTS) as of September 2018 showing that the outstanding issues of both federal debt held by the public (‘marketable’) plus intragovernmental debt (‘non-marketable’)—aka the total ‘National Debt’—redeemed last year was “over $100 trillion!”

One small detail that Mike left out (read: that only people who can properly understand data could see) is that the NET CHANGE in the amount (listed right below the $100T on that same DTS) was only $1.271T. Meaning that the amount ‘printed’ (Total Issues minus Total Redemptions = annual federal gov’t deficit spending which is ‘added’ to the Public Debt Outstanding) last year was approx $1T and not $100T (the federal gov’t deficit for 2018 officially wound up being $746 billion).

Anyone who has a credit card knows that ‘revolving’ a debt is not the same thing as ‘adding’ a debt. Mike was deadly, innocently and fraudulently misinterpreting off-budget non-marketable intra-gov’t held Gov’t Account Series (GAS) bonds being redeemed. Instead of $100T of bonds being ‘printed’ last year, what the DTS actually shows is that there was $90T worth of ‘transactions’. More specifically, GAS bonds were ‘rolled over’ to the tune of $90T. There is only $6T of GAS bonds. What makes that $90T figure seem like so much is that most of the $90T transacted is just multiple rollovers of the same bonds with very short maturities, day after day, same as always, which ”we did last year and the year before and the year before, etc.”

MineThis1 is right—Even a monetary sovereign can’t just ‘print’ (the federal gov’t can’t just newly-create and enter) over $90T into the banking system without risking serious consequences.

The pure MMT insight (the point MineThis1 was making to Mike Norman and the point many others are now making when warning MMTers to the dangers of rising ‘Debt’/GDP) is that the reason that it is a risk is not because there isn’t an offsetting tax ‘to pay for it’.

You can keystroke dollars but you cannot keystroke output—it’s a risk if the rise in how much you ‘print’ is not offset with an increase in productivity.

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Deadly Innocent Fraudulent Misinterpretation #58: “Only after the government spends its new currency does the population have the funds to pay the tax. To repeat: the funds to pay taxes, from inception, come from government spending (or lending).”

Fact: The monetarily-sovereign federal government doesn’t necessarily have to spend its new currency so that the population has the funds to pay federal taxes. To repeat: the funds to pay taxes, from inception, do not necessarily come from government spending or loans from the Fed.

One of several reasons that ‘the funds to pay taxes come from government spending’ (from public-sector money creation) is wrong, is a US law called the Taxpayer Relief Act of 1997—which allows you to pay taxes with a credit card (with private-sector money creation).

The above quote from Warren Mosler’s 2010 book Seven Deadly Innocent Frauds (pg 20) foreshadowed this 58th of the 77 Deadly and Innocent Fraudulent misinterpretations that we are now hearing from the ‘prescription’ MMT community today. In other words, just as Mr. Mosler does in the course of explaining fraud #1 starting with the brilliant insight—that the federal gov’t has no ‘solvency risk’—along with more ‘description’ MMT enlightenment for the 100% (7DIF parts I & II) ends up getting undermined when data is cherry-picked and feelings replace facts to fit narratives pushing political ‘prescriptions’ (7DIF part III).   

Please note that I too (along with all MMTers) consider Warren Mosler an MMT champion, but even the Great Ones swing and miss sometimes. By pointing out mistakes, I am actually trying to help improve the MMT message to the mainstream—to the 100%.

All MMTers should do so as well. If we don’t, if MMTers discourage that, if we instead consider MMT ‘chiseled in stone’, then MMT becomes more like a religion (and more people will continue to assume that MMTers are in a cult).

To fit the ‘funds to pay taxes comes from government spending’ narrative, Mr. Mosler reasons that whenever taxes are paid to the Treasury, since the taxpayer’s bank’s reserve account at the Fed is debited, and the Treasury’s account at the Fed is credited with reserves; thus, since “the private sector cannot generate reserves” (pg 20 / footnote #3), therefore that means “the funds to make payments to the federal government can only come from the federal government.” Using an analogy, “the government, in this case, is just like the parents who have to spend their coupons first, before they can actually start collecting them from their children” (with reserves being “the coupons the kids need to make their payments to their parents—that have to come from their parents”). Sure, that analogy works—if we were all kids and didn’t have credit cards (if we didn’t have the ability to create allowance coupons ourselves along with collecting the ones our parents created).

If you use a credit card (if you ‘deficit spend’), that’s a creation of dollars by the private-sector financial institution that issued the credit card; and if you pay federal taxes with a credit card, those taxes paid didn’t come from gov’t spending. If the US monetary system had the same rules as The Monopoly Game, which states that Monopoly Players can not borrow from other Monopoly Players (meaning no private-sector money creation), then that ‘Federal Gov’t (Monopoly Bank) Funds The People (Monopoly Players)’ narrative would hold true, but that’s not the case. The ‘bathtub’ (the economy) doesn’t just get the ‘water’ (newly-created dollars) from the ‘faucet’ (federal-gov’t spending); the economy ALSO gets dollars from private-sector money creation as well. Today’s MMTers (who prefer memey catchphrases over facts, math & data) don’t count those private-sector creations because those dollars ‘net-out’—so they are told. The monetary reality is that if a household takes out a 30-year mortgage, that means it takes THIRTY YEARS for that private-sector creation of dollars that went into the ‘bathtub’ to ‘net-out’ (while those newly-created dollars are working their magic in money-supply circulation). The same goes for large corporations who are constantly rolling over debt in the wholesale interbank funding markets—meaning lots of private-sector money creation that rarely ‘nets-out’. In fact, there are instances when private-sector money creation NEVER ‘nets-out’. Warren Mosler himself often points out that banks CAN and DO actually add Net Financial Assets (unintentionally) when they have negative capital (when a bank loan—or a bank itself—defaults).

The MMT insight (Mr. Mosler’s original ‘description’ that went off course) is that instead of the gold-standard era where the gov’t had to wait to collect gold-backed dollars first, the order of operations switched. The gov’t can now issue fiat dollars out of thin air and fund us first (the ‘federal stadium’ distributes ‘tickets’ first)—and then we fund the gov’t back (and then we pay the stadium for the tickets).

Another deadly innocent misinterpretation in that 7DIF fraud #1 is where Mr. Mosler writes that in addition to taxes, the funds to buy Treasury bonds also comes from government spending as well. More specifically, that the Fed “does repos – to add the funds to the banking system that banks then have to buy the Treasury Securities; otherwise, the funds wouldn’t be there to buy the Treasury securities and the banks would have overdrafts in their reserve accounts.” (pg 20 / footnote #2). So, the first narrative was that ‘the funds to pay taxes comes from government spending’ and this narrative is that ‘the funds to buy the Treasury securities comes from government’ too. The former cherry-picks one tiny ‘reserve accounting’ part of the process to say taxes aren’t ‘technically’ funding taxes (which is like saying that the gasoline you put in your car doesn’t make the wheels turn because the gas is ‘destroyed’ in the pistons); with the latter misinterpreting repurchase agreements (also called repos) done by the Fed as meaning that the Fed is providing the funds on behalf of private investors to facilitate their purchases of Treasury securities. Which again isn’t the case. In the pre-LSAP (pre-quantitative easing) days, the Fed did repo transactions called Open Market Operations in the secondary market—meaning with existing Treasury bonds—with banks to maintain the Fed’s target (the Fed’s desired) overnight borrowing rate; however, the Fed DOES NOT do repos—the temporary purchase and selling of Treasury securities (a swap of bonds for reserves that is quickly unwound)—to fund the banks in order to buy newly-issued Treasury bonds at auction in the primary market.

