The National Deb(i)t

  • Dog Ear Publishing, LLC (March 4, 2015)

Edward J. Delzio


Second Edition

How the Post-Gold-Standard

Modern Monetary System Really Works
















          There is an innocent false impression of our present day economic ecology that widely exists today. This collective misunderstanding mostly arises from a failure to distinguish the completely separate monetary functions of the United States federal government, from the monetary functions of everyone else. Since the gold-standard era ended, the federal government operates under a new paradigm, different from what we were taught long ago, and different from what we are still told today. Certain idiosyncratic relics from that bygone-gold-standard era, like the formality of needing to raise a debt ceiling to increase federal government deficit spending, or the tradition of selling Treasury bonds to finance that spending, still clumsily coexist with today’s post-gold-standard reality. As a result, the important needs of the rest of us, to balance our individual budgets, are routinely confused and often commingled with the more important needs of the federal government, to balance their entire economy.

          In the gold-standard era, the U.S. federal government, then a user of dollars backed by gold, needed to finance deficit spending by raising revenue via taxation, or by selling debt in the form of bonds, which are today called U.S. Treasury bonds. When it left the gold standard, however, the federal government completely changed, from being a user of dollars (backed by gold), to becoming the issuer of dollars (that are not backed by gold). Today, in the post-gold-standard era, the function of financing federal government deficit spending has also completely changed, and Treasury bonds now play a new multifunctional role in our modern monetary system.

          All U.S. Treasury securities (short-term bills, medium-term notes, and long-term bonds) are a safe investment for all users of dollars because all U.S. Treasury securities are risk-free, interest-bearing, time deposits in the Securities, or savings account, at the U.S. central bank, the Federal Reserve. Treasury bonds are actively traded in a liquid global Treasury bond market which serves as a safe harbor for dollars taking flights to quality away from risky assets, into risk-free assets like Treasury bonds, during global market turbulence. Treasury bonds are used in monetary policy to set the ‘price’ of dollars, or, the interest rate of money, and to keep the economy growing smoothly by accommodating or tightening economic conditions to achieve full employment and price stability. Treasury bonds are used in fiscal policy to help grow the economy whenever increased federal-government deficit spending is needed to stimulate aggregate demand. Furthermore, Treasury bond issuance today serves to neutralize the inflationary bias of newly printed, freshly created, fiat dollars that now finance federal government deficit spending. Note that’s only an inflationary ‘bias’, because unlike being able to determine the EXACT dilution of outstanding shares of company stock when creating new shares; when it comes to inflation, there are way too many moving pieces at play for anyone, to reach any conclusions, with any specific formulas (like the now debunked ‘Quantity Theory of Money’), about any direct relationship between newly-created dollars and the dilution—if any—of purchasing power.

          The federal government is the issuer of dollars, and everyone else—you, me, all households, all businesses, any U.S. local cities, U.S. states, or foreign governments (all together, this book will refer to these as the “nonfederal government”), are the users of dollars. In today’s modern monetary system, dollars are added by federal-government deficit spending, and they multiply from nonfederal-government deficit spending. All dollars are ‘printed’, or keyboard-created, by both federal-government and nonfederal-government deficit spending, and far from being a problem, this is how the economy grows. Injections of newly created dollars from both federal-government deficit spending and nonfederal-government deficit spending kick that flywheel, a yin-yang of supply and demand, to keep it spinning in a steady balance along with all other existing dollars in the economy. Post gold-standard, the federal government, the issuer of dollars, doesn’t need to borrow dollars to deficit-spend anymore, but the nonfederal government, the users of dollars, still does.

          We should all rethink the concept of federal government debt, or more specifically, not let ourselves be intimidated by it, because there is no such thing as the issuer of dollars needing to borrow its own dollars, as long as those dollars are no longer fixed, nor convertible to anything. The issuer of dollars can always issue more dollars, so it never has debt in dollars (a liability, yes; an actual debt, no). Therefore, since leaving the gold standard, Treasury bonds, and all other Treasury securities which are all denominated in dollars, are more like ‘bondholder’s equity’ rather than debt. The issuer of dollars can always return the dollars to holders of maturing Treasury bonds, and the issuer of dollars can always pay the dollars in interest income due from those Treasury bonds, so Treasury bonds will never default for a lack of dollars. Treasury bonds could default if poor choices are made by policymakers; however, the insight is that the issuer of dollars will never default for ‘running out of dollars’ like a user of dollars. Today, instead of being actual debt, Treasury bonds are merely debits (from the issuer of dollars) offsetting equal and opposite credits (to the users of dollars).

            Since leaving the gold standard, Treasury bond sales and federal tax collections are not needed to finance spending because the ‘financing function’ of Treasury bonds and federal taxes have taken the back seat to other functions, like maintaining the ‘political constraint’ to federal spending, maintaining price stability in the economy and maintaining the demand for fiat dollars. Post-gold standard, the issuer of fiat dollars spends first and then collects dollars—not the other way around. Because federal taxes must be paid in dollars, federal taxes serve to make us need dollars, to go out and earn the dollars needed to pay federal taxes; thus, in the post-gold-standard era, federal taxes generate the initial velocity of dollars. Rather than see those Treasury bonds as debt, better to think of them as financial ‘products’ like bank Certificates of Deposit sold to ‘customers’ seeking investments paying risk-free fixed income (sold to fulfill the savings desire of Main Street consumers).

          The federal government has full monopoly control over dollars. The U.S. central bank, our Federal Reserve Bank, operates independently yet is part of, or within, the federal government, the issuer of dollars. The Fed facilitates everyone in both the federal government and the nonfederal government to deficit spend (to ‘print’ money). The Fed routinely swaps dollars for assets, or transfers dollars between its Reserve and Securities accounts, on a daily basis to provide liquidity for the proper functioning of markets. Acting as the banking agent for the federal government, the Fed, via monetary policy, mainly adds or drains existing dollars to and from the monetary base to attempt to influence interest rates. As mandated by Congress, the Fed does this to try to achieve suitable conditions that will accommodate steady economic growth, full employment, and price stability. Extraordinary monetary policy and even an emergency ‘printing’ of dollars (a creation of dollars intentionally designed to enter money-supply circulation) on the part of the Federal Reserve Bank or any other central bank is only needed to contain a financial panic—as a last resort to counterbalance political fiscal policies if they are pro-cyclical (if they are unintentionally magnifying) poor economic conditions.

          The nonfederal government, the users of dollars, has a desire to save dollars. Federal-government deficit spending fulfills this savings desire. Far from being a problem, federal-government deficit spending increases the nonfederal-government savings surplus by exactly the same amount. Without federal-deficit spending, all of us in the nonfederal government would have a harder time fulfilling our savings desires, which would lead to excess hoarding, and cause deflation. During the gold standard, if too much gold was saved, or hoarded, usually in response to a financial panic, the federal government could not issue more gold, which resulted in depressions. Since leaving the gold standard, however, the federal government, the issuer of dollars, can now always meet nonfederal-government savings desires by simply lowering federal taxes, or increasing deficit spending (issuing more dollars) without worrying about having enough gold to back those dollars. As a result, since leaving the gold standard, the United States has avoided depressions.

            The traditional formality of using the outstanding amount of all Treasury bonds as the running count of all federal government deficit spending remains, because federal government deficit spending should never be arbitrary. As per the U.S. Constitution’s Appropriations Clause (Article 1, Section 9, Clause 7), our country’s cornerstone of the “power of the purse”, federal government deficit spending is controlled, or limited, by Congress. This running total, the so-called “national debt”, is not actual federal debt anymore, but is still a useful measure, an important vital sign of the economy. The amount of federal government deficit spending tells us precisely at any given moment what amount would not be needed if aggregate demand in the economy were strong enough, healthy enough, to not depend on federal-government stimulus. Those legs of mass production and mass consumption, along with those arms of Congress and the president, if in sync, should keep us moving without too much federal-government deficit spending, without excess federal-government stimulus. The amount of federal-government deficit spending the economy needs to keep growing tells us by how much our economy has strayed away from being in balance; however, not from a balanced federal budget standpoint, but from a balanced national economy standpoint. In other words, how much the federal government deficit-spends should not be focused on balancing a gold-standard-era federal government budget, but instead on balancing the entire post-gold-standard national economy. For example, in the modern monetary system, if total aggregate demand is too strong, (if mass consumption is overpowering mass production), the federal government must decrease deficit spending to get an economy in balance, not to get a budget in balance.

          Congress should use the debt ceiling as an opportunity to improve the economy and create results for constituents, instead of as a weapon to bludgeon other policymakers, because the debt ceiling is an anachronism from a previous era of dollar convertibility to gold. In the post-gold-standard, modern monetary system, dollars should be spent by a proactive federal government according to present economic conditions, not past self-imposed constraints. Adjustments in federal government deficit or surplus spending should counterbalance slowing or accelerating nonfederal government spending. For example, if aggregate demand is too weak, increased federal government deficit spending is needed; if aggregate demand is too strong, decreased federal government deficit spending is needed. People who fear raising the debt ceiling because it would cause more federal-government deficit spending and lead to long-term weakness and instability fail to see that precisely because of federal-government deficit spending, this country has had many years, and will continue to have many more, of economic strength and stability.

          Today, our federal government, now the issuer of dollars, is no longer a business, and the federal government does not have a profit motive like the users of dollars. The federal government, now the largest economy, and the world’s sole superpower, has a higher calling, a greater purpose, to promote democracy and expand freedom across the globe. In the post-gold-standard modern monetary system, the federal government, the issuer of dollars, should always strive to have a balanced economy, which widens prosperity. Conversely, the nonfederal government, the user of dollars, just as during the gold-standard era, remains a business, still has a profit motive, should spend within its means, and should always strive to have a balanced budget, which maintains that prosperity.



            Imagine you are sitting in a packed stadium, watching your favorite team at a home game for the championship title. Both teams are making tremendous plays; the score is very close, and then suddenly your team gets hot and starts scoring again and again. Soon, it becomes a blowout and your team is absolutely sure to win, but instead of the crowd going wild with joy, they go suddenly quiet, then start getting worried and frightened. Why? Because everyone watching the game has been led to believe that if their team keeps scoring, the stadium might run out of points. The crowd gets concerned that continuing to put so many of these points on the scoreboard may be unsustainable, so they wonder if the stadium should slow down, or maybe even stop putting any more points on the scoreboard. Even worse, if the stadium isn’t able to pay for all these points put up, then the balance due will create a debt that will affect future games. All of the spectators are getting disgusted at the thought of this reckless, out-of-control point-giving by the stadium and upset at the thought that this stadium will be dumping the burden of paying for all that debt of points into the future onto the backs of the crowd’s children. The fans get so terrified at the thought of all this crushing indebtedness of points that the leaders in charge decide to stop play and the stadium is shut down.

            This is what is going on in our federal government today because of the present collective fiction on many issues related to our monetary system, federal deficits, and the national debt. People look up at a sinister-looking U.S. National Debt clock in midtown Manhattan ticking away at around 18 trillion dollars, and they are told that it represents some unsustainable, catastrophic doom.

            Instead, they should be imagining another clock, with a less negative outlook, perhaps one called the U.S. Household Net Worth clock (which ticked over 80 trillion dollars in 2014). They should imagine a U.S. Standard of Living clock ticking away even faster, with even more impressive amounts, decade after decade, generation after generation. Yet instead of the crowd being ecstatic that their home team is beating the competition, that their players are the best in the world, playing in the greatest stadium in history, they just keep worrying themselves sick over an imminent default or other nonexistent threat to the financial security of the country.



            In late summer of 1983, about a month after starting entry-level work at RMJ Securities, a U.S. Treasury bond brokerage shop in the financial district of New York, I finally got the nerve to ask coworkers: “What is a Treasury bond?” I kept getting wildly different answers—mostly that they were IOUs on our country, or that they were debt of the government from world wars, or, whatever they were, because of them, America would soon go bankrupt. This was also the first time I ever heard the word ‘trillion’, after one coworker read out loud from that day’s Wall Street Journal that the national debt was now over that amount, meaning our country owed over A TRILLION DOLLARS, the amount of outstanding Treasury bonds. Fast forward thirty years later to 2013, the Japanese public debt exceeded A QUADRILLION YEN—that sounds scary, doesn’t it? You bet it does and why in 1983 my coworkers and I wondered nervously if each of us had to pay a proportionate share of all that U.S. gov’t debt back. The conversation quickly turned gloomy; all of us were soon resigned to an impending disaster, a financial reckoning no doubt in store for all of us because of these Treasury bonds. Were Treasury bonds really debt that would soon crush our country? Was that why banks and investors were desperate to sell them, and the reason why our company brokered these bonds like mad? It sure seemed so where I worked, in a room full of desks of brokers screaming and barking at the top of their lungs like they were escaping a fire in a crowded theater for eight hours straight every day.

            Anyway, the only definitive thing I found out about Treasury bonds right then was that nobody really knew for sure what they were. Not satisfied and now concerned, I picked up the phone, dialed information, and, without a clue of who, what, or where I would get my answers from, asked the operator at directory assistance for ‘the Treasury.’ I didn’t realize until later that the area code I was given was for Washington, DC, so I had probably called the United States Treasury Department right across the street from the White House. Naturally, I got transferred all over, and each time I got someone, I just kept asking whoever picked up to please tell me exactly what Treasury bonds were. Eventually, I got someone honest enough to admit that they couldn’t explain exactly what Treasury bonds were; however, they did know for sure that I could buy one myself, almost like any major bank (primary dealer), or institution (direct bidder by a non-primary dealer), or foreign central bank (indirect bidder) does every week. I was told I could do this personally right at the Federal Reserve Bank of New York located on Maiden Lane in New York City, which was just two blocks away from where I worked, so I found out when the next Treasury auction was and walked over to the Federal Reserve Bank before one o’clock in the afternoon that day (the deadline for applications, or bids, for the bonds called tenders). I submitted the application form called a noncompetitive tender (the big players submit a competitive tender), and made out a check to the Federal Reserve Bank for the minimum bond purchase of $1,000 (the big players’ checks have more zeroes). A week later, after the bond was issued, I received it in the mail (they were still physically delivered to individual buyers back then). It was a $1,000 par, or face-value, ten-year Treasury note, an 11 ¾%  Nov ’93, meaning it paid me, the Treasury bond buyer, exactly $58.75 every six months until maturity in November 1993, when I would receive the last interest payment plus my entire principal, the original investment, back. The semiannual interest payments were also city- and state tax free. Everyone I showed this Treasury note to at the office was impressed—especially the RMJ brokers that lived locally and paid ‘triple tax’ (paid federal, NY state and NY city taxes). At the next auction, I passed out tender forms to half the trading floor.

            That was more than thirty years ago. Today, Treasury bonds are no longer physically delivered—they are all electronically registered—and you no longer have to go to a Federal Reserve Bank to buy them. Instead, you can go online to purchase them. The website where you can purchase the bonds, which is called Treasury Direct, refers to Treasury bonds as debt. Furthermore, it explains that the reason Treasury bonds are sold is “to borrow money to raise cash needed to keep the government operating”—so even today, the federal government, which is the issuer of dollars, is sticking to an outdated, gold standard era narrative that it needs dollars from us in order to function. No wonder then, when one listens to most of our politicians; watches popular hosts and guests of high-rated TV, cable, and radio programs; or reads articles in newspapers written by the world’s smartest reporters, the conventional wisdom that Treasury bonds are debt holds. Furthermore, it is widely believed that because the Federal Reserve Bank is printing money, it is enabling the government to dangerously overspend.

            I understand why everyone feels this way. I felt this way for a long time as well, until I recently found out what, exactly, Treasury bonds are, and what they are not. What I learned is that so many things that we are constantly being told about Treasury bonds, the national debt, quantitative easing, printing money, debt monetization, the debt ceiling, an inflation threat, and our dollars becoming worthless is false. There is even less understanding of how and why the Federal Reserve Bank uses Treasury bonds at the operational level. Worse, our belief in these untruths causes alarm and misunderstanding most likely leading to more self-inflicted uncertainty, denial of investment spending needed to spur our economy, and unnecessary government shutdowns.



            Just like that scene in ‘The Wizard of Oz’, Americans today are in front of that curtain at the end of the yellow brick road (at the end of the gold-standard era). We stand there, shivering in fear, as that constant bellowing, from scary-sounding talking heads, projected on that curtain (that facade), warns us about our ‘out-of-control’ U.S. federal spending, our ‘imminent default’ of U.S. Treasury bonds, our ‘soon-to-be worthless’ U.S. dollars and our ‘inevitable collapse’ of the U.S. economy—all because of the national ‘debt’. Just like Toto the dog, Modern Monetary Theory (MMT) pulls back that curtain.

In 1992, I supported Ross Perot in that year’s presidential election. Even though I had been living and working in Tokyo for several years, I was still a proud card-carrying member of Ross Perot’s Reform Party because I firmly believed that reducing our huge federal deficit, which he campaigned on, was the most important issue. I was absolutely wrong. I was letting all the noise and the fear mongering misinform me. I was just as clueless about Treasury bonds and federal-deficit spending until recently. I even wrote an op-ed in a local Honolulu newspaper while my wife and I lived there during 2010. I criticized conservatives complaining about all the spending under President Obama. I asked where all their rage had been when President George W. Bush had vaporized the Clinton administration’s surplus, eliminated pay-as-you-go, put everything on a Bank of China credit card, and doubled the debt.  

Although that paper thought my letter was good enough to print, the truth is that I was again dead wrong. What I would soon learn is that the Clinton surpluses were not actually good, unless you intentionally wanted to cause a recession, which was exactly what happened. I would also learn that dollars to finance federal government deficit spending under President George W. Bush or any other president since Richard Nixon have not been charged on a credit card, or, more specifically, have not been borrowed at all. I figured after a long career as a Treasury bond broker, I was an expert on the subject, but not so. I was making the same mistakes about our monetary system as most people. Then finally, I had my awakening, my economic epiphany. A couple of years ago, I discovered modern monetary theory (MMT), and the truth, shall I say, set me free. I first got wind of MMT after watching economist Mike Norman on YouTube. Then I learned about economist Warren Mosler, champion of MMT, by reading his book, The 7 Deadly Innocent Frauds of Economic Policy. Professors Stephanie Kelton and L. Randall Wray at the University of Missouri-Kansas City are also prominent proponents of MMT. MMT for me has been like those art pictures, those 3D stereogram images: You stare at the center of the picture cross-eyed for a while, then, eureka, that hidden image inside that was right in front of you the whole time…suddenly, you see it. It turns out I was staring at the Wall Street Journal every morning, staring at all those Treasury bond trading screens for thirty years, until I finally saw it: that hidden component needed to fully see and truly understand our modern monetary system. I consider that fast, too, because if it weren’t for MMT, I never would have seen the simple truth about Treasury bonds in the post-gold-standard era that was always right before my eyes. Warren Mosler’s blog, The Center of the Universe, inspired the cover of this book, and the analogy of points on a scoreboard (Chapter 1) comes from Mr. Mosler’s speeches.

            Until I started understanding what Warren Mosler was writing and talking about, I was making the same mistake that most people make today, which is still thinking of Treasury bonds as they used to be in a bygone era—an era when the dollar was fixed, or convertible to gold. An era when our federal government could not just issue or ‘print’ gold out of thin air, so to pay back the debts incurred, the federal government needed to raise money through tax revenues or borrowing. All of us, even the federal government, were in the same boat; we were all users of gold. Since 1971, however, the dollar has not been tied to gold; therefore, the federal government no longer needs to dig up gold to put in vaults to guarantee, to back up, our dollars—or even worry about having enough gold stored in case anyone wants to redeem their dollars. Our economy, and by extension, the global economy, is no longer limited, no longer fixed, or tethered to gold. The entire dynamic, our monetary system, completely changed. Our federal government, the issuer of dollars, became the origin source of all dollars, and the nonfederal government, the users of dollars, all rotate around the federal government, which sits at the center of universal finance.

            The basic concept of modern monetary theory is that the lifeblood of our economic ecology today is no longer gold, a hard currency, with only a finite amount available; it is now a soft currency, created by fiat, and is of infinite amount. Our dollars no longer come from a mine in the ground but can enter circulation directly from federal government deficit spending, in amounts accounted for and facilitated by Treasury bonds. The precise amount of deficit spending, through fiscal policy, aside from provisioning the federal government, also plays an important role as a policy tool that strives to influence aggregate economic demand and foster productive economic activity. In short, productivity now backs the dollar (and confidence now backs all fiat systems). For example, because federal government taxes must be paid in dollars, one purpose of federal government taxes now is to create demand for dollars, to give those dollars issued by the federal government their needed initial velocity and not needed to finance federal government spending. In other words, the modern monetary theory begins (the ‘modern money story’ starts) with the federal government—desiring to provision itself—imposing a tax liability that can only be settled in dollars, creating a nonfederal gov’t need (creating a nonfederal gov’t velocity) of dollars. Another purpose of federal government taxes is to raise them if needed to ‘drain’ dollars from incomes, out of the hands of consumers, to prevent inflation; or to lower them to ‘add’ dollars back to incomes, back into the hands of consumers, to prevent deflation. The federal government has monopoly power over dollars. It wields that power through its central bank, the Federal Reserve Bank. The Fed uses Treasury bonds, which also now play a very important role as tools, through monetary policy, to influence (to manipulate), the interest rate (the ‘price’), of dollars.

