What The Great Recession, The Great Depression, and the Previous Depressions in US History All Had In Common

When it comes to US federal government spending, we are constantly told how ‘unsustainable’ federal gov’t deficit spending is, yet the opposite is true. History has shown, time and again, that only US private sector deficit spending can ever reach a point of being ‘unsustainable’…

 

The reason is simple. It is because the federal gov’t is the issuer of dollars, and the rest of us are not. We are users of dollars, we all have to ‘get’ dollars from somebody, from somewhere, while the federal gov’t, the issuer of dollars, the sole monopoly ‘supplier’ of dollars, does not…

 

The one thing that the 2008 Great Recession, the 1929 Great Depression, plus the five previous depressions in US history (the ‘Panics’ of 1893, 1873, 1857, 1837, & 1819) all had in common, was that each of them were preceded (started) by sustained US private sector deficit spending. In addition, there was also that one thing in common that ended the Great Recession and those six other depressions. Each of them were followed (ended) by sustained federal gov’t deficit spending…

 

For the US private sector to avoid being forced to consistently deficit spend (forced to deplete savings which leads to US private sector deficit spending), the US private sector depends on the deficit spending of the US federal gov’t to consistently ‘supply’ newly-created US dollars, known as a ‘dollar add’ that finance newly-created federal gov’t demand (that finance ‘demand-side’ economic policies like new spending in conjunction with ‘supply-side’ policies like tax cuts). However, what we learned from the 2008 Great Recession was, just because the federal gov’t is deficit spending, just because federal gov’t deficit spending is supplying newly-created dollars entering into the banking system that increases non federal gov’t net financial assets (federal gov’t deficit = non federal gov’t surplus), that still doesn’t necessarily mean we in the US private sector are good to go…

 

The non federal gov’t is divided into two sectors, the Non federal gov’t / domestic and the Non federal gov’t / international. If in any given year the US trade deficit is as much as, or even larger than, the US budget deficit, that means all those newly-created federal gov’t deficit spending dollars that year, that ‘dollar add’, skipped right over the US private sector and went straight into the US bank accounts of overseas interests. Those dollars were promptly converted to foreign currency to pay overseas workers, factories, shipping, plus any other expenses and profits generated from that product sold in America (Note: US dollars never ‘leave’ the US banking system, however, the damage is already done because the entire production of said goods took place overseas, instead of here in the US, causing what is known as a US aggregate ‘demand leakage’). Those ‘dollar adds’ all going to the non federal gov’t / international sector, that’s the same difference, that’s just as bad, for the non federal gov’t / domestic (US private sector) as if the federal gov’t ran a surplus, meaning no newly-created federal gov’t deficit spending dollars, no ‘dollar-adds’ for the US private sector in that case either. This is EXACTLY what happened for thirteen straight years in a row from 1996 (cough *nafta* cough) to 2008…

 

Let’s check out exactly how those dollars from the federal gov’t to the non federal gov’t for the first of those thirteen years got divvied up. In 1996 the US budget deficit (total federal gov’t deficit spending funded by newly-created dollars which were a net increase of dollars entering into the banking system) was $107B. Meaning there was a $107B addition of net financial assets, a ‘dollar add’ to the non federal gov’t (the domestic US private sector and the international sector combined). So far so good for both non federal gov’t sectors in 1996, but the US trade deficit in 1996 was $170B. The US trade deficit in 1996 was larger than the US budget deficit in 1996. Meaning that the domestic US private sector paid $170B for imported goods that they bought from the international sector over and above the amount they were paid for goods that they sold to the international sector. That means that every penny of that $107B ‘dollar add’ from the federal gov’t all went to the non federal gov’t / international sector, and that news got worse for the US private sector in 1996. The difference (170 – 107 = 63), was a transfer of dollars, a ‘dollar drain’, that also went to pay the remaining balance, of $63B, for those imports, in 1996, from the non federal gov’t / domestic (US private sector) to the non federal gov’t / international (overseas sector). In other words, because the non federal gov’t / domestic (US private sector) had a ‘dollar drain’ of $63B in 1996, the effect on the US private sector was the same as if the US federal gov’t had run a $63B surplus in 1996. After 1996 comes the fatal blow to the non federal gov’t / domestic (US private sector). Those US private sector ‘dollar drains’, those US private sector deficits, continued (they were sustained), for thirteen straight more years. When looking at these sustained US private sector deficit figures below, these final fiscal year results, keep in mind that all six depressions in US history were preceded by sustained federal gov’t surpluses (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

_____________

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

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

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

_____________

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

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

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

______________

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

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

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

______________

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

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

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

_______________

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

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

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

______________

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

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

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

______________

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

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

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

______________

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

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

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

______________

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

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

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

______________

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

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

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

_______________

 

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

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

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

_______________

 

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

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

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

 

(H/T Chris Brown ‘Sectoral Balances info-graph of US Private Sector Dollar Drains & Dollar Adds Since 1992′)

We all remember what happened in 2008. Policymakers quickly ended those significant amounts of sustained non federal gov’t / domestic (US private sector) deficits, and ended the Great Recession with even more significant amounts of sustained US federal gov’t deficits (sustained US private sector surpluses), the same that was done to halt the previous six depressions:

$1.413T ‘dollar add’ from the federal gov’t in 2009:

$544B surplus to the non federal gov’t / International

$869B surplus to non federal gov’t / Domestic

_____________

$1.294T ‘dollar add’ from the federal gov’t in 2010:

$636B surplus to the non federal gov’t / International

$658B surplus to non federal gov’t / Domestic

______________

$1.300T ‘dollar add’ from the federal gov’t in 2011:

$726B surplus to the non federal gov’t / International

$574B surplus to the non federal gov’t / Domestic

_______________

$1.087T ‘dollar add’ from the federal gov’t in 2012:

$730B surplus to the non federal gov’t / International

$357B surplus to the non federal gov’t / Domestic

_______________

2013 to present: The non federal gov’t /domestic (US private sector) deficits have returned again, but the accumulated amount of US private sector surpluses since 2009 until 2013 (+$1.770T) is still safely far away from the level of accumulated US private sector deficits prior to the 2001 recession (-$1.787T) and the critical level of accumulated US private sector deficits prior to the 2008 Great Recession (-$2.754T)…

 

Keep in mind that US trade deficits are not to blame. US trade deficits are good. It is better that the US leads the innovation of new goods & services, while most of the factory floor work is delegated elsewhere. It is better that the US depends less on export-led growth and that the US depends more on organic, consumer-led growth (which inoculates you better from economic downturns). However, like the saying goes, ‘It’s not what you make, it’s what you keep’, and the same goes regarding US trade deficits. It’s not what the federal gov’t makes (how many ‘dollar adds’ they are creating into banking system existence), it’s how much the non federal gov’t / domestic (US private sector) keeps…

 

From 1996 to 2008, the US private sector kept nothing, and even worse, sustained deficit spending by the US private sector kept up. In the post-gold standard, post-nafta, modern monetary system, policymakers need to understand that the federal gov’t must overcompensate for those US private sector deficits that larger US trade deficits cause. Policymakers with outdated gold standard mentality fear those US trade and US budget ‘twin’ deficits, and they believe that they should bring them both down, but that is out-of-paradigm thinking. Policymakers need to ‘use’ the positive effects of US budget deficits to control the negative effects of US trade deficits. What really happened prior to the 2008 global financial credit crisis was that, in order to continue lifestyles that they had grown accustomed to, the non federal gov’t / domestic (the US private sector) had no choice but to keep deficit spending year after year (first borrowing against their dot com stocks and then against their home equity) in lieu of no ‘dollar adds’ from the federal gov’t. UNLIKE the deficit spending of the federal gov’t (the issuer of dollars), the deficit spending of the non federal gov’t / domestic US private sector (the users of dollars) does have a real and attached actual debt. Counter-intuitive to mainstream thought, THAT is the deficit spending which is unsustainable…

 

P.S. That was the not-too-distant past. In the not-too-distant future, policymakers may enact a ‘US Federal Balanced Budget Amendment’. Meaning if policymakers actually do this, then they think the federal gov’t (the issuer of dollars) which only needs to balance their economy, should instead be treated the same way as a household (the users of dollars), which only needs to balance their budget. A US federal balanced budget amendment, if passed, would legislate, or in other words, would guarantee, sustained US private sector deficits (and now you know what THAT could mean).  

 

Thanx for reading,
eddiedelz@gmail.com

Modern Monetary Theory (MMT) Will Be On The Right Side of History

Perhaps a bit of the 2016 election was some of the 1896 election history repeating itself:

 

In The Wonderful Wizard of Oz, (the American children’s novel, not the movie), the ‘cowardly lion’ character was based on William Jennings Bryan. The entire story, published in 1900, and written by author L. Frank Baum, was a political allegory. Officially, any similarities of the book and actual events was a ‘coincidence’ (Just like all episodes of South Park open with the tongue-in-cheek disclaimer that “All characters and events in this show – even those based on real people – are entirely fictional”). While writing the book in 1896, Baum had been a political activist and wrote on behalf of William McKinley, the Republican candidate for president in that year’s election. McKinley ran on a platform calling for prosperity for everyone through industrial growth, high tariffs on imports, and the continuation of the gold standard…

 

McKinley’s opponent was William Jennings Bryan, the Democratic candidate for president, who campaigned for the average working man against the rich, and he blamed the rich for impoverishing America, by intentionally limiting the money supply (by keeping just gold as the only metal backing of the dollar). Bryan and his followers, called ‘Silverites’, wanted a bimetallic-standard redux (a return of silver) with it tied to gold at a 16:1 conversion rate. Bryan argued that restoring silver, which was in ample supply, if once again coined into money, would restore prosperity while undermining the illicit power of the ‘big-city business owners’ and the ‘money trust’. Bryan’s moralistic rhetoric included his crusade for ‘reflation’ (a slight and intentional, federal-gov’t orchestrated inflation, generated by an increase in money supply by including silver with gold). Bryan convinced many that the ‘Free Silver’ movement was the best solution that would get more purchasing power into the hands of consumers and ending frequent depressions caused by the deflationary shortage of dollars due to the monetary constraint of the gold standard. Silver, or the ‘people’s money’ as it was referred to in his politically-charged speeches, became increasingly associated with populism, unions, and the fight of ordinary Americans…

 

Fast forward to today, MMTers (enthusiasts of Modern Monetary Theory) are certainly not calling for currency to be backed by metals, but the main themes of William Jennings Bryan’s presidential campaign do rhyme with the MMT movement (actually it is more like an ‘enlightenment’ than a movement). Which is that we need to pull the curtain back and expose the facade that the federal gov’t is monetarily ‘constrained’ (federal taxes are not actually needed for spending), that there is nothing to worry about if inflation is ‘slight’ (is contained to < 2% / yr); that policymakers could easily get desperately-needed purchasing power into the hands of consumers; and finally, that despite the group-think narrative otherwise, we have the financial means already at our disposal to solve many of the country’s, perhaps most of the entire world’s, problems…

 

To be fair, in 1896, the Republican Party steadfastly opposed Democrats and their silver movement, arguing that the best road to national prosperity was ‘sound money’, backed only by gold, which they felt was crucial to continued success in international trade. Republicans pleaded that by adding silver, that just meant guaranteed higher prices for everyone, not just for farmers and the steel workers who needed the extra cash. Republicans criticised William Jennings Bryan by arguing that the real net gains of his plan to spur the economy would chiefly go the silver interests (who Republicans claimed Bryan was cowardly shilling for)…

 