Don’t take my word for it. A copy of a 08/20/15 letter posted up on the Intro to MMT facebook page from James A. Clouse, Deputy Director, Division of Monetary Affairs of the Federal Reserve System in Washington, D.C., responding to a question by Stanley Mulaik (regarding the mechanics of Treasury debt auctions) said the following:

“Chair Yellen asked me to respond to your recent letter…and a set of ideas that has been popularized as ‘Modern Monetary Theory.’ On the question of the mechanics of Treasury debt auctions, there are a number of inaccuracies in the description of the process…Contrary to some of the MMT website discussion you mentioned, primary dealers are never overdrawn at the Federal Reserve—they do not have reserve accounts with the Federal Reserve that can be overdrawn…It bears emphasizing that at no point in the Treasury auction process, does the Federal Reserve temporarily purchase or sell Treasury securities to facilitate settlement on behalf of private investors nor does it provide credit temporarily to facilitate their purchases of Treasury securities.”—BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

Here’s another example of Mr. Mosler cherry-picking to fit a narrative. To show that federal gov’t spending is just like changing numbers on a scoreboard, 7DIF fraud #1 includes the following transcript from a 03/15/09 episode of a 60 Minutes interview of Ben Bernanke during the early phase of the credit crisis when the Fed was lending money (with the bank’s toxic assets as collateral) to these troubled banks then suffering liquidity problems (when the Fed was creating reserves and giving them to the banks to ‘exchange’ for dollars to be spent into money supply circulation):

Pelley: “Is that tax money that the Fed is spending?”

Bernanke: “It is 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…

Which is a perfect statement that all MMTers should use to explain how federal gov’t spending is completely different in the post-gold-standard era using fiat dollars. That’s as golden a line for the MMT community as that Greenspan “There is nothing to prevent the government from creating as much money as it wants” response to then-Chair of the House Budget Committee Paul Ryan (R-WI); but the very next line Bernanke said—that Mr. Mosler intentionally left out—was this:

…so it’s much more akin, although not exactly the same, but it’s much more akin to printing money than to borrowing.”

Pelley: “You’ve been printing money?”

Bernanke: “Well, effectively yes, and we need to do that because our economy is very weak and inflation is very low. When the economy begins to recover, that’ll be the time that we need to unwind those programs, raise interest rates, reduce the money supply and make sure that we have a recovery that does not involve inflation.”

Again, that’s a perfect printing-money-friendly quote for MMT, because ‘printing money’ = ‘money creation’ (the kind of money creation just like federal-gov’t deficit spending that results in needed net additions of financial assets feeding into money-supply circulation along with welcome increases in newly-created aggregate demand), and that’s how easy it’s done by our gov’t these days; but Mr. Mosler left that part out because like all political ‘prescription’ MMTers, he hates the term ‘printing money’ (since it means different things to different people).

(NOTE to Pure ‘description’ MMTers: In a follow-up interview with 60 Minutes on 12/05/10, Chair Bernanke explained that even though quantitative easing was also a creation of reserves to pay for the bank’s AAA-rated Treasury bonds, that was NOT to be considered ‘printing money’ because unlike Japan’s QE which includes buying commercial debt and equity ETFs to get more money into circulation—to specifically increase Japan’s money supply—the Fed’s QE was not creations that were intended to enter money-supply circulation. Rather than being like those earlier Fed loans for subprime bonds to cash-poor banks to be spent into circulation to keep their lights on, or just like routine federal-gov’t deficit spending, QE is not ‘printing money’ because QE is only a swap of bonds specifically done to extend a 0% short-term interest rate monetary policy (ZIRP)—by also lowering long-term interest rates. Rather than ‘printing money’, QE is ‘credit easing’; and rather than changing the money supply, QE only replaces the bank’s holdings of higher-yielding bonds that are not in the money supply, with holdings of lower-yielding reserves that are also not in the money supply).

(NOTE to Political ‘prescription’ MMTers : Disregard all that. Bernanke is wrong to say ‘printing money’ and the clueless Fed ‘has the pedals backwards’. In addition, Marx was right—Bernanke and the evil Fed are always plotting to ‘intentionally’ throw people out of work to control inflation. That plus any other cute story that fits an anti-Fed narrative to peddle a ‘prescription’ that dismantles capitalism).

The reason why today’s ‘prescription’ MMTers get very squeamish when it comes to the topic of inflation (the consumer’s loss of the purchasing power of their money over time) is because MMTers can’t stand when folks—bashing their beloved proposals—say things like ‘Oh sure, you just want to print more money, for more free stuff.’

Even though ‘printing money’ isn’t applicable now because we are in a digital computer age—and not ‘because MMT’—as the saying goes, never let facts get in the way of a good narrative. To avoid ‘prescription’ MMTers getting their feelings hurt, Mr. Mosler deploys some clever sleight-of-hand by telling them that ‘Saying printing money is wrong’ —meaning Bernanke is wrong— ‘because it’s a non-applicable gold-standard era term’.

Saying printing money is ‘wrong’ so let’s leave that part out of 7DIF fraud #1 (because it doesn’t fit the narrative), but let’s cherry-pick the part Bernanke is ‘right’ about (which does fit nicely).

In closing, may I repeat, the ‘description’ MMT found in Warren Mosler’s 7DIF is brilliant. There is nothing wrong with having ‘prescriptions’—and the more the merrier (from both sides of the political aisle because that’s how the best solutions are found). However, just like that paradigm difference between the federal gov’t and your household, there’s also a big difference between the ‘description’ (the facts) and your ‘prescription’ (your feelings). Pure MMTers are way ahead on the MMT learning curve because they separate their economics from their politics. Those who don’t, dilute their expertise in both at the same time.

“All things are poison, and nothing is without poison, the dosage alone makes it so a thing is not a poison.”—Swiss physician Paracelsus,1538

“Expansive fiscal policy and expansive monetary policy is a very powerful tool, which should be used if needed and at the same time handled with great care. Once again: It is the dose that makes the poison.”—German economist Peter Bofinger, 2019

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Deadly Innocent Fraudulent Misinterpretation #59: First it was ‘Deposits Create Loans’ and now it is ‘Loans Create Deposits’.

Fact: It was always ‘loans create deposits’…’Deposits create loans’ was just a historical blip, a subset, within ‘loans create deposits’.

The story of credit creation (the expansion of balance sheets) is the same old story—it’s when a damsel named Faith hooks up with a stud called Creditworthiness.