            If any of this sounds familiar, it’s because you’ve played the Monopoly game. There is absolutely no mention in the rules about the Monopoly Bank going into ‘debt’ when creating more Monopoly Money; nor is there any mention whatsoever in the rules about the Monopoly Bank having to ‘borrow’ Monopoly Money from anyone. The Monopoly game rules were written around the same time when President Franklin Delano Roosevelt initiated our country’s phase-out from the gold standard—our switch from dollars that were convertible to gold, to dollars that were not. As per the Monopoly game rules, “The Monopoly Bank never goes broke, if the Monopoly Bank runs out of money, the Monopoly Bank may issue as much as needed by writing on any ordinary paper.” In short, as long as the Monopoly Banker approves the creation of Monopoly money, then ‘let it be done’—the translation of the Latin word ‘fiat’. Which is just like our federal gov’t today. The federal gov’t, the issuer of fiat dollars, plays by similar rules as the Monopoly Bank. After Congress approves any proposal for deficit spending (after the ‘political constraint’ is satisfied), the federal gov’t taps dollars into electronic existence with a keyboard—the modern equivalent of the Monopoly bank simply printing $1, $5, $10, $20, $50 and $100 on ordinary pieces of paper. Which is the same as any monetary sovereign (like Japan, the U.K., Canada, Australia, etc.) issuing their own non-convertible, free-floating, fiat currency. Anyone today saying otherwise probably never fully-understood the Monopoly Game rules. Anyone today who did understand those Monopoly Game rules (that does understand the ‘currency analysis’ of the Monopoly money), easily grasps the paradigm difference (the MMT insight) of the federal government’s switch from spending in gold-backed dollars to spending in their own fiat-currency. We, along with our policymakers, should all be thinking like Charles Darrow—who wrote those Monopoly Game rules in 1933—when it comes to the question of ‘How are we going to pay for’ federal-government deficit spending on the public purpose for the common good. We all should be using ‘modern monetary thought’, rather than using gold-standard-era mentality (rather than thinking in the past). In the post-gold standard, modern monetary system, the federal government, the issuer of fiat dollars (the issuer of a STRONG ‘World Reserve’ currency in an era of LOW inflation and even lower interest rates), HAS MUCH MORE flexibility to deficit spend. Under the guise of ‘borrowing’ and going into ‘debt’—a formality of a bygone era that mainly still exists only to make certain that the ‘Power of the Purse’ of Congress is not usurped—the federal gov’t/the issuer of dollars (The Bank) is merely ‘debiting’ (is simply supplying) the users of dollars (The Players) with more needed currency (with more needed liquidity) to keep the economy in balance (to keep The Game functioning properly); so that We The People can be given the same opportunity to pursue happiness (so that The Players can be given the same opportunity to be winners).



            The federal government, the issuer of dollars, is the center of the U.S. economic universe and the origin source of all dollars in the world economy. The nonfederal government, the users of dollars, is the rest of us—you, me, all households, all businesses, local governments, state governments, even foreign governments, everybody else—everybody except the federal government: any person or institution that cannot issue dollars and is instead a user of dollars. Federal government spending for provisioning itself, for entitlements, for defense, for our infrastructure—all spending, any spending, spending beyond what the federal government takes in from federal taxes, Social Security taxes, Medicare contributions, etc.—is deficit spending, or when the federal government ‘prints’ money. Deficit spending by the federal government is the federal government crediting dollars to us, the nonfederal government. We, the nonfederal government, the users of dollars, we also deficit spend, we also ‘print’ money; we print money when we use credit cards, get student loans, get mortgage loans, borrow to start businesses or expand businesses, and so on. Federal government deficit spending adding dollars and nonfederal government deficit spending multiplying those dollars is the optimal environment for a growing, expanding, and stronger economy.

            The key to understanding modern monetary theory is to look at our present economic structure as a ledger with the issuer of dollars on one side, and the users of dollars on the other. Similar to Newton’s laws of motion, every debit causes an equal and opposite credit on a ledger, and vice versa. The main ledger of a soft currency like dollars has the issuer, the federal government, on one side, and the users, the nonfederal government, on the other. The issuer and the users interact together in one vast and holistic economic ecology. Today, any amount of federal government spending that goes beyond federal government income is simply debited, or, more specifically, created by keyboard, and spent into the economy to the nonfederal government (users of dollars), which simultaneously triggers a credit, or, an addition in the same amount that was deficit spent, to the outstanding balance of Treasury bonds of the federal government (issuer of dollars). Since leaving the gold standard, the federal government’s ability to create dollars is now unlimited, no longer constrained, no longer fixed to some kind of backing to gold or anything else. In the post-gold-standard modern monetary system, the federal government should spend as much or as little as needed to help the national economy in response to the country’s prevailing economic condition, to promote long-term growth prospects, and should not be constrained by arbitrary debt ceilings, political agendas, or short-term special interests.

            As mentioned previously, the nonfederal government is absolutely everybody except the federal government, or those that do not issue dollars and thus are users of dollars—that is, all of us who need to budget ourselves, to budget our dollars, and to prevent ourselves getting into too much debt of dollars. Furthermore, because the nonfederal government does not issue dollars, it will always need to ‘get’ dollars the old-fashioned, gold-standard way—through borrowing—meaning go into debt, to finance deficit spending. The federal government does issue dollars, so it does not go into debt, to finance deficit spending.

          If the issuer of dollars (federal government) is spending in deficit, then the other side of that ledger, the users of dollars (nonfederal government) are saving in surplus, by the same amount to the penny. Conversely, if the issuer (federal government) is saving in surplus, then the users (nonfederal government) are not saving and are forced to spend in deficit also by that same amount to the penny. Since it is eventually unsustainable and problematic for the nonfederal government to deficit-spend for any prolonged period, the federal government should not save in surplus unless intentional to purposely put the brakes on an overheating economy. A federal government surplus is the economic equivalent of a reverse thruster on a commercial jet airplane. You should only go into federal government surplus, turn that reverse thruster on, to reverse the flow of dollars if you are going too fast at that moment and want to immediately slow the economy, slow that plane down. The Clinton surplus actually triggered the Bush recession. Just like that reverse thruster, a federal government surplus should be used only a little bit, not too much—just enough to balance the economy back to slow and steady growth, not with the explicit need of balancing a federal budget. In the post-gold-standard modern monetary system, only the nonfederal government needs to balance their budgets.

          Outdated gold-standard mentality is the reason why most people today think it is unsustainable for the federal government to spend in deficit. Actually, it is unsustainable if the federal government spends in surplus for any prolonged period because in economic reality it is unsustainable if the nonfederal government spends in deficit for any prolonged period. All six major depressions in United States history were preceded by prolonged federal government surpluses. The depressions of 1819, 1837, 1857, 1873, 1893, and 1929 all had that same thing in common. During the gold standard, the federal government and the nonfederal government were both users of gold (users of gold-backed dollars), so both the federal government and the nonfederal government needed to balance a budget. Those six times in history, with the good intention of a balanced budget, the federal government had overdone the amount of surplus (left that reverse thruster on too long) which resulted in the unintended consequence of an unbalanced economy. To understand why those depressions occurred, why federal government surpluses triggered them, all you have to do is look at the credits and debits of dollars flowing between the federal government and the nonfederal government as a bookkeeper. If the federal government, on one side of the ledger, is saving in surplus, then the nonfederal government, on the other side of the ledger, must be, in equal and opposite amounts, spending in deficit, meaning it is borrowing heavily or depleting savings for all spending, which eventually ends badly. Most people have this backward today; they think it is unsustainable for the federal government to spend in deficit, as if the federal government was still in the gold standard era and needed to acquire gold or borrow gold-backed dollars before spending those dollars. What is true, however, is that it is unsustainable for the federal government to not spend in deficit for a prolonged period of time. For example, the federal government also ran budget surpluses in 1920, 1921, 1922, 1923, 1924, 1925, 1926, 1927, 1928, and 1929—so for ten years straight, on one side of the ledger, the federal government was saving in surplus, and on the other side of the ledger, the nonfederal government was spending in deficit, either depleting savings or going further into debt to finance spending. The result was the Great Depression. Ben Bernanke’s key area of scholarship was the Great Depression, and he puts the blame for that depression on the federal government because it prevented inflows of gold (gold-backed dollars) from entering the money supply. In other words, the nonfederal government had suffocated.

          Another important concept of modern monetary theory is that the federal government does not need to issue Treasury bonds to finance its spending, not anymore. In our post-gold-standard modern monetary system, the federal government issues Treasury bonds to be used by its agent, the Federal Reserve Bank, to achieve a dual mandate, or goal of full employment and price stability through its monetary policy. The federal government also issues Treasury bonds to be used as tools by the Federal Reserve Bank to maintain monopoly power over the dollar and to manipulate the price, or interest rate, of the dollar as it sees fit to attempt to regulate aggregate demand. Furthermore, as the issuer of dollars, the world’s reserve currency, the federal government issues Treasury bonds to serve as a safe haven for global dollar deposits. Treasury securities may be marketable, meaning some Treasury bonds, notes, and bills trade in a huge and highly liquid Treasury bond market, thus adding to the dollar’s worldwide appeal. When countries buy our Treasury bonds, they are not lending us dollars but are simply depositing their dollars into an interest-bearing account, just like you do, but on a bigger scale at a bigger bank. Central banks of other countries—all our global trading partners—desire to park their reserves of dollars in Treasury bonds, for safekeeping. One controversial reason is to sterilize their dollars to maintain competitive trade advantages, known as strategic devaluation, another example of complete monopoly power that all federal government central banks have over their currencies.



            Perhaps the greatest misconception about U.S. Treasury bonds today is that they are debt of the federal government. They aren’t. Treasury bonds used to be debt, but not anymore. If the United States owed China its yuan, or owed Japan its yen, then the United States would be in debt. If the United States owes these countries nonconvertible U.S. dollars, a currency that the U.S. federal government creates, that’s not debt. It’s liabilities to make interest payments and obligations to pay principals at maturity, yes; an actual debt, no. We still do use that retro terminology, however, just like we still say how much horsepower your car engine has. You don’t have to worry about driving your car too fast so as to not tire the horses out, yet that is the same thinking you hear and read today concerning our federal government debt, as if we might somehow run out of dollars, or tire them out. Remember, this applies only to the federal government. The federal government, because it is the issuer of dollars, dollars no longer convertible nor fixed to anything, is never in debt of dollars, just like IBM is never in debt of IBM stock because IBM can always issue more IBM shares. However, if you, me, any household, any business, any U.S. local city, any U.S. state, or any foreign government borrows dollars, gets a mortgage in dollars, takes out a loan in dollars, issues a municipal or dollar-denominated sovereign bond, then yes, that is debt. That is debt because we cannot issue dollars, we are users of dollars, when we deficit-spend we are on the hook for those dollars, and we have to get those dollars back from somewhere to return them. Let’s take a closer look at dollars and Treasury bonds.

            Most of us keep some of our dollars in accounts at banks, and at those banks, we have checking accounts and savings accounts. We transfer our dollars back and forth between our checking accounts and savings accounts. We transfer dollars from checking into savings, because savings accounts earn interest over time, and we also transfer dollars that we instead need to be liquid from savings back into checking. Most people today aren’t familiar with the actual workings of our U.S. monetary system on this same operational level. A big source of many myths and collective angst comes from all those mysterious machinations of Treasury bonds behind the scenes over at the Federal Reserve Bank. Let’s pull the curtain at the Fed back a little bit.

            The Federal Reserve Bank is set up almost exactly the same as any private bank, with one notable exception—the Fed has complete monopoly power over dollars. The Fed, our central bank, where all the banks do their banking, has a similar account setup as any other bank does, but instead of a checking account, the Fed calls it the Reserve account, and instead of a savings account, the Fed calls it the Securities account. All banks with outstanding deposit liabilities are required to keep a certain percentage, called a reserve requirement, in the Reserve account at the Fed, because that reserve requirement, like any emergency money, needs to be liquid, like a checking account at any other bank. In addition, any bank, plus anybody else who wants to, may deposit its dollars in the Securities account at the Fed, because the Securities account earns interest, like a savings account at any other bank. Making a deposit in the Securities account at the Fed is also known as buying a U.S. Treasury bond.

            All marketable U.S. Treasury securities (Treasury bonds, notes, bills, and also Treasury inflation-protected securities, or TIPS), are nothing but interest-earning time deposits in the Securities, or savings, account at the Federal Reserve Bank. When anyone buys a Treasury bond, he or she is opening a term deposit in the savings account at the Fed, just like opening a deposit in a savings account at any bank. Whether you are a widowed senior citizen or a foreign central bank, buying a Treasury bond is like getting a CD at any bank, except a Federal Reserve Bank CD is called a Treasury bond. So what exactly happens when anyone buys an existing or newly issued U.S. Treasury bond?

            The dollars used to buy Treasury bonds usually originate from checking accounts at private banks and, because these dollars are excess dollars, were transferred overnight to the checking, or Reserve, account at the Fed. On the settlement date of the Treasury bond purchase, those dollars are then transferred from the Reserve, or checking, account at the Fed, over to the savings, or Securities, account at the Fed, and registered in the buyer’s name. That’s it; that’s buying a Treasury bond. Buying a long-term Treasury bond, a medium-term Treasury note, or a short-term Treasury bill is nothing but a simple transfer of dollars from the Fed’s checking account to the Fed’s savings account, just like you do at your own private bank, and for the very same reason—to transfer liquid, demand deposit of dollars over into an interest-earning time deposit of dollars.

            Conversely, what, exactly, happens when someone sells a Treasury bond, or when a Treasury bond matures? Those dollars are transferred from the savings, or Securities, account at the Fed back to the checking, or Reserve, account at the Fed, just like you do for the same reason—to transfer your interest-earning time deposit of dollars over into a liquid, demand deposit of dollars. The same thing happens for quantitative easing (QE), or large-scale asset purchase (LSAP), when the Federal Reserve Bank forces the sale of marketable Treasury bonds out from the Treasury bond market to manipulate the price, or interest rate, of dollars lower. The Fed is not permanently printing money, just temporarily transferring the dollars of the holders, or sellers, of those Treasury bonds from their Securities account at the Fed over to the Reserve account at the Fed. The dollars of those Treasury bond owners were transferred at the Fed, purposely by the Fed, in an exercise of monopoly control of the Fed.

            Again, the exact same thing would happen if China or Russia or Japan ever decided to sell its U.S. Treasury bonds, dump them, even all at once. That would certainly cause turbulence on the airwaves and in the markets, but after all the selling on the rumors and all the buying on the news, at the end of the day, what would have happened was simply more transfers of dollars, with extra noise. There is nothing to worry about if any country sells its Treasury bonds, because China, or anybody else who owns Treasury bonds, paid for them with dollars. Dollars are our free-floating currency that is no longer backed, or convertible, or fixed to gold, and which our federal government, the issuer of dollars, creates. In this scenario, the Fed would merely transfer China’s dollars from the Fed’s Securities account to the Fed’s Reserve account. Click. Enter. Blink. Done. No burden on your children. No unsustainable debt. No out-of-control borrowing, and no danger to the financial stability of the country. In our post-gold-standard modern monetary system, the buying and selling of Treasury bonds is just ebb and flow inside our very own economic ecology, nothing but routine transfers of dollars back and forth between checking and savings accounts in one holistic U.S.-dollar dominion.

            It is crucial to understand that there is a huge difference when the federal government deficit-spends and when the nonfederal government deficit-spends. The nonfederal government, the users of dollars, incurs a debt when it prints money, or deficit spends, so it needs to spend within its means and balance its budget. The federal government, however, since leaving the gold-standard era, is now the issuer of dollars and is not in debt when it prints money, or deficit spends; it has bigger problems to deal with now: It needs to spend according to need, to balance its economy. In other words, all of us in the nonfederal government are in our very own balancing acts, but the federal government is balancing all of us in one gigantic balancing act. The federal government balances the economy by attempting to regulate aggregate demand with fiscal policy and also with monetary policy. Fiscal policy is executed by the legislative and executive branches, Congress and the president, and monetary policy is executed by an agent of the federal government, the Federal Reserve Bank. Fiscal policy is administered by adjusting amounts of federal government deficit spending and federal income taxes; and monetary policy is administered by adjusting the price, or interest rate of dollars. Whether the federal government chooses to adjust federal deficit spending and/or adjust federal income taxes is a political decision. All that is important is that adjustments to spending and adjustments to taxation be countercyclical, that they reverse economic conditions for the better, like the tax cuts and spending increases did in the year 2001. Fiscal policy should never be pro-cyclical—that is, continue to be a drag on already anemic economic growth—like the tax hikes and spending sequestration did in 2013. Federal deficit spending and federal income taxes should be adjusted in opposite directions to be effective. For example, if both federal deficit spending and federal income taxes are increased, the net effect is minimal because accommodative and non-accommodative actions are being taken at the same time. The same thing happens if both are decreased. If federal deficit spending is decreased, which is non-accommodative, and federal income taxes are decreased at the same time, which is accommodative, the result is again minimal. Fiscal policy is effective only when your actions are in sync with what you want to accomplish. For example, you increase federal deficit spending and lower federal income taxes like in the year 2001 if you want to speed up the economy (which was what most politicians were trying to do). You do the opposite, decrease federal deficit spending and increase federal income taxes like in 2013, only if you want to slow the economy (which wasn’t what most politicians were trying to do). The key is that everyone should understand the difference between adjustments in federal deficit spending and federal income taxes of fiscal policy in a modern monetary context.

       Along with fiscal policy there is monetary policy. Monetary policy is administered by the federal government, the issuer of dollars, through its agent, the Federal Reserve Bank. The Fed controls monetary policy independently of the federal government but understand that the Fed is part of the federal government. More precisely, the Fed is independent within the federal government, not independent of the federal government. Monetary policy by the Fed is attempted mainly by adjustments to the price, or interest rate, of dollars. Monetary policy and fiscal policy together make up our economic ecology, a spectacular masterpiece that is our modern monetary system.

       Our Fed can easily determine the proper balance of interest rates by the rate of unemployment and the stability of prices. For example, if unemployment and prices are stable, the interest-rate yield curve is normal, or positively ascending, then the economy is balanced, the economic environment is perfect, and the Fed has achieved its “dual mandate.” If unemployment is very low, and wages and consumer prices are rising too quickly, the Fed needs to increase interest rates for less liquidity. By draining liquidity, the Fed tightens economic conditions and prevents inflation. The opposite, if unemployment is very high, and wages and consumer prices are not rising at all, means the Fed needs to decrease interest rates for more liquidity. By adding liquidity, the Fed eases economic conditions and prevents deflation.

       If and when the Fed chooses to adjust interest rates is not a political decision, and the Fed is independent so it can make decisions on monetary policy without interference or influence from any outside forces. All that is important is that the Fed’s actions help balance the economy, not help special interests or win elections. Fed actions sometimes are made not only because of prevailing economic conditions but also to counter prevailing political inaction, to buy time so that politicians can make needed economic reforms. The extraordinary quantitative easing from 2008 to 2014 was needed because of the extraordinary dysfunction of the political process that resulted in bickering, downgrades, and shutdowns. Such an environment does not create confidence; nor is it in any way conducive for stronger economic growth. We all know that political parties are competing with each other, and we get that they don’t like each other. The question is, can they work with each other? Look at Japan. Japan’s “Lost Decade”, that ten plus years of economic contraction and deflation, wasn’t caused by the Japanese citizens. The Japanese are well-educated, hardworking, and diligent savers. The Japanese politicians, on the other hand, are a different story. The average term of Japan’s prime ministers is just two years. From 2006 to 2011, four out of five prime ministers did not stay in power for more than twelve months. Frequent political changes and the uncertainty they create were the major reasons for Japan’s prolonged economic stagnation, a situation that Japanese policymakers are still trying to fully escape from today. The Japanese, who invented quantitative easing in the mid-1990s, know all too well that extraordinary monetary policy can help buffer political inaction but cannot cure it. Chairman of the Federal Reserve Bank, Ben Bernanke frequently expressed concern about a drag from Washington and included the phrase “Fiscal policy was restraining economic growth” in thirteen straight Federal Open Market Committee (FOMC) policy statements from March 20, 2013, until his successor, Fed Chair Janet Yellen, ended QE on October 29, 2014. This is why the Fed or any central bank is independent—so its monetary policy can also counter, or negate, political dysfunction and pro-cyclical fiscal policies that amplify, or make worse, bad economic conditions.



            In 1971, President Nixon closed the gold window, meaning from then on, the United States would not convert dollars and, by extension, Treasury bonds held by foreign central banks, to gold. That day, because the federal government then became the issuer of fiat—non-convertible dollars—no longer backed by gold, Treasury bonds went from being debts payable in dollars backed by gold (something that the federal government needs to get), to just savings accounts in dollars (something that the federal government doesn’t need to get) . The training wheels of our early economic structure, which the gold standard was, were taken off.

            From the infancy days of our economy up until 1933, the dollar was technically convertible to metals, mostly to gold, meaning it was perceived that all dollars floating out there, or our money supply, was physically backed by gold. This gave our currency credibility and helped our initial economic growth, but it also constrained, or limited, it. We could issue only as many dollars, extend as much credit, as we had gold in our Treasury vault. Furthermore, whenever users of our gold-backed dollars for some reason decided to suddenly not spend so freely, if there was any hoarding of gold, this would create shortages, reduce the ‘velocity’ of spending—money velocity throughout the economy—and cause panics. In worse cases, it caused bank runs, deflationary spirals, and even severe depressions.