Despite William Jennings Bryan’s inspired campaign effort and his impassioned ‘Cross of Gold’ speech (“We will answer their demand for a gold standard by saying to them: You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold”), the ‘Silverites’ lost to William McKinley in the 1896 election. By 1900, the silver market had completely collapsed. The gold dollar was declared the standard unit of account and a gold reserve for government issued paper notes (existing legal-tender greenbacks) was established…

 

However, in a nod to William Jennings Bryan (in a nod to his voters and to see if maybe he was right), silver dollar coins went back to being legal tender. Also included as legal tender were silver certificates (paper bills that on demand could be redeemable to silver dollar coins). Some silver standard countries began to peg their silver coin units to the gold standards of the United Kingdom and the United States, but both Bryan’s ultimate goals to become US president and to garner national / worldwide support for the continued acceptance of silver failed miserably. In short, throughout American history, in the trials of remaining as an additional backing of currency, silver had its fits and starts and simply came up short. A centuries-long era of silver as a world currency was ending. Bryan also lost to McKinley a second time, in the 1900 US presidential election (McKinley was assassinated six months into his second term and succeeded by Vice President Theodore Roosevelt), and Bryan again lost the 1908 US presidential election to William Howard Taft. Meanwhile, other countries moved away from silver and began adopting only a gold standard. By 1910, only China and Hong Kong remained on any kind of silver standard…

 

Getting back to the book The Wonderful Wizard of Oz, why was William Jennings Bryan portrayed as the ‘Lion’? Most likely it’s because he roared tirelessly like a lion. At the age of 36, Bryan became (and still remains) the youngest presidential nominee of a major party in American history. In just 100 days in the 1896 campaign, Bryan gave over 500 speeches to several million people. His record was 36 speeches in one day in St. Louis. Why a ‘Cowardly Lion’? Politics makes strange bedfellows and Bryan often found himself in alliance with the same folks he roared against. For example, while supported by William Randolph Hearst, plus other powerful figures in the silver mining industry, Bryan also associated with industrialist Andrew Carnegie, as well as others who had fought against silver, and for that, the press mocked Bryan as an indecisive coward…

 

Other metaphors in the book include ‘Dorothy’, who was the naïve, young and simple person. She was all of us, the American people at that time, led astray and seeking a way back home…

 

The ‘Scarecrow’ was the wheat and cotton farmers and the ‘Tin man’ was the blue collar industrial worker, especially those of the American steel industry. Both were overworked and both were poor debtors needing relief…

 

The four of them set off on the yellow brick road (the gold standard) towards OZ (the abbreviation for ounce as in a troy oz. of gold) in the hopes of adding silver to the gold standard, at a conversion rate of 16:1. This rate is represented by the four of them skipping twice to the left and twice to the right on the yellow brick road, meaning a total of sixteen (silver) steps equals one (gold) step forward…

 

The ‘Good Witch of the North’ represented pure kindness, an extremely gentle character, who stood against the oppression and subjugation of people. In the book, she deposed her predecessor, the Wicked Witch of the North, and because she was good, it renders her, the new Good Witch of the North less powerful, yet loved by her own subjects and others in Oz…

 

The ‘Wicked Witch of the East’ was the eastern moneyed class, mainly the banks. The banks (underwriters of bonds plus any outright bondholders) feared William Jennings Bryan’s plan because the effects of inflation would hurt them. In the book, the Wicked Witch of the East wears silver slippers unlike the movie that used ruby slippers (the movie is intentionally apolitical). After Dorothy deposes the Wicked Witch of the East (killed by Dorothy’s house landing on her), the dead witch’s silver shoes transfer to Dorothy and the Good Witch of the North tells Dorothy that “there is some charm connected with them.”…

 

The ‘Wicked Witch of the West’ was the mountain-states robber-barons, mainly the railroad monopolists and the gold-mining interests out west. Like banks in the east, the railroad monopolists were also creditors and feared any plan that would devalue the dollar, making their investments, denominated in greenbacks less valuable. In addition, gold mine owners feared any plan that would put silver mines back in business (more competition). In the book, the witches carry umbrellas, not brooms, and the witches are not sisters, they are not related at all, only that the witches are both leagued together to stop any plan that would mean a loss of their powers…

 

The ‘Flying Monkeys’ were Native American Indians that the Wicked Witch of the West used to harass anyone on her turf posing a threat. Why author L. Frank Baum would call them ‘monkeys’ in his book could be because Baum had a dark side as a hard-core, blood-thirsty racist. In several editorials for his local newspaper, the Saturday Pioneer, Baum recommended the total genocidal slaughter of all remaining indigenous peoples in America. “The Whites,” Baum wrote in 1890, “by law of conquest, by justice of civilization, are masters of the American continent, and the best safety of the frontier settlements will be secured by the total annihilation of the few remaining Indians, so why not annihilation?”

 

The ‘Wonderful Wizard of Oz’ was the scheming politician of green ‘Emerald City’ (greenback dollars). The Wizard uses publicity devices and tricks to fool everyone into believing he is benevolent, wise, and powerful when in reality he is a selfish, evil humbug. When Dorothy arrives, the Wizard can’t be bothered to see her (to consider adding silver), so to get rid of her, he tells her that he would help her if she killed the Wicked Witch of the West. The Wizard can’t do this himself because as he admits to Dorothy, “I’m a very bad Wizard”…

 

Dorothy does kill the witch, by melting her with plain water (the long held belief amongst major religions is that water is effective for purifying the soul and combating evil). When Dorothy returns, the Wizard isn’t pleased to see them again. He continues his scripted narrative, projected on a screen, until Toto pulls aside the curtain…

 

After Toto’s reveal, The Wizard is abashed and apologetic, and offers help to Dorothy and her friends. When the day comes to help Dorothy return back home, there is a mishap, and all seemed lost, until the Good Witch of the North appears. The Good Witch reassures Dorothy that she always had the power (“You had the power all along to return home to Kansas”) by simply clicking her heels together (meaning the country had the silver all along, and it could solve many of everyone’s needs, by simply jingling the silver coins).

 

The messenger, William Jennings Bryan (Bernie Sanders) fell on the wrong side of history…

…however…

Pulling back the curtain and revealing the macroeconomic reality (the MMT enlightenment), so that our federal gov’t can fully serve public purpose without constraint, will be on the right side of history.  

 

 

Thanks for reading,

eddiedelz@gmail.com

Q) Federal Taxes Don’t Fund Spending, right? A) Wrong.

 

Local gov’t taxes fund local gov’t spending.

 

State gov’t taxes fund state gov’t spending.

 

Federal gov’t taxes fund federal gov’t spending…however…* (see below)

 

The oft-abused phrase “Federal Taxes Do Not Fund Spending” is not entirely accurate. I don’t question anyone’s motive saying it, to be clear, I am 100% positive that each time it is said by an MMTer (Modern Monetary Theory enthusiast), no question it is to promote MMT. Federal gov’t DEFICIT spending (the spending that is not funded by taxes) was only 15% of total spending last year. Besides not being entirely accurate, saying ‘Federal taxes do not fund spending’ veers off course from that first of Seven Deadly Innocent Frauds, which states that it is incorrect to think that federal taxes “must raise funds through taxation”, and that it is incorrect to think that federal “gov’t spending is limited by its ability to tax” (7DIF pg 13). I interpret that not as saying that federal taxes do not fund spending, but only as saying that the federal gov’t, while it is taking in tax revenues, while it is indeed spending those funds, because it is the issuer of dollars, those revenues, those federal taxes are NOT NEEDED to fund spending anymore, a big difference. ’Federal taxes do not fund spending’ is a deadly innocent misinterpretation of this MMT pillar…

 

‘Federal taxes do not fund spending’ is also a misinterpretation of the accounting construct on the consolidated balance sheets of the federal gov’t. When taxes are paid, yes, those dollars are ‘destroyed’, it’s a simple bank entry, a bank debit, a ‘dollar drain’, debited from the taxpayer’s account, but that’s only half of it, only one side of the seesaw. Rather than thinking that ‘dollar drain’ is a simple change of numbers on a spreadsheet, you should be thinking where are those dollars draining to; and more importantly, other than a taxpayer’s bank account balance, that federal taxation just ‘destroyed’ net financial assets (dollars in the banking system). Thanks to the consolidated balance sheets of the federal gov’t however, that debit of taxes creates an equal and opposite entry, a ledger posting, a credit (funded by taxes), to the federal gov’t, which in turn is immediately debited back, to someone else, a.k.a. ‘surplus spending’, the spending funded by dollars that DO NOT add net financial assets (that is not a net increase in the amount of dollars in the banking system). So rather than only seeing taxes as a ‘destruction’ (debit) of dollars, better to also see it as an equal and opposite creation (credit) to the federal gov’t of previously-existing, or more significantly, as previously-Congressional-approved dollars being immediately ‘recycled’, and instantly making whole those net financial assets, those dollars in the banking system, that were just previously ‘destroyed’ by federal taxation…

 

All MMTers say that the federal gov’t deficit equals our surplus, that federal gov’t deficit spending funds our savings, which is absolutely correct. Last year, FY16, (Oct 1, ‘15 – Sept 30,‘16), the US federal gov’t spent $3.854 trillion. Federal tax revenues (mostly federal income tax, social security & medicare) was $3.267 trillion, and the difference, $587 billion, was deficit spending, or funded by newly-created dollars. That federal gov’t deficit equals to the penny, our surplus, agreed; that federal gov’t deficit funded our savings, absolutely; and that federal gov’t deficit funds our spending on things like paying our federal taxes, most certainly, but why do some MMTers have trouble saying that the other way around? In FY99, the US federal gov’t spent $1.704 trillion dollars and federal tax revenues were $1.827 trillion dollars, meaning that on top of federal taxes funding ALL federal spending in 1999, there was also a federal gov’t profit, a federal gov’t surplus, a federal gov’t ‘savings’ of $123B. So in that case, why do some MMTers hide their sectoral balances chart and say that our deficit, that our tax spending, didn’t fund those surpluses, didn’t fund those federal gov’t savings? Same goes for the double-entry accounting system that all MMTers routinely apply as well. All MMters correctly agree that for every debit posted on one ledger (federal gov’t deficit), by accounting identity, there is an absolute, equal and opposite, credit, somewhere else (non federal gov’t surplus). All MMTers understand that federal taxes, that confiscation, that ‘destruction’ of dollars, are a ‘dollar drain’ of dollars out from the banking system. So after taxes ‘defund’ net financial assets out from the banking system, which are then ‘refunded’ back into the banking system via surplus spending, why do some MMTers then hide their double-entry ledgers and say that those taxes don’t fund anything?

 

Let’s take a closer look at our federal government’s central bank, the Federal Reserve. The Fed is part of the federal gov’t, or as they define it, ‘independent within the federal government’. Even though it is part of the federal gov’t, the Fed however, is not capitalized by the federal gov’t. The way the Fed gets its equity capital is by private sector US banks being required to buy and hold non-voting shares in the Fed. Furthermore, some spending by the Fed (part of the federal gov’t) is not funded by the federal gov’t. Show me someone who thinks that we in the private sector do not fund federal gov’t spending at all, and I’ll show you someone who does not know (or does not like to mention the fact) that the Fed’s spending IS NOT funded through the congressional budgetary process. The Fed gets most of its revenues from the bonds it holds. Meaning the Fed pays for some its spending from the interest income of mortgage bonds held at the Fed, like for example, at the time of this writing, the $2T of mortgage-backed securities (MBS) that the Fed purchased during the Large Scale Asset Program (LSAP) and presently held on the Fed’s balance sheet. So to this day every time some folks in the private sector make a mortgage payment, a mortgage payment that includes interest expense servicing that mortgage, that interest, those hard-earned dollars, goes to where the mortgage is held, which right now has a one in six chance of being at the Fed. The Fed pays for its own spending with that interest income from the private sector. In other words, payments from the private sector *literally* funded gov’t (Fed) spending in 2016. Furthermore, any profits after funding the Fed’s expenses are handed over to the Treasury. Last year the Fed sent a record $97.7 billion in profits to the U.S. Treasury, which was promptly credited right back to the private sector in the form of federal gov’t surplus spending. So anyone thinking ‘we don’t fund federal gov’t spending’, has it wrong. The correct thinking is that we don’t fund federal gov’t spending PER SE (Latin for “by itself”). Meaning that even though federal gov’t revenues are intrinsically part of funding federal gov’t spending, they ARE NOT ESSENTIAL to funding federal gov’t spending.