Picture a villager known as Creditworthy during medieval times. Seeing a herder named Faith with a few young goats, he offers to buy one; but having no coins, he also asks if he could pay her the asking price on the following month—to buy on credit. The herder agrees and hands over a goat. That promise to pay (newly-created IOUs), conjured up—out of thin air—to reach an agreement between counterparties (creating loans) is the newly-created asset that the herder deposits into her pocket (creates deposits), along with the already-existing asset that the villager adds to his barn.

Just like today when the federal gov’t ‘prints money’ (deficit spends), the newly-created IOU (the Treasury bond) is the addition of Net Financial Assets going into the banking system. Almost the same goes for the rest of us in the nonfederal gov’t when we deficit spend (except we go into actual debt when we ‘leverage’); and the opposite of the creation, is the destruction—when we pay off the ‘bond’ (when we ‘deleverage’).

Here’s the breakdown of the herder & the villager’s balance sheets: The sale of the goat is not an expansion of the herder’s balance sheet because she has only replaced one asset for another; however, as soon as she is paid back (and profit is ‘realized’), her net worth (Capital) does increase. Furthermore, the deposit of the goat into the villager’s barn IS an expansion of the herder’s balance sheet; however, it is also not yet an increase in his net worth (Capital) since his IOU (Liability) ‘nets-out’ with his goat (Asset). Only after the villager pays offs his ‘bond’ and then maybe sells some goat cheese for profit (‘retained earnings’) could he then increase his net worth (Capital). Which was the whole point of the exercise. Like dollars seeking yield, folks seek to lend and borrow—risk & reward running side by side—to increase their net worth.

Fast forward to the beginnings of the banking era, with requirements to hold a certain percentage of deposits of gold-backed dollars from savers (as a safety precaution against an over-extension of credit to borrowers). This ‘fractional reserve’ system, becomes a ‘deposits create loans’ form of money creation along with the already-existing system of ‘loans create deposits’.  

Today, when the private sector borrows money (deficit spends), it always begins with a newly-created promise to pay back the money in the future (the creation of the ‘bond’ that is handed over in exchange for the loan). Note that it is WE who ‘print’ the money—the banks (the financial intermediaries) are only facilitating OUR printing of money. The difference is that it is these middlemen who pay the vendor—it is the middlemen who the villager settles up with, instead of with the goat herder directly.

In other words, it’s the same as it always was. Ever since the first civil caveman (good at hunting) accepted a promise from another hungry caveman (good at gathering) to deliver some stone arrows / or some other equivalent of productivity / or some other unit measurement of debt, later; for a serving of roasted woolly mammoth, right now.

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Deadly Innocent Fraudulent Misinterpretation #60: “There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.”—Mosler’s Law

Fact: “Mosler’s Law assumes that all spending can be beneficial by decree, regardless of whether such spending translates productively to real economic benefit or not—it de-emphasizes the importance of real economy impacts in favor of playing up a trivial point.”—Jack Litle

“Modern Monetary Theorists don’t properly address productivity and the productivity issue is extremely important.

According to MMT, the government does not need to tax nor does not need to issue bonds to raise money—that both of these actions are simply policy controls, like plumbers adjusting the pressures and levers on a boiler. This isn’t the part of MMT that is fatally flawed. They are right when they say the government is self-funding.

Consider the (true) assertion that the U.S. government could fund itself without taxes or bonds. This highlights that the government’s spending choices are unlimited. But will all choices on the roster have the same impact on the economy?

When the government chooses to spend money—be it borrowed, extracted via taxation or created directly—it still matters HOW that money is spent.

The importance of wise spending is addressed in passing by MMT, but nowhere near thoroughly enough and not in consistent fashion, with MMT’s main assertions.

Productivity of investment is incredibly key… Why? Because funds spent and invested productively contribute to the health and growth of the U.S. economy, whereas funds not spent productively do not.

The importance of this distinction cannot be understated, yet MMT glosses over it. Why? Because Modern Monetary Theory does not properly address the vital linkage between fiat money creation and the real productivity of the U.S. economy.

Productivity—tangible assets and the volume of real goods and services provided—is what counts as genuine wealth. The digital 1s and 0s riding on top are just manipulated transaction mechanisms.

This is why it is so important to distinguish between productive spending and unproductive spending. Productive spending adds to the real wealth of the real economy. Unproductive spending does not.

The specific problem with an unproductive-debt boom is that it will further increase the total amount of credit flows WITHOUT a corresponding increase in the real wealth of the economy [it will further increase Debt/GDP, or in other words, it increases the ratio of ‘Our’ Savings v. output].

Of course, just where inflation shows up varies from case to case. Sometimes the results of an unproductive-debt boom can show up as pure, unadulterated asset inflation.

This is the heroin and cocaine of Wall Street—when all those extra flows push up the value of stocks, real estate, junk bonds et cetera while leaving the Fed’s traditional inflation-warning gauges untouched. Party!

Paper-asset inflation can be just as destructive as any other kind of inflation.

When the government malinvests, i.e. borrows or spends unproductively, it does not help things. In fact it only makes matters worse.

Though Walter Bagehot, 19th century editor of The Economist died more than 130 years ago in 1877, his description of the boom-bust cycle is still accurate in this era of ‘modern’ monetary systems.

Which is that the boom-bust cycles of today, just like those of yesteryear, are driven by a build-up of malinvestment and unproductive debt.

The key distinction is not between ‘public’ and ‘private’, but ‘productive” and ‘unproductive’; because productive credit-flows facilitate corresponding growth in the real wealth of the real economy, whereas unproductive credit-flows do not.

Real wealth is not created by a printing press or punched out by government decree. Real wealth is assets, savings, goods and services—the productive output of the underlying economy itself.

And thus the dog-and-pony show of self-funding government regimes counts as little more than a technicality. The U.S. government never has to technically go into default…fine, so what.

The financial power of the United States government is still inextricably linked to the productive power of the real U.S. economy.

This split also shows why Warren Mosler is wrong in his goofy assertion that ‘There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.’

The wackiness of ‘Mosler’s law’ (why it’s wrong) is that THE GOVERNMENT CAN SPEND AT WILL, BUT IT CANNOT SPEND PRODUCTIVELY AT WILL.”—Jack Litle aka ‘Jack Sparrow’, CEO of Mercenary Trader

Jack Litle aka ‘JACK SPARROW’, CEO of Mercenary Trader (@mercenaryjack ‏on twitter) has fifteen-plus years worth of experience in markets. He cut his teeth as an international commodity broker with clients on five continents, including a large Russian hedge fund and has traded virtually every asset class except real estate. His specialty is global macro.

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Deadly Innocent Fraudulent Misinterpretation #61: During the gold-standard era, the constraint on the federal gov’t—same as on any household—was a lack of gold-backed dollars to finance spending. Today, since there is no longer that financial constraint for a monetary sovereign because the only constraint to deficit spending in fiat currency is real resources, the federal gov’t can create money as long as there is a lack of inflation.

Fact: The constraint on deficit spending in fiat currency is a lack of production.