            In 1913, seeing that these gold shortages were causing these panics, and realizing that the lack of gold was the same thing as lack of credit, Congress created the Federal Reserve Bank. In 1933, in the depths of another depression, the Great Depression, the worst deflation in history, an Executive Order by President Franklin Delano Roosevelt declared that a serious emergency existed, that any further hoarding of gold and silver posed a grave threat to the U.S. economy, and criminalized its possession. The days of gold’s relevance were then numbered. The creation of the Federal Reserve Bank was the solution to the problem caused by a lack of gold. Lack of gold was like a short leash that kept our economy constrained because gold cannot be issued, a gold supply is always limited. If gold was limited, then our dollar was limited, and by extension, our economic potential was limited.

       The Federal Reserve Bank began an undertaking that replaced gold with credit, which is unlimited yet can be controlled. The Federal Reserve could add credit to ease conditions to stimulate spending and investment to prevent deflation. Conversely, the Fed would also have the power to do the exact opposite: to intentionally drain or remove credit, or tighten it, to intentionally slow the economy if necessary to halt inflation. The Federal Reserve would use credit, via Treasury bonds, to harness the forces of liquidity to attempt to influence aggregate demand and the direction of the economy.

       This was a monumental evolution of monetary development in our country. This was an entirely new concept, going forward, that the Fed would now step in as a “lender of last resort” to provide credit and increase liquidity, to keep the velocity of spending, or money velocity, going strong, and prevent panics. By smoothing out the booms and busts, the Federal Reserve Bank would provide an environment in which everyone felt confident and certain about the future of the economy. Our dollar, our Treasury bonds, and our monetary system would transform. Ours would soon become the greatest economy in world history, backed not by gold but by something even more valuable, with even greater potential, and, best of all, in unlimited supply. Our dollars, our Treasury bonds, our post-gold-standard modern monetary system would be backed by the “full faith and credit” of the United States.

            Many people today still clamor for the United States to go back to a gold standard. My guess is that these people have lots of gold, or they are betting on gold. Perhaps they are seeking political power and are using fear to get it, or maybe they just miss the good ole days and want to go back in time. Putting America back on a gold standard would be like putting the training wheels back on a teenaged child’s bicycle. For the same reason one wouldn’t do that, America should not go back on a gold standard; it is a bad idea, because the gold standard was our young country’s early economic and monetary system’s ‘golden’ training wheels.

           For centuries, the economic universe revolved around gold, silver, or currency backed by these or other metals. Convertible, or fixed to these metals, these currencies were considered ‘hard’ currencies. All businesses, all economies, all monetary systems, were therefore also fixed, constrained, or tethered to a limited amount of gold, silver, or other metals because no one could issue, create, or print them. Before any issuance of more currency, these metals needed to be mined, shipped, and stored in vaults to back up the currency. The amount of gold was always limited, so economic growth under a gold standard was also always limited to the amount of gold that could be dug up from the ground or plundered from elsewhere. This was rudimentary, inefficient, and one of two major disadvantages of gold as a currency or a backing of a currency. The second disadvantage of gold as a currency or a backing of a currency is that gold, a precious metal, is an excellent store of value. Gold retains value, will always be even more valuable over time, and that is a major disadvantage for a currency in a modern monetary system because it encourages hoarding. People can take their gold, or gold-backed dollars, leave it in a safe deposit box in a bank, or place it in a chest and bury it, and know that it will forever be more valuable because there is only a limited amount of gold. This feature of gold makes it great for the few who have it, but not so great for the population at large, limits the ability for an economy to grow and stunts wider prosperity. Under a gold standard, with a limited amount of gold, our economy, and, by extension, all economies, were playing in a zero-sum game. Furthermore, the ability to respond to hoarding, savings gluts, or any other shortages of gold was also limited, which resulted in financial panics and economic depressions.

            Dollars, or, more specifically, unconvertible dollars, which are fixed to nothing and are issued by fiat, serve better as a currency in a modern monetary system because they are perishable, they have an ‘expiration date.’ Unlike gold’s, the dollar’s purchasing power is always shrinking; therefore, instead of encouraging hoarding, dollars encourage spending. A shrinking purchasing power of idle cash dollars encourages investment. The more that the federal government can encourage the spending of dollars, the more that the federal government accommodates the investment of dollars, the more the economy grows. Dollars have an embedded ‘use it or lose it’ functionality (dollars have a ‘planned obsolescence’), which is when a product is purposely designed to slowly break down after a certain time to encourage turnover. The issuer of currency needs this slow disintegration built into the currency to discourage hoarding (to encourage spending)—to influence an increase in the velocity of money. Dollars are intentionally manipulated to deteriorate about 2% per year, and the price, or interest rate, of dollars is in firm monopoly control by the federal government, the issuer of dollars, through its agent, the Federal Reserve Bank. Unlike gold or any other ‘hard’ currency, ‘soft’ dollars are much more efficient because they can always and easily be made available to the population at large by swapping an IOU, a note payable, or indebtedness for dollars with financial intermediaries within the banking system, aka credit extension. Credit facilitates all of us, gives us all access to money when we wish to deficit-spend, to ‘print’ money, which multiplies dollars previously added to the economy by federal government deficit spending.

        Instead of being limited or constrained by a fixed amount of gold bars needed in a Treasury vault to back the currency, in our post-gold-standard modern monetary system we have dollars that are unconvertible, fixed to nothing, which allows the economy to be limited only by a nation’s imagination and reach of innovation. As a result, the U.S. economy is the strongest, our U.S. dollar is the world’s reserve currency, and our U.S. Treasury securities are the safe haven of choice in global flights to quality when markets are volatile. Our federal government, the issuer of dollars, in complete monopoly control of those dollars, sits firmly at the center of the economic universe since leaving the gold standard. Once an economy has grown, matured, and proven it can ride on its own, no more training wheels are needed. Then all that is needed to back its currency is the “full faith and credit” of the government and its people. Nothing more or less.  



            Since leaving the gold standard, the purpose of U.S. Treasury bond issuance in our modern monetary system has morphed. What once was a simple task that used old handheld tools needed to finance federal-deficit spending dollars is now a complex modern electronic masterpiece used to neutralize the inflationary bias of federal deficit-spending dollars. Neutralizing these dollars means offsetting newly-printed, potentially inflation-stoking dollars, fresh from the federal government’s keyboard, that are funding federal deficit spending, entering INTO money-supply circulation, by neutering already-existing dollars—of the same exact amount to the penny—OUT FROM money-supply circulation. During the gold-standard era, existing gold-backed dollars were borrowed, or received from investors buying Treasury bonds, so there was no addition of dollars, no inflationary bias caused solely by federal-deficit spending. Post-gold standard, keeping the same formalities of Treasury bond issuance in place serves this purpose. In addition, Treasury-bond issuance today makes sure that—even post-gold standard—we continue to embrace the ‘Power of the Purse’ of Congress. In other words, unlike users of dollars, even though there is no longer a ‘financial constraint’ for the issuer when spending its own fiat dollars, there still remains that ‘political constraint’—spending still has to be approved by policymakers.

In normal economic conditions, federal-government deficit spending is funded with newly-printed dollars and offset by a removal in the same amount of existing dollars from the money supply via Treasury-bond sales. This is done to prevent too many dollars from chasing too few goods—aka, inflation. For example, the United States, while provisioning itself and making other outlays, usually needs to deficit-spend a certain amount in any given month. The federal government goes about deficit spending, and vendors are paid with newly printed dollars deposited into their bank accounts. To neutralize these dollars entering money-supply circulation, Congress authorizes the debt ceiling to be increased so the Treasury department can issue Treasury bonds. The amount of issuance is added to the running total, or our national ‘debt.’ The Federal Reserve Bank, acting as the financial agent of the federal government, assists the Treasury in selling the Treasury bonds. These new Treasury bonds, denominated in dollars, are sold to U.S. citizens, U.S. banks, nonbank institutional investment firms, or foreign central banks; thus, the Treasury bonds are paid for with dollars already existing in the money supply throughout the economy. Treasury bonds issued and sold are always in the same amount of federal deficit spending so that the same amount of newly printed dollars used to fund federal-deficit spending entering into the money supply is at the very same time coming out of the economy elsewhere and getting parked in the Securities account at the Fed when the Treasury bonds are bought. In other words, newly-printed dollars come in (deficit spending), and the same amount of older, existing dollars, comes out (pays for the Treasury bond). This offset, or neutralization, prevents these newly-printed U.S. dollars from being possibly being inflationary (potentially harming the economy).

            Large-scale asset purchases (LSAP), or so-called ‘quantitative easing’ (QE), is the Fed simply switching off this neutralization. Operationally, QE, or LSAP, means the Federal Reserve Bank is buying Treasury bonds every month. The Fed does this for the same reason a company buys back its own stock: to make the price go up. QE is just Treasury bond buybacks. ‘Buyback’ is exactly how the back-office trade settlement people of any Treasury bond trading desk at the banks, during QE, referred to QE whenever I confirmed Treasury trades done with clients. When the price of bonds goes up, their yield (the effective yield in dollar amount that is ultimately paid in interest income to the buyer of the bond) goes down, so by keeping the yields of Treasury bonds low, the Fed is further manipulating interest rates, or the ‘price’ of money, down, to accommodate the economy—more specifically, to help borrowers at the expense of savers. In a slow economy, with inflation that is far too low, or in a very weak economy threatened by deflation, neutralization of newly printed dollars created for deficit spending is not needed because the economy lacks inflation. The economy needs inflation. Whatever amount of Treasury bonds the Fed buys during LSAP has the same effect as if those Treasury bonds had not been issued in the first place. One arm of the federal government has sold Treasury bonds, and another arm of the federal government is buying them back. This reverses the neutralization, so from then on, freshly created, newly printed, inflation stoking, fiat dollars are entering the economy without any offset. In other words, the Fed has stopped the neutralization of federal-deficit spending dollars entering the economy that is normally done to prevent inflation, in this case to intentionally try to cause inflation. The key word here is try. This is the tricky part. The cliché “You can lead a horse to water but you can’t make him drink” is very applicable here and is the very reason so many people got wrong what effect the Fed’s actions would have on our economy in the LSAP years that started in November 2008 and ended in October 2014. You can drain a trough (decrease liquidity) and make a horse stop drinking (slow the economy), but the opposite is not automatically true. The Fed can push the economy into recession, like Chairman Paul Volcker did successfully in 1981 to slow the economy to stop runaway inflation, but the Fed alone cannot pull the economy out from a recession to stop deflation. Only aggregate demand (the horse) can pull the economy out of recession. Increased reserves don’t automatically mean increased aggregate demand. The Fed can fill the trough (add lower-costing liquidity) but can’t make the horse drink. The Fed needs help. Only if the politicians are eliciting confidence by implementing sound fiscal policies, making growth-inhibiting reforms, creating an environment for a stronger economy and a better future, can they convince the horse to drink. Most people got this wrong; they thought QE would automatically cause hyperinflation, interest rates to rise, and Treasury bond prices to tumble—things that would happen only if and when aggregate demand were to increase dramatically. What many hedge fund ‘stars’ and bond ‘kings’ learned from Professor Bernanke was that, other than manipulating interest rates lower, QE does not automatically cause anything, period. The threat of deflation, however, will automatically cause QE.

          QE, or LSAP, begun in December 2008, lowered the price, or interest rate, of dollars to ease credit, to accommodate the economy by attempting to stimulate growth with regularly scheduled forced sales of selected Treasury and mortgage bonds. The Fed took extraordinary LSAP measures for several reasons: Mass production (supply) was overpowering mass consumption (demand). Disinflation was and still is the world economy’s main threat. Demographic forces continue to cause structural unemployment, which has piled on to cyclical unemployment, resulting in labor-force slack and stunted labor-wage growth. Strategic devaluations overseas are weakening currencies against the dollar, which imports more disinflation. Fiscal policy (raising federal income taxes for upper-income earners in January 2013 and sequestering federal spending in March 2013) restrained U.S. economic growth. QE should stimulate the economy and spur growth, but the result is not automatic. Even less of a guarantee is that any growth caused by QE would be so strong that it would spark high inflation. The Japanese know this all too well; those many years of zero economic growth and falling prices during their “Lost Decade” is proof. Misunderstanding of Treasury bond buybacks, or QE, that began in 2008 is why so many traders and other investors lost money putting on positions, or placing bets, that it would cause immediate inflation. Inflation hurts owners of any bonds because the fixed interest income (set coupon payments) received from those bonds has less purchasing power, so if you expect inflation, you sell bonds. Realization that QE wasn’t going to cause inflation or cause Treasury bond prices to collapse reversed those bets, and the Treasury bond market reflected that capitulation on July 25, 2012. The buying of Treasury securities that day was so strong that the Treasury note (ten-year maturity) yield touched an all-time record low of 1.38%, meaning this “flight to quality”, or demand for those bonds was the highest ever. Two days later, and wanting to stop panic selling of Eurozone sovereign bonds of the stressed member states, European Central Bank (ECB) President Mario Draghi pledged to do “whatever it takes” to encourage traders, and to convince the markets, to buy those bonds, and also force yields down, to accommodate the Eurozone economy. Meanwhile, in the U.S., bond vigilantes (traders that still had no confidence in the Fed’s handling of the credit crisis) wisely chose to stop fighting the Fed until the following year, when Chairman Bernanke hinted that “tapering”, or the beginning of ending QE, was being considered, and that process eventually begun in December 2013.

          During LSAP or QE, selected Treasury and mortgage bonds are impounded, or somewhat exist, in suspension from the bond market, and are temporarily placed in the Fed’s portfolio (the Fed’s balance sheet), without owners, until the economic crisis has passed. Because these bonds no longer have registered owners, interest payments on them while they are in the Fed’s portfolio are given back to the Treasury. According to minutes of the Federal Open Market Committee, if any of these bonds mature while economic conditions still warrant no change to Fed policy, the Fed will reinvest the bonds. By reinvest, this means the Fed will use any maturing mortgage bond principal payments for the purchase of more mortgage bonds; or in the case of Treasury bonds, the Treasury department will roll over any maturing bonds into new issues and the Fed will repurchase those Treasury securities at auction. This keeps the same notional (original principal or ‘par’ value) amount of both mortgage and Treasury bonds right where they are, in the Fed’s portfolio, to maintain accommodative monetary conditions. If at any time the Fed deems it appropriate to no longer maintain accommodative monetary conditions because the economy is improving, the Fed will not reinvest, meaning it will outright sell these bonds back into the bond market, assigning the bonds once again to owners. This action will unwind, or reverse all that has been done, and this is why LSAP is not a permanent creation of money by the Fed. Next is the timing of the Fed’s “lift off” or normalization to higher interest rates. As per FOMC statements, when the Fed decides to begin “lift off,” depends on the Fed’s assessment of actual and expected progress toward its objectives of maximum employment and two percent inflation.

           Lowering interest rates by buying bonds during LSAP increased reserves, our monetary base. Increasing monetary base does not automatically mean increased money supply, increased consumer loan activity, weaker dollars, or inflation, however. Again, any new money in reserves enters the money supply not by being pushed by the Fed but only if pulled by outside forces of that horse, aggregate demand, which then could expand the money supply, stoke consumer borrowing, dilute existing dollars, and cause mild inflation. Although the situation was not necessarily ‘mission accomplished,’ on October 29, 2014, the U.S. economy, still the world’s strongest economy by far, had enough strength to end LSAP. Any mortgage or Treasury bonds remaining on the Fed’s balance sheet are nothing more than central bank fire extinguishers to be used in the very low-odds chance that the economy kicks into high gear and we suddenly suffer from massive hyperinflation. The odds of that are slim, but with another $3 trillion of cash earning around 0.00% burning holes in the pockets of money market account holders, it is good to know there is at least that much on the Fed’s balance sheet at their disposal.

           When asked in December 2010 on 60 Minutes if he felt confident that he could prevent inflation from getting out of control, Chairman Bernanke answered that he was 100% confident that he could raise rates in fifteen minutes to slow down the economy and stop inflation from becoming a problem. Everyone should not doubt this, except for the “fifteen minutes” part. If the Fed sprayed $4 trillion in notional value of bonds from those fire extinguishers onto the open market, interest rates would skyrocket and put the flames of an economy burning too hot out in fifteen milliseconds! For the record, I should note that the modern monetary theory (MMT) community is not a big fan of quantitative easing (QE), or large-scale asset purchases (LSAP). MMTers would prefer that the Fed simply leave short-term overnight Fed Fund rates (which influence all interest rates throughout the economy) permanently at zero, then leave it to Congress and the President to deploy fiscal policy measures to stimulate the economy and to increase aggregate demand. MMTers argue that the Fed buying Treasury bonds to lower interest rates and provide economic accommodation is a wash at best because the drastic reduction of interest income payments to holders of all bonds acts like a tax, another drag against spending. QE causes lost interest income that would have been spent into the economy, thus negating any monetary easing effects, or may even worsen an already existing deflationary bias. In contrast, the Federal Reserve Bank sees fixing a weak economy as the domestic side of U.S. national defense, and LSAP as a crucial mobilization very similar to any war effort—an economic battle that calls for a sacrifice, of savers’ dollars, which are enlisted and put in uniform as dollars of spenders. If all goes according to the Fed’s plan, those dollars will be deployed as consumption and investment, and rally other dollars of savers to also become dollars of spenders. Hopefully, policymakers will stop bickering with each other, get out of their foxholes, and join the war effort. Victory is achieved when the allied forces of spending-dollars have marched forward in a combined offensive with enough velocity and increased aggregate demand to defeat the debilitating deflation that threatened the country before those savings-dollars were deployed.

            When attempting to describe LSAP or QE by the Federal Reserve Bank, the pundits and financial mythologists frequently use the words “debt monetization” on the airwaves and in the newspapers. Some critics go even further and accuse the Fed of engaging in “debt monetization to finance federal deficit spending.” LSAP is often confused with yesteryear’s monetizing of the debt. During the gold standard era, ‘debt monetization’ meant a permanent funding of Treasury bonds forced upon the Fed by the Treasury department during an inflationary time when the economy was suffering from an excess of dollars. LSAP means a temporary funding of Treasury bonds at the Fed’s discretion, and done only in the event of disinflation, or weak aggregate demand suffering from a shortage of dollars. Monetizing the debt, or permanently using newly printed dollars to fund deficit spending in a strong economy that didn’t need them, was pro-cyclical, making economic conditions worse. LSAP, temporarily using newly printed dollars to fund deficit spending in a weak economy, is countercyclical, or makes economic conditions better. Monetizing the debt refers to the bygone gold-standard era when the federal government issued Treasury bonds with low rates pegged by the Treasury Department, with the goal (with their goal) of balancing the budget by financing the debt as cheaply as possible. Quickly after WWII, when inflation was rising dangerously, the Fed, with the goal (with their goal) of balancing the economy, was not pleased at being forced to buy Treasury bonds, or more precisely, funding these Treasury bonds, or monetizing the debt, with newly created ‘high-powered’ printed money and at low interest rates unsuitable for the prevailing economy. Prior to the Korean War, the Fed chairman at the time, Marriner Eccles (who designed the blueprint of President Franklin Delano Roosevelt’s New Deal), argued that investor dollars, or dollars that were previously printed and that already existed in the money supply, should buy these Treasury bonds instead. Rather than a dollar ‘add’ of high-powered, newly-printed, freshly-created dollars, Chairman Eccles (correctly) argued to ‘drain’ dollars out from the economy to prevent inflation. As explained in Chairman Eccles’s recollections, Beckoning Frontiers, this rift was resolved, and the Federal Reserve Bank was given independence from the Treasury Department in the game changing Fed-Treasury Accord of 1951. Two things you can conclude for sure whenever a critic says that the Fed is monetizing the debt: (1) The person saying that isn’t quite sure what ‘monetizing the debt’ really means, but (2) no matter what it is, the speaker’s ignorance has made him or her fearful of and biased against all that federal-gov’t ‘money printing.’



            The words ‘printing money’ have different meanings for different people. For this chapter, ‘printing money’ simply means what most people (correctly) think it means: federal government deficit spending. More specifically, it is any money creation that enters money-supply circulation. Meaning that the nonfederal gov’t (as well as the federal gov’t) ‘prints money’ too—which is what American economist Hyman Minsky meant when saying “Everyone can create money, the problem is to get it accepted.” The only difference between the two is that when the federal government creates money, they can take a little longer than the nonfederal gov’t paying it back. In fact, the last time that the federal gov’t paid back any money (the last time that the national ‘debt’ went down), was in 1957. Yes, you read that right, the national debt DID NOT go down during the budget surplus years of President Clinton—another difference between quote unquote ‘debt’ of the federal gov’t and actual debt of the nonfederal gov’t (actual debt of households). households).

            An easy way to think about ‘printing money’ (money creation) is to forget about the money being created and instead think about the BOND being created. Just like the federal gov’t that creates a Treasury bond in order to create money (in order to deficit spend); the rest of us, the nonfederal gov’t, also creates an IOU, a promise, a ‘bond’ to pay back the newly-created money with interest over a set period of time. That newly-created bond—conjured out of thin air—is the starting point. If there is any takeaway that readers should get from this chapter, let it be this: It’s better to think of all money creation (deficit spending) as being the newly-created bond—not the newly-created money. Whether the federal gov’t is deficit spending (creating a bond) to put a rover on Mars; or you are deficit spending (creating a bond) to drink a cup of Starbucks, that newly-created bond is first and foremost. It’s been that way for a long time—since a damsel named Faith first hooked up with a stud called Creditworthy—way before we started ‘printing money.’