 

The paradigm difference between the gold standard era and the post-gold standard era is that federal gov’t revenues became obsolete as a federal gov’t financing operation. The federal gov’t, or any issuer of a non-convertible, free-floating (pure fiat) currency NO LONGER NEEDS revenue to fund spending. In a brilliant 1946 article “Taxes For Revenue Are Obsolete”, former Chairman of the Federal Reserve Bank of New York, Beardsley Ruml, wrote that the federal gov’t is “free of money worries and need no longer levy taxes for the purpose of providing itself with revenue”. On 04/17/10 Bill Mitchell billy-blogged about this and titled the post “Taxpayers Do Not Fund Anything”. I respectfully disagree. Of total federal gov’t spending ($3.854T in FY16) taxpayers funded 85% ($3.267T). The key words in that 1946 piece is ‘need no longer’. Interpret that as saying that while those taxes are indeed funding surplus spending, because the federal gov’t is now the issuer of fiat dollars, in the post-gold standard, modern monetary system, there is no longer any constraint for any monetary sovereign spending beyond taxpayer revenues, since those federal gov’t tax dollars or any federal gov’t revenues whatsoever actually NEED NO LONGER fund federal gov’t spending…

 

In a 02/20/17 YouTube video, Mike Norman says ‘federal taxes do not fund spending’, using the Monopoly game analogy, saying that “it’s the same in real life.” His rationale is that the Player (household) taxes do not fund Bank (federal gov’t) spending because “basically you are just giving back money that was already distributed by the game.” True, Player taxes did not fund that original spend (the $1500 in Monopoly Money that the Bank gives the Players at the start of the game), but that was Bank deficit spending, those were newly-created dollars. Player tax didn’t fund the initial Bank deficit spending, however Player tax funds subsequent Bank surplus spending. For example, if a Player then rolls the dice and lands on ‘Chance’ and has to pay a $200 tax, that Player tax spending (debit entry on one spreadsheet) is an equal and opposite Bank savings (credit entry on another spreadsheet). That Player tax ‘dollar drain’ of $200, that ‘destruction’ of aggregate Player net financial assets, is only the half of it, it is also a simultaneous ‘creation’, an increase of $200 in Bank surplus. When the next Player lands on ‘GO: Collect $200’ the Bank does not need to deficit spend, the Bank immediately recycles that surplus and spends the $200 (federal gov’t surplus spending). Bank surplus spending is funded with existing-dollars received as revenues from Players, meaning the Bank is not using newly-created dollars (that needs Congressional approval). This Bank ‘dollar add’ then makes whole the previous reduction of net financial assets. Player taxes fund Bank surplus spending but the more important point is that Player taxes are actually not needed to fund spending at all. The Bank (issuer of Monopoly money) can never go broke. The game never ends because the Bank runs out of Monopoly money (fiat dollars). The game always ends because Players run out of money. As per Monopoly rules, “…if the Bank runs out of money it may issue as much more as may be needed by merely writing on any ordinary paper.” Meaning that the Bank, once it has run out of tax revenues that fund Bank surplus spending, the Bank can deficit spend (authorized to use newly-created Monopoly money) without constraint (without debt). The game ends when all but one of the Players runs out of money, which is inevitable because the Players (users of Monopoly money) do have a constraint when they deficit spend. Players, unlike the issuer of Monopoly money, have a corresponding debt attached to any deficit spending. Counter-intuitive to mainstream thought, it is Monopoly Player deficit spending, not Monopoly Bank deficit spending, that is actually unsustainable and ‘it’s the same in real life’…

 

While a Ph.D. candidate in 1998, Stephanie Bell wrote a paper entitled ‘Do Taxes and Bonds Finance Gov’t Spending?’ In this paper, she describes federal financing on the reserve accounting level (the banks and the Treasury department), not on the policy level (everybody else included with the other accounts that make up all the consolidated balance sheets of the federal gov’t). As per Stephanie Bell (now Dr. Stephanie Kelton) “Modern (federal) governments finance all of their spending through the direct creation of new High Powered Money (HPM).” This is true, however, what she’s missing there is whether that HPM funding federal gov’t spending is or isn’t a net addition of financial assets, a net increase of dollars into the banking system. Regardless, once again, the actual point she is driving home here is that MMT pillar, that taxes ARE NOT NEEDED to fund spending and that taxes “mask a more pragmatic operation.” Stephanie Bell correctly concludes in her paper that policymakers need to stop seeing “taxation and bond sales as financing operations”, but today Stephanie Kelton like to say ‘taxes don’t fund spending’, which slightly veers off course from that. Even worse, this ‘taxes don’t fund spending’ line confuses some MMTers even more who believe that ‘taxes and spending are totally separate operations’, yet another MMT misinterpretation, this time of Stephanie Kelton herself. In her paper, Stephanie Bell makes no such claim, in fact the opposite, she wrote about “the coordination of taxation and bond sales”, and far from being separate functions, she adds, “Treasury CHOOSES (emphasis by Stephanie Bell) to coordinate its operations, transferring funds from T&L accounts (Treasury accounts created at commercial banks to accept electronic tax payments), draining reserves AS IT SPENDS (emphasis by Stephanie Bell) from its account at the Fed.” She concludes that “This interdependence is not de facto evidence of a ‘financing’ role of taxes and bonds.” In other words, taxes and bonds sales (revenues) are obsolete, that they actually are not needed to finance spending. That doesn’t mean they don’t. It means that taxes and bond sales (revenues) are presently financing surplus & deficit spending but they don’t have to, period. If Stephanie Kelton or any MMTer today says ‘taxes don’t fund spending, they are jumping ahead. If you say ‘taxes don’t fund anything’ before MMT has taken hold, before MMT has brought forth that modern monetary way of thinking, before that sorely-needed comprehensive reform to policymaker understanding of how the system really works, until then, until the mainstream no longer sees those Treasury bonds as ‘debt’, you still need to include those crucial words, ‘taxes ARE NOT NEEDED to fund spending’. Otherwise, anyone outside the MMT circle will not understand what you mean by ‘taxes don’t fund spending’ or ‘taxes and spending are totally different functions’. When federal tax revenues end (when taxes are no longer funding surplus spending), that is the changeover from surplus spending to deficit spending. From spending that doesn’t need congressional approval (spending that doesn’t raise the ‘debt ceiling’), to spending that does. Most people understand that. If you say ‘taxes don’t fund spending’, most people will assume you don’t understand that, and they won’t pay much attention to whatever else you have to say. For example, in 2016, when Dr. Stephanie Kelton, chief economist for the Democrats on the Senate Budget Committee in Washington, said ‘taxes don’t fund spending” to presidential candidate Sen. Bernie Sanders, he was like ‘WTF?’ That’s why we did not hear anything about MMT from Bernie in 2016. That’s why it was not Bernie but his opponent that actually got the closest to starting an MMT discussion with the now-famous words “First of all, you never have to default because you print the money, I hate to tell you, OK?” And that’s why Bernie, to this day, the politician with the MMT economist, still thinks that ”the federal gov’t must first raise tax revenue to pay for policy.” Don’t get me wrong, Dr. Stephanie Kelton is one of the great ones. I think that if there is ever an MMT Mount Rushmore National Memorial, Dr. Stephanie Kelton should be chiseled in right next to Warren Mosler, who I consider the greatest economic mind walking the planet right now. That said however, even the great ones do swing and miss sometimes, and I believe ‘taxes don’t fund spending’ is a miss. Surplus spending does not need congressional approval because taxpayers are funding surplus spending. The surplus spending distinction is that it has a deflationary bias (emphasis on ‘bias’ – this is not a rule – just one of many moving pieces in the economy that may or may not result in actual deflation), which is why fiscal policymakers of any federal gov’t (any issuers of currency) should not run surpluses (the ‘Clinton’ surplus triggered the ‘Bush’ recession and all six depressions were preceded by sustained federal gov’t surpluses). Federal taxes, that ‘dollar drain’ of dollars from the banking system, that ‘destruction’ (‘defunding’ of net financial assets), functions in tandem with spending, and this function is what determines the end of the line for surplus spending which makes whole the previous destruction (‘refunding’ of net financial assets). That is the point where the deflationary bias of surplus spending ends and the deficit spending (‘funding’ of net financial assets) begins. That is the line where the surplus spending stops being ‘funded’ / ‘recycled’ / ‘used’ / ‘offset’ / ‘reinvested’ / ‘credited’, whatever word makes you comfortable, with already-existing dollars, dollars funded by taxpayers, dollars that do not need congressional approval because they already were approved before. That is the changeover to deficit spending funded by ‘borrowed’ dollars (an outdated facade from the bygone gold-standard era), but the big difference is, unlike taxes that fund surplus spending, where taxpayers receive nothing in return for paying taxes, buyers of federal ‘debt’ get something for their dollars (a US Treasury bond), so this part of the ‘financing’ process is a swap of assets in the banking system. Meaning that instead of ‘refunding’ a ‘dollar drain’ of dollars out from the banking system, those federal gov’t deficit spending dollars result in a ‘dollar add’ into the banking system, an increase in net financial assets. Another distinction, the net addition of ‘newly-created’ dollars funding deficit spending, unlike the ‘already-existing’, ‘already-Congressional-approved’ dollars funding surplus spending, has an inflationary bias. Again only a ‘bias’ because, as we saw, in the eight years after the credit crisis, even though the ‘debt’ was doubled (a lot of federal gov’t deficit spending), there wasn’t much inflation, because the inflationary bias of those deficit-spending dollars vaporized on impact. MMTer Chris McArdle puts it well: “Federal taxes, as a matter of policy, not operations, can be properly understood to be funding spending when, as a matter of policy, they have been connected.” He adds, “That’s not a prescription, it is a description, and it is not at odds with the operational fundamentals, it illuminates how things actually function (or, at least, attempts to).”