The word ‘productivity’ is not often spoken in the MMT community. The main reason for this (as explained in Deadly Innocent Fraudulent Misinterpretation #23) is that political ‘prescription’ MMTers simply accept that ‘taxes value the currency’ and call it a day. The only time these MMTers mention ‘productivity’ is when defending against that most popular of criticisms leveled against their ‘prescriptions’: ‘If you keep printing money we’ll end up like Zimbabwe.’ The quick retort to that is it WASN’T ‘printing money’ that causes countries to suffer hyperinflation and in fact ‘printing money’ may not cause any inflation at all. What hammered Zimbabwe was a lack of production, resulting in a scarcity of real resources, like consumer goods, that caused hyperinflation (and printing more money was just a last-ditch effort to save the economy). Which is all absolutely true; however, these MMTers keep their fingers crossed while saying that because they’re hoping that you don’t figure out that their ‘prescriptions’ (like a ‘job’ guarantee that is designed to be unproductive so as to not compete with the private sector) is exactly what would contribute to a lack of productivity in the USA—or at least they’re hoping you don’t realize it until after you’ve already voted.

Productivity is the constraint on private-sector money creation too. If you walk into a bank looking for a loan (if you want to deficit spend and create money), the first thing the bank does is find out if you have income and if your balance sheet looks good (if you are ‘productive’). So even in the non-federal gov’t, same as the federal gov’t, if you are ‘unproductive’, nobody wants your ‘IOUs’.

History shows that collapses of productivity proceed a total collapse of consumer purchasing power. Saying that ‘the federal gov’t can create money as long as there is no inflation’’ is not good enough—because the economic damage could already be done before you see rising ‘headline’ inflation. It would be like telling children that they can have all the junk food and candy they want; and then telling them to stop eating it on the day that you see signs of health problems:

“MMTers should launch a diet plan. Step 1) Eat whatever you want (cheeseburgers, pizza, ice cream). Step 2) Stop eating before you gain weight. It would be very popular. By definition it must work!”—Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, tweeted 04/12/19

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Deadly Innocent Fraudulent Misinterpretation #62: The Federal Job Guarantee will increase wages for those right below the ‘anchor’ wage.

Fact: The Federal Job Guarantee will increase wages for those right below the ‘anchor’ wage while decreasing wages for those right above it.

H/T Charles ‘Kondy’ Kondak

“The Federal Job Guarantee (FJG) is considered by most in the Modern Monetary Theory (MMT) community to be an integral part of MMT. The Federal Job Guarantee is said to provide ‘Price Stability at Full Employment’.

One favorite throwaway line of #FakeMMT is that the Federal Job Guarantee will improve the ‘well-being of all workers’ by providing a wage/benefit floor such that Employers would have to offer better wages to lure workers away from Government Employment.

Some prominent Economists disagree on that effect of a Federal Job Guarantee and argue it will have a dampening effect on wages for workers higher up the Income ladder. One Economist says MMT would use ‘full employment [FJG] 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.’ (MMT Economist Professor Stephanie Kelton).

Based on this statement we’ve established the wage suppression effect of a FJG, at least for skilled workers—with Kelton’s commentary. Two other Economists write:

‘Would the incumbent workers use the decreased threat of unemployment to pursue higher wage demands? That is unlikely. … [T]here might be little perceived difference between unemployment and a JG job for a highly-paid worker, which means that they will still be cautious in making wage demands.’ (MMT Economists Professors L. Randall Wray and William Mitchell).

Who are these highly-paid workers that would still be cautious in making wage demands?

We are not only talking about a highly-paid (higher educated and higher-skilled) worker, but also a highly-paid (but not so higher-educated nor higher-skilled) worker like a doorman in NYC making $49K. To hire a NYC doorman, Employers ‘would not have to bid wages up trying to compete with one another’ according to Kelton; and the employed doorman on Union scale ‘would still be cautious in making wage demands’ according to Wray and Mitchell.

In other words, according to Kelton, the FJG compresses wages towards the FJG wage (rather than having ‘to bid wages up’ an employer simply combs the FJG pool for a person willing to work at $45K as a NYC doorman); and in addition, according to Mitchell/Wray, to at least some degree, the FJG compresses wages immediately above the FJG wage (the NYC doorman making $49K ‘will still be cautious in making wage demands’) as well.

Simply put, there is no other way to describe the effects of a Federal Job Guarantee as alluded to here: Wage suppression further up the Income ladder. The part the macroeconomic role the FJG plays here is more in the interest of price stability and less in the interest of worker well-being. Now I can see how some early MMT advocates broke from the herd based on this issue.

Further, it is also said by #FakeMMT that the Federal Job Guarantee would be ‘Federally Funded but Locally Administered’. Here at this juncture, one group of MMT Economists describe their proposal this way:

‘The PSE [Public Service Employment Program, aka FJG] would be under the jurisdiction of the DOL [Department of Labor], as UI [Unemployment Insurance] is today. Similar to UI, states will participate in the program’s administration. Congress would appropriate funding for the PSE program through the DOL. The DOL budget would fluctuate countercyclically in a manner consistent with hiring anyone who wants work over the course of the business cycle. The DOL would supply the general guidelines for the kinds of projects authorized under the PSE program. Municipalities would conduct assessment surveys, cataloguing community needs and available resources. In consultation with the DOL, states, and municipalities, One-Stop Job Centers (discussed below) create Community Jobs Banks—a repository of work projects and employers that offer employment opportunities.’

Thus, without the flowery language of serving the priorities of the State (sic Public Purpose), it sure does sound like the FJG is marshalling labor.

In conclusion, it is my contention that only with very strong trade unions can the Federal Job Guarantee system be given some consideration but this is certainly not the case in the USA.

Perhaps the beginning point could become changing US Labor Laws that gives workers countervailing power (like in Northern Europe), another possible Pure MMT for the 100% PRESCRIPTIVE proposal? Meaning that unlike the current FJG proposal, this would be a proposal that would be taken seriously by policymakers because it doesn’t need a single deficit-money keystroke.”—Charles Kondak

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Deadly Innocent Fraudulent Misinterpretation #63: Article 1 Section 8 mandates Congress to mint money to provide for the general welfare.

Fact: Federal gov’t spending with newly-minted gold coins is not the same thing as federal gov’t spending with newly-created fiat dollars.

WHEN IN THE COURSE OF HUMAN EVENTS it becomes necessary for some MMTers to say Article 1 Section 8 mandates Congress to mint money to provide for the general welfare to substantiate deficit spending on their ‘prescriptions’; they are not only misinterpreting ‘description’ MMT, they are misinterpreting the US Constitution as well.

First of all, the US was NOT a monetary sovereign when the Constitution took effect in 1789.

Secondly, the reason why the US was a ‘user’ of currency was because the US had just tried and failed at becoming an ‘issuer’ of currency.

MMTers don’t need to go all the way to Wiemar or Zimbabwe to find examples of a fiat currency hyperinflating into oblivion—because we Americans had our own experience right here in America.

Our own original central government (the Continental Congress) printed $241,552,780 in paper money (in Continental Dollars) from May 10, 1775 to January 14, 1779 to finance the Revolutionary War.