            What is money printing—or, more specifically, who is printing money? Money is printed by both federal-government deficit spending and nonfederal-government deficit spending. Everybody is printing money. The Federal Reserve Bank, along with other financial intermediaries in the business of credit extension, facilitate the printing of money by everybody else. Your VISA card company doesn’t call you and say it just printed money into your account so go out to eat somewhere nice. Just like when the federal gov’t approves ‘printing money’ (approves any deficit spending); when we, the nonfederal gov’t authorizes it; the Fed and the banks (and the credit card company) acting as financial intermediaries (as middlemen), assist us. The point being that we shouldn’t point our fingers at the Federal Reserve for ‘printing money’. For example, to help contain the credit crisis in 2008, Congress actually printed all that money for the Troubled Asset Relief Program (TARP); the Fed tapped the keyboard and recapitalized the troubled institutions only after Congress authorized it. Congress printed that money, not the Fed. The U.S. bailouts turned out to be a good political decision. The dollars printed by Congress for targeted rescues were very successful, albeit despised by the general American public. By December 2014, every penny ($426 billion) that was ‘printed’ by Congress for TARP to rescue firms needing bailouts actually turned a profit.

          The Fed really only monitors, or regulates, money already printed by everybody else until one of two corrective actions is needed. The Federal Reserve Bank is like a box that is connected to all the tubes that all the dollars in the world flow through. On top of that box are two light bulbs. If the money is circulating too fast, meaning too many dollars are chasing too few goods and services, one of those light bulbs turns on. That means that the Federal Reserve needs to flick a switch that decreases, tightens, or ‘drains,’ money from the monetary base, (from the Fed’s Reserve account to the Fed’s Securities account), to raise interest rates and prevent the economy from overheating and causing inflation. Conversely, if money is circulating too slowly, meaning too few dollars are chasing too many goods and services, the other light bulb turns on. That means the Federal Reserve needs to flick the other switch that increases, eases, or ‘adds,’ money to the monetary base, (to the Fed’s Reserve account from the Fed’s Securities account), to lower interest rates and prevent the economy from stalling and causing deflation. Most of the time, the Federal Reserve Bank is not printing money (is not intentionally trying to add newly-created dollars to the money supply) but simply regulating the flow of all the money already printed by everybody else. If unemployment is low, and prices are rising at the Fed’s desired pace of about 2% per year, then neither of the light bulbs is on and the Fed is achieving its dual mandate

            Much of the criticism regarding money printing comes from a fear that the more money is printed by federal-government deficit spending, the more it devalues the dollar. This is absolutely true, but rather than fear the devaluation, or debasement, or dilution of dollars, we should try to understand it better. Since the United States left the gold standard, instead of being a user of dollars similar to using a credit card whenever deficit spending, try to think of it as if the federal government, now as the issuer of dollars, is now using a debit card. Every time the federal government deficit-spends and prints dollars, the purchasing power of all outstanding dollars decreases, just like the float of all stock shares of one company dilutes every time that company issues more shares. If diluting the outstanding float of a particular company’s shares was bad, a company would never issue more shares. However, a company issues more shares routinely and intentionally, with the explicit goal of growing the company. For example, a company may issue more shares to be used to purchase more factory equipment, acquire another company, or incentivize executives to improve results, so that hopefully, in the long term, the company increases profits, successfully grows, which benefits all shareholders. Any shareholder would much rather have a smaller percentage ownership of a company that routinely issues more shares to grow that company, than a bigger percentage ownership of a company that was not issuing more shares, not making an effort to expand, and not growing at all. The same goes for any user of dollars. A user of dollars should be glad that the issuer of dollars is printing more dollars, which grows the economy and widens prosperity. There is no doubt that the American quality of life keeps getting better, our standard of living is constantly improving, and our per capita wealth remains higher than most people around the world, a direct result of U.S. economic growth, that in large part is made possible by the intentional devaluation of dollars by the Fed.

          For example, since the United States left the gold standard, the spending, or purchasing, power of one U.S. dollar in 1971 is now less than 20 cents. Here’s another way to look at this: An 80% devaluation in about 40 years means that since then, your money lost roughly 2% per year. The Fed calls this 2% per year shrinkage of your dollar mild inflation, but far from being a problem, this is actually intentional, the secret sauce that makes our economy so dynamic since it left the gold standard. The federal government as issuer of dollars has monopoly power over dollars, and this shrinkage is part of its design embedded in dollars. The Federal Reserve and the other major central banks around the world are all targeting a mild 2% inflation rate. 2% inflation is a desired rate for any central bank because it gives consumers the most purchasing power while still staying a safe distance from a dangerously low zero or negative inflation rate (deflation). As mentioned previously, modest inflation is that ‘use it or lose it’ functionality purposely built into dollars to prevent savings gluts, to promote risk taking and investing, which grow the economy. The federal government needs you to spend your dollars, not sit on them. When it comes to dollars, the federal government, the issuer of dollars, the creator of dollars, is just like your creator, your parents, chasing you out of the house so you don’t sit around all day. The federal government reminds us all that our dollars on account, just like our time on earth, are disintegrating, so get busy.

            For example, the reason that required minimum distributions (RMDs) exist in traditional individual retirement accounts (IRAs) is not that the federal government needs to confiscate the taxes from that money to finance itself. The federal government needs you to spend all that money and to help stimulate demand, not die with a pile of cash that you could have enjoyed during your life and deployed sooner into the economy. Another example, in June 2014, ECB President Mario Draghi adopted a –0.1% interest on the deposit rate, a first for such a large central bank. This meant that commercial banks would have to pay to leave reserves at the ECB instead of lending them out. This could be a test drive that may portend what new tools central banks are planning to use to arrest deflationary forces in future monetary policy. If, let’s say, federal governments were to eliminate all cash currency and coins (some costing more to make than they are worth) to streamline the drag of counting out change during everyday transactions or to perhaps try to reduce off-the-book, underground economic activity, you would not be able to withdraw cash out from your bank to escape a negative interest rate. To avoid this devaluation, this ‘tax,’ you would have no choice but to put your dollars to work—exactly what every central bank wants. Therefore, despite what you hear, dollar devaluation, deficit spending, and money printing, when used and understood correctly, actually play important roles in growing our economy.

            An example of out-of-control money printing is the credit crisis of 2008. Access to credit was overextended to non-qualified home buyers. Mortgage lending standards evaporated. We all drank the Kool-Aid. Everyone was convinced that home prices would keep going up: the home buyers, the real estate brokers, the mortgage loan companies, the politicians, the Fed, the banks, the traders, the rating agencies, and the buyers of collateralized debt obligations (CDOs) infected with toxic sub-prime loans—everyone except the home sellers and the people who bet on a mortgage market meltdown using those synthetically created CDOs intentionally designed to pay off when the mortgage market crashed.

            An example of controlled money printing that grows our economy goes something like this: Someone borrows money from a bank to buy a home. He signs an IOU over to the bank and gets the money. That is how the nonfederal government monetizes debt. Nonfederal-government debt monetization occurs the moment anyone borrows, or sells his indebtedness for money. Next, the bank sells that IOU, now a mortgage loan, to the Government National Mortgage Association (Ginnie Mae), a direct arm of the federal government. Ginnie Mae buys mortgage loans from all the banks and mortgage loan companies to expand the mortgage bond market, to provide greater liquidity for more mortgage loans and achieve its goal of promoting increased home ownership. Ginnie Mae takes that mortgage loan and other mortgage loans purchased from other banks and, through a process called securitization, creates a mortgage bond known as a Ginnie Mae bond. Ginnie Mae bonds are ultra-safe and liquid because they have an explicit guarantee, or backing of the federal government. Unlike a Treasury bond, this Ginnie Mae bond is actual debt of users of dollars, the nonfederal government. That Ginnie Mae bond is sold to individual investors through mutual funds, or through banks and broker dealers, to institutional investors like pension funds. Other investors may also buy and sell those bonds during the normal course of daily Wall Street bond trading, and all of this is a normal part of growing our economy.

            The part that is not normal is the credit crisis of 2008, which the Fed responded to by starting LSAP. That Ginnie Mae bond and other mortgage bonds known as Fannie Mae or Freddie Mac agencies or mortgage-backed securities (MBS), were all eligible for monthly purchase by the Federal Reserve Bank’s LSAP program. The Fed bought all these bonds back to manipulate the price of money—this time in the form of mortgage loan rates—downward, to attempt to specifically stimulate the housing market. Most people in general again confused this with debt monetization, but it’s more like debt monopolization. Those mortgage bond holders forced to sell their bonds to the Fed would much rather have those bonds back rather than have all those cash dollars in a low-interest-rate environment, but they had no choice—another example of the complete monopoly control of dollars that the federal government, the issuer of dollars, and its fiscal agent, the Federal Reserve Bank, holds.

            At the end of the day, what has really happened? Instead of the federal government just providing liquidity to banks and mortgage loan companies to promote home ownership, the federal government has taken the banks and the mortgage loan companies out of the picture. The federal government is now directly involved in the mortgage loan business, directly providing credit to those seeking to finance spending on homes. If any criticism or complaint is made that the federal government is ‘monetizing debt’ or ‘printing money’ to finance spending on homes, is that true?

            The answer is no. The answer is no because the nonfederal government, the home buyer is the one who monetized debt and printed money. The home buyer monetized debt at the moment he received the money in exchange for signing a mortgage, at the moment he was approved for the loan. This nonfederal-government deficit spending is how the economy grows, the way the money supply increases. The Fed can keep filling that trough with low-interest money and lead the horse to that water, but only aggregate demand—like someone borrowing to own a home—only that horse, can drink the water.

            Another key to understanding modern monetary theory (MMT) is to also see how the nonfederal government in our modern monetary system prints money, or creates deposits on the operational level. Using the above example of getting a mortgage loan, on the operational level, money was given (debited) from the mortgage lending bank to the home buyer, and that loan amount was posted (credited) on the books of the lending bank as an account receivable (equal and opposite). The bank that lent the money to the home buyer then created reserves—or, more specifically, created a deposit in the Reserve account at the Federal Reserve Bank—to cover a necessary reserve requirement that is always done for any bank liability like a new loan obligation. Note that the loan (the home buyer) created (printed) the deposit (money). That is how the entire nonfederal government, the users of dollars, prints money—by borrowing it. The home buyer, or anybody else in the nonfederal government, prints money—or, more specifically, creates deposits—by borrowing money, by taking out loans, a necessity anytime the nonfederal government deficit-spends. This is why the Fed increasing reserves during LSAP does not automatically result in increased borrowing, or more printing of money by people. The Fed wants people to increase borrowing, the Fed is trying to encourage the people to print money, but increased borrowing is not automatic. This is a crucial concept of MMT: Loans create deposits, not the other way around; and as explained above, your newly-created ‘bond’ create loans create deposits. You don’t borrow a million dollars from a bank because the bank has a million dollars; the bank has a million dollars in loan receivable assets because you borrowed that amount. You didn’t take out a mortgage because the Fed printed money; a reserve requirement on deposit was printed at the Fed because you took out a mortgage.

            The federal government, the issuer of dollars, also prints money by spending more than it receives, by deficit spending. For example, the federal government prints money when it orders up and pays for an aircraft carrier. Federal-government deficit spending and nonfederal-government deficit spending together interact in an economic ebb and flow of demand between the issuer of dollars and the user of dollars. Money is created, or printed, by an initial demand by either the federal government or the nonfederal government. The Fed watches over all this money printed by everyone else, studies the effect that all this money is having on the prevailing economy, and through monetary policy, attempts to regulate future demand.

            That demand from both the federal government and the nonfederal government, or total aggregate demand, is crucial for money to keep being created, for the velocity of dollars to keep going, ensuring that our economy keeps growing. If the demand from us, the nonfederal government, starts to leak, then the federal government needs to take up that slack, to recover that demand leakage. It is much better, though, if demand from us—that is, nonfederal government demand—is strong enough to not need federal government demand, to not need the federal government to ‘prime the pump.’ That home buyer may have decided to borrow, or to print, the money to buy that home because his job is going well, or because he feels confident about the future and maybe even plans on borrowing more in the future. This represents healthy demand and is why nonfederal government borrowing is so important for a growing economy: Nonfederal government deficit spending prints money from, or is pulled by, real demand; whereas federal government deficit spending tends to print money for, or is pushed by, artificial demand. For example, money printed into the economy from federal-government pork-barrel deficit spending may not have as much velocity as money printed into the economy from real demand from nonfederal-government deficit spending. Just like a rope, money printing works better when it is pulled, not pushed, so conditions need to be created that provide an environment that encourages money printing by the nonfederal government. If an environment is created that encourages money printing by the nonfederal government, then the economy is growing organically, and won’t have to rely so much on ‘money printing’ by the federal government.               



            The debt ceiling is an anachronism of a bygone era when the U.S. dollar was backed by gold, when the federal government needed to acquire that gold, an era when both the federal and nonfederal government were users of gold. An era when the federal government, like everyone else, had to exchange something to get dollars. Created in 1917, the debt ceiling replaced a previous policy in which each spending appropriation had to be approved, so to avoid having to legislate each and every single bond issue, Congress gave a limit, like with a credit card.

            Today, however, a credit card for the federal government, the issuer of dollars, is no longer like a credit card for you and me, the users of dollars. Both the nonfederal government and the federal government print money. The big difference is that when the nonfederal government prints money, those users of dollars are in debt, but when the federal government prints money, it isn’t in debt. We dollar users have to get dollars to pay a credit card balance back because we cannot issue dollars to pay the balance like the federal government can. A credit card limit is a constraint on all of us, the nonfederal government, because we all need to get the money to pay back our debts. The federal government, the issuer of dollars, will never run out of dollars; therefore the debt ceiling today is an arbitrary and unnecessary vestige from the past. The federal government creates dollars, so it always has the ability to make dollar interest payments on Treasury bonds. The United States will never default on its Treasury bonds unless intentionally because of suicidal politicians. There should be no fear of the federal government spending beyond a ceiling, nor even the mention of a default. Until the debt ceiling stops being used to threaten a default, the theatrical fights over it that caused the 1995, 2011, and 2013 debt-ceiling crises (and that will cause future crises) to come were (and will be) nothing more than dangerous power grabs.

            The key to understanding why the debt ceiling and the debt-ceiling fights are meaningless is knowing that since leaving the gold standard, the nonfederal government and the federal government are playing the same game but by different rules. The nonfederal government prints money but has to finance it because it doesn’t issue dollars, while the federal government prints money but doesn’t have to finance it because it does issue dollars. Our credit cards have credit limits that are real because we can’t issue dollars, whereas the federal government credit limit called the debt ceiling is not real because the federal government can issue dollars. We dollar users have to get dollars to pay our credit cards, which is a problem, but the federal government can issue dollars to pay its credit card, which is not a problem.

            To be fair, an important point of view in the debt-ceiling debate is the concern held by many that every time the government raises the debt ceiling—every time more Treasury bonds are issued—the federal government is mindlessly spending money. That depends. If an economy is growing rapidly, inflation expectations are increasing, interest rates are ticking up, and everyone who wants a job can find a job, then the federal government would be foolishly spending money by raising the debt ceiling. In that scenario, the federal government would be recklessly fueling inflation, when too many dollars are chasing too few goods, and causing prices to increase too quickly. That should instead be the time to drastically decrease federal-government deficit spending, and even to also consider raising federal taxes if necessary, to hit the brakes on growth as prudent fiscal policy in the interest of balancing the economy, (rather than the interest of balancing a budget), would call for.

            At this writing, seven years after the 2008 credit crisis, however, the world economy is facing the exact opposite problem: The aggregate demand for goods and services is simply not strong enough; we are still suffering from a dangerous and threatening worldwide disinflation. We may not think the economy will get worse, but it may. We may not see people standing outside in bread lines like during the Great Depression, but they are—only out of eyesight, because the unfortunate masses today get assistance electronically. Too many people have given up hope of finding work and have dropped out of the labor force for good, which sugarcoats the unemployment rate. We are now in a generational demographic shift that started in January 2011 when 10,000 baby boomers began turning sixty-five every day, half of them with inadequate savings, dependent on family, on government, and on Social Security to survive, and that continues, another 10,000 each and every day, until the year 2029.

            That was the bad news. Now here is the good news: In October 2014, the Fed ended the LSAP program, which breathed a sense of relief to everybody, especially because all other major developed economies across the globe still needed aggressive monetary policy. In the November 2014 U.S. midterm elections, the Republican Party scored decisive victories and won full control of the Congress, so with that and the Democratic Party in the White House, everybody in America now at least has something to like in Washington, DC. With all uncertainty removed for the next two years, both political parties can focus on actually governing and effectively legislating for positive results to show their constituents for the next national election. Add to this equation recent plunging oil prices, meaning less money required to fill up our gas tanks and heat our homes, and you have the perfect environment for a potential economic breakout.

          Meanwhile, more federal-government deficit spending (stimulus spending on infrastructure for example) will still be needed to help attempt to make up for the massive slack in aggregate demand, to help get the unemployed back to work, to help increase skills, which helps increase wages, to help keep our economy, and the global economy, from stalling or even possibly slipping into a perilous deflationary spiral. Increased federal government stimulus spending, lower federal taxes, (fiscal policy) and low interest rates (monetary policy) play only a part in getting our economy back to full strength. Broader solutions and comprehensive reforms to boost competitiveness are needed to get us, the people spending more. Putting more purchasing power back into the hands of consumers, with fiscal and monetary policy rowing in the same direction, plus a surge in confidence throughout the country from a true belief that the federal government is working well to improve our lives, is the only way to get a weak economy back to being strong again. Let’s hope our politicians engage in that debate.



            The concept of U.S. national debt is a fossilized, American antiquity, a vestige of our gold-standard era. Since the gold standard era ended, the federal government operates under a new paradigm, different from when it was a user of gold or gold-backed dollars like everybody else. The U.S. national debt was the total, or the accumulated amount, of all the federal-government deficit spending ever done to date—that is, the amount of money our federal-government deficit spent from its very first year as an independent nation since funding the Revolutionary War, plus all the years of deficit spending in the years that followed. Each of those years of federal-government deficit spending, added up, that grand total, even to today in the twenty-first century, is still called the U.S. national debt, because even to this day, it is thought by most people that our federal government is still in debt, just as if it were still a user of gold. Since the federal government changed from being a user of gold or gold-backed dollars into the issuer of dollars, dollars that are neither convertible nor fixed to anything, however, the national debt is no longer a debt at all. If that clock in midtown Manhattan weren’t there only to create a sensation, it would correctly say the national debt is $0.00 instead of ticking ominously ever higher. Better yet, let’s start calling our national ‘debt’ and that $18-odd trillion on that clock the national debit.

          There is no federal-government national debt, nothing to worry about, no burden on your children, and no danger to the financial stability of the country, because all Treasury bonds are denominated in dollars. The federal government can always issue dollars backed not by gold, which is limited, but instead by our full faith and credit, which is unlimited. Contrary to a user of dollars like a local or state government, the federal government cannot run out of dollars. The economic fact of life today is that our federal government, the issuer of dollars, never, ever, lacks the means to finance itself.

            On August 15, 1971, when President Nixon ended both the Bretton Woods system and the convertibility of our Treasury bonds to gold, our country’s cumulative national debt changed from being a historical debt of gold, gold-backed currency, or gold-backed Treasury bonds to just an accounting entry, a ledger posting, a debit of dollars by the federal government, the issuer of dollars. Today, in the post-gold-standard era, in our modern monetary system, when the federal government deficit-spends, or ‘prints,’ money, because it is no longer a user of gold or a user of dollars like everybody else but is instead now the issuer of dollars, the federal government no longer needs to borrow to finance spending. Buyers of Treasury bonds are not financing the federal government anymore. Nobody is lending our federal government anything. Our federal government, the issuer of dollars, doesn’t need to get dollars from anyone. Congress authorizes spending, the count is kept by an accounting credit entry, or addition, in outstanding Treasury bond issuance, and these new issues of Treasury bonds are auctioned, sold, and assigned to new owners in book entry (electronic) form. Simultaneously, the Fed, as the agent of the federal government, by fiat, by computer keystroke, simply debits dollars. These newly created, freshly printed deficit-spending dollars are distributed from the issuer of dollars to the users of dollars. Each year’s deficit spending by the federal government equals the amount of net savings to the nonfederal government to the penny. (That is not conjecture, it is an accounting identity like assets equal liabilities plus capital). Far from being a problem, deficit spending by the federal government, the center of our economic universe, is the true source of dollars in the global economy and is therefore crucial to balancing total aggregate demand.

            Besides provisioning itself and making national expenditures, our federal-government’s deficit spending balances the economy by kicking that flywheel, a yin-yang of mass production and mass consumption (supply and demand). When the U.S. economy is strong and that wheel has balanced spin, then less kicking, less—or even no—federal deficit spending is needed. If the economy were too strong, growing too quickly, and dangerously close to a spike in inflation, or even a drastic hyperinflation, would decreased federal government spending that creates a surplus be prudent, as long as that surplus were short term and simply slowed, not totally stopped the wheel. Conversely, if the economy were too slow, if amounts of federal spending, or federal purchasing power (fiscal policy) is insufficient— political decisions made between the president and Congress—then it would be up to the Fed, independent yet within our federal government, to counterbalance with needed action (monetary policy) that accommodates the economy until it recovers needed spin from strong consumer purchasing power.

          Today, the broad market for all bonds, all debt issuance, is known as the credit markets. This is another example of gold standard mentality, because today all bonds are not debt. Only the users of dollars are in debt when they deficit spend, because users of dollars cannot issue dollars and they must still borrow dollars to finance that deficit spending. The issuer of dollars is not in debt when they deficit spend, because they can issue dollars to finance that deficit spending. Since leaving the gold standard, whenever the issuer of dollars spends in deficit, instead of increasing a debt balance like any user of dollars, the issuer of dollars increases a debit balance. Because U.S. Treasury bonds issued by the issuer of dollars are now debits instead of debt, instead of calling the marketplace where Treasury bonds trade the credit markets, it would be more accurate to call the marketplace where Treasury bonds trade the debit markets.