 

The ‘taxes don’t fund spending’ line is a complete distraction from a larger issue, which is whether or not any net financial assets (federal gov’t deficit spending ‘dollar-adds’) going into the banking system are reaching the non federal gov’t / domestic, a.k.a. private sector. In 16 of the past 20 years, those dollars did not. In most of the recent years, the US private sector was forced to deplete savings +/or deficit spend while the non federal gov’t / international sector saved. In an October 2015 Seminar Series at the International and Comparative Law Center (ICLC), titled ‘Modern Money Theory: Intellectual Origins and Policy Implications’, Professor L. Randall Wray states that “Logically, the gov’t spends so you can pay taxes.” He adds that “the spending has to come first…what that means is taxes actually don’t ‘finance’ gov’t spending.” He is talking about DEFICIT spending, yes, taxes don’t fund DEFICIT spending, but what about subsequent SURPLUS spending (excuse me professor, why is it called SURPLUS spending)? With all due respect to Professor Wray, he too belongs on that MMT Mount Rushmore, but here he also veers off course from that MMT pillar that taxes actually ARE NOT NEEDED to ‘finance’ gov’t spending. Instead he groups both deficit and surplus spending as being the same, he says that ‘taxes aren’t funding spending’ and that’s where Randy Wray, another great one, also swings & misses because there are those major distinctions between federal gov’t surplus spending and federal gov’t deficit spending. Instead of confusing his listeners by saying “You can’t pay your dollar tax unless the gov’t provided some dollars” (excuse me professor, what if I borrowed the dollars from a bank to pay the tax?), perhaps Professor Wray, regarding gov’t spending, should say this: Just because the federal gov’t is deficit spending, just because federal gov’t deficit spending is supplying newly-created dollars entering into the banking system that increases non federal gov’t net financial assets (federal gov’t deficit = non federal gov’t surplus), that still doesn’t necessarily mean we in the US private sector are good to go, because the non federal gov’t is divided into two sectors, the Non federal gov’t / domestic and the Non federal gov’t / international. If in any given year the US trade deficit is as much as, or even larger than, the US budget deficit, that means all those newly-created federal gov’t deficit spending dollars that year, that ‘dollar add’, skipped right over the US private sector and went straight into the US bank accounts of overseas interests. Those dollars were promptly converted to foreign currency to pay overseas workers, factories, shipping, plus any other expenses and profits generated from that product sold in America (Note: US dollars never ‘leave’ the US banking system, however, the damage is already done because the entire production of said goods took place overseas, instead of here in the US, causing what is known as a US aggregate ‘demand leakage’). Those ‘dollar adds’ all going to the non federal gov’t / international sector, that’s the same difference, that’s just as bad, for the non federal gov’t / domestic (US private sector) as if the federal gov’t ran a surplus, meaning no newly-created federal gov’t deficit spending dollars, no ‘dollar-adds’ for the US private sector in that case either. This is EXACTLY what happened for thirteen straight years in a row from 1996 (cough *nafta* cough) to 2008. Let’s check out exactly how those dollars from the federal gov’t to the non federal gov’t for the first of those thirteen years got divvied up. In 1996 the US budget deficit (total federal gov’t deficit spending funded by newly-created dollars which were a net increase of dollars entering into the banking system) was $107B. Meaning there was a $107B addition of net financial assets, a ‘dollar add’ to the non federal gov’t (the domestic US private sector and the international sector combined). So far so good for both non federal gov’t sectors in 1996, but the US trade deficit in 1996 was $170B. The US trade deficit in 1996 was larger than the US budget deficit in 1996. Meaning that the domestic US private sector paid $170B for imported goods that they bought from the international sector over and above the amount they were paid for goods that they sold to the international sector. That means that every penny of that $107B ‘dollar add’ from the federal gov’t all went to the non federal gov’t / international sector, and that news got worse for the US private sector in 1996. The difference (170 – 107 = 63), was a transfer of dollars, a ‘dollar drain’, that also went to pay the remaining balance, of $63B, for those imports, in 1996, from the non federal gov’t / domestic (US private sector) to the non federal gov’t / international (overseas sector). In other words, because the non federal gov’t / domestic (US private sector) had a ‘dollar drain’ of $63B in 1996, the effect on the US private sector was the same as if the US federal gov’t had run a $63B surplus in 1996. After 1996 comes the fatal blow to the non federal gov’t / domestic (US private sector). Those US private sector ‘dollar drains’, those US private sector deficits, continued (they were sustained), for thirteen straight more years. When looking at these sustained US private sector deficit figures below, these final fiscal year results, keep in mind that all six depressions in US history were preceded by sustained federal gov’t surpluses (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

_____________

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

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

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

_____________

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

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

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

______________

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

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

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

______________

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

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

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

_______________

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

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

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

______________

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

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

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

______________

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

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

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

______________

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

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

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

______________

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

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

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

______________

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

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

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

_______________

 

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

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

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

_______________

 

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

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

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

 

(H/T Chris Brown ‘Sectoral Balances info-graph of US Private Sector Dollar Drains & Dollar Adds Since 1992′)

We all remember what happened in 2008. Policymakers quickly ended those significant amounts of sustained non federal gov’t / domestic (US private sector) deficits, and ended the Great Recession with even more significant amounts of sustained US federal gov’t deficits (sustained US private sector surpluses), the same that was done to halt the previous six depressions:

$1.413T ‘dollar add’ from the federal gov’t in 2009:

$544B surplus to the non federal gov’t / International

$869B surplus to non federal gov’t / Domestic

_____________

$1.294T ‘dollar add’ from the federal gov’t in 2010:

$636B surplus to the non federal gov’t / International

$658B surplus to non federal gov’t / Domestic

______________

$1.300T ‘dollar add’ from the federal gov’t in 2011:

$726B surplus to the non federal gov’t / International

$574B surplus to the non federal gov’t / Domestic

_______________

$1.087T ‘dollar add’ from the federal gov’t in 2012:

$730B surplus to the non federal gov’t / International

$357B surplus to the non federal gov’t / Domestic

     The real point, the ‘logical’ point, professor, isn’t whether or not private sector taxes are financing federal gov’t spending; it’s whether or not federal gov’t spending is financing the private sector…Class dismissed.

 

My biggest problem with ‘taxes do not fund spending’ is the tone of it. Saying that dollars today are just like points on a scoreboard is an excellent analogy, but don’t take the analogies too literally. Saying that your taxes do not fund spending is like saying to the football player that his touchdown didn’t put the seven points up. If some MMT academic pointing to his blackboard tries to tell that running back that he doesn’t understand how it works, that the points on the scoreboard change ‘via crediting accounts’ and that ‘they don’t come from anywhere’, that sweating, bleeding and exhausted player who knows exactly who funded those seven points is not going to agree. This schoolroom notion that federal gov’t spending is just dollars being ‘keyboarded in’, that it’s only just ‘1s and 0s’, and nothing more, oversimplifies what is happening in the real world. Federal spending isn’t a helicopter drop, those dollars aren’t keyboarded in to just anyone. Anyone getting federal gov’t spending dollars performed a service, provided some goods, they ‘provisioned’ the federal gov’t, which carries forward, in a non-stop trade-off of labor for dollars. Regarding those tickets collected in the analogy, before being ‘ripped up’, ‘destroyed’, ‘discarded’, those tickets were counted, those tickets indirectly funded the stadium. Any non federal gov’t debit entry (taxes) triggers an automatic, equal and opposite federal gov’t credit entry (fund) which is immediately debited out (surplus spending). But again, the more important point is that unlike over at ‘Local Gov’t Stadium’ and at ‘State Gov’t Stadium’ where those tickets are needed to fund their spending, at ‘Federal Gov’t Stadium’, those tickets are not. To be clear, ‘Federal Gov’t Stadium’ is still getting funded like the other stadiums, but unlike the other stadiums, as a monetary sovereign, it doesn’t actually need that funding for spending, or more specifically, its spending is no longer by constrained by ticket sales. That’s why there are so many more arguments with the accountants about expenses at ‘Federal Gov’t Stadium’…

 

J.D. Alt, author of ‘The Millennials’ Money’, has a video that perfectly visualizes how our monetary system works with both his ‘old diagram’ (the narrative using gold standard mentality) and his ‘new diagram’ (the reality using the MMT description). The video is perfect…because….J.D. doesn’t veer away from that MMT pillar that says taxes are NOT NEEDED to fund spending. Instead of innocently misinterpreting that MMT pillar with ‘taxes don’t fund spending’, J.D. says it correctly. In his video he says “The federal gov’t DOESN’T NEED the cancelled iou in order to issue and spend new fiat dollars” and “The sovereign federal gov’t HAS NO NEED to harvest what it can create on its own anytime it needs to.” Furthermore, J.D. Alt offers suggestions for new mainstream thinking. For example, he suggests that we all start saying “Net Spending Achievement” instead of federal gov’t deficit spending, and call the national debt “The National Savings.” I give J.D. Alt a lot of credit for understanding that this is a giant leap in new thinking for most people, and he is very careful to include those words ‘not needed’ in his statements…because…as he also says in that video, “We need to make sure we use the right terminology.”

 

Federal taxes fund surplus spending and US Treasury bond sales fund deficit spending, BUT THAT IS ALL A CHARADE, an idiosyncratic relic of a bygone era. The MMT ‘enlightenment’ is that rather than believing the mainstream NARRATIVE that revenues are collected to fund federal spending, revenues ARE NOT NEEDED to fund federal gov’t spending anymore. If you are a professor or a lecturer (in a classroom) preaching to the MMT choir, then fine, go ahead, say ‘taxes don’t fund spending’, because fellow MMTers know what you ‘mean’, but if you are outside that MMT circle (in reality) and say that to a layperson who you are trying to enlighten, you will simply lose them fast. If you say it correctly, if you say ‘taxes are not needed to fund spending’, you will pique your listener’s intellectual curiosity and they will hopefully follow up with a question like, if revenues (federal gov’t taxes and federal gov’t bond sales) are not needed to fund spending, then what are they needed for? My suggestion how to answer that: Federal revenues are needed as a federal gov’t fiscal and monetary policy function, not a federal gov’t financing function, meaning that the purpose of federal gov’t taxes and federal gov’t bond sales today, under the guise of ‘financing’ the economy are actually regulating the economy. Revenues today are only needed to finance users of currency, like households and businesses, in their quest to balance budgets; however, in the post gold standard, modern monetary system, revenues to any monetary sovereign, perform more important functions for the issuer of currency, to balance their economies. US Treasury securities sales (short-term bills, medium-term notes, long-term bonds) provide users of US dollars a safe, risk-free place to park their dollars, to fulfill their savings desires. Treasury securities are actively traded in a liquid global bond market which serves as a safe harbor for dollars taking a flight to quality away from risky assets, into risk-free assets, like Treasury bonds, during worldwide market turbulence (which further solidifies the US dollar’s stature as a world-class reserve currency). Treasury securities are tools used in monetary policy to set the price, or interest rate of dollars; and in fiscal policy to increase aggregate demand to stimulate the economy with more deficit spending (Treasury bond issuance acts as a dollar drain that neutralizes the inflationary bias of that net financial add, that increase to the money supply, of that deficit spending). Rather than financing the federal gov’t, federal revenues today are mostly needed for two things. In his prophetic 1946 article, NY fed chair Ruml writes that federal taxes are obsolete when it comes to financing the federal gov’t because for any monetary sovereign using a pure, fiat currency, federal taxes are only really needed to control inflation and serve public purpose. MMTers expand on this, that federal taxes are also needed to create the initial velocity and continuous demand for the currency by requiring that federal tax must be paid in the currency issued by the federal gov’t. Furthermore, federal taxes are also needed to balance the economy by redistributing wealth to widen prosperity. Finally, federal taxes are also needed to ‘create’ unemployment. The federal gov’t does this in the exact same way that a parent starts making their child pay for stuff they want. In order for the now ‘unemployed’ child to make those payments, the child must start doing chores and earn an allowance. The parent is doing this to force the child to help provision the household. Afterwards, when the child, spending the earned allowance, pays the household, in exchange for wanted privileges, the child is technically funding the household, but financing the household is not the real function of collecting the child’s allowance, the child’s allowance is not needed to fund the household’s spending…

 

A recent comment by Brandon Verdier put it succinctly, “…the presence of federal tax is what allows us to spend more without experiencing more inflation than we are comfortable with.” Geoff Coventry also recently put it very nicely, “…the primary purpose of federal taxation is to maintain stable demand for government currency and offset the economic effects of its issuance.” In my opinion that’s a much better tact to take rather than saying to someone that their federal taxes don’t fund spending. My fellow MMTers, I know you won’t agree with this post (in my last That Isn’t Entirely Accurate posting only one brave soul, Jim Morley did), but when doing the good deed of spreading the MMT gospel, may I suggest losing the ‘taxes don’t fund spending’ catchphrase. If you tell people outside MMT circles that their federal taxes, their hard-earned cash, confiscated from their earning, that they are painfully watching come out of their paychecks, over three trillion dollars last year, and then you say ‘they don’t fund spending’, you won’t change minds…

 

Finally, in addition to stop saying ‘taxes don’t fund spending’ (and start saying ‘taxes ARE NOT NEEDED to fund surplus spending and ‘borrowed’ money IS NOT NEEDED to fund deficit spending’), I suggest MMTers also stop getting hung up on that ‘the deficit spending is the beginning, it has to come first, BEFORE taxes are paid’ thing. The way I see it, step one is, taxes defunds net financial assets; then step two, surplus spending refunds that decrease of dollars in the banking system; and step three, deficit spending funds increases of net financial assets. If you want to say number three comes first, FINE, go ahead, but it really doesn’t matter, because once you step back from the picture, you will see that all three are part of huge cycle, an ebb and flow, a perpetual motion, a man-made economic ecology, inside our very own US dollar dominion. There is no ‘beginning’ or ‘end’ on this like on any other circle.