Those Continentals were fiat currency—they were NOT backed by gold. Similar to today’s state or local gov’t—a ‘user’ of fiat currency—issuing a municipal ‘revenue’ bond, Continentals were an ‘IOU’ denominated in nonconvertible dollars that were only ‘backed’ by the ‘anticipation’ of tax revenues.

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’.

Which is why the Founding Fathers did not mention anything about ‘printing’ money in the US Constitution. Here is what it says about the money-creation power of the federal government:

From Article I, Section 8, there is “Congress shall have Power…to coin Money, regulate the Value thereof, and of foreign Coin.” And from Section 10, “no state…shall make any Thing but gold and silver Coin a Tender in Payment of Debts.”

In other words, the US (which won independence but fell short in trying to become a monetarily-sovereign issuer of fiat) was to continue as a ‘user’ of gold / gold-backed dollars for the time being.

Every time a political MMTer says that the Constitution gives the federal gov’t the power to create money for the public purpose they are unwittingly agreeing with the ‘neoliberal’ criticisms against MMT’s pet ‘prescriptions’ and backing the ’Austrian’ argument for the return to ‘sound’ money.

Thanks for reading,

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

Real Macro for the 100% https://www.facebook.com/InvestingMMT/

77 Deadly Innocent Fraudulent Misinterpretations (#50-56)

Deadly Innocent Fraudulent Misinterpretation #50: Every time that the Federal Reserve Bank pays interest on excess reserves, they are subsidizing the banks.

Fact: Every time that the Federal Reserve Bank pays interest on excess reserves, they are not subsidizing the banks.

“It’s a bit of a misnomer to think that there’s a subsidy there. We aren’t paying an interest that is above the general level of short term rates. We are paying rates to the banks that they can get from other banks or from elsewhere in the short-term money markets. In addition, those Treasury bonds and MBSs (our assets), are yielding much more than the interest we are paying on those reserves (our liabilities), so it is not a subsidy to the banks—and in fact it is a huge profit to the federal taxpayers.”—Fed Chair Jay Powell’s comment after the FOMC unanimously raised the target range for the federal funds rate to 1-1/2 to 1-3/4 percent, 03/21/2018

_______________

Deadly Innocent Fraudulent Misinterpretation #51: The Labor Force Participation Rate remaining roughly unchanged is a sign that the job labor market is terrible because disenfranchised people have given up.

Fact: The Labor Force Participation Rate remaining roughly unchanged is not necessarily a sign that the job labor market is terrible because disenfranchised people have given up.

“The LFPR remaining roughly unchanged is actually another sign of improvement of the current strength of the labor force given the downward pressure of our aging population.”—Fed Chair Jay Powell’s comment after the FOMC unanimously raised the target range for the federal funds rate to 1-1/2 to 1-3/4 percent, 03/21/2018

“The recent year’s strengthening of our labor force participation has been an upside surprise that most people didn’t see coming and is extremely welcome.”—Fed Chair Jay Powell, FOMC Statement press conference, 03/20/2019

_____________________

Deadly Innocent Fraudulent Misinterpretation #52: The Fed is trying to fight inflation by creating unemployment.

Fact: The Fed is not trying to fight inflation by creating unemployment.

The Fed targets (the Fed sets) the overnight interest rate between banks (known as the Federal Funds Rate)—and adjusts that rate as it sees fit in order to (as mandated by Congress) maintain price stability and achieve MAXIMUM employment. The Fed also makes ‘predictions’ (known as the Summary of Economic Projections) of what the Fed’s committee guesses what the unemployment rate will be in the future. This ‘dot plot’ of projections is dangerously, innocently and fraudulently misunderstood by the entire MMT community as meaning that the Fed is ‘targeting the unemployment rate’ and ‘intentionally creating unemployment’.

Anyone (from the new MMT student all the way to the veteran MMT academic) who says that ‘the Fed is trying to fight inflation by creating unemployment’ during The Longest Jobs Growth And The Longest Economic Expansion In UNITED STATES HISTORY—many thanks to the Fed—is being a tad fantastical.

Anyone saying ‘the Fed is intentionally creating unemployment’ has no idea how out of touch they are with how capitalism works nor has any idea how ridiculous they sound. It’s understandable when ‘entertainers’ over the airwaves today (playing to a specific ‘audience’) create stories to fit an anti-Fed narrative (because the first rule of feeding a conspiracy theory is that you never let facts, math & data get in the way of a good story). However, it’s another thing when political ‘prescription’ MMTers make things up. The Fed is mandated by Congress. Do ideologically-extreme MMT ‘scholars’ who think that the Fed is ‘intentionally causing involuntary unemployment’ think that Congress is in on this conspiracy too?

By the way, ‘involuntary’ means ‘forced’. Think bread lines during the 1930s—people were forced to be unemployed because THERE WERE NO JOBS—and then think about today’s 7,000,000 JOLTS. Meaning that there are more than 7 million jobs available! Meanwhile MMTers (with PhDs in Econ) think it would be a good idea to address those 7,000,000 open jobs currently going unfilled with a $500B federal ‘job’ guarantee (to ‘create’ more ‘jobs’). If you think that’s probably a bad idea then you will be reprimanded for being worried about ‘how will we pay for it’ and that you need to #learnmmt.

Another ‘prescription’ MMT proposal is to take away the Fed’s power of adjusting the overnight interest rate (resulting in the Fed no longer having that tool at its disposal to immediately respond in the event of financial emergencies). Many voices of reason, including the central banker in Japan—the so-called ‘poster child’ of MMT—have let the world know what they think of that proposal (and of today’s radicalized version of MMT).

“To be fair, both sides of the spectrum love to hate the ‘mysterious’ Fed and blame it for everything that is wrong—including sunspots. The better the Fed gets at the job assigned to it by Congress the more they are hated by each side. Although I would really like to see the Fed stop assigning a number to maximum employment as the NAIRU does not exist or at least changes its address so often as to be useless as a policy indicator. I think if one reads between the lines, Fed Chair Powell is there, but openly saying the NAIRU is dead by a Fed Chair would likely be very jarring to markets. I know the Chair of Economic Advisors Larry Kudlow has said the Phillips Curve which underlies the NAIRU is dead.”—Charles ‘Kondy’ Kondak

__________________________

Deadly Innocent Fraudulent Misinterpretation #53: Higher rates = higher interest payments to the economy.

Fact: Higher rates = higher interest payments to the bondholders (to the top 5% of the economy).

In a 03/06/19 discussion on Twitter, a comment by Monetary Wonk (@monetarywonk) that “MMTers want a permanent ZIRP [want to anchor the overnight fed funds rate to 0%] because they believe that Treasury [bond] rates are net neutral and don’t influence [aggregate] demand,” got this reply from Warren Mosler:

“No, the private sector credit is nominally ‘net neutral’ regarding non gov interest paid and earned, but the Treasury and fed—the gov sector—are net payers of interest to the economy. Higher rates = higher interest payments to the economy.”