          All bonds other than Treasury bonds are in the credit markets because there is a credit risk, or a chance that the bond issuer may fail to pay interest and principal in a timely manner, or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline. Treasury bonds should not be thought of as being in the credit markets. Treasury bonds are issued by the issuer of dollars, and because the issuer of dollars can always issue more dollars to make interest and principal payments in dollars, Treasury bonds will never fail. There is no credit worthiness to consider because Treasury bonds will never default. The issuer of dollars can never go bankrupt, only a user of dollars can go bankrupt. All bonds issued by the users of dollars, however, may default. Because the users of dollars may not always be able to make those bond interest and principal payments, all these bonds other than Treasury bonds may fail, so that is why these bonds of the users of dollars are in the credit markets. Credit rating agencies would most likely not agree with any of this, in fact, Standard & Poor’s reduced the credit rating of U.S. Treasury securities, to AA+, four days after the Budget Control Act of 2011. Keep in mind, however, that credit rating agencies are the same folks that prior to the 2008 credit crisis, had rated many toxic mortgage-related securities, AAA, or ‘Outstanding’.

          The debit markets should include not only all U.S. Treasury securities, but all other worldwide federal or national government bonds denominated in a floating, non-fixed, nonconvertible currency like JGBs, and UK Gilts as well. A debit markets designation would clearly separate the cost of capital between the debits of the issuers of currency and the debts of the users of currency. All investors around the globe would be able to distinguish the difference between what are essentially only debits, of the issuers of currency in the debit markets (subject to central-bank manipulation and cannot default), from the actual debts of users of currency in the credit markets (subject to market forces and can default).

          In the post-gold-standard modern monetary system, it is crucial for federal policymakers, across the world, to help their users of currency, by balancing the economy, rather than obsess over balancing a gold-standard-era federal budget. In other words, it is no longer a problem for a national budget to be out of balance, it is only now a problem for a national economy to be out of balance. In the post-gold-standard modern monetary system, the only way to get your federal budget moving back towards balance is to first get your federal economy moving back towards balance. On the website of economist Warren Mosler, The Center of The Universe, it states “Mosler’s Law”: “There is no financial crisis so deep that a sufficiently large tax cut or increase in public spending cannot deal with it”. Countries across the world struggling with unbalanced economies should heed this advice.

          In Japan, instead of considering a large tax cut to deal with a weak economy, struggling for decades now to fully escape the deflationary forces of contraction, Japanese policymakers increased taxes! In April 2014, because those Japanese policymakers were more concerned with balancing the federal budget, the Japanese government raised the national sales tax, called the Consumption Tax, from 5% to 8%, and with an additional increase to 10% planned for the following year. The result of this nonsensical gold-standard mentality was a recession. As is standard operating procedure with any large tax hike, the Japanese economy promptly contracted both quarters immediately after that tax hike.

          Like any country that needs more economic growth, Japan simply needs less taxes, more public spending, and meaningful reforms to get the economy back in balance. Japan should not be worrying about balancing a federal budget. Japan has over one quadrillion yen in outstanding Japanese government bonds (JGBs), double the size of the economy, but so what? Those JGBs are denominated in yen. Yen is a non-convertible, free-floating currency. Yen is not backed by gold, nor fixed to the U.S. dollar anymore, so the issuer of yen will never, ever, have a problem ‘paying back’ anything denominated in yen. Just like a U.S. Treasury bond, a JGB is not actual federal debt anymore, not in the modern monetary system. Today, just like U.S. Treasury bonds, JGBs are not a national debt anymore, Treasury bonds and JGBs are just a national debit. Today, the Japanese government, the issuer of yen, creates yen, deficit-spends that yen, pays that yen, into the economy, to the users of yen, and then those users of yen put it all back, right back into the Japanese government, into JGBs. That is not debt. That is ebb and flow, tidal gravity, ecological transfers, all within one vast and immense, intertwined, interacting, multivariate, multinational, Japanese yen dominion. Japan rose from the rubble of the Second World War to become a free, wealthy, industrialized, modern paradise, the third largest economy in the world, because of all the federal government deficit spending, not despite of it. Getting a federal budget back into balance is not Japan’s problem, getting a national economy back into balance is Japan’s problem. The issuer of yen, with an economy out of balance, simply needs to get more yen, more purchasing power, into the hands of Japanese consumers to buy more goods and services, not just more yen into the hands of central bankers at the BOJ to buy more bonds.

          Furthermore, over in the Eurozone, since the 2008 credit crisis, many citizens of the weaker Eurozone countries that did not cause the crisis have been subjected to austerity. This cutting back by some Eurozone citizens makes most others cut back, which creates a so-called paradox of thrift, making overall economic conditions even worse. Meanwhile, Eurozone politicians, with 12% of the Eurozone labor force unemployed, are not making the immediate reforms desperately needed for both immediate-term and long-term economic growth. The ECB wants Germany, the largest economy of all member states in the Eurozone, to consider increasing stimulus spending (demand-side fiscal policies) while Germany wants the ECB to consider pushing for more reforms like labor reforms in weaker countries, like Spain (supply-side fiscal policies). Until Germany and the ECB can come to a solid agreement on ways to help long-term growth prospects throughout the Eurozone, and implement them, the ECB has no choice but to kick the can down the road and increase bond buying.

          In a confluence of events in late October 2014, at the same time the U.S. Federal Reserve Bank ended its QE program, the Bank of Japan, with an economy that had just fallen into yet another recession, announced its own expansion of quantitative qualitative easing (QQE). This QQE program included $250 billion, yen equivalent, of more in purchases of Japanese government bonds by the BOJ than previously announced, plus a tripling of purchases of both Nikkei 400 stock index exchange-traded funds (ETFs) and real estate investment trusts (J-REITS) by the BOJ. In addition, sensing an urgency to “do what it must” to lift inflation, ECB President Draghi said he would also like to start another asset purchase program called “public” QE, meaning the start of Eurozone sovereign debt purchases by the ECB.

          Only bold politicians making unpopular, but desperately needed tax cuts, shovel-ready stimulus, and real reforms that kick-start consumption will create an environment for long-term economic growth, not just the BUY button of a central bank keyboard.



            Investment in Treasury bonds, like any other investment, is generally done for one of three reasons: to simply buy and hold, to hedge against other investment positions, or for speculation (taking the other side of the first two). With the rise of day traders, hedge funds, and full-scale high-frequency trading, the share of speculative activity in the investment realm has also risen dramatically. That space once dominated solely by investment banks is now shared by all kinds of financial-products-and-services firms. This is not because Wall Street has gotten greedier; it is because, as the saying goes, that’s where the money is.

            Of course, Wall Street, like any street, has its share of bad actors, but working in tandem with the Federal Reserve, Wall Street has powered capitalism and our country. State-of-the-art technologies with microsecond market price formation enables buyers and sellers to continue coming together here in the financial capital of the world. To know just how much money Wall Street firms are competing for, look at our national debt—or, as I would prefer it be called, the national debit. Nearly $18 trillion at this writing has been debited from the federal government, which issues those dollars, and credited to the nonfederal government, which uses those dollars to grow the economy. Thanks to our fine-tuned, man-made, post-gold-standard modern monetary system, today, the United States of America has the strongest economy on earth.

            Full faith and credit in the U.S. federal government, which confers risk-free status in our U.S. Treasury bonds and other securities, is really a full faith and credit in ourselves. It is not just our Treasury bonds and our dollars giving strength (and backing) to our economic system; it is us, we the people. What truly backs our monetary system is us. We are all backed by nothing but the full faith and credit we have in each other. It is a backing, a commitment amongst ourselves, to abide by our laws, to help others, to pursue happiness, and to make the world a better place for our children. The gold standard was replaced by the golden rule.

          Most people think of a crystal ball as some kind of magical sphere with which one can perform an act of clairvoyance or pretend to see the future. Actually, the crystal ball is more like a reflection glass. The proper way to read the crystal ball is not to look into the middle of it but to look at the side of it, to see the reflections of the past. What goes around usually comes around, so you can have a lot of success in the future by watching the reflections on the crystal ball, by looking at the past and studying the past, because the past usually repeats. As that saying goes, you yourself should study the past or be condemned to repeat it. Keeping your eye on the reflections will also let you recognize the past if it does go around and reappear on the other side of that crystal ball.

           In a June 2012 policy study called Global Aging and the Future of Emerging Markets, Richard Jackson, senior fellow for the Center for Strategic and International Studies (CSIS), warned that “Japan may be on the edge of a new economic era, an era of secular economic stagnation, which certain other fast-aging developed countries will soon enter.” At that same time in 2012, the Unicharm Corporation, Japan’s largest diaper maker, reported that in Tokyo, sales of diapers for the elderly had begun outstripping sales of baby diapers. You can safely assume that you will be seeing a similar statistic about diapers coming around that other side of the crystal ball here in the United States and other countries in the not too distant future.

         Studying Japan’s past is an easy way of guessing what will appear on that crystal ball next, and perhaps the easiest way to have guessed what would happen here in the U.S. is to have lived in Japan about twenty five years ago. In October 1987, I had the amazing opportunity to transfer to my company’s Tokyo branch, where I met my wife, Yukiko, and I eventually spent fourteen years living in Japan. My coworkers and I saw several strange phenomena in Japan during the 1990s that came across as very odd to any other recently arrived American expat. For example, twenty five years ago in Japan, during the nineties, there was a lot of concern among the Japanese about their “graying of society.” There was an unusual spike in suicide rates. Many Japanese started losing faith in their government. Young adult Japanese, even though they were employed in good jobs paying well, were having fewer children or none at all, and preferred to live in “rabbit hutch” apartments. Other Japanese, that recently graduated college, were having trouble finding full-time employment, and called “freeters” from the English word freelancers, had no choice but to accept low-paying part-time jobs. Some of these part-timers couldn’t afford rent in Tokyo and, known as “parasite singles,” moved back in with their parents. Many Japanese gave up on ever finding jobs again, some never left their bedrooms, and became known as “the reclusive people.” The Japanese media focused on the shrinking middle class and referred to those increasingly marginalized from the elite as the “gap society.” The Bank of Japan (BOJ) introduced a novel monetary policy invention that became known in the press as quantitative easing, with the explicit purpose of manipulating interest rates down to almost zero to accommodate the Japanese economy and pull it out from deflationary forces that had lasted many years. Pundits ridiculed this dangerous “experiment”, and many opportunistic Japanese policymakers constantly criticized this reckless expansion of the central bank balance sheet. Sound familiar?

          My coworkers and I could never imagine that these eerily bizarre events taking place in Japan back then, in the nineties, would ever reappear on the other side of the crystal ball in the U.S. or in other countries, ever again, yet today, a variation of these same themes routinely appears. Since the credit crisis of 2008, here in the U.S., there has been plenty of criticism leveled against the Federal Reserve Bank’s extraordinary monetary policy actions. The war of words excoriating central bank bond buying is now flaring up in the Eurozone, as the ECB contemplates beginning a “public QE”, or an expansion of purchases that will include member state sovereign bonds. Lost in all this criticism, finger pointing, and fear mongering, is who is also to blame for endless worldwide central bank intervention in the markets. Instead of doing nothing, and trying to turn the public against competing parties of the federal government and all the central bankers, policymakers can simply to their jobs, get to work, improve the economy, and that will stop the central banks, that alone will end all the QE. Nobody said that extraordinary monetary policy of central bankers is the cure-all for an economy in crisis. Extraordinary monetary policy just buys time so policymakers can do what actually needs to be done to cure an economy in crisis. One the patient is put under sedation, that’s the time for the surgeons to operate, not start bickering with the anesthesiologists. Just as in normal economic conditions, you have to first balance your economy in order to balance the federal budget; policymakers need to first make the extraordinary fiscal policy changes that will grow the economy out of crisis, in order to end the extraordinary monetary policy.

          Most of the fear propagated by politicians, pundits, and market gurus has a purpose. They repeat inaccurate myths to exploit your fear and use it to gain power, ratings, or your wealth. Some politicians are uncomfortable with the immense power that the Federal Reserve Bank wields, especially because the less effective those politicians are in their fiscal policies, the more aggressive the Fed has to get with its monetary policies. These politicians despise the Fed’s independence and that the Fed does not take orders from them. Some pundits on the airwaves need to keep scaring you constantly so you keep watching their commercials. Some investment gurus will frighten you into thinking the worst—that Social Security is a Ponzi scheme, for example—to goad you into letting them handle your finances. A dubious salesman will insist that the dollar will soon be worthless, to convince you to buy gold or to bet against the country by using his products. Anyone with a trade position against the American economy getting stronger will commonly ‘talk his book’ and predict financial Armageddon to make those bets pay off. Supporters of a special interest may invent a fake or simulated problem caused by some nonexistent threat to gain power, or it is possible, that they just aren’t sure what they are talking about. People spreading fear may just not understand our modern economic ecology and may cling to the old understandings, the old instruments of the past, as if our economy leaving gold was just like a rocket in initial flight, still pulled by the forces of gravity; that rocket, however, had a booster separation and left those forces of gravity (gold) and entered outer space as a capsule. Thus, we have many people today struggling with the controls, with that instrument panel, not understanding zero gravity, and thinking like old-school pilots instead of space-age astronauts

            Do not fear of a default of our Treasury bonds, or of our dollars becoming worthless, or of our monetary system ever collapsing, but only of a weakening of that full faith and credit that we have in each other. As long as we continue to believe in each other, our country’s achievements, like our dollars, are truly unlimited. The next time you hear or read someone once again trying to scare you about the national debt or our country going broke, just remember that one of two things is happening: (1) The speaker knows that what he or she is saying is not true, but the speaker needs you to believe it to advance some agenda, or (2) the speaker has no idea what he or she is talking about. Ask yourself which is worse. Then sit back, tune out the noise, and have full faith that the use of fear to weaken your full faith, will, like many other things in this life, reappear on the other side of that crystal ball again.


          Marine mammals that live in the sea must surface to take gulps of air. These mammals are always conscious of how much oxygen they still have left, because this fixed amount determines when they need to resurface for more. This is how our monetary system worked in the gold-standard era. The dollars in our national economy, like oxygen inside those lungs underwater, was constantly limited. The range, or potential, of our economy was constantly limited. Then, just like a mammal that evolves from the sea, our monetary system evolved. Our federal government, the issuer of dollars, like that evolved mammal, is no longer limited by a fixed amount of air, unlike those other mammals, the users of dollars, which were left behind and remain in the sea. Like that evolved mammal, with newer powers, that now roams the land, no longer needing to be concerned about its source of oxygen or of running out of oxygen, our post-gold-standard modern monetary system has many other, much more important, things to worry about.

            Let’s circle back to the beginning of the book and the analogy of points on a scorebook, but now I want you to imagine that you are walking home from that stadium after the game. To sustain a leisurely stroll, you breathe at a natural, steady pace. Every fresh breath of oxygen going right into your lungs is like fresh deficit-spending dollars going right into our economy. If you then start walking up a steep hill, you naturally need to breathe more heavily, you need to breathe more of that oxygen; and just like an economy currently in a more difficult position, the economy would need more dollars, more economic oxygen. Just an increase in oxygen isn’t enough, however. You need much more help to get up this hill; you must have more effort from the rest of the body. Just standing there, taking huge gulps of air won’t get you up that hill, just like QE adding reserves alone will not automatically cause the economy to move to a better position. The national economy needs the two legs, mass consumption and mass production, to work together, striding powerfully to make that climb. The national economy also needs the two arms, Congress and the president, working in sync, not just hanging there, unmoving. Afterwards, once you resume walking in a balanced pace on level ground again, that would be the appropriate time to breathe more easily; and likewise, for the economy, only then should federal deficit spending to be restored back towards balance as well. Once back to a ‘normalized’ walk on level ground, you should just let the rest of the body do the work, resume normal breathing, without having to heavily gulp oxygen anymore. Understanding the concepts of modern monetary theory will help you enjoy that walk, and not worry about being in debt for how many breaths you took when climbing that hill or having to pay back that oxygen. Just like you do not pay back the air you breathe to supply your body with that air, the issuer of dollars also does not pay back the dollars it creates to supply their economy with those dollars (nor do we have to put all that gold that we dug up back underground).

          To help understand modern monetary theory (MMT), one must have an open mind, and may need to unlearn many mainstream beliefs regarding the monetary system. Common understanding about financing the federal government or our monetary system inaccurately pertains to how it worked in a now outdated gold standard era. The further away that our monetary system moves beyond that gold standard era, the less understanding there is about our monetary system, which only increases the frustration many people have with Washington. Before you even begin to understand MMT, however, you need to check your political bias, as well as any gold standard mentality, at the door. Be willing to consider an opposing viewpoint, and try as hard as possible to think independently. The Federal Reserve is independent. The Fed has no political bias. To truly understand the Fed and our modern monetary system, neither should you.

          The more that the concepts of modern monetary theory begin to make sense, the more that the concepts of political theory may begin to make sense as well. For example, in MMT, all of the users of dollars, the households, the businesses, the local and state governments, all must live within their means, balance their budgets, and avoid getting into too much debt. Traditionally, this is the purview of the Republican Party. Fiscal conservatism is a core pillar of the Republican Party’s principles, and the most to benefit from fiscal conservatism are the users of dollars. No doubt a good reason why, at this writing in 2015, Republicans have full control of both houses of Congress, (54% Republican Senators, 57% Republican Representatives), and 62% of U.S. states have Republican governors. On the other hand, the federal government, the issuer of dollars, since leaving the gold standard, should be more concerned with balancing the national economy than balancing a federal budget. In the post-gold-standard modern monetary system, the President of the United States should also be thinking beyond balanced budgets, greater profits, or healthy balance sheets; the federal government, the issuer of dollars, should also be thinking about a balanced economy, greater prosperity, and healthier citizens. Traditionally, this is the strong suit of the Democratic Party. Liberal thought tends to concentrate on those needs that are of higher importance for the issuer of dollars, like more equality, greater tolerance, and the expansion of opportunities, for all. Therefore, both the issuer of dollars and the users of dollars need and depend on both political parties. The better both political parties work together, the better off both the issuer and users of dollars are.

          Just try to not let yourself be led to believe from others constantly telling us how to think that one political party is good and the other is bad. That is not rational. Politics is not sports. On any given Sunday, you should watch both teams through an independent prism and cheer for the team, the political party, which has the best idea. A spirited clash on the field of ideals, between competing political parties, always going head to head, will usually result in a moderate compromise, and a huge win for all Americans. Being a free country, free to disagree, which encourages constant debate, and constant improvement, may not always be so pretty, but is definitely the quickest, most efficient way to become a stronger nation.

          Our economy is no longer financially constrained, nor quantified by chests of gold as in our past or in the pasts of others. Our economy, just like our dollar, is now held back only by a limit of imagination and reach of innovation. Today, our monetary system is untethered. Issuers and users of dollars are backed by nothing more than the full faith and credit in our federal government and in each other. This alone is enough to make our dollar the world’s reserve currency, the payment of choice across countries, and the money supply of Earth’s greatest economy—an economy kept resilient to external shock by expert handling by the Federal Reserve Bank. Many critics try to convince us otherwise, that instead the Fed’s actions are a threat to the financial security of the country. For example, critics of the Fed will try to convince you that the Fed’s actions will cause some calamity such as hyperinflation, or a collapse as in the German Weimar Republic. The truth, however, is that the currencies of Weimar or Bolivia or any other country that collapsed were fixed or convertible to something. There is no example in history of any government collapsing from hyperinflation with a floating, nonconvertible currency like the U.S. dollar. Instead of listening to misinformation and standing too close to the gold-standard-mentality picture, we should all step back, understand modern monetary theory, and marvel at the totality of the masterpiece that is our post-gold-standard, modern monetary system.

            U.S. Treasury bonds play a crucial part in the function of capitalism which powers the largest economy in the world, and the greatest nation in history. Treasury bonds serve as electronic postings, or debit entries of money printed by the federal government, to equally offset all deficit spending (to equally offset all those credit entries made to the nonfederal government). All money printed, or all dollars issued by the federal government and spent into our economy adds to the national debit balance—the total amount of outstanding U.S. Treasury bonds. During the gold standard era, when dollars were convertible, or fixed, that balance of the national debt was an actual debt to the federal government—because it was denominated in gold-backed dollars and the federal gov’t could not create gold by fiat. Post-gold-standard however, dollars are no longer convertible to gold, dollars are free floating, and so today, that national debit balance is no longer a ‘debt’ to the federal government—because it’s denominated in dollars that the federal gov’t can create by fiat. Take a dollar bill out of your wallet. You are looking at a perpetual ‘bond’ with a 0% coupon. Treasury bonds are just dollars with a maturity date and a coupon (and since the national ‘debt’ hasn’t gone down since 1957, now in the post-gold-standard era you could consider them all ‘perpetual’ as well). Think about that, the federal government is exchanging their ‘dollars’ (which they have an unlimited amount of) for your blood, sweat and tears (which you only have a limited amount of)—and the federal gov’t will do that trade All.Day.Long. So rather than think of it as a ‘debt’, that national debit balance is better thought of as an asset of the nonfederal government (on the left side of their balance sheet); and, as a rolling, or perpetual, ‘bondholder’s equity’ of the federal government (on the right side of their balance sheet). Every penny of that public-held national debit balance is saved in U.S. Treasury bonds by the nonfederal government, and it always remains within the U.S. dollar dominion of the sole issuer—the U.S. federal government’s banking system. That national debit balance of Treasury bonds represents the total amount that was needed ever since the founding of our nation to keep the promise of democracy to all Americans. Today, that national debit balance equals the confidence that all users of dollars around the globe currently have in the United States. The higher the amount of that national debit balance, the fuller the faith and credit the world has in our nation. That national debit balance will grow and will continue to underwrite freedom and prosperity to all humanity. That balance, the national debit, credited out to us, to We The People, benefiting all mankind, is a true treasure and “if it is not excessive will be to us a national blessing”. Alexander Hamilton (the guy on the ten-dollar bill) was right.