 

In closing, I submit to the court, the enclosed video, as Evidence A, @ 5:52 the question is posed from Steven D. Grumbine, Real Progressives webcast host to his guest, Warren Mosler: “Federal taxes do not fund spending, right?” and the answer is, “…I don’t actually say it that way… You don’t need to say it that way…To use an ambiguous word like fund…because to fund something means different things to different people”. Bingo. That answer was not “Yes, that’s right, that’s correct, and whoever disagrees or posts otherwise doesn’t understand MMT”, that answer was Q) Federal taxes do not fund spending, right? A) Wrong. Interpret that as him wavering on ‘federal taxes do not fund spending’. Keep saying it if you want but keep in mind, he doesn’t say it that way, because it’s missing the point, it’s ambiguous and it’s not entirely accurate.

 

About a month later, during another webcast, Steven asked Iain Dooley, Economics Adviser, of the Australian Workers Party:

Q) “Taxes don’t fund spending right?”

A) “ I think that’s the most contentious statement that MMT makes.”

I rest my case.

 

Local gov’t taxes are needed to fund spending…State gov’t taxes are needed to fund spending…however…* Federal gov’t taxes ARE NOT NEEDED to fund spending.

 

 

eddie d

eddiedelz@gmail.com

 

 

The Japan That Can Say No More

080816 The Japan That Can Say No More (2)

A lot has changed in Tokyo since the year 1989 when the book ‘The Japan That Can Say No‘ came out. In the late eighties, Japan’s economy, still the world’s second largest, was growing between 4% and 7% annually. Japanese corporations were on a buying spree, snapping up U.S. trophy properties like Rockefeller Center and Pebble Beach. In 1989, Akihito, the current Emperor of Japan, acceded the Chrysanthemum Throne, and the property value of the Imperial Palace in central Tokyo, measuring approximately one square mile, was assessed higher than the entire state of California. While stock and property markets soared, Japanese consumers splurged. High-end restaurants were offering sushi wrapped with gold leaf instead of seaweed, or upon request, they routinely served sake and green tea sprinkled with gold dust (I’m not making this up, I was living in Tokyo, a 15-year run, brokering US Treasury bonds). Golf course memberships, a huge status symbol in Japan, were changing hands for millions of dollars. On December 29th, the last trading day of 1989, the Nikkei stock average closed at what still remains to this day, its all-time high of 38,915…

As it turned out, there was as much hot air in that book as there was in those asset prices, and it was Japan’s markets, that instead, said ‘No’. The bubble burst, the country fell into recession, what became a long, slow, economic slog, what we all now know as Japan’s ‘Lost Decade(s)’…

Prior to 1989, there are multiple reasons that explain the past economic ‘miracle’ of Japan, but for this post, I would like to concentrate on the biggest, which was the aggressive fiscal stimulus (increased deficit spending) by the Japanese government. On the other hand, there are also multiple reasons that explain the current economic ‘lost decades’ of Japan, and that biggest, is the over-reliance on ‘monetary stimulus’ (increased quantitative easing) by the Japanese central bank, which they pioneered in March 2001. To counter weak economic growth, the Japanese government has continued with more experimental ‘monetary stimulus’ and less proven fiscal stimulus (because they believed then and still believe today that it problematically adds to Japan’s ‘debt’)…

The Japanese economy, same as the economy of any monetary sovereign, only does exactly what it has been instructed to do by the fiscal policymakers in its government and the monetary policymakers in its central bank. Any economy of a monetary sovereign, using a pure, fiat currency, like Japan, goes in whatever direction the knobs have been turned by these policymakers. If policymakers in Japan want to intentionally slow the economy, then they should raise national consumption sales taxes (drain yen from consumers), introduce negative rates (drain yen from savers), expand central bank asset purchases (further distort markets), and provide an inadequate amount of fiscal spending (add an insignificant amount of public sector demand that doesn’t increase inflation). These measures, if all combined, and continued over time, will also have a powerful and exponentially compounding effect (‘paradox of thrift’), that keeps adding a poisonous uncertainty (decreased consumption), more flight to risk-free assets (stronger yen), which then hurts manufactures (lowers capital expenditures), hurts their employees (lower paychecks), and makes imports more expensive (drains even more yen from consumers). The Japanese economy has done exactly what it was told to do by its policymakers, so no one should be surprised at the country’s economic performance. People should be surprised, however, if in the distant future, economic historians did not compare the prolonged ‘monetary stimulus’ policies deployed in Japan in our lifetimes as the financial equivalent of medieval bloodletting.

It’s easy to see what the problem is. The chief economic surgeons in Japan call monetary stimulus an ‘arrow’. That’s the problem right there, they aren’t familiar with the post-gold standard, modern operating room. They see monetary stimulus as being one of the so-called ‘3 Arrows’ of Abenomics, but monetary stimulus, the lowering of interest rates, is not an ‘arrow’ (is not a scalpel). Only those other two arrows of Abenomics (more fiscal stimulus and more pro-growth reforms), are actual arrows (are actual scalpels). ‘Monetary stimulus’ isn’t a scalpel, it’s only a monetary accommodation, an economic sedative. ‘Monetary stimulus’ is just the anesthesia, that is used by the anesthesiologists (monetary policymakers) while the surgeons (fiscal policymakers) are busy employing more fiscal stimulus (repairing body parts), enacting those reforms (removing tumors), and the anesthesia should only be temporarily administered to the patient (if you know what you’re doing).  Furthermore, fiscal policymakers in Japan, as well as in the U.S., have bought into that ‘federal-gov’t-is-the-same-as-a-household’ delusion. Same as in the U.S. regarding Treasury bonds, fiscal policymakers in Japan are absolutely convinced that more federal deficit spending, which increases Japan’s so-called national ‘debt’ due to more issuance of Japanese government bonds (JGBs), would be a bigger problem than a chronically weak economy. By even thinking that JGBs are ‘debt’, by even believing that Japan itself is in ‘debt’, the real problem is that policymakers in Japan, just as in the U.S., are using outdated, gold-standard mentality, which is still taught to all of us by economists using textbooks referring to that bygone era….

JGBs are no longer ‘debt’. The Japanese national government, the issuer of yen, yen that is now a pure, fiat currency, does not have ‘debt’ because all those Japanese federal gov’t bonds, those JGBs, are denominated in yen. If those JGBs, that are issued by Japan, were denominated in U.S. dollars, or fixed to U.S. dollars at a certain foreign exchange rate, or pegged to any other foreign currency that Japan did not issue, THEN YES, THAT WOULD BE DEBT, but the Japanese yen isn’t any of these. Since 1971, when President Nixon dismantled the Bretton Woods system (fixed-exchange rate), the Japanese yen, just like the US dollar, is a pure, fiat currency meaning that it freely floats and it is not convertible to gold or anything. To be clear, JGBs are ‘obligations’ (JGBs are legal tender obligations of Japan to any holders of those securities), and JGBs are ‘liabilities’ (the outstanding JGBs and the interest payable are liabilities of Japan on a national consolidated balance sheet), but ask any accountant, not all obligations and liabilities are debts. Japan, like any other monetary sovereign that issues it’s own pure, fiat currency (not convertible to anything and freely floats), is never in ‘debt’ of anything denominated in that same currency.

The government of Japan, the issuer of yen, is not the same as a household, a user of yen. When the Japanese gov’t (issuer of yen) deficit spends, it is a different paradigm from when a Japanese citizen (user of yen) deficit spends. A user of yen must borrow yen to finance deficit spending, and when they do, that means that user of yen incurs an actual debt, whether it is in the form of a monthly credit card balance (same as a bond), an outstanding student loan (same as a bond), or a mortgage amount (same as a bond). Conversely, every single Japanese gov’t bond (JGB) in existence is issued by the gov’t of Japan, sold by its banking agent, the Bank of Japan (BOJ), and it is denominated in Japanese yen, a currency that the Japanese gov’t has sole monopoly power to issue. Rather than being ‘debt’, those JGBs are just a time deposit, a safekeeping service, for anyone with a desire to save yen. Just like a certificate of deposit (CD) at any bank, JGBs are a place to park yen, risk-free. It’s just like buying a CD at any other bank, except a CD from the BOJ is called a JGB…

Unlike a user of yen, the Japanese goverment, the issuer of yen, doesn’t need to ‘borrow’ yen. The Japanese gov’t, the issuer of yen, doesn’t need to sell JGBs to ‘finance’ deficit spending in yen. The Japanese gov’t, the monopoly ‘supplier’ of yen, is simply adding newly-created yen, to the economy, and the Japanese people, the Japanese financial institutions, or anyone else, when buying JGBs, are putting some of it back. A 250% JGB to GDP just means that the Japanese are incredibly good savers, that’s all. That is not Japan going into ‘debt’. That is yin and yang, ebb and flow, tidal gravity, like fallen rain and natural evaporation, and it’s all happening inside Japan’s very own economic ecology of yen, Japan’s post-gold standard, modern monetary masterpiece. The gov’t of Japan, their policymakers, have as much to worry about having to ‘pay back’ that ‘debt’, those JGBs, as much as they have to worry about ‘putting back’ all the rain that has ever fallen, or ‘paying back’ all the oxygen ever breathed. Japanese JGBs are as much a ‘debt’ to the country of Japan as are shares of Nissan stock ever issued and sold by Nissan being a ‘debt’ to the corporation of Nissan.

Thankfully though, Japanese government policymakers seem to have recently begun to rethink ‘monetary stimulus’. The latest fiscal stimulus announced by Japanese gov’t policymakers last month did NOT increase the asset purchase sizes of QE, nor did the BOJ push negative rates even deeper. Earlier this year, the Japanese gov’t also decided NOT to raise across-the-board sales taxes (Japan National Consumption Tax) any higher, again, to 10%, like they did, to 8%, in April 2014. All these are very good signs that regarding ‘monetary stimulus’, maybe, just maybe, Japanese gov’t policymakers are possibly thinking ‘No More’.

Imagine the monetary policymakers at the Bank of Japan, following Emperor Akihito’s lead, speaking directly to the Japanese people, leveling with them, admitting to them, that it is not your ‘deflationary mindset’ that is holding the country back, but the government’s own policies. Federal policymakers should announce that they will start acting like the issuer of yen…not like users of yen…so…unlike users of yen that need to get their budgets in balance…that instead…that they…the issuer of yen…with a wobbly economy caused by a lack of aggregate demand…by a lack of consumer purchasing power…will increase that demand, by increasing spending, that keeps increasing ‘deficits’ coming FROM the issuer (meaning larger injections of ‘surpluses’ going TO the users), and will not let up that fiscal stimulus until the issuer gets their economy in balance. So that a fair and proper worldwide economic expansion could finally begin, perhaps the rest of the world’s policymakers would also decide to step down from their ‘monetary stimulus’ throne.