Meaning that whenever you or I deficit spend (whenever the non federal gov’t creates money), that is an actual debt (for users of dollars), which is intended to be paid back (‘net-out’); so Mr. Mosler is correctly pointing out that it isn’t the case when the federal gov’t deficit spends (whenever the issuer of dollars creates money), since the federal gov’t is a ‘net payer’ because that money creation, is a net addition of dollar-denominated assets aka Net Financial Assets being added into the banking system, that is not intended to be paid back (to ever ‘net-out’).

That money creation by federal gov’t deficit spending is a stimulus to the economy. The reason why Fed Chair Eccles coined federal gov’t money creation ‘High Powered Money’ is because unlike federal gov’t surplus spending that DOES NOT add NFAs (which has a deflationary bias); federal gov’t deficit spending DOES add NFAs (which has an inflationary bias).

However, it is a bit of a stretch to also say that higher interest rates are a stimulus to the economy in the same way that more federal gov’t deficit spending is since (as the logic goes) ‘higher interest rates = higher interest payments to the economy’. According to this logic, the Fed is mistaken because it thinks that rate hikes are effective at slowing the economy—and therefore ‘the fed has the pedals backwards’.

That logic would be correct if most Americans were bond holders (if most were savers and only a few were borrowers), but in reality the opposite is true (making that logic seem ‘backwards’).

When the Fed raises rates, only the top 5%—the savers—are receiving higher interest; while the 95%—the borrowers—are paying higher interest to service debt +/or to deficit spend any further.

That’s why when the Fed sees too much inflation coming, they raise rates (a ‘net neutral’ dollar drain from borrowers to savers) as a disincentive to the 95%; and conversely, when the Fed sees too little inflation coming, they lower rates (a ‘net neutral’ dollar drain from savers to borrowers) as an incentive to the 95%.

“A change in money prices and money income does have ‘real effects’. If you increase the cost of money, that is a cost for debtors and an income source for creditors. This is real. By making debtors worse off and making creditors better off, there will be changes in the distribution of income, there will be changes in demand and in output. Real magnitudes in the economy will change.”—Steve Keen, ‘Can We Avoid Another Financial Crisis?’, 2017

Furthermore, when fiscal policy makers are not in agreement (like during a Republican ‘sequester’ or when Democrats are being ‘obstructionists’), the Federal Reserve Bank and their monetary policy makers become, as Mohamed El Erian put it in his book, ‘The Only Game In Town’. Meaning that monetary policy may not the best tool to stimulate the economy (and why so many are always critical of the Fed), but in absence of action from fiscal policy makers—when time is of the essence—the Fed becomes the Policymaker Of Last Resort.

With all due respect, anyone calling for taking those price-stabilizing abilities away from central bankers; or calling for a federal job guarantee program which takes employment decisions out of the hands of the private sector; or saying back in early 2016 that “it looks like the Fed began liftoff during a recession” may be the ones getting it backwards.

________________________________

Deadly Innocent Fraudulent Misinterpretation #54: A monetarily sovereign gov’t can issue all the bonds that it needs in its own local currency without the worry of default risk.

Fact: Even if issued by a monetary sovereign and denominated in their own local currency, there is still a default risk of bonds.

“It is a complete fallacy that a gov’t with monetary sovereignty can issue all the bonds that it needs in local currency without worry of default risk. It is also untrue that because you are a monetarily sovereign gov’t (that because you have the monopoly of issuing the currency) you can issue all the money that you want to finance deficit spending without risk of high inflation. The reason why a gov’t, that is monetarily sovereign, issues bonds (adds debt) that is denominated in a foreign currency—rather than in its own local currency—is not because they don’t understand MMT. It’s because there’s no longer any real demand for their own local currency. If an investor knows that a gov’t will continuously depreciate the currency (if an investor knows that a gov’t thinks it can create its own bonds without risk of default and create its own currency without risk of hyperinflation), then that investor will simply not want that local currency either. The reason why citizens nor investors don’t want their own local currency—the reason why they reject it—is because they don’t want to suffer the currency risk. There is evidence of more than 20 defaults of bonds denominated in local currency of gov’t with monetary sovereignty since the 1960s. In addition, throughout history there are more than 150 cases of fiat currencies, that because of high inflation, have disappeared—and in none of those cases did that gov’t decide to stop creating more currency (or issuing more bonds).”—Daniel Lacalle

_________________________________  

Deadly Innocent Fraudulent Misinterpretation #55: US Treasury bond coupon rates are not determined by market forces, they are instead set by the Treasury.

Fact: All US Treasury bond coupon rates are determined by market forces at origination.

A post on the Intro to MMT page on Facebook by Jim Gaddis (author of the book ‘Richard Gatlin and the Confederate Defense of Eastern North Carolina’) posed the question whether or not federal gov’t bond coupons were ‘set’ by the Treasury prior to auction or ‘set’ by market forces during the auction.

That was an excellent question.

The answer is both.

The Treasury used to set the coupon rate of all new bonds by an explicit pronouncement but that all got changed in the ’51 Accord. Now the market sets the coupon rate. It’s a ‘dutch’ auction for newly-issued Treasury securities. That’s where the highest bidder—the lowest interest rate (the lowest yield) that the bidder is willing to receive—gets filled first, then the next highest and etc, etc, until all the bonds are sold. The coupon becomes the average of all the yields accepted, rounded down to the nearest eighths of a percentage point.  

Anyone can go to the TreasuryDirect.gov website and after clicking the ‘upcoming auctions’ tab, they can see the ‘announcement’ (the details) of all marketable US Treasury bonds that are about to be sold to the public.

The coupon of any newly-issued Treasury bond is quote “to be determined” unquote during the auction (meaning whatever the market will bear).

There is an exception.

The coupon may however, be ‘set’, before the auction, but ONLY in the case that a Treasury bond is being ‘re-issued’ (aka ‘re-opened’).

If you look at the announcement details of a re-issued Treasury bond, the COUPON is already ‘set’ because the Treasury bond already exists and the YIELD (the final price that buyers will pay) for that additional batch is quote “to be determined’ unquote based on prevailing market yields. For example, if at origination (at initial offering) a 10-year Treasury note gets a 3% coupon (determined by market forces) and then the following month it is re-opened; if prevailing rates have dropped to 2.5%, then buyers of that batch will pay a premium because of that ‘set’ 3% coupon. In other words, the price that the investors will pay (the effective yield of that batch) is going to be in the neighborhood of 2.5% (determined by market forces).

The reason why the Treasury offers more of the same bond for sale is because federal gov’t deficits are rising, so they are increasing the frequency of bond sales. For example, the 10-year Treasury note usually is offered every 3 months. If deficits are rising quickly, the Treasury will re-issue that same 10-yr note the following month (technically as a 9-yr 11-month note auction).

If deficits keep rising, we may even see the Treasury bring back the issuance of the 4yr note or the 7yr note or maybe even the 20yr bond again (meaning less ‘re-openings’ of existing bonds needed).

____________________________________

Deadly Innocent Fraudulent Misinterpretation #56: When a Non-bank (a ‘non formal bank’) lends EXISTING money to a borrower, it is NOT a credit creation. Only when a Bank (a ‘formal or traditional bank’) lends newly-created money is it a credit creation.