Debt/GDP ratio in a post-gold standard, post-QE world

“Reform lies dormant as Tokyo proves ‘Modern Monetary Theory’ —badly —but bond markets are unperturbed.”—William Pesek, Asia Times, March 2019

To be fair to MMT, most articles like this are written by folks who haven’t yet fully-grasped the pure MMT insight, which is that Japan’s ‘debt’ isn’t an *actual* debt (like a household debt).

Said in another way, a lot of the criticism of ‘description’ MMT emanates from a gold-standard-era mentality where Japanese Gov’t Bonds, aka Japan’s national debt, or US Treasury bonds, aka the US national debt—which are now denominated in a fiat currency—is still a ‘debt’ to the issuing monetary sovereign of that currency (as if IBM were in ‘debt’ of IBM stock).

In addition, to be fair to Japan, Japan’s government Debt/GDP ratio reached 253% in 2017—but is it an *actual* ratio of 253%?

In a post-gold standard, post-QE world, if Japan has a 253% Debt/GDP ratio BUT their central bank bought back 40% of their bonds, perhaps it’s more like a net 152% Debt/GDP (60% of 253).

In other words, don’t count the bonds at the federal government’s own central bank (nor the newly-created reserves that replaced them) as part of the Debt/GDP ratio. Don’t take my word for it, ask someone in finance that’s worth their salt if bonds that are ‘called’ back from bondholders, by the bond issuer, are still a debt to that issuer?

First of all, what is ‘QE’? Quantitative Easing (coined in the 1990s by Richard Werner who as chief economist of Jardine Fleming Securities Asia used this expression during presentations to institutional clients in Tokyo) was first tried in Japan. QE (also known as ‘credit-easing’ or ‘Large Scale Asset Purchases’ in the US) is a gov’t bond ‘buyback’ done by the issuer of a fiat currency. After a QE is done, it is as if the federal gov’t never collected that amount of money from investors, nor issued them any gov’t bonds in the first place; and the federal gov’t instead simply financed that amount of deficit spending by ‘paying cash’ with newly-created money (without going through the charade of ‘borrowing’ the money to finance it). The reason why monetary policymakers (the anesthesiologists) at central banks do a QE, is to lower long-term interest rates—to ‘accommodate’ the economy—which is not to be confused with ‘stimulus’ done by fiscal policymakers (the surgeons). Central bankers have been ‘targeting’ interest rates since the 1980s once the notion of targeting the quantity of money in the money supply was debunked—or as those initiated to MMT would say: ‘It is the price (of money), not the quantity.’

During their decades of quantitative easing, the Bank of Japan created reserves to buy the Japanese Gov’t Bonds. Meaning an increase (a net addition) of yen going into their banking system (that normally doesn’t occur without QE). Which begs the question, why even count those JGBs as debt if they’re now held at the BOJ? That would be like counting your own IOU that you just bought back and stuck in your own pocket—as still being debt.

Getting back to Japan’s private sector, the public-held debt in that 253% Debt/GDP was broken up. 101% of it (40% of 253) went to the BOJ—leaving a net 152% Debt/ GDP (60% of 253) in the private sector.

That 101% became newly-created reserves that the BOJ paid (for the bonds that replaced that 101% of that 253% Debt/GDP out from the private sector).

Meaning that (not including the 101% of JGBs that left the private sector and went to the central bank’s balance sheet) the 253% Debt/GDP is actually 152% Debt + 101% reserves / GDP in the private sector.

Furthermore, why count those reserves as debt (why include those reserves in the Debt/GDP ratio) if after all, those reserves are not debt. They are liabilities, yes; debt, no.

So that 253% Japan Debt/GDP ratio (that Godzilla) is more like 152%…

…and that’s even if you consider it a ‘debt’ (if you consider it a real monster).

Thanks for reading,

Pure MMT for the 100%

Real Macro for the 100%

P.S. As per MineThis1, “The nation is selling out its national wealth as Debt to GDP rises (as Debt to Asset rises)”; and as per Charles Kondak, “One could argue that Japan is a classic example of when deficit spending has the effect of diminishing marginal returns on the productive economy.”

So rather than thinking that Debt/GDP being HIGH is bad (or even considering it actually being a ‘debt’ that is even actually that ‘high’), if it’s RISING is the real warning indicator. Furthermore, rather than thinking of the national ‘debt’ as a monstrous Godzilla, better to think of the central bank as Godzilla.

Here’s the same picture as above showing the screaming people running from Godzilla (or more specifically, the people screaming trade orders while front-running Godzilla).


‘The more that the federal gov’t goes into debt, the more that we are indebting future generations.’

We are not ‘indebting’ future generations—not anymore. The pure ‘description’ MMT insight is that unlike a household debt, a federal debt is not an actual debt because now—unlike during the gold standard era—those Treasury bonds are denominated in a fiat currency that the federal gov’t has sole monopoly power to issue at will.

‘The more that the federal gov’t goes into debt, the more that we are burdening future generations.’

“When some people say that the government debt is a burden on future generations, I would say that is wrong.”—Stephanie Kelton, economics professor at Stony Brook University, in an interview with The Asahi Shimbun, 04/27/19

However, what Stephanie Kelton actually meant there is that you aren’t burdening the ENTIRE future generation, only SOME:

“The bondholders in the future will benefit from the interest payments on those bonds. Bondholders are also taxpayers. The next generation will be made up of bondholders and taxpayers, just like the current generation. But some taxpayers aren’t bondholders. It’s true that bonds are not distributed equally. There are distributional consequences. So you can’t burden an entire generation,” she added.

The current squad of MMTers should keep that quote in mind when they get frustrated every time their ‘prescriptions’ aren’t ‘funded’ (read: ‘approved’). It isn’t because federal policymakers need to ‘learn MMT’; it’s because political MMTers themselves need to factor in the times that we live in—and the distributional consequences of their good intentions.

For example, these MMTers need to realize that more federal ‘keystroke’ creations—that they covet—may be intended for the 95% (the borrowers), but eventually wind up with the 5% (the savers). NOTE that is only IF the 95% get their hands on any federal deficits AT ALL—because most of those ‘keystrokes’ get whacked up between the 5% (US Treasury bond interest payments paid directly to savers) and the foreign sector (US trade deficits). In other words, the question MMTers should be asking themselves is, ‘Federal deficits (their red ink) EQUALS WHOSE SAVINGS (equals whose black ink)?’ MMTers should also keep in mind that federal deficits are now (and will be routinely) rising big-time during an expansion. Meaning that unlike in the past, those larger deficits are moving in a pro-cyclical fashion rather than only as a Keynesian stabilizer during a contraction. Rather than worsen wealth inequality—which is what sours political ‘prescription’ MMTers and their internet followers on ‘evil’ capitalism in the first place—perhaps it’s better to come up with proposals that checks future generations of wealth inequality with ‘pen stroke’ creations of feedback loops from the nonfunctional ‘financial’ economy (where savings $$$ go out to pasture) back into the productive ‘real’ economy.

“Let me say I haven’t seen a carefully worked out description by what is meant by MMT. It may exist but I haven’t seen it. I have heard some pretty extreme claims attributed to that framework and I don’t know whether that’s fair or not. I will say this. I think US debt is fairly high, at a level of GDP and much more importantly than that, it’s growing faster than GDP, significantly faster. So we’re going to have to either spend less or raise more revenue. We are not even close to primary [budget] balance, which means the deficit before interest payments.”— Chair Jerome H. Powell, Board of Governors of the Federal Reserve System, semiannual testimony before congress, 02/26/19

Thanks for reading,

Pure MMT for the 100%

Real Macro for the 100%

Chart of the day: THE RISE AND FALL OF (‘Prescription’) MMT

H/T Jim ‘MINETHIS1’ Boukis

Modern Monetary Theory had a wonderful opportunity to keep the description PURE and help people better understand the monetary system. The benefits and limits of deficits not only for their own lives but also for the overall economy. How using deficits appropriately is a great economic tool, that has in certain times, assisted in getting us better overall economic health over the decades. Since 1983 we have had only 3 recessions—one being the Great Financial Crisis of 2008. However, the trade-off for a more stable economy over that long run has been increased inequality.

MMT description also had the opportunity to explain that the inequality we see today is not the same that one would think of traditionally under a gold standard—where the rich take from the poor in a zero-sum game.

Modern day inequality under a FIAT system is vastly different. Where deficits and private debt naturally flow through the sectoral balances chart: Gov’t 》 productive economy (99%) creating income/dissavings 》 Business (1%) Profit/Savings unproductive economy》 to investment such as buying Gov’t Bonds for deficit spending starting the cycle over again.

Of course some of these deficits end up external via imports; some are reinvested back to the productive economy; and as investments in other asset classes i.e. real estate, commodities and stocks, causing asset price inflation from a glut of ever-increasing savings fueled by Govt and Private debt in the hands of the few.

MMT description PURE could have clearly illustrated that while deficits can be a great economic tool in certain cases, the solution to more inequality and a healthier economy is NOT predicated on deficits, but rather a self sustaining eco system feedback loop between productive and unproductive parts of the private sector within an economy. Learning to lower that debt to GDP ratio (meaning productive growth and more real wealth for everyone). Thus we require more ‘pen strokes’ rather than ‘keystrokes’.

It is unfathomable that any political ideology could argue against what is self evident mathematics.

Instead MMT chose the Political PRESCRIPTIONS Fantasy that the reverse is true. More deficits & more private debt is the key to prosperity by handing out free stuff to all for a vote. A Soviet-inspired, feudal-system style of economics. Where everyone serves to provision the Gov’t and those very few in the political ruling party are the beneficiaries—who must be worshiped by all as they hand out free candy from the goodness of their hearts while we all lavish in an ever-increasing free ‘this’ and free ‘that’ postmodern neomarxist utopia. Like I said before, fantasies.

For these reasons #FAKEMMT Prescription ultimately screwed the pooch by being rejected worldwide and died out before it even got started. Something we PUREMMTers predicted would occur. I hope they enjoyed their 15 minutes of fame.—Jim ‘MINETHIS1’ Boukis

Thanks for reading,

Follow Jim ‘MINETHIS1’ Boukis



H/T Charles Kondak

Regarding the above quote by Mathew Forstater http://@mattybram (Professor of Economics at UMKC, and research director of the GLOBAL INSTITUTE FOR SUSTAINABLE PROSPERITY), the full quote was:

“Yes, Supply Side Economics has been a complete and utter failure. However, it was never instituted during a time when the Economy was not in a technical recession. This was not the case this time around. That is not to imply it will work this time around, but to point out that this could be called Supply Side Economics last stand. It will likely fail this time around, because there is not a sufficient back and flow of money between the Financial Savings Asset bubble and the Functional Economy where most of us live.”

It’s good to see that more and more in the MMT community are now grasping the ‘feedback loop’ insight, albeit not fully since even demand-side stimulus is ineffective if the loop of $$$ draining to the functional ‘real’ economy (where capital creates production) is still being overpowered by the loop of $$$ draining to the nonproductive ‘financial’ economy (where capital just creates more capital).

“I suspect these academics get half the equation and can’t see that demand-side economics as well, in the absence of a recession, would also result in many of the same results as Supply side with out the back and forth flow.”—Charles ‘Kondy’ Kondak

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

“The chartalists and MMTers are correct to say that the state can create money, but the state cannot guarantee that this money has any value. Without a productive economy behind it, money is meaningless. Money is only a representation of value and real value is created in production. And yet chartalism (and also MMT) offers no analysis of value, or of commodity production and exchange. As a result, it misses the essence of capitalism, and of money’s role within it.”—Adam Booth, Marxist, 06 September 2019 

AGREED…Central bankers, who have a mandate ‘to achieve full employment’ and who all agree that a lack of fiscal policy restrains economic growth (same as fake MMTers) are criticizing fake MMTers…

The Greens, who want things like ‘social justice and environmentalism that will create a foundation for world peace’ (same as fake MMTers) are criticizing fake MMTers…

Above is a Marxist, that wants to ‘abolish capitalism and liberate humanity’ (same as fake MMTers) criticizing fake MMTers…

Once again, the same reason why they (the Democrats, the Green Party, left-leaning economists, worldwide central bankers and now even Marxists who are all politically-aligned to fake MMTers) are criticizing fake MMTers—is because academic MMT ‘scholars’ KEEP GETTING THE ECON WRONG. 

Funny that while trying so desperately hard to masquerade their ‘prescriptions’ (fake MMT) as the ‘description’ (pure MMT), it WASN’T the politics of fake MMTers that hurt their cause in 2019. On 09/23/19 in Brussels (four days before the 09/27/19 Third International Conference of MMT in NY), during a meeting of the Committee on Economic and Monetary Affairs (ECON), ECB President Mario Draghi said that “some of the new ideas about monetary policy like the MMT, like a recent paper presented by various authors, amongst which professor Fischer and others, would suggest different ways of channelling money to the economy.” In that August 2019 paper titled ‘MACRO AND MARKET PERSPECTIVES’, professor Stanley Fischer wrote that “our proposal stands in sharp contrast to the prescription from MMT proponents [because] they advocate the use of monetary financing in most circumstances and downplay any impact on inflation.” In other words—and to be fair to the MMT community—it’s not MMT’s politics (it’s not their good intentions) that Fischer’s whitepaper dislikes about ‘prescription’ MMT proponents, it’s some of MMT’s economics (it’s their lack of fully grasping the unintended consequences of their good intentions).

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

Deadly Innocent Misinterpretation #64: “The Job Guarantee is a specific and intrinsic element of MMT rather than a policy choice that might reflect progressive Left values.”—Bill Mitchell, ‘Critics of the Job Guarantee miss the mark badly…again’, 04/26/18

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

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

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

Warren Mosler: Yes.

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

Warren Mosler: Yeah.

Bloomberg:…that has its own currency…

Warren Mosler: Right.

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

Warren Mosler: Yeah.

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

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

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

Bloomberg: Ok

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

[NOTE: What Mr. Mosler is saying (almost) without using the word ‘prescription’—because ‘prescription MMT’ is now a phrase (a trigger word) like ‘printing money’ or ‘federal taxpayer dollars’ that fake MMTers hate to hear—is that *duh* of course the job guarantee is a ‘prescription’. The JG (employer of last resort) is an MMT prescription that Mr. Mosler wrote about in the policy proposal section at the end of his book ‘7DIF’ that he believes is a good idea and just like those other variations of a ‘federal job guarantee’ (i.e. the Military, the Civil Service), could also become the ‘description’ reality.]


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

Fact: MMT is the analysis of a dynamic currency.

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

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

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

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

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

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


Deadly Innocent Misinterpretation #66: MMT is macroeconomics.

Fact: MMT is not macroeconomics.

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

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

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

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

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

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

“MMT is not macro. That’s why MMT keeps getting so much wrong and nothing they say jives. Austrians did the same thing—they used micro to call it macro with their bullschitt. When pandering for votes, political ‘prescription’ MMT is no different. They say things like ‘unemployment is proof that deficits are too small’ so just PRINT PRINT PRINT and all your worries will go away. Those good intentions all sound logical—that it would bring economic ‘justice’—but guess what, we DID exactly that and the global economy is slowing (with inequality getting worse BECAUSE of deficits). Look at Japan, the political MMT ‘poster child’. They printed their ass off and lost 4 decades. All MMT has is a bunch of excuses, caveats, silly misrepresentations or outright lies for every single dopey little thing they say. ‘There’s no financial crisis so deep that a sufficiently large fiscal adjustment cannot deal with it?’ If so, Venezuela, Argentina, and Turkey would be economic power houses instead of collapsing into the dark ages. Running a federal surplus is bad? Thailand, Australia, and the Philippines all ran surpluses with no recession. ‘Taxes value a currency’? Well, the Middle East doesn’t have a federal income tax and their currency value is just fine. Saying in 2016 that ‘it looks like the Fed hiked [started liftoff] during a recession’ or saying in 2018 that the American economy is a ‘junk economy’— during The Longest Economic Expansion In United States History? If MMT was macro, it would have predicting abilities (which it clearly doesn’t). Even MMT ‘description’ fails at macroeconomics because it does not describe what values a currency. If ‘description’ MMT could describe what values—what drives—a currency, it would quickly reveal that deficits only serve the top 5% via asset price inflation in their savings while putting the liabilities of those assets on the shoulders of the 95%. MMT has become nothing more than being about political rhetoric along with policy ‘prescriptions’—under the guise of being about the macroeconomic ‘description’. MMT has nothing to do with macroeconomics and everything to do with false promises of free stuff for a vote—disguised as macroeconomics. It’s that oldest trick in the political playbook—under the pretense of being ‘modern’.”—Jim ‘MineThis1’ Boukis

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

“This is why political economic theory and economics DO NOT MIX. Politics and economics are not friends, they are like that ‘War of the Roses’. Politics needs votes, so politicians need to speak to get votes; while economics doesn’t need anything, because econ is a set of numbers that speaks for itself.”— Logan Mohtashami, 09/18/19

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


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

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

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

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

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

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

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

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

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

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


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

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

H/T Terry Flemming

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

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


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

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

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

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

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

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

(G – T) + (X – M) + (I – S) = 0

(G – T) = $107B ‘dollar add’ from the federal gov’t in 1996:

(X – M) = $170B surplus to the non federal gov’t / International

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


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

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

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


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

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

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


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

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

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


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

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

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


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

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

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


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

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

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


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

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

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


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

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

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


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

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

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


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

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

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


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

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

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


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

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

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

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

“The axiomatically correct relationships are:

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

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

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

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

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



“Some people use this chart [the sectoral balances chart] in a misleading manner. The worst abusers of this chart are the MMT people and they constantly use it to misrepresent how the monetary system works. The government’s spending is someone else’s income (‘this is accounting identity’). You could recreate a chart of this using any sectoral relationship. For instance, when I take out debt and spend the money, that becomes someone else’s income. The Cullen Roche deficit is the non Cullen Roche surplus. It’s not helpful or insightful to run around saying that my deficit is everyone else’s surplus without a lot more context. After all, if we did this then we could run around posting silly charts showing corporate debt [a chart showing non-corporate assets rising as corporate liabilities rise] and trying to imply that corporate debt is always good or always needs to be expanding. Sure, this might be partly true, but it’s not something we should lazily throw around. The worst part about this chart’s depiction in MMT circles (‘Their deficit is our financial surplus’) is the implication that the government is somehow an external entity. Who is ‘our’? We all save, borrow and grow our wealth against other sectors. There are literally millions of individual sectors in the economy. All of these sectoral assets and liabilities net to zero so it’s misleading to strip out one sector and imply that this is the sector supplying all the savings. That’s simply not how it works at an aggregate level.”—Cullen Roche, ‘Let’s Talk About Sectoral Balances’, 11/09/19




“To truly understand the ‘sectoral balances’ equation, the crucial point for people to understand is that instead of only three ‘balances’, in reality there are four ( household, business, federal government and the rest of the world); with Saving as the balance of the household sector and Profit as the balance of the business sector. By merging the household and the business balances—by reducing the four sectors to three—the macroeconomic aspect of profit (of capitalism) magically vanishes. This fraud is intentional (to fool unsuspecting people to gain political power/push radical policy ‘prescriptions’) and each time it is invoked, it invalidates MMT.”—Jim ‘MINETHIS1” Boukis

“Great points! Put another way in Econ-geek speak: Very simply, household Consumption (C) + business (I) + government (G) + the rest of the world (eXports – iMports) = Domestic Output [C + I + G + (X-M)= GDP]. To get their equation, MMT starts with factoring out consumption from that GDP equation to get the accounting identity of 0, which makes Government spending look like the sole driver of the economy. If we leave Consumption in and then factor out Government spending that sectoral balance approach also produces the accounting identity of 0, which makes it appear the private sector is the sole driver of the economy. Neither is in fact true. We’ve seen examples—of each approach—in history and both are unappealing.”—Charles ‘Kondy’ Kondak


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

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

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

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

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

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

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

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

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

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



“The pro-globalization consensus of the 1990s, which concluded that trade contributed little to rising inequality, relied on models that asked how the growth of trade had affected the incomes of broad classes of workers, such as those who didn’t go to college. This was, I now believe, a major mistake — one in which I shared a hand.” Economist Paul Krugman, longtime defender of global free trade, ‘What Economists (Including Me) Got Wrong About Globalization’, 10/10/19


Deadly Innocent Misinterpretation #71: “Under a state currency system with floating exchange rates, the natural, nominal, risk free rate of interest is zero.”

Fact: Under a state capitalist system with floating exchange rates, the natural, nominal, risk-free rate of interest (the prevailing ‘price’), is determined by supply & demand—just like any other price.

On February 17, 2005 during the Semiannual Monetary Policy Report to Congress, Fed Chair Alan Greenspan described the surprisingly low yields of US Treasury bonds as a “conundrum.”