Yonde kurete arigato,

eddiedelz@gmail.com

 

 

 

Budgets Are For Users

     Once upon a time, you could pop open the front hood of a car, and looking inside was not so intimidating. If you were lucky enough to have a muscle car, you even knew how to adjust the choke, to increase the amount of gasoline going into that gas / air mix, to get that beast started when it got really cold outside…
     The economy works with a similar principle. During an economic cold snap, the federal gov’t needs to add more gasoline, more potency, to that combustible mixture of public sector demand / private sector demand, to get that engine to turn over and started again…
     Our economy has been in a winter freeze for too long. Our fiscal policymakers could offer a hand by simply adjusting the choke to add more federal gov’t spending (more federal gov’t demand) to that mix (total aggregate demand). Instead, we only have our monetary policymakers just giving the car more gas, trying over and over again to start the engine, and the more they try, the more gas they give it, so rather than starting the engine, they have flooded it. The pistons are not in sync because the policymakers are not in sync.
     Perhaps this is because of ideological differences, but my guess is that our fiscal policymakers are out of sync with our monetary policymakers because when most fiscal policymakers open that federal gov’t hood and look inside, they’re afraid to admit that they really don’t understand how the modern model works.
     First the ideological differences: Some of your policymakers today are ‘Keynesian’ deficit doves and some are ‘Austrian’ deficit hawks. The Keynesian says that we shouldn’t worry about federal gov’t deficit spending because ‘printing money’ will not cause inflation, and the Austrian says that we should worry about federal gov’t deficit spending because ‘printing money’ will cause hyperinflation.
     Both are mistaken. In 1971, President Nixon unilaterally cancelled the direct international convertibility of the US dollar to gold, meaning from that day on, our US dollar was a pure, fiat currency, and the US officially entered the post-gold standard, modern monetary system. Since then, the US economy has never had a year on record without inflation, so the Keynesian is wrong about the ‘printing money doesn’t cause inflation’ thing. In fact, a 1971 dollar today is worth about 18 cents, but that decrease in purchasing power is the secret sauce. Newly-printed dollars are the engine lubricant that keeps the economic moving parts running smoothly, and a big advantage is that since 1971, the federal gov’t uses it’s own motor oil instead of borrowed motor oil. Since 1971, the federal gov’t is the sole issuer, the monopoly supplier, of the fiat brand of motor oil that the post-gold-standard era engine takes. Just like motor oil for any engine, more newly-issued dollars needs to be routinely added to our economy. Constant additions of newly-issued dollars, like motor oil, keeps our economy from seizing up and going into depressions (which the economy did six times before 1971 and also has never happened since). Furthermore, no monetary sovereign, in all of history, deficit spending with its own, pure, fiat currency, that is not convertible to anything, nor pegged to anything, and freely floats on a global foreign exchange market has never, ever, had hyperinflation, so the Austrian is wrong about the ‘printing money will cause hyperinflation’ thing as well. That said, both the Keynesian and the Austrian don’t need to fight an endless ideological battle between each other, because today, in this modern monetary system, both are needed very much at crucial times by the issuer of dollars and the users of dollars. So instead, the Keynesian (with a fear of deflation) and the Austrian (with a fear of inflation) should compromise, get it sync, and work together with each other.
     Let’s get back to what is really happening under that hood. During the gold standard era, the federal gov’t could not just ‘print’ gold out of thin air. Federal gov’t deficit spending was being financed by borrowing gold-backed dollars. For whatever amount of debt that was incurred, it meant that the federal gov’t was on the hook in gold-backed dollars. Back then, Step 1 was for the federal gov’t to get authorization from Congress to deficit spend. Step 2 was to issue bonds to borrow the gold-backed dollars. Step 3 was to pay the vendors. After officially replacing gold-backed dollars with pure-fiat dollars, federal gov’t deficit spending became a different paradigm. Now, the federal gov’t, the issuer of fiat dollars, can just issue fiat dollars out of thin air. Post-gold standard, Step 1 is still the same, the federal gov’t gets authorization to deficit spend. Step 2 is the federal gov’t prints new fiat dollars by clicking on a computer keyboard. Step 3 is to ‘credit’ the vendor’s bank account with that computer keyboard. Step 4 is to issue bonds in the same exact amount that was newly-printed, however, not to borrow that amount, but only as an accounting entry, a ledger posting, a ‘debit’, of that same amount of fiat dollars, to consolidate the federal gov’t balance sheet. So before, federal gov’t deficit spending added to an actual outstanding debt of gold-backed dollars (similar to a household borrowing more and causing indebtedness); now federal gov’t deficit spending subtracts from the purchasing power of all outstanding fiat dollars (similar to a company issuing more stock and causing dilution). A gold-standard era credit card that ‘monetized debts’ with gold-backed dollars was cut in half and replaced by a post-gold-standard-era debit card that ‘monetizes deficits’ with fiat dollars. What causes the puzzled look on most fiscal policymakers whenever looking under the hood these days is understandable, because the US Treasury and the central bank are still using an outdated, gold-standard-era driver’s manual. Those bygone instructions, that were taught to all of us long ago and still told to us today, stick to the narrative that the federal gov’t, the issuer of fiat dollars, needs to ‘borrow’ fiat dollars, however, what is actually going on under that hood is quite different. In the post-gold standard, modern monetary system, federal gov’t deficit spending has been ‘money’ (debit) financed for decades, yet still to this day, takes place behind what is only an archaic facade of being ‘bond’ (debt) financed. The national debt, what was once an actual debt of gold-backed dollars before 1971, is now nothing more than a national debit of fiat dollars.
     For the non-federal gov’t, nothing much changed in 1971. You, me, all households, all businesses, state & local gov’t, we are not issuers of dollars, we are still just users of dollars. For the non-federal gov’t, the users of dollars, it’s simple: We can deficit spend more if our personal debts are low, and we shouldn’t deficit spend more if our personal debts are high. For the non-federal gov’t, the users of dollars, the dashboard indicator is the same one that we have always used, and is easy to understand:
Scenario #1)

    USER OF DOLLARS dashboard ‘indicator’:

    No Debt—————————Too Much Debt

                                ^ 

This is the best scenario. The needle is balanced perfectly between ‘No debt’ and ‘Too Much Debt’. Servicing your debt is manageable, and the amount of your deficit spending is not too high, nor not too low:

= FINANCIAL SITUATION IS WELL UNDER CONTROL (No need to be a deficit hawk or a deficit dove, nor take any counter-measures, because the budget is in balance)...

 

 

Scenario #2)

    USER OF DOLLARS dashboard ‘indicator’:

    No Debt—————————Too Much Debt

         ^ 

You have no debt, no deficit spending, so the needle is all the way left. Not a bad problem to have, but not really a preferable scenario either:

= NEED TO TAKE ON MORE RISK…ADD INVESTMENTS USING LEVERAGE (Here is the time to be a deficit dove, because if the budget of any user of dollars is in balance, if not under any threat whatsoever of ‘running out of dollars’, users of dollars should take that opportunity to increase spending on investments to widen prosperity).

Scenario #3)

    USER OF DOLLARS dashboard ‘indicator’:

    No Debt—————————Too Much Debt

                                                                 ^ 

This is the worse scenario because it is the hardest to resolve. The needle has gone all the way to the right, meaning that the amount of your deficit spending has made servicing your debts unmanageable:

= NEED TO DELEVERAGE…BALANCE YOUR BUDGET (Here is the time to be a deficit hawk, because if deficits of any user of dollars gets too high, they may ‘run out of dollars’, so any user of dollars must reduce spending in order to get their budget in balance).  
062316 Budgets Are For Users
     The issuer of dollars is a completely separate paradigm from the user of dollars. The federal gov’t, the issuer of dollars, should use a different dashboard indicator, but sadly, because too many fiscal policymakers suffer from a federal-gov’t-is-the-same-as-a-household delusion, they don’t use it, despite also being very easy to understand:
Scenario #1)
ISSUER OF DOLLARS dashboard ‘indicator’:
——————0%——————2%——————
                                                ^
This is the best scenario, where the newly-created dollars that finance federal gov’t deficit spending & entering the money supply is closely matched by the newly-created goods & services entering the expanding economy. Those newly-created dollars are neither causing more than 2% inflation (dangerously subtracting too much purchasing power from all dollars) nor any deflation (dangerously adding too much purchasing power to all dollars). In this optimum economic environment, the decrease of purchasing power of all dollars is contained to a desired level of inflation, just under 2%, the perfect margin of safety away from 0%:
= STRONG GROWTH SUSTAINED, MONETARY POLICYMAKER MANDATE OF PRICE STABILITY ACHIEVED…No need for the deficit hawks nor the deficit doves to prod their fiscal policymakers to take any counter-measures, because the economy is balanced. However, fiscal policymakers could still strive to correct remaining social imbalances, by addressing wealth inequality, and creating opportunities for all those that are not benefiting from the growing economy, like the underemployed, the unemployed, or the non-participating (Collateral damage from that ugly, yet just-as-important, other blade side on the sword of capitalism).
Scenario 2)
ISSUER OF DOLLARS dashboard ‘indicator’:
——————0%——————2%——————
                                                                     ^
Not a good scenario, but an easy problem for both monetary & fiscal policymakers to solve. In this scenario, newly-created dollars that finance federal gov’t deficit spending & entering the money supply is overpowering the newly-created goods & services entering the economy. Too many dollars chasing too few goods has resulted in inflation over 2%:
= INFLATION WARNING: MONETARY POLICYMAKERS SHOULD REDUCE ACCOMMODATING MEASURES (RAISE INTEREST RATES), WHILE FISCAL POLICYMAKERS SHOULD REDUCE STIMULUS MEASURES (LESS FEDERAL SPENDING AND/OR RAISE FEDERAL TAX RATES) TO GET THE ECONOMY BACK IN BALANCE…(Here is the time for the deficit hawks, taking the cue from their monetary policymakers, to prod their fiscal policymakers to act, but note, it’s a separate paradigm, the issuer of dollars is reducing spending to get the economy that is running too hot in balance, NOT to get the budget in balance).
Scenario 3)
ISSUER OF DOLLARS dashboard ‘indicator’:
——————0%——————2%——————
                        ^
In this scenario, the newly-created dollars that finance federal gov’t deficit spending & entering the money supply is getting overpowered by the newly-created goods & services entering the economy. Too many goods and services chasing too few dollars has resulted in disinflation to levels near zero which is threatening to worsen into a full-blown deflationary spiral. This is the worst scenario, the situation that many countries are stuck in today, and not an easy problem to solve, especially if fiscal policymakers fail to act because they think like users of dollars:
= DEFLATION WARNING: MONETARY POLICYMAKERS SHOULD INITIATE ACCOMMODATING MEASURES (LOWER INTEREST RATES), WHILE FISCAL POLICYMAKERS SHOULD INITIATE STIMULUS MEASURES (MORE FEDERAL SPENDING AND/OR LOWER FEDERAL TAX RATES) TO GET THE ECONOMY BACK IN BALANCE…(Here is the time for the deficit doves, taking the cue from their monetary policymakers, to prod their fiscal policymakers to act, but again note, it’s a separate paradigm, the issuer of dollars is increasing spending to get the economy that is running too slow in balance).
     In conclusion, unlike the users of dollars, the dashboard indicator for the issuer of dollars is the current rate of inflation, not the current amount of debt. The perfect inflation rate, one that provides a margin of safety, is just under 2% per year. This 2% annual decrease in the purchasing power of all outstanding dollars, this slight level of inflation, is much more preferable to the alternative, which would be dangerously low inflation, or worse, outright destructive deflation. What determines how much the federal gov’t, the issuer of dollars, should deficit spend, is ALWAYS to keep inflation balanced, to keep the economy in balance, and NEVER to keep a budget balanced.
     The questions that fiscal policymakers need to ask themselves while looking under the hood: Is that newly-created demand entering the economy from that federal govt deficit spending increasing aggregate demand (?) Are the newly-created dollars entering the economy from that federal govt deficit spending stoking inflation (?)
     OR, is the stimulative effect of that newly-created demand and the inflationary bias of those newly-created dollars vaporizing on impact (?)
     If so, then please give your monetary policymakers a hand, and adjust that choke.
Happy driving,
Eddie D  <eddiedelz@gmail.com>
P.S. SPECIAL THANX TO  @netbacker  FOR HIS SUGGESTIONS THAT INSPIRED THIS POST…(Follow @netbacker on Twitter for more about the economy).