Fact: ALL borrowing is a credit creation (an expansion denominated in dollars).

“While Non-banks grant credit, it would be misleading to speak of ‘credit creation’ by Non-banks.”—Richard Werner, German economist, ‘International Review of Financial Analysis’, Volume 36, Pages 71-77, December 2014 (Mr. Werner earned a BSc at the London School of Economics. Further studies at Oxford University were interrupted by a year studying at the University of Tokyo—Japan’s most prestigious university—after which his doctorate in economics was conferred by Oxford. In Tokyo he was also a Visiting Researcher at the Institute for Monetary and Economic Studies at the Bank of Japan; plus he was a Visiting Scholar at the Institute for Monetary and Fiscal Studies at Japan’s Ministry of Finance. Mr. Werner coined the term ‘quantitative easing’. As chief economist of Jardine Fleming Securities Asia he used this expression during presentations to institutional clients in Tokyo in 1994).

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 either newly-created or already-existing—because it mostly has to do with the ‘soundness’ of the person the money was lent to.

“They [AMI & ‘positive money’ folks] are wrong because as Minsky argued—and my models demonstrate—crises can still occur even if all lending was entirely ‘responsible’, meaning it was for productive purposes.”—Steve Keen, ‘Can We Avoid Another Financial Crisis?’, 2017

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 (represented by your newly-created bond). 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. Anyone saying that credit creation is ‘only in the case of when borrowing newly-created money’ is missing the bigger picture. When someone lends, it is a granting of purchasing power—no matter if it involves any actual banks or any actual newly-created money or not. Whether banks are involved, or whether newly-created money is created or isn’t created, that is only a subset of the credit-creation process. As Dr. Steve Keen correctly wrote in his 2017 book, “credit is equivalent to the growth in private debt”. Meaning that EVERY time someone borrows, they are increasing private-sector debt (they are ALWAYS expanding private-sector balance sheets).

“Is Minsky (1986) right and ‘everyone can issue money'”?—Richard Werner

That’s close. Everyone can issue (can extend) credit. In other words, everyone can grant purchasing power and all borrowing by everyone is a credit creation (an expansion denominated in dollars). To believe otherwise is fictitious and imaginary.

Thanks for reading,

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

If you want to know how money works, it helps to know how money trades…Follow MineThis1 and his REAL MACRO instructors at https://www.facebook.com/InvestingMMT/

All Borrowing is Credit Creation (is an expansion denominated in dollars)

“While Non-banks grant credit, it would be misleading to speak of ‘credit creation’ by Non-banks.”—Richard Werner, German economist (Mr. Werner earned a BSc at the London School of Economics. Further studies at Oxford University were interrupted by a year studying at the University of Tokyo—Japan’s most prestigious university—after which his doctorate in economics was conferred by Oxford. In Tokyo he was also a Visiting Researcher at the Institute for Monetary and Economic Studies at the Bank of Japan; plus he was a Visiting Scholar at the Institute for Monetary and Fiscal Studies at Japan’s Ministry of Finance. Mr. Werner coined the term ‘quantitative easing’. As chief economist of Jardine Fleming Securities Asia he used this expression during presentations to institutional clients in Tokyo in 1994).

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 (represented by your newly-created bond). 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. Anyone saying that credit creation is ‘only in the case of when borrowing newly-created money’ is missing the bigger picture. When someone borrows, it is a granting of purchasing power—no matter if it involves any actual newly-created money or not. Whether newly-created money is created or isn’t created, that is only a subset of the credit-creation process. As per Dr. Steve Keen in his 2017 book titled ‘Can We Avoid Another Financial Crisis?’, “credit” he writes, “is equivalent to the growth in private debt”. Every time someone borrows, they are increasing private-sector debt and they are expanding private-sector balance sheets.

“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.

Thanks for reading,

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

P.S.

If you want to know how money works, it helps to know how money trades. Follow MineThis1 and his REAL MACRO instructors @ https://www.facebook.com/InvestingMMT/

Source: ‘How do banks create money, and why can other firms not do the same? An explanation for the coexistence of lending and deposit-taking?’ https://www.sciencedirect.com/science/article/pii/S1057521914001434?fbclid=IwAR0bB904qYxwdq9on1iWEXZ7zyxyvuAk9QCMo3KLi7VOQubrVFwpbX5tM-s

P.S.

03/13/19:

No, I do not agree with anyone that says that the Fed 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”.

To believe otherwise is fictitious and imaginary.

P.S.S.

05/06/19:

“Take the money out and look at it in terms of production.”—Mike Morris

BINGO…MMTers will see how the monetary system really works more clearly if they take the financial middlemen—if they take the ‘lookalike bank credit’, the ‘reserves’, the ‘Endo’, the ‘Exo’, the ‘M0’, all of that—OUT of the picture for a second. Take out the loans and just look at the newly-created bonds (the newly-created IOUs conjured up out of thin air by a counter party called Creditworthy) that create deposits (of newly-created IOUs into the pocket of another counter party named Faith )—which are net increases of assets going into the economy. Focus on that; and also focus on the PRODUCTIVITY of Faith (selling goats) & Creditworthy (selling goat cheese), which increases their net equity, which encourages more IOU creations, more exchanges of those bonds, more ‘atomization’ of productivity and even more expansions of balance sheets, which expands the economy—which organically rises all boats.
(see 77DIF MISINTERPRETATION #59 )

February 2019 was not a good month for political ‘prescription’ MMT

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? 

Nope…

Here’s why: 

“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).

Thanks for reading,

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

If you want to know how money works, it may help to know how money trades. Follow MineThis1 and his Real Macro Instructors:

https://www.facebook.com/InvestingMMT/

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.

77 Deadly Innocent Fraudulent Misinterpretations (#29-35)(#36-42) (#43-49)

Deadly Innocent Fraudulent Misinterpretation #29: The Fed neither ‘has’ nor ‘doesn’t have’ dollars.

Fact: The Fed has dollars.

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).

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Deadly Innocent Fraudulent Misinterpretation #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 on 03/15/2009, Chair Bernanke was referring to the initial lending programs, early in the credit crisis, where the Fed lent newly-‘printed’ (newly-created) reserves to troubled banks in exchange for their toxic subprime assets (aka the ‘Maiden Lane’ transactions). The Fed did this so that these banks, suffering from a liquidity problem (and not a solvency problem), could have dollars to spend into money-supply circulation—to pay their bills—to stay in business. In a follow-up 60 Minutes interview in 12/05/2010, Chair Bernanke next explained that “so-called Quantitative Easing”* (QE) was not akin to printing money because, unlike those Fed loans, which were about buying toxic bonds / changing the money supply; QE was about buying AAA-rated bonds / changing long-term interest rates.

*(Bernanke tried but failed to get the media and markets to use the term ‘credit easing’ rather than ‘quantitative easing’ which was a term applied to unsuccessful Japanese programs earlier in the decade which differed from the Fed’s securities purchases in many respects. In particular, the Japanese QE programs were aimed at increasing the Japanese money supply to specifically cause a spike in inflation; while the Fed’s QE was only focused on reducing longer-term US interest rates).