Meaning that in 2005, the head of the Federal Reserve Board could not explain why, during the past year, long-term yields were dropping (why the 10yr yield went from 4.6% to 4%), while over that same past year the Fed was hiking (the Fed had raised the overnight Federal Funds Rate by 150 basis points). Furthermore, while Greenspan’s Fed was raising short-term rates, adding to that “broadly unanticipated behavior” of falling long-term rates (which threatened a yield-curve inversion), the US dollar was strengthening (which helped US trade deficits get larger). Sound familiar?

On March 10, 2005 in a lecture to the Virginia Association of Economists, then-Fed Governor Ben S. Bernanke argued that over the past decade a combination of diverse forces has created a “significant increase in the global supply of saving—a global saving glut—which helped to explain both the increase in the U.S. current account deficit and the relatively low level of long-term real interest rates in the world today.”

On April 14, 2005 Governor Bernanke presented similar remarks confirming his findings with updated data at the Homer Jones Lecture in St. Louis, Missouri. As per Bernanke, in the shift that transformed emerging-market East Asian countries from being net importers to net exporters (in some cases—notably China—to very large net exporters), their current account surpluses resulted in using their excess savings to acquire foreign assets. “An interesting aspect has been the remarkable reversal of international flows in the capital markets to these developing and emerging-market economies,” Bernanke added.

In other words, Bernanke was pointing out that countries running trade surpluses not only export the goods they make, but then they export the money they make—building up “war chests” of foreign reserves (foreign assets like US Treasury bonds).

In addition, in a process known as a ‘strategic devaluation’ done to keep their local currency weak (to maintain a trade advantage) countries also issue debt to their citizens, convert the proceeds into dollars and buy even more US Treasury bonds. Which effectively pushes down long-term interest rates even further by channeling domestic saving away from local uses (away from productive ‘real’ economies) and into international capital markets (into the global savings glut) where capital just creates more capital (in nonproductive ‘financial’ economies).

On June 2, 2005 ‘The Natural Rate of Interest Is Zero’ was published in the Journal of Economic Issues by Mathew Forstater (Associate Professor of Economics and Director, Center for Full Employment and Price Stability, Department of Economics, University of Missouri, Kansas City, USA) and Warren Mosler (Associate Fellow at the Cambridge Centre for Economic and Public Policy, Downing College, Cambridge, UK).

It concluded that “Under a state currency system with floating exchange rates, the natural, nominal, risk free rate of interest is zero…since…the conventional wisdom of a fixed exchange rate system does not apply to floating rates.” It suggests that we “allow the rate of interest to settle at its natural rate of zero to serve as a base rate in the economy…with markets determining the credit spreads through risk assessment.”

On December 15, 2005 the US yield curve inverted. “Look at what happened in the mid-2000s when Greenspan was trying to hike rates and the long rates wouldn’t budge. Part of the issue there was that, because the dollar and in particular, because our Treasury bond market is so deep and liquid, at a time when there was excess savings throughout the rest of the world, so much capital flowed to the US,” said Financial Times Alphaville’s Cardiff Garcia (@FTAlphaville). What also ended up happening, Garcia points out, was that capital was filtered into subprime mortgage-backed securities.

The financial crisis, of course, followed.

On August 5, 2019 the market value of the Bloomberg Barclays Global Negative Yielding Debt Index closed at a record $15 TRILLION! Why is that? It is ‘because MMT’ or ‘the natural rate of interest is zero negative?’

In a reply to a post by Bloomberg editor Joe Weisenthal (@TheStalwart) who posted “Imagine the level of privilege that is thinking you’re entitled to a positive real rate of return without taking any risk”, Mike Larson (@RealMikeLarson) Tweeted back “As an employee, your employer’s use of your labor entitles you to be compensated; so if you offer a bank your money, or lend it to a company that wants to use it to expand or whatever, how is it that you are not entitled to some form of compensation? It’s capitalism.”

Bingo…It’s not that (nowadays) ‘the natural rate is zero’—it’s simply because of supply and demand (as always). If there’s a low supply of savings dollars seeking yield, the ‘compensation’ rises; and if there’s a high supply, the ‘compensation’ heads down. Especially if individual buyers of bonds are now up against central banks that are also buyers of bonds.

To be fair to Mathew Forstater and Warren Mosler, since an issuer of currency is a different paradigm and no longer needs to ‘borrow’ its own fiat currency, it makes 100% sense (it’s a pure ‘description’ MMT insight) that the natural rate of interest for any federal gov’t bond, of any monetary sovereign, denominated in any free-floating currency, is naturally LOWER than the coupon of a bond issued by a ‘user’ of currency (because it is naturally less riskier than the coupon of a federal gov’t bond in a fixed-currency regime).

However, as Ben Bernanke (correctly) explained, the real reason for lower or zero or negative yields—of any bond—is that they are subject to those garden-variety economic forces which could be external to the currency, the central bank and even the country itself.

As far as “allowing the rate of interest to settle [to be anchored] at its natural rate of zero” goes, the federal gov’t already does that. Those dollar bills in your wallet are Federal Reserve Notes—risk-free ‘perpetual bonds’ with a ‘0% coupon’. The federal gov’t swaps an unlimited amount of their currency (with a ‘natural’ rate of zero) for a limited amount of your time on earth spent provisioning the federal gov’t, and they—any monetary sovereign—will do that trade All.Day.Long. Cash currency and actual bonds both have a ‘face value’. Cash doesn’t have a price (because it changes hands at its face value), while bonds do have a price (that fluctuates around its face value). The price of actual bonds are not ‘natural’, they are ‘prevailing’. The Federal Reserve Bank—the price stabilizer—sets an overnight Federal Funds Rate (“that serves as a base rate”) and then all bond prices move according to the prevailing winds of the economy (“with markets determining the credit spreads through risk assessment”). Just like any other price in the economy, in the post-Gold standard, post-NAFTA globalization, post-QE, modern monetary system, under capitalism, with floating-exchange rates, the natural, nominal, risk-free rate of interest (the prevailing ‘price’) is subject to the worldwide Law of Supply & Demand.



Convexity, Algos, QE—OH MY!

In order to understand this next quote completely, one would need to ask a seasoned trader—to translate it into ordinary layman terms—however, it’s surprisingly simple: Too many savings dollars chasing too few bonds (a.k.a. garden-variety Supply & Demand).

H/T Gregor Samsa

“Enter the bizarro world of negative-yielding debt we now find ourselves, driven by a QE induced structural shortage of long-dated risk-free fixed income instruments, trend following, negative convexity chasing algos with no context that negative rates are a no-no, and traders front running expectations of a new round of QE, wrapped in a narrative of a coming deflationary collapse. More market nonsense, in our opinion, but we have to trade the hand the market has dealt us.”—Gregor Samsa (@macromon), ‘Modern Monetary Theory (MMT) Has An Argentina Problem’



Deadly Innocent Misinterpretation #72: The Green Party Chose Mainstream Economics Over MMT.

Fact: The Green Party chose Pure MMT over Fake MMT.

Political ‘prescription’ MMTer (Hector Danson): “I will argue that a small group of economic advisers (including Jon Bongeovanni, Howard Switzer, Sue Peters, and Rita Jacobs) have fundamentally misled the Green Party.”
Pure ‘description’ MMTer (Pure MMT for the 100%): I will argue that a small group of economic advisers (including all MMT ‘scholars’) have fundamentally misled ‘description’ MMT into becoming ‘prescription’ MMT.

Hector Danson: “In this article, I will focus on Rita Jabobs’ written request to ‘look beyond MMT.'”
Pure MMTer: In this post, I will focus on Rita Jabobs’ written request to ‘look beyond MMT’ as well as our own written request to ‘look Beyond The Memes’.

Hector Danson: “It is clear that the Green Party is generally opposed to MMT (currently), which was seen last year when MMT supporters proposed to amend a small section of the platform about the national debt. The proposal was shot down 63 – 15, providing a quantitative measure of how much the Green Party opposes MMT.”
Pure MMTer: It is clear that the Green Party—as well as the Democrat Party and most central bankers around the world—are generally opposed to radical ‘prescription’ MMT (currently), which was seen last year when US House Speaker-elect Nancy Pelosi and her 116th Congress would be reinstating the ‘pay-as-you-go’ provision (requiring all new spending to be offset with either budget cuts or tax increases), providing a quantitative measure of how much the Democrat Party opposes fake MMT.

Hector Danson: “This conspiracy – that MMT supporters are coordinating with elites – is baseless and insulting.”
Pure MMTer: This ‘conspiracy’ that fake MMT supporters are coordinating with elites is blatantly obvious—that political ‘prescription’ MMT is a neoliberal agenda (to gain power), at best; or a neomarxist agenda (to dismantle capitalism), at worst. Don’t take my word for it: “MMT is a scientific failure and a political fraud. Stephanie Kelton is just another clown in the political Circus Maximus. MMT’s social policy proposals ― the Job Guarantee in particular ― are political door-openers and friend-of-the-people signaling. MMT policy guidance ultimately boils down to deficit-spending / money-creation. It is a macroeconomic fact that Public Deficit = Private Profit, so MMT is money-making for the one-percenters. MMT is stealth taxation for the ninety-nine percenters. MMT is ALWAYS a bad deal for the ninety-nine-percenters. The MMT policy of ever-increasing public debt amounts to the permanent self-financing of the oligarchy.”—Egmont Kakarot-Handtke, AXEC Project

Hector Danson: “Rita then voices her fundamental disagreement with MMT, saying ‘the U.S. government would not be able to spend at all without taxing or borrowing’—this is incorrect at the most basic level. If the US government can only get US dollars by taxing us, or borrowing from us, then where does she think we get our US dollars from?”
Pure MMTer: Rita is right. Since the dollars collected from federal taxes wash with the dollars spent in ‘surplus’ and the dollars collected from Treasury bond sales wash with the dollars spent in ‘deficit’, the federal gov’t only ‘net’ adds more US Treasury bonds that only the savers (the top 5%) ‘gets’ when the federal gov’t deficit spends.

Hector Danson: “Helpfully, the right of the government to produce the currency is written into the Constitution.”
Pure MMTer: When in the course of human events it becomes necessary for fake MMTers to say that the Constitution gives Congress the power to create money to provide for the general welfare to substantiate deficit spending on their political ‘prescriptions’; they are not only misinterpreting ‘description’ MMT, they are misinterpreting the US Constitution as well. From Article I, Section 8, there is “Congress shall have Power…to coin Money, regulate the Value thereof, and of foreign Coin.” And from Section 10, “no state…shall make any Thing but gold and silver Coin a Tender in Payment of Debts.” In other words, the newly-created United States—which won independence but fell short in trying in their recent (disastrous) attempt to become a monetarily-sovereign issuer of newly-created fiat—was to continue as a ‘user’ of gold / gold-backed dollars for the time being. Every time a fake MMTer says that the Constitution gives the federal gov’t the power to create fiat for the public purpose they are unwittingly backing the ’Austrian’ argument for the return to ‘sound’ money.

Hector Danson: “Next, Rita confuses this money creation process with bank loans. Banks create loans that expand the money supply, but these loans must ultimately be paid back. In other words, banks do not net produce money. Only Congress does that.” 
Pure MMTer: She’s right. She says ‘the government does not directly create new money [dollars], but delegated that function to the commercial banks when it passed the Federal Reserve Act of 1913.’ To reiterate, Rita is (correctly) saying that the gov’t gave banks permission to create NEW money—she didn’t say ‘net’ money (she didn’t say that the gov’t gave banks permission to create Net Financial Assets like Congress does with little or no intention of ever ‘netting-out’ (like Congress does with attached quote unquote ‘debt’ in the form of Treasury bonds with little or no intention of ever being ‘paid-back’). In other words, WE THE PEOPLE ‘print’ the dollars going into money supply circulation—the banks and the federal gov’t are only facilitating OUR ‘printing’ of dollars that have actual debt attached (that do routinely ‘net-out’). Private sector leveraging (when we ‘print’ money) and deleveraging (when we ‘unprint’ money) is the heartbeat of the economy. Furthermore, Congress does NOT produce net money. Just like every dollar entered into existence by private-sector deficit spending that ‘nets-out’ with an IOU to the bank (our ‘bond’), all federal-gov’t deficit spending also ‘nets-out’ with a newly-created IOU (their ‘bond’). The only difference is that those Treasury bonds, those financial assets that are denominated in dollars, that are newly-created with the approval of Congress, that are net additions going into the banking system, are not expected to be paid back—they are not expected to ‘net-out’—NOT that they DON’T.

Hector Danson: “This is beyond Rita’s scope—banks do not net produce money.”
Pure MMTer: Banks CAN and DO net produce money (money that will NEVER ‘net-out’). Perhaps you haven’t read all the MMT literature. Warren Mosler has pointed out that banks, on many occasions, actually produce net money (unintentionally) when they have negative capital (when a bank loan defaults). A bank loan default acts as ‘synthetic’ federal-gov’t deficit spending adding Net Financial Assets into the banking system because monies were lent out endogenously and will NEVER be paid back. In other words, banks occasionally go out of their lane and bank money is created without *actual* debt attached, as if it was created like the federal gov’t, the sole monopoly issuer of money, creates money—with very little intention of ever being paid back.

Hector Danson: “MMT supporters know that the sale of government debt is unnecessary for a currency-issuing government and would stop the process immediately. So this is another example of Rita accepting an artificial economic constraint that just so happens to harm the people.”
Pure MMTer: Fake MMT supporters have yet to grasp that even though there is no longer an artificial ‘financial’ constraint to federal gov’t spending, there still remains a ‘political’ constraint to federal gov’t spending—to prevent a policy that (albeit made with good intentions) happens to harm the people (has unintended consequences).

Hector Danson: “This unprofessional, presumptuous, foolhardy, libertarian-biased, conspiracy-laden attitude to economics is exactly why I cannot take the GP seriously at this time.”
Pure MMTer: This unprofessional, presumptuous, foolhardy, radical-biased, conspiracy-laden attitude to economics is exactly why very few folks are taking political ‘prescription’ MMT seriously at this time.

NOTE: This is not the first time that prescription MMTers pushing politics (under the guise of promoting economics) have called the Green Party ‘neoliberals’: “Green parties have developed a tendency to be ‘neo-liberals on bikes’ as a means of gaining power,”—Bill Mitchell, 05/14/18. Unlike fake MMTers who usually say that they want YOU to ride bikes and for all the Other People to be ‘green’, financed by Other People’s Money (read: Other People’s Productivity), at least the Green Party rides bikes—at least the Greens seem more sincere.

H/T GPAX Co-chair Rita Jacobs for not wanting fake MMT to try to hijack the GP (along with hijacking ‘description’ MMT too) and trying to keep it real, to keep it pure (to keep it green).



After posting this on the Pure MMT for the 100% page on Facebook, Hector Danson (who was obviously not thrilled with this critique) admitted that he left out a ‘minor caveat’ (about banks occasionally creating NFAs). To be fair, I’ll give him the last word: “I ended the article by saying ‘I am not an economist, which is why I don’t presume to advise a political party’. Which makes it clear that I’m not going to know all the ins and outs of the banking industry. Meanwhile, Rita…is misleading a political party that many people with good intentions rely on or would want to rely on. Thanks for the discussion.”—Hector Danson, Progressive Independent



Deadly Innocent Misinterpretation #73: When the federal gov’t spends money, they are actually creating the money that they’re spending. The very act of spending by governments is the primary source of money in the economy.

Fact: The primary source of money in the economy is the very act of DEFICIT spending by the PRIVATE sector.

The very act of spending by federal governments is A source of money in the economy—not the primary source. That is, of course, if you, along with the MMT community, consider federal (Treasury) bonds as also being money—which is the correct way to think about all federal gov’t securities (Treasury bills, notes and bonds). Those Treasury bonds are simply dollars with a coupon and a maturity date; however, deficit spending by the gov’t—which creates Treasury bonds—is not the primary source of money creation. Those Treasury bonds SUPPORT the actual primary source of money creation, yes; but those Treasury bonds are the primary source of money creation in the economy, no.

Sure, ‘when the federal gov’t is spending money they are actually creating the money they are spending’; but, there’s a difference between newly-created money v. newly-created money that is a net addition to the economy. For example, gov’t surplus spending is a wash with federal taxation and gov’t deficit spending is a wash with bond sale collections—no net additions there.

The net addition (the money creation) of federal deficit spending is the attached liability, the newly-created federal (Treasury) bond. That newly-created bond is a net add into the banking system, it is added to The National ‘Debt’— but it does not enter money-supply circulation. That’s why the gov’t doesn’t consider Treasury bonds as ‘money’—because they aren’t in the money supply (they aren’t part of what the gov’t calls ‘M1’). Another example, to pay for all those Treasury (and mortgage-backed securities) bonds the Federal Reserve Bank bought during ‘Quantitative Easing’, Ben Bernanke keyboarded over FOUR TRILLION DOLLARS into existence—and not a penny of that was intended to enter money-supply circulation (M1). Meaning that 4.2 trillion newly-created dollars (reserves denominated in dollars) were added into the banking system, yes; but the money supply, no (because QE was only done to accommodate borrowers in the economy by lowering long-term rates and not by changing the money supply).

The primary source of money in money supply circulation (in ‘the economy’) is the very act of DEFICIT spending by the PRIVATE sector—by OUR newly-created IOUs, by OUR promises to pay back the money with interest (our ‘bonds’) that trigger newly-created dollars.

In other words, the primary source of money creation (and destruction) is when We The People ‘print’ money, when we conjure up newly-created ‘bonds’, aka ‘leverage’ (and when we ‘unprint’ money, when we pay off our ‘bonds’, aka ‘deleverage’).

Sure, one can say that the banks are all agents of the federal gov’t (thus all money creation is from the gov’t); but, never lose sight of the fact that it is We The People and our PRODUCTION that supports that money creation. No gov’t, no monetary sovereign, by itself, can print PRODUCTION into the economy, nor print VALUE into their currency. OUR private sector newly-created bonds (conjured up out of thin air) creates loans and OUR loans create deposits. 

The federal gov’t—and by extension the Fed and all the financial INTERMEDIARIES, aka ‘middlemen’—only FACILITATES our creations of money.


Deadly Innocent Misinterpretation #74: When you have 7 million unemployed as reported by the BLS, that’s a reserve army of unemployed that lowers wages below $31k/year, so that’s why you need to spend $500 billion on a federal Job Guarantee program to anchor wages at $31k/year.

Fact: When you have 7 million job openings (7M JOLTS as reported by the BLS), you have 7 million ‘sellers’ of jobs & wages (looking for ‘buyers’ of jobs & wages) acting as a ‘reserve army’ of job openings (acting as a buoy growing jobs & wages).

“Advocates of the Job Guarantee maintained that a reserve army of the unemployed was the way inflation was controlled. The Job Guarantee is/was to be used to control inflation through Labor Markets by tempering wage demands and increases by creating a buffer stock of workers employed in it. The Achilles heel of the Job Guarantee always has been the suppression of wages the mechanism by which it prevents inflation by penalizing one group of workers (those that would be getting wage increases) for another as the cost of controlling inflation. The need for a reserve army of the unemployed to anchor inflation is now unnecessary and the theoretical reason of anchoring wages to a fixed wage Job Guarantee buffer stock of the employed has vaporized before their eyes. Of course, Job Guarantee advocates will come up with another reason for it. They are like gun nuts saying ‘you’ll have to pry it from my cold dead hands’. They’ll yammer on about the Job Guarantee being a wage floor not understanding the real purpose behind it. The minimum wage is a floor the JG anchors wages to prevent inflation the same as the now defunct Phillips Curve was supposedly doing.”—Charles Kondak

AGREED…Advocates of the Job Guarantee maintained that a ‘reserve army of the unemployed’ was ‘the way inflation was controlled’, yet the Fed just agreed with Rep. Alexandria Ocasio-Cortez that it’s just not so—not anymore. More specifically, Fed Chair Powell testified to Congress last week that “The connection between slack in the economy—the unemployment levels—and inflation was very strong if you go back 50 years, back to the 1960s when we had a very different economy.” Also agreed that their need to have a FJG ‘to anchor inflation’ is unnecessary—it has vaporized before their eyes with the rest of Powell’s answer to AOC: 

“I think we learned that downward pressure on inflation around the globe and here is stronger than we thought. One reason why there has been this decoupling of the unemployment and inflation rates is that inflation expectations are so settled…so you don’t see inflation reacting to unemployment the way it has because inflation just seems to be very anchored.”—Chair Jerome H. Powell, Semiannual Monetary Policy Report to the Congress before the Committee on Financial Services, U.S. House of Representatives, Washington, D.C., July 10, 2019

When there’s no inflation and no jobs shortage and no importance whatsoever to NAIRU modeling, you don’t go around saying that right now we need the federal gov’t to spend $500B to anchor ‘inflation’ and create ‘jobs’ and replace NAIRU with ‘NAIBER’ (if you want to be taken seriously).


Deadly Innocent Misinterpretation #75: The ‘crowding-out effect’ does not exist. The money to finance federal deficits and private sector investment comes from two different places.

Fact: When the federal gov’t spends there is a crowding-out effect of private sector labor, resources and productivity—which may ultimately crowd the value right out of the currency. 