Almost All Swiss Gov’t Bonds Have Negative Yield

Almost all Swiss federal bonds issued by the Swiss federal gov’t have a negative yield, so do the Swiss people still think of those bonds as the federal gov’t ‘borrowing’ (?)

061716 From 1 Month to 33 Years, Almost the Entire Yield Curve for Swiss Bonds is Negative

Do Swiss ‘deficit hawks’ think that further Swiss gov’t bond issuance that increases federal debt (that *literally* makes money for the Swiss gov’t)…is…’unsustainable’ (?)

Take a look at a bill from inside your wallet. You are staring at a zero-coupon perpetual bond issued by your federal gov’t. Do you consider that as your federal gov’t being in ‘debt’ (?)

Take a close look at this WSJ graph above…

Which one of the four countries is NOT like the other?

If you said ‘Germany’, no need to read any further, see you at the luau buffet at sunset.

For the rest, may I explain, of the 4 countries above, Germany is NOT a monetary sovereign…

Germany is a sovereign, yes, but not a monetary sovereign like Japan, the United States, or Switzerland…

Germany is like a U.S. state, sharing a currency with other sovereigns, within one federal monetary sovereign…

So for a non-monetary sovereign like Germany (a currency user),

to be included in the same graph with Japan, the US, or Switzerland (a currency issuer),

…is like comparing apples to oranges at best; or at worst it doesn’t give the credit that a Eurozone ‘member state’ actually being in the same ballpark as a monetary sovereign, is due. In fact, in the article, the WSJ narrative is that Germany was “outdone” by Switzerland. Here’s a reality check on that WSJ narrative: In 2015, Germany, a member state of the Eurozone, had the US dollar equivalent of $1T in government revenues, which worldwide, was ranked third, only behind China ($2T), and the United States ($3T), while Switzerland was way down that list at $175 billion.

The German federal government, a member state of the Eurozone, just like any US ‘member’ state or US state gov’t, just like any user of currency, needs to ‘get’ currency from someone else to finance deficit spending in that currency. Switzerland, however, an issuer of currency, unlike Germany, doesn’t need to ‘get’ that currency to finance deficit spending. The Japanese federal gov’t, the issuer of currency, unlike Germany, doesn’t have to ‘borrow’ currency to deficit spend in that same currency. The United States federal gov’t, the issuer of currency, unlike a US state gov’t, unlike Germany, unlike any users of currency, doesn’t have to ‘borrow’ that currency, from anyone, not anymore, not since become a monetary sovereign issuing a pure fiat currency.

Those German gov’t bonds are actual ‘debt’ (because they are denominated in a currency that, as a non-monetary sovereign, Germany cannot issue). Those Japan, US, and Switzerland federal gov’t bonds are not actual ‘debts’ (because they are denominated in a currency that, as monetary sovereigns, they can issue). Those Japan, US, and Switzerland federal gov’t bonds are nothing more than accounting entries, ledger postings, ‘debits’, that consolidate a balance sheet to simply keep record of the newly-created fiat currency that was added, that was ‘credited’, to the non federal gov’t. To help remove the specter of ‘debt’, so that policymakers can enact productive, desperately-needed, counter-cyclical fiscal measures that would stimulate their economies, perhaps Japan, the US, and Switzerland’s ‘debts’ should be called ‘debits’ (?)

Those German gov’t bonds are actually part of what is called the ‘credit markets’ because like the bonds of any other non-monetary sovereign, business, or household, those bonds could default, there is credit risk. As users of currency, any non-monetary sovereign, business, or household could become insolvent, it could ‘run out of currency’. However, the federal gov’t bonds of Japan, the US, and Switzerland will not default, unless intentionally by nihilistic politicians, so there is practically no credit risk. Any monetary sovereign, as issuers of a currency that is not convertible and free-floating, could never become insolvent, they will never ‘run out of currency’. So that the people could stop seeing their federal gov’t less as ‘borrowing’ currency, and more as offering a service of ‘safekeeping’ currency, as a seller of term deposits, more like fully-insured central bank CDs, perhaps the marketplace for Japanese federal gov’t bonds, US federal gov’t Treasury bonds, and Switzerland federal gov’t bonds should just be called the ‘debit’ markets (?)

(So that people like central bankers, politicians, and WSJ reporters don’t confuse them.)

 

 

 

Eddie D   <eddiedelz@gmail.com>

Source: http://blogs.wsj.com/moneybeat/2016/06/16/from-1-month-to-33-years-almost-the-entire-yield-curve-for-swiss-bonds-is-negative/

 

A Suggestion For MMT

Today we say ‘Gov’t v. Non Gov’t’…

We say that ‘Gov’t Deficits = Non Gov’t Surpluses’, which makes it clear, and that is good…

But on a given day, if the federal government deficit spent and added newly-created, high-powered dollars into the money supply which ONLY went to state & local gov’t, this isn’t captured with just Gov’t v. Non Gov’t. For example, if the federal gov’t deficit spent only to state & local gov’t, for grants, infrastructure, workforce development, or medicare/medicaid reimbursement, the Gov’t v. Non Gov’t model shows net nothing happened. Meaning with this present two-sector model, we are missing that improvement of those state & local government’s financial standings due to that significant state & local surplus, which also decreases their municipal bond ‘leverage vulnerability’…

Conversely, in a misguided effort by policymakers to attain federal gov’t surplus, if they were to cut federal funding to the state & local gov’t, again, this model doesn’t reflect state & local gov’t savings deficits that will have negative economic effects to their financial standing. In addition, that may spill over to decrease private sector savings, threatening the private sector’s financial standing, which may not only increase the state & local ‘leverage vulnerability’, but the private sector’s as well…

Perhaps we could improve on the Gov’t v. Non Gov’t model and make it even better? Not to say that there is anything *wrong* with it, just offering an idea that may improve it. We’d still be crank-starting cars if we stopped tweaking them, right? So here’s a suggestion: How about we slide state & local gov’t over with the private sector, and instead say Federal gov’t v. Non federal gov’t…

I believe this modification would go a long way, not just in a slightly better illumination of financial flows, but also in helping the uninitiated better understand and more easily accept the concepts of Modern Monetary Theory (MMT). The ‘issuer’ of dollars v. the ‘users’ of dollars will start to make more sense to more people. This may also have a far-reaching cauterization effect that may heal the political divisiveness that has been so detrimental to solving America’s problems. If we no longer commingle federal gov’t with state & local gov’t, more folks with hard-wired ideology and confirmation bias may begin to understand what ‘the-federal-gov’t-is-not-the-same-as-a-household’ and by extension ‘the-federal-gov’t-is-not-the-same-as-a-state-&-local-govt’ really means. This is a compromise to all the ‘Fiscal conservatives’ and ‘Deficit hawks’ who can continue to fight their good fight for state & local gov’t to get their fiscal houses in order, while at the same time becoming less suspicious of MMT proponents if they, as we, see the federal gov’t as a separate paradigm…

Take these three entities:

A) Federal gov’t  B) State & local municipal gov’t  C) Private sector households & businesses

Of the entities above, which one, or two, and/or maybe all three, match these scenarios:

1) This entity has the AUTHORITY TO TAX…2) The taxation by this entity MUST be done to finance its spending…3) Once all revenue inflow (no matter what source) is exhausted, this entity MUST then borrow dollars to spend…4) In order to borrow, dollars must be LENT to this entity (this entity must ‘get’ dollars from someone else)…5) When borrowing dollars, this entity goes into actual DEBT…6) All of this entity’s debt must be ‘PAID BACK’…7)  This entity is the ‘ISSUER’ of dollars…8) This entity is a ‘USER’ of dollars…9) In the game of Monopoly, this entity is more like ‘BANKER’…10) In the game of Monopoly, this entity is more like ‘PLAYER’…11) This entity IS NOT revenue constrained (it always has unlimited dollars)…12) This entity IS revenue constrained (it only has limited dollars)…13)  This entity needs to BALANCE THE ECONOMY because it will never run out of dollars…14) This entity needs to BALANCE THEIR BUDGET or else they will run out of dollars…15) This entity acts for the greater good and a common cause for ALL people…16) This entity acts as either a ‘non-profit’ or a ‘for-profit’ only for CERTAIN people…17) This entity IS the ‘Lender-of-last-resort’…18) This entity IS NOT the ‘Lender-of-last-resort’ 19) This entity has NEVER experienced a missed interest payment, a debt restructuring, or actual default of their debt (this entity has very little leverage vulnerability)…20) This entity MAY have in the past experienced a missed interest payment, a debt restructuring, or actual default of their debt (this entity has some leverage vulnerability)…

How many times did you choose Federal gov’t AND State & local govt together at the same time…once or twice (?)

How many times did you choose State & local govt AND Private sector together at the same time…more than that (?)

If it walks more like a duck….and it sounds more like a duck…why not start calling it a ‘Non federal government’ duck (?)

 

 

 

 

eddie d   <eddiedelz@gmail.com>

 

President Jackson Demoted

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Here’s what they *should* say why President Andrew Jackson, the seventh President of the United States, was bumped to the backside of the $20 bill:

He was moved to the back of the Twenty because he paid off the national debt…(Yes, you read that right).

As counter-intuitive as it sounds, paying off the national debt, running federal gov’t budget surpluses, a spending sequester, are all glaring examples of why that federal-gov’t-is-the-same-as-a-household groupthink has it all backwards. To pay off the national debt, President Jackson’s administration ran sustained budget surpluses for 7 straight years (meaning sustained public sector deficits was replaced with sustained private sector deficits)…

Two years later, the Panic of 1837, the U.S. economy went into a depression, banks became insolvent, business failures rose, cotton prices dropped, and unemployment dramatically increased…

That depression lasted for four years until 1841 when, the national debt went back to increasing again (meaning private sector deficits switched back to private sector surpluses), and the economy began to rebound…

Not convinced? Take a look at these dates:

1817-1821

1829-1836

1852-1857

1867-1873

1880-1893

1920-1930

These dates above were the 6 periods in American history when the US federal gov’t had substantial yearly budget surpluses meaning, at the very same time, and by accounting identity, the non-federal-gov’t (everybody else) was being subjected to ‘savings deficits’. Next look at these dates:

1819

1837

1857

1873

1893

1929

These dates above were the starting years of all six economic depressions in U.S. history. Now let’s put all the dates together:

1817-1821 federal gov’t surpluses and the 1819 Depression

1829-1836 federal gov’t surpluses and then the 1837 Depression

1852-1857 federal gov’t surpluses and then the 1857 Depression

1867-1873 federal gov’t surpluses and then the 1873 Depression

1880-1893 federal gov’t surpluses and then the 1893 Depression

1920-1930 federal gov’t surpluses and then the 1929 Great Depression

Coincidence?