“By purchasing these Japanese Gov’t Bonds (JGB) bonds from non-banks—insurance companies, for instance—in its large ‘quantitative easing’ programmes, the Bank of Japan generated an increase in the money supply (higher bank deposits on the part of non-banks) and the monetary base (higher reserves of commercial banks with the central bank as a corollary of its increased liabilities with non-banks).”— German economist Peter Bofinger, 2019
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Deadly Innocent Fraudulent Misinterpretation #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, 01/04/19 (11:35 in the video)

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’ from the ‘Run’ ledger, and then that ‘1’ is ‘credited’ 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 (the ‘asset’ goes from one part of the banking system to another).

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).
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Deadly Innocent Fraudulent Misinterpretation #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.
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Deadly Innocent Fraudulent Misinterpretation #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 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.

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Deadly Innocent Fraudulent Misinterpretation #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 that a rising Debt / GDP in Japan, like many things, “Is fine—UNTIL IT ISN’T.” To understand more about Debt / GDP (Our money ‘stock’ v. Our productive ‘output’) 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) so an intentional, gov’t-induced deflation was needed to achieve the pre-War 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. In an attempt by US monetary policymakers to intentionally ‘keystroke’ higher ‘value’ into US dollars, the act removed the 412.5-grain $1 silver coins out from circulation. It worked. By 1879 the price for gold dropped to $20.67/oz (the market price matched the mint price of gold). With the resumption of convertibility on June 30, 1879 the gov’t once again began paying back its debts in gold and redeemed greenbacks on demand in gold. Greenbacks became perfect substitutes for gold coins.

The point of the story is that monetary policy alone (whether inducing deflation in the US then or inducing inflation in Japan today) may, or may not, work. Japan needs growth and ‘keystroking’ for growth only gets you so far. Japan needs citizens that are confident in the economic outlook (and are spending instead of saving). Japan is a ‘homogeneous’ nation (read: prefers racial ‘purity’—not in a racist way—but 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 those peddling pet policies (political ‘prescription’ MMTers) sounded not too long ago while whispering their sweet-nothings (that pillow talk MMT) in your ear:

“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

A few years later, that tune changed to “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

Just like America’s QE was NOT a ‘sideshow’, Japan’s QE is NOT a ‘sideshow’. Perhaps MMTers should stop listening to the anti-Fed rhetoric (yet another ill-advised gambit by the MMT community today) 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.

Meanwhile, Japan keeps slipping away. 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. Instead of more money creation (keystrokes), Japan just needs creative legislation (pen strokes) —like simple adjustments to immigration laws / labor laws / corporate laws, etc). Until then, as Steve Keen writes in his 2017 book titled ‘Can We Avoid Another Financial Crisis?’, “Japan now features in popular culture as a cautionary tale about fading stars rather than rising suns.”

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”.

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 is NOT ‘a gem’ / is NOT ‘a model’ / is NOT ‘a laboratory’ / is NOT ‘a poster child’. Heed the words of Japan’s central banker, BoJ Governor Kuroda who on 03/15/19 said “I think MMT is an extreme argument that won’t be accepted widely. The gov’t holds responsibility over fiscal policy and Japan’s public debt is very high. It’s important to improve Japan’s fiscal health in the long term.” In other words, the MMT community should NOT get lulled into thinking that we aren’t in any danger zones just because there’s no bond ‘vigilantes’, or that there’s no high interest rates, nor any inflation (read: Don’t get lulled into thinking that any MMT ‘prescription’ is doable just because there’s none of those).

Don’t take my word for it. On 05/29/19, Stephanie Kelton herself seemed to push back on the ‘Japan is the poster child’ misinterpretation when she Tweeted that “Japan shows mainstream theory is wrong, but their policy has been overwhelmingly the opposite to that advocated by MMT.” On 06/04/19, L. Randall Wray also weighed in on the ‘Japan is the poster child’ misinterpretation by making it absolutely clear that his answer is ‘NO’ to the question ‘Does Japan serves as the premier example of a country that follows MMT policy recommendations?’ Regarding Japan’s policymakers now wanting to raise their ‘National Consumption’ sales tax (set to increase from 8% to 10% in October 2019) in an attempt to reduce the fiscal deficit (even though past attempts threw the Japanese economy back into recession); Randy Wray adds that “Japan is the perfect case to demonstrate that all of mainstream theory and policy is wrong.”

Agreed…and Japan is also the ‘perfect case’ why, from the very start of economic troubles, PEN STROKES, not more keystrokes, make much better solutions to grow an economy.

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 (and Warren 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


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Deadly Innocent Fraudulent Misinterpretation #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.

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Seventy Seven Deadly Innocent Fraudulent MMT Misinterpretations (#36-42)

Deadly Innocent Fraudulent Misinterpretation # 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.
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Deadly Innocent Fraudulent Misinterpretation # 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’.

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Deadly Innocent Fraudulent Misinterpretation #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 hasn’t yet fully grasped the pure MMT insight and probably doesn’t actually 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—rather than saying they don’t at all.

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Deadly Innocent Fraudulent Misinterpretation #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’. 
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Deadly Innocent Fraudulent Misinterpretation #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
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Deadly Innocent Fraudulent Misinterpretation #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’ monetary community during The Longest United States Economic Expansion In History (thanks to the Fed).
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Deadly Innocent Fraudulent Misinterpretation #42: Loans create deposits.

Fact: Bonds create loans create deposits.

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.

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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.

Seventy Seven Deadly Innocent Fraudulent MMT Misinterpretations (#43-49)

Deadly Innocent Fraudulent Misinterpretation #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
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Deadly Innocent Fraudulent Misinterpretation #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

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Deadly Innocent Fraudulent Misinterpretation #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 
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Deadly Innocent Fraudulent Misinterpretation #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
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Deadly Innocent Fraudulent Misinterpretation #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
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Deadly Innocent Fraudulent Misinterpretation #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
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Deadly Innocent Fraudulent Misinterpretation #49: Involuntary unemployment is a great economic evil and MMT solves that problem.

Fact: “Another specific problem that only 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.


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.

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

Thanks for reading & keep it pure,

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Fellow MMTers: Be an MMT user, not an MMT issuer.

P.S.

02/26/19

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 Down Low on the Shut Down

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.

Thanks for reading,

Pure MMT for the 100%

https://www.facebook.com/PureMMT/

P.S.

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.

P.S.S.

01/26/19:

“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

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).

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When ‘Chartalists’ (aka MMTers) confuse credits & debits with creation & destruction

The payment of federal taxes is not a ‘destruction’ of dollars.

The payment of taxes is a drain of $$$ to the Daily Treasury Statement (DTS)—the same exact account where all federal spending is drawn.

Only Congress can ‘destroy’ $$$—only Congress can reduce the Net Financial Assets (NFA) that Congress created.

Even if you burned a dollar bill to a crisp, you wouldn’t change the numbers on the ‘scoreboard’.

However, 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 taxation / Treasury bond sale collection) are a destruction.