Here’s another example of federal gov’t surpluses having its fingerprints on economic downturns: The 2001 recession was also preceded by federal gov’t budget surpluses. The ‘Bush recession’ was triggered by the ‘Clinton surpluses’. In my opinion however, the economy was very strong during Clinton’s second term, not to mention that dot com internet stock hysteria was reaching full ‘silly-crazy’ stage, so in that particular case, those short-lived surpluses were justified, because they were analogous to tapping the brakes. Masterfully, that 2001 recession was a mild one because Clinton’s successor, incoming President George W. Bush, with both the Congress and the Fed Chair Alan Greenspan’s blessings, quickly resumed federal budget deficits with tax cuts passed on June 7, 2001 (a rare example of both monetary and fiscal policymakers being in sync and turning their launch keys at the same time)…

Alexander Hamilton, the first United States Secretary of the Treasury, who, it was also announced today, will remain on the front of the $10 bill, said in 1790, “A national debt, if it is not excessive, will be to us a national blessing.” (No mention of paying it off, in fact, he argued for the usefulness of safe, easily traded federal debt, that would provide a store of value, as collateral for deals, as a lubricant for business activity, making the economy more productive, which he predicted would help our new nation someday surpass England as a world power)…

Unless you truly need to slam the brakes on growth, and you actually want to slow down the velocity of those twenty dollar bills, sustained and prolonged federal gov’t surpluses throughout American history are a fiscal policymaking case study of What Not To Do.

 

 

Eddie D  <eddiedelz@gmail.com>

April 15th Tax Day is the “Big blind”

Today, in the post-gold-standard era, and especially on tax day April 15 (April 18 this year because of the Emancipation Day holiday in Washington, D.C.), the present narrative that the US federal government must collect federal taxes in order to finance it, is analogous to the federal government saying that it must hitch horses to its brand-new 2016 Ford Pickup in order to pull it.
Here’s another analogy regarding those federal taxes for Texas hold ’em poker fans:
Imagine a casino, not your ordinary casino, but one with the most action in the history of mankind, with many poker tables inside, and each of the separate poker tables are just like a separate local and state gov’t inside that casino, the federal gov’t. Then picture local and state taxes being like the “Rake”; and federal taxes being like the “Ante”, or more precisely, the federal taxes are like the “Small blind” and the “Big blind”. The players pay all rakes and blinds (federal, state & local taxes) with casino-issued chips (federal, state & local tax credits)…
The blinds are different from the rake. The blinds (the federal taxes) paid before dealing each new hand do not finance that poker table; instead, the rake (local & state tax) confiscated from the winning pot finances that poker table. This is because the casino (the federal gov’t) is the issuer of chips, while each of the poker tables throughout the casino (the state & local gov’t) are not the issuers of chips. The poker tables and the poker players are the users of chips…
The casino never worries about getting chips. Only the tables and the players worry about getting chips, while the casino has other, much more important things to worry about. The casino doesn’t get their chips from players from China, from Japan, not from anyone. Unlike the tables or the players, the casino issues the chips by fiat. The casino is who first enters the chips into existence. The tables get their chips from the casino. The players get their chips from the tables…
Rather than funding the poker table or the casino, those blinds prevent all poker players in the casino from just waiting to be dealt pocket aces, or never risking their chips unless they get a royal flush on the river card. The blinds are just making sure that all players, especially those few players with a lot of chips can’t just sit there, hoarding their chips, never calling a bet, and never slide anything into the middle of the table…
The rake ‘funds’ the tables, while the blinds ‘facilitate’ the tables. Local and state gov’t finances itself by raking some of your chips, but unlike that rake, the purpose of the blinds is not to finance anyone. That Big blind (that federal tax) players must pay once every round (every April 15th) is an imposed redistribution of chips. In addition, both those small and big blinds speed up the game, they increase chip velocity, by creating an urgency to play because those blinds remind the players that they will bleed their chips away if they stop trying to win more chips…
Most important, the rake and the blinds must be paid for, can only be paid for, with just those casino-issued chips (those federal, state & local tax credits). Throughout the casino, no matter which table you play on, you can only spend those casino-issued chips, which gives full monopoly control of the flow of those chips, full power over the entire chip dominion, to the casino, the sovereign issuer…
The users of chips, the local & state gov’t, as well as all the players, stay focused on either breaking even or winning. Meanwhile the issuer of chips, the federal gov’t, stays focused on growing the action, improving the casino, adding gaming diversity to the floor, or upgrading the facilities, which gins up enthusiasm for more people to play. The federal gov’t is also that ‘eye in the sky’ that watches for cheats or other criminal activity to make players feel secure…
In the post-gold-standard, modern monetary system, it’s important to understand the dynamics between the rake (collected by the non-sovereigns) and the blinds (imposed by the monetary sovereign). The purpose of the rake is to fund that table (local & state gov’t); and the purpose of the blinds is for the casino (federal gov’t) to create your need to keep trying to get more of those chips, which leads to more consumption using those chips, in a perpetual pursuit of profit and/or happiness…
It’s not those chips that the federal government needs from you today, it’s your work at the tables, your interactions with the players, and your spending of those chips that it always only needs.
Many happy (federal) returns,
eddie d  <eddiedelz@gmail.com>

All About That Base

Just a thought…
Going back to the start of the Large Scale Asset Purchase (LSAP) program right after the Lehman bankruptcy in Sept ’08…
The reason why those bond ‘kings’ and hedge fund ‘stars’ predicted that so-called QE, QEII, III, etc., would cause massive hyperinflation and sky-high interest rates were so wrong, was because as we (hopefully) now know, there’s a difference between the newly-printed dollars that finance deficit spending (that add net financial assets into the banking system), and the newly-printed dollars that financed LSAP (that do not add any net financial assets to the banking system). The reason why LSAP was not an increase of dollars in the banking system, why it had nothing to do with the money supply at all, and why it had no inflationary bias whatsoever, was simple: The Fed was only swapping newly ‘printed’ reserves going into the monetary base, for bonds, for the exact same amount, that were ‘unprinted’ out from the secondary bond market. If you understand that, then consider yourself ahead of the mainstream media, all fiscal policymakers, and all those Very Smart People like Nobel-laureate economists that constantly bark fake narratives using outdated gold-standard mentality over the airwaves today…
Outside of normal Open Market Operations (OMO), there are two scenarios where that present * $2.3T balance of reserves that were previously printed by buying Treasury bonds from banks during LSAP could be reduced by selling Treasury bonds to banks. More specifically, when those $2.3T of reserve balances are transferred from that bank’s checking account at the Fed (the Reserve account) into that bank’s savings account at the Fed (the Securities account)…
In the first scenario, a bank purchases more Treasury bonds outright, on its own volition, directly from the Treasury, at initial offering in the primary market, paying for those Treasury bonds with their reserves, reducing their amount of reserves sitting at the Fed, decreasing the net amount of total reserves in the monetary base. ‘Net’ because this is not a bank or financial institution buying bonds from (or trading bonds with) another bank or financial institution, which would only be a reallocation of reserves. (Out of a total of approx $4.1T in reserves that were printed during LSAP to buy both Treasury and Mortgage-Backed Securities, this has already been happening to the tune of $1.8T in total Fed reserves reduced)…
In the second scenario, a bank purchases Treasury bonds, not on its own volition, but directly from the Fed, in the secondary market, after that bank is ‘assigned’ Treasury bonds, not for OMO, but in an intentional Fed unwinding of LSAP.  Again, those bonds are paid for by that bank’s reserves, reducing their amount of reserves sitting at the Fed, decreasing the net amount of total reserves. (This has not happened, nor will ever, unless the Fed decides to unwind their balance sheet +/or there is a sudden, unexpected US economic boom that is so strong that the Fed needs to slam on the brakes and quickly ‘unprint’ reserves to drive interest rates higher)…
Unless those $2.3T in reserves are not significantly reduced by either of these two scenarios and the banks continue to let their reserves sit idle deep in the monetary base down below, then for reasons beyond LSAP’s good intentions, we shouldn’t expect much change in the money supply up above.
In the meantime, what if we monitored the changes of those total Fed reserve balances that are reported every week. If the balance increased, we should interpret that as financial institutions and investors taking caution (a ‘risk-off’ yellow flag); and if the balance decreased (a ‘risk-on’ green flag), it means they throttled up (?)
If you agree, here are those quarterly numbers:

 

Consolidated Statement of Condition of All Federal Reserve Banks
 ‘Other deposits held by depository institutions’  (total reserves at the Federal Reserve bank)
Fed balance sheet liabilities (In millions of dollars):
DATE FED RESERVES  EVENTS
03/30/17

12/31/16

09/30/16

2,337,776

1,942,983

2,085,237

03/15/17 Third Fed rate hike

01/20/17 US President Donald Trump inaugurated

12/31/16 Investors poured a record $97.6 billion into U.S. equity ETFs since the U.S. election

12/14/16 Second Fed rate hike

11/08/16 Donald Trump elected US President

06/30/16 2,199,119 06/24/16 Brexit
03/30/16 2,336,086
12/30/15 2,208,683 12/16/15 Janet Yellen announces ‘liftoff’, the first rate hike by the Fed since June 2006, which closes the chapter on an unprecedented era of easy monetary policy
09/23/15 2,602,196
06/24/15 2,493,529
03/25/15 2,737,802
12/24/14 2,609,635
09/24/14 2,707,185 10/29/14 US Federal Reserve Chair Janet Yellen announced it is ending LSAP that added approx $4T worth of assets to its holdings ($2.4T UST + $1.7T MBS)
06/25/14 2,628,060
03/27/14 2,611,169
12/25/13 2,450,733 12/18/13 The Federal Reserve announced Wednesday it would start to taper its aggressive bond-buying program to $75 billion a month beginning in January
09/25/13 2,307,013 9/18/13 The Federal Reserve holds its asset purchase program steady, putting off any decision for tapering until later in the year
06/26/13 2,017,729 7/19/13 Ben Bernanke says the Fed could begin to taper its purchase of bonds later this year, if the economy continues to improve as Fed officials expect
03/27/13 1,829,612
12/26/12 1,532,687
09/26/12 1,470,536
06/28/12 1,491,988 9/13/12 FOMC announces continued LSAP beginning in September 2012 (“QEIII”)
03/29/12 1,564,982
12/28/11 1,569,267
09/28/11 1,608,996 9/30/11 FOMC announces re-investment of maturing MBS into UST ceased (to instead re-invest in more MBS to maintain MBS level)
06/30/11 1,622,395 6/22/11 FOMC announces re-investing principal to maintain total balance sheet $2.6T level
03/31/11 1,458,165
12/30/10 1,020,726
09/30/10 984,139 11/3/10 FOMC announces continued LSAP from November 2010 to June 2011 (“QEII”)
06/24/10 1,062,348 8/10/10 FOMC announces re-investing principal to keep levels current
03/25/10 1,147,747
12/31/09 1,025,271
09/24/09 903,044
06/25/09 745,173
03/26/09 822,412
12/29/08 819,404 3/18/09 FOMC announces  Large-scale Asset Purchases (LSAP) to last from Spring 2009 – Spring 2010 (“Quantitative Easing”)
09/25/08 95,301 9/15/08 Lehman Brothers bank filed for bankruptcy, the largest in US history
06/26/08 12,833

* (Note: This is an updated version of the original post from April 2016)