State & Local gov’t: “Eventually you run out of other people’s money.”—Margaret Thatcher

Federal gov’t: “Eventually you run out of other people’s productivity.”—Pure MMT for the 100%

H/T Charles Kondak, Pure MMT for the 100%: Aside from the money that is newly-created (which does not cause any ‘crowding-out effect’), the insight that mainstream ‘chalkboard’ MMTers have yet to grasp—or fails to admit to their unsuspecting students because it doesn’t fit the ‘prescription’ MMT narrative—is the ‘crowding-out effect’ of labor, resources and productivity during all that federal government deficit spending in the private sector (which of course causes a ‘crowding-out effect’). In other words, what you and I are provisioning to the federal gov’t (including our blood, sweat & tears) ‘crowds-out’ what we could have provisioned to the private sector (including what we could have provisioned to ourselves). 

As previously covered (SEE DIM#66), MMT claims to be a breakthrough in macroeconomics, but once one strips away the esoteric language and candy-coating, MMT is just a microeconomic description of money and banking—with a bit of a civics lesson on how federal government spending occurs thrown in. MMT’s political appeal becomes the ability to seemingly answer the question ‘How Do We Pay For It?’ By condemning the role of the Evil Private Sector and worshipping the Almighty State, ‘prescription’ MMTers (poorly) attempt to imply some divine ability of the federal government to solve everything that ails all mortals.

If you say that aloud, these MMTers will of course scold you that MMT says nothing of the sort and you will get a booming earful, their responsorial psalm, which is that the federal government should only spend until all resources and labor are fully employed. They’ll tell you (with a straight face) that it is only at that point that inflation sets in and fiscal policymakers—not monetary policymakers at the Fed (who they tied up and blindfolded)—would cut spending or increase taxes to manage inflation. You read that right—these MMTers are asking you to take seriously the notion that Congress would responsibly impose ‘austerity’ in the face of inflation by tamping down demand and slowing the economy through tax increases or spending cuts. As if some group of 535 ‘technocrats’ can determine when we are near or at full capacity, set aside political concerns and together act quickly to tame inflation.

Now pay attention and keep your eyes on the chalkboard because here comes the miraculous part. It is at this point when the austerity and spending cuts and tax increases to combat inflation that their pet prescriptive proposal, the ‘Federal Job Guarantee’ (where they had the federal gov’t deficit-spend $500B—DURING A LABOR SHORTAGE—to create make-work ‘jobs’) kicks-in. As per the chalkboard, the FJG acts as an ‘anchor’ that provides ‘price stability’ by absorbing laid-off workers as the economy slows—rather than using a ‘buffer stock of the unemployed’ like those childish monetary policymakers (with their toy steering wheel and their backwards pedals) did before we dragged them away kicking and screaming. 

Remember, we were just talking about slowing the economy to combat inflation. However, these MMT Job Guarantee adherents simultaneously make the claim that the purpose of the Job Guarantee is to prop up demand when the economy slows. The Job Guarantee will prop up demand while at the same time you’re also trying to decrease demand to cool inflation! 

You may conclude that ‘prescription’ MMT works in strange and mysterious ways, or that their theory of inflation is incomplete (that their politics are fine, but their economics are not). More to the point, their econ does not compute; but keep that to yourself, otherwise you will again be reprimanded for making a ‘straw man’ argument and ‘you haven’t read the literature’ (so repent and sin no more).

The temptation of chalkboard MMT is to use MMT politically—to be all things to all people. So the problem is that in the real world, MMT underestimates the political constraints of the implementation of chalkboard MMT. The ability of a monetary sovereign to issue its own currency and to keep spending on resources, labor and productivity in the private sector will almost certainly be abused. 

Sooner or later, after these ‘prescription’ MMTers have soured you on those evil billionaires in the private sector (and you are instead fully-dependent on the kindness of strangers in Washington D.C.), the economy will snap like a twig. 

Next goes the value of the currency—another snap. 

To be fair, it is true enough that there is no ‘crowding out effect’ caused by federal government spending and money available for private sector investment; IF, one only focuses on their microeconomic analysis of money and banking, coupled with the modern federal-spending mechanism. 

However, there is another type of crowding-out effect that occurs when the federal government provisions itself from the private sector; which is the crowding-out effect for resources, labor and productivity in the private economy caused by federal gov’t spending. You know, the real stuff. It will be fine…until it isn’t.

Sure a bowling alley can’t run out of points, but if there are no pins to knock down then the points on the scoreboard are meaningless.


Deadly Innocent Misinterpretation #76: The FJG is countercyclical. The UBI is not.

Fact: The FJG is a UBI with a make-work requirement and both move people to the same countercyclical degree.

“The FJG is countercyclical. The UBI is not. The Universal Basic Income (UBI) is a neoliberal scam. And too many self-identified progressives are falling for it, due to a lack of basic macroeconomic literacy. The Federal Job Guarantee (FJG) is far superior in every conceivable way.

H/T Charles Kondak, Pure MMT for the 100%: This above quote was taken from a hardcore Federal Job Guarantee (FJG) adherent from their Facebook page. It was the first of eleven supposed advantages of a Federal Job Guarantee vs. a Universal Basic Income (UBI). However, since the differences between a FJG and a UBI are minimal, at best, FJG & UBI proponents are in fact arguing against themselves by opposing one policy over the other. At this point it is well to note it is not my purpose to advocate for one over the other, in fact I’m against both as a Public Policy prescription.

Using the assumption that the Federal Job Guarantee and Universal Basic Income remuneration is set at the same level of income to sustain the most basic living standards society deems appropriate, the countercyclical difference vanishes. 

The reason being is that when the economy contracts, some people go out from private-sector employment and then fall into lower-paying FJG employment (they go out from private sector ‘buffer-stock unemployed’ into ‘buffer-stock employed’ in a FJG). Resembling that, under the Universal Basic Income, when the economy contracts, other people lose their private-sector employment income and fall back on the UBI—the same level of income one would get working in the FJG. 

In other words, it’s quite obvious that when the economy slows, the FJG people and the UBI people are the same. They both will move back and forth, out from getting private sector income and into getting public sector income (out of private-sector independence and into public-sector dependence) to the same countercyclical degree. The FJG is a UBI with a make-work requirement. Don’t take my word for it:

“The Employer of Last Resort (ELR) alternative at one level resembles workfare…”—Mosler Economics, ‘The Center of the Universe / mandatory reading / Full-employment and price stability’.

Source (AND RECOMMENDED READING): ‘The Job Guarantee: A Series of Contradictions’ by Charles Kondak


Deadly Innocent Misinterpretation #77: There is ‘The Deficit Myth’.

Fact: There is the pure ‘description’ deficit myth and the political ‘prescription’ deficit myth. 

H/T Jim ‘MineThis1’ Boukis, Pure MMT (and REAL MACRO) for the 100%: Dr. Stephanie Kelton’s ‘The Deficit Myth’ is a political ‘prescription’ MMT deficit myth. In the real world (outside classrooms), federal deficits are made possible by good-old fashioned hard work by the private sector. Federal deficits are predicated on the private sector to innovate and invest (using foreign or domestic savings—on existing wealth—that is assessed and collateralized into loans by bankers seeking to make a profit). That leads to the growing production of future wealth, which the federal gov’t can tax and ‘borrow’ from its citizen’s wealth (which enables every Uncle Sam to deficit spend).

This is how America—with only $23 trillion of all federal deficits combined a.k.a. the public ‘debt’—yet with only 5% of the total global population produces 25% of global GDP. Once you consider that US total national assets are about $150 trillion—almost a 6:1 ratio—it should become clear that federal deficits were not the driver of the creation of that wealth. 

In fact, the complete opposite is true. It is private-sector PRODUCTIVITY that enables private-sector deficit spending (private-sector money creation) that enables those ‘almighty’ federal gov’t deficits and NOT the other way around—as political ‘prescription’ MMTers desperately try to get everyone to believe.

If you don’t have that private sector productivity, your economy is toast. For example, the cause of hyperinflation is always and everywhere a collapse in private sector productivity. Syria, Iran, Iraq, Turkey, Egypt, Cuba, Tunisia, the Soviet Union, Ukraine, Venezuela, Argentina, Zimbabwe are all fine examples. Whether it was war, civil war, gov’t corruption, or natural disaster, the cause of hyperinflation was a hindrance of the private sector to produce. NONE of these economies ended up hyperinflating because the federal gov’t wasn’t deficit spending enough on ‘prescriptions’ like gov’t subsidies or social programs and NONE couldn’t prevent hyperinflation with more federal taxation—both which are claims made by #FakeMMT that a US economy serving the ‘common good’ and ‘functionally financing’ the ‘public purpose’ would do. Lastly, what about those other deficits, the TRADE deficits? #FakeMMT tells you that ‘imports are a benefit’ and so it’s a ‘myth’ to worry about trade deficits too. Yet NONE of those economies ended up hyperinflating because they didn’t have enough imports. The problem was that their citizens didn’t have enough money to pay for them (because their local currency was becoming worthless).

Excessive federal-gov’t budget deficit growth (‘debt’) to production growth (to GDP) is what diminishes—is what devalues—the currency. It ‘crowds out’ the private sector’s appetite to invest and lend in that currency. If deficits are not excessive / if ‘Debt’ to GDP isn’t rising excessively / if production is keeping up with deficits, it’s fine…until it isn’t. Until you’ve reached a danger zone where inflation only reflects monetary growth (where capital just creates more capital which only coddles the 5%) rather than reflecting economic growth (where capital creates more production which benefits the 95%).

#FakeMMT skips the part where a nation first trashed the currency and points at private-sector borrowing as the root cause of all the economic problems—a huge mistake. In addition, another deadly innocent misinterpretation is that when the IMF steps in to implement changes (to discipline) a country’s excessive public-sector ‘printing’ and ‘borrowing’, it’s called ‘Neo-Liberal’ by #FakeMMT. But that is what got the country in trouble in the first place—so returning to sound economics is a must! There is no other way.

#FakeMMT puts the cart before their trojan horse (their Free Pony For All). They are cleverly (deceivingly) using marketing strategy (political economics) to push dogma (ideological narratives) to indoctrinate unsuspecting economically illiterate people (voters). If you disagree, then you don’t care about global warming, you are against humanity, you haven’t read the literature, you’re a racist—or some other circular logical fallacy. As my friend Edward Delzio rightly says, MMTer’s politics are just fine, it’s the economics behind it that sometimes makes little sense. I agree. In politics, lying, cheating, kicking and scratching is the norm. In actual economics, math, facts and data are cold, hard truths that most people do not like to hear, so most would rather listen to political economics (aka pandering) without realizing the dire implications.

The private sector drives the economy and the value of a currency—period. Free Stuff For All is always voodoo economics because all deficit spending initially goes to the borrowers (the 95%) in the productive ‘real’ economy, but eventually winds up with the savers (the 5%) in the non-functional ‘financial’ economy. Deficits don’t equal ‘our’ savings, their deficits = profit for the top 5%. No profit can ever exist without household dissavings, so it is crucial that funding of income for the 95% come via investment from that top 5%—NOT from federal gov’t deficits. If you want to maintain an ecosystem feedback loop ‘balance’ between the productive (95%) and non-functional (5%) sectoral balances within the private sector, what is needed in the US now (during an economic expansion) are federal policy proposals that maintains current economic growth without requiring deficits. Today, you need more pen strokes, not keystrokes. 

The pure ‘description’ MMT ‘deficit myth’ is that federal ‘debt’—denominated in its own fiat currency—is not an actual debt like a household debt. However, that doesn’t mean the federal gov’t can spend willy nilly. Just because there are no ‘financial constraints’ for a monetary sovereign, you still have those ‘political constraints’ when it comes to spending—same as a household. Meaning that you need to take the hint when Congress with the Power of the Purse (or your household spouse) doesn’t approve of your ‘prescription’; not because of the ‘cost’, but because fiscal policymakers are also concerned about the unintended consequences of your good intentions—and don’t want to risk throwing that golden baby goose (that private sector productivity) out with the bathwater. So in order to get Congress to approve any proposals for federal gov’t spending that increases deficits, it’s important to make sure that there will also be corresponding productive growth. That’s why surplus spending doesn’t need approval—because that spending is offset (is approved) by some taxes (by some production). Those are the pesky accounting rules & appropriations laws (the ‘operational reality’) enshrined in the US Constitution. The pure ‘description’ MMT insight is that unlike any user of fiat currency, rather than worry if you can ‘pay for it’ (if you can keep your budget in balance); the concern for any issuer of fiat currency is if you can ‘deliver it’ (if you can keep your ‘debt’/GDP in balance).

All I’m saying (especially to the people having a romance with radicalism now ‘liking’ and ‘hearting’ #FakeMMT), is just be careful about the free candy that you wish for. When you have been led to believe by POLITICAL ‘prescription’ MMT that The State can pay for it—but we cannot produce it—that is a recipe for ‘too many dollars chasing too few goods’. Look at the Lebanese crisis now. Those poor people have no clue that it was years and years of print, borrow and import (and of course corruption) that got them to their economy’s ‘snap’ moment. They just think it’s ONLY corruption and not their lack of productivity relative to the free candy. So what you have now in Lebanon (same as Venezuela and all the other basket cases) is everybody blaming ‘the corrupt guy’ when it snaps, but it’s their fault too—they got what they asked for (for free).  

Just because an economy starts using a free-floating non-convertible currency, that doesn’t mean tomorrow you can print, borrow and import as long as it isn’t causing headline inflation today—that’s THE DEFICIT MYTH of political ‘prescription’ MMT!— Jim ‘MineThis1’ Boukis, Pure MMT (and REAL MACRO) for the 100%  

P.S. Agreed…To be fair, Dr. Stephanie Kelton gets a lot of credit for all the work she puts in promoting MMT over the airwaves, but there’s a difference between promoting the pure ‘description’ and pushing the political ‘prescriptions’. For example, policymakers on one side of the political aisle criticizing policymakers over on the other side by saying their policies would increase federal gov’t deficits/debts—and that’s ‘bad’—is a Deficit Myth. However, saying it’s not bad because ‘Their Deficits = ‘OUR Savings’ may help the political ‘prescription’ MMT cause but hurts the pure ‘description’ MMT cause. Perhaps calling ‘Their’ deficits (Their quote unquote ‘debt’) something like ‘bondholder’s equity’ which shouldn’t be considered ‘debt’ (shouldn’t be booked as debt on the balance sheet)—which is very similar to a company issuing and selling shares of stocks or perpetual bonds that are not intended to ever be ‘repaid’ (ever be ‘destroyed’). That’s a pure ‘description’ MMT way to put it, which kills two birds with one stone because it’s obvious that 1) you have to be a Treasury bondholder to see federal deficits/debt as ‘OUR Savings’; and 2) it dispels any fears about issuance by the ‘issuer of currency’ of Treasury bonds denominated in the exact same currency as being any kind of a financial constraint—unlike Our deficits (Our *actual* debt) like the plain-vanilla bonds issued by ‘users of currency’ like households and businesses when we deficit spend.



September 2019

Eddie Delzio: Once upon a time, MMTers would (correctly) say that ‘MMT is the description not the prescription’ because they were (properly) warning everyone. They were (understandably) worried that the MMT community would get too political (that MMT would become less about education and more about indoctrination). Fast forward to today, you’ll never hear anyone say ‘MMT is not the prescription’, since there’s no need to say it (because it’s so blatantly obvious that—just like that gold standard—it’s a bygone era).

In September 2017, after several months of some vigorous debate among many MMTers over the contentious phrase and that deadly innocent MMT misinterpretation ‘Taxes Don’t Fund Spending’, we started the ‘Pure MMT for the 100%’ page on Facebook. What began on this new page as a thread of comments—as suggestions—for the MMT community to ‘go beyond the memes’ and improve on (read: correct) some of the facts/math/data MMTers were using, became a post called ‘Seven Deadly Innocent Misinterpretations.’ We assumed that MMTers would get the joke that the title was a tongue-in-cheek reference to Warren Mosler’s classic book 7DIF and that we were simply trying to help the MMT community from getting their ‘descriptions’ (read: their econ) wrong. 

However, it was Pure MMT for the 100% that wasn’t getting the joke. More specifically, it was WE who were making a deadly innocent misinterpretation—that MMT was (still) the description and not the prescription. Unbeknownst to us, Mr. Mosler and his fellow academic MMT ‘scholars’—now also with political aspirations—were taking MMT out for an ideological spin and started throwing the ‘descriptions’ (the facts/math/data) out the window because they decided to wager that ‘prescriptions’ (stories/feelings/narratives) would get more eyeballs (more votes). You could even pinpoint the exact moment when MMT was no longer ‘the description not the prescription.’ That would soon officially happen when Professor Bill Mitchell, in a post called ‘Critics of the Job Guarantee Miss The Mark Badly Again’ wrote that “I note that various social media discussions still don’t quite grasp the idea that the Job Guarantee is a specific and intrinsic element of Modern Monetary Theory rather than a policy choice that might reflect progressive Left values.”

On multiple occasions (including in his final speech at the September 2017 MMT Conference), Mr. Mosler tried to discourage the MMT community from regurgitating ‘taxes don’t fund spending’, but those efforts merely foreshadowed a losing cause. Just as he did then, Mr. Mosler would later (during a Bloomberg TV interview and follow-up Tweets) push back against the notion that the Job Guarantee—actually his very own policy proposal mentioned in the ‘prescription’ section of his book 7DIF—as being the ‘description’; however, just like those previous attempts to talk sense into MMTers, it wouldn’t matter. It was too late. Modern Monetary Theory used to be ‘the description not the prescription’, has since been reshuffled, and the new deal is a political ‘prescription’ MMT that pushes policy—under the guise of promoting pure ‘description’ MMT.

It’s ironic (it’s a tragic comedy) watching today’s political ‘prescription’ MMT community keep trying to disguise their politics with their economics—even though it’s their economics (even though it’s what they keep getting wrong/making up) that hurts their cause (that hurts the chances of ever seeing their ‘prescriptions’ become reality). Which is why our first rule at Pure MMT for the 100% is that folks should NEVER mix their politics with their economics (because when they do, they dilute their expertise in both at the same time). 

To be clear, Pure MMT for the 100% has no problem at all with anyone’s politics/proposals for federal policymakers. It’s your civic duty to speak up about whatever programs you feel that federal gov’t dollars should be spent on. The more ‘prescription’ ideas, the merrier; and the more debate over those proposals on that battlefield of ideals, the better. May the best proposals win (be approved by Congress).

In other words, MMTer’s politics are fine; it’s only MMTer’s economics that is their problem. Which is exactly why it was not a surprise to pure ‘description’ MMTers (while writing the Seventy Seven Deadly Innocent Misinterpretations) that things would soon start to go poorly for political ‘prescription’ MMTers. The only surprise was just how much, how much beyond expectations, that so many folks—from ALL political persuasions—would be critical of MMT.

As Pure MMT for the 100% has always suggested to today’s MMTers, if you want your ‘prescriptions’ to be taken seriously by experts in the field, you have to get the ‘description’ right. For example, if you’re in the MMT kiddie pool wearing ‘taxes don’t fund spending’ floaties, pontificating during a labor shortage about the benefits of having the federal gov’t deficit spend $500B for a Fake Job Guarantee, someone (who might have been a federal civil servant for 25+ years) may someday clue you in on labor unions, the Davis/Bacon Act and the unintended consequences of your good intentions. If you are pushing cute stories and dopey catchphrases about it looking like ‘the Fed started lift-off during a recession’ because ‘the Fed has the pedals backwards’ while America is in The Longest Economic Expansion in United States History, don’t be surprised if someone, someday (who might be an Airbus 321 Captain that also knows how money works because he knows how money trades) fills you in on how ridiculous you sound. If you’re an academic ‘scholar’ in front of your MMT chalkboard lecturing about how the post-gold standard, modern monetary system really works, someone (who is a former federal gov’t securities interdealer / Treasury bond broker that might have written a book—not a ‘paper’ written by students or teachers in a school—about ‘how the post-gold standard, modern monetary system really works’) may someday let you know what you’re getting wrong. 

We hope that these 77DIMs will help future generations of MMTers keep it pure. 

Thanks for reading,

Pure MMT for the 100%



There’s nothing wrong with MMT’s ‘prescriptions’ (the more policy proposals, the merrier). Besides, we already have them—like a job guarantee in the civil service +/or Medicare for ‘some’—and political MMTers just simply want ‘more’ of it, which is fine by me (a hard-core moderate) if policymakers approve it. Since this is a presidential election year and because I do not want readers to think that I am trying ‘to muddy the waters of MMT’ (to criticize left-leaning politics), I ‘demoted’ myself as an Admin of Pure MMT—to just being a ‘top fan’ of MMT (back to whence I came).

In other words, to paraphrase Forrest Gump, after completing these 77 DIMs, for now, ‘that’s all I have to say about that.’

Eddie Delzio

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Thanks for reading,

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77 Deadly Innocent Misinterpretations (77 DIMs #57-63)

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

Bernanke: “It is not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed…

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

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

Pelley: “You’ve been printing money?”

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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


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

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

H/T Charles ‘Kondy’ Kondak

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

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

Some prominent Economists disagree on that effect of a Federal Job Guarantee and argue it will have a dampening effect on wages for workers higher up the Income ladder. One Economist says MMT would use ‘full employment [FJG] to fight inflation’ by giving companies that want to hire a better option:

‘They don’t have to bid wages up trying compete with one another for employed workers. They can hire from this pool, this ready-pool of skilled workers who are employed in public service jobs.’ (MMT Economist Professor Stephanie Kelton).

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

By the end of the war, they had become worthless (“not worth a continental”).

Which left the colonists with a searing memory (read: a legitimate fear) of ‘printing money’.

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

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

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

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

Thanks for reading,

Pure MMT for the 100%

Real Macro for the 100%

CONTINUED: 77 Deadly Innocent Misinterpretations (77 DIMs #64-77)

77 Deadly Innocent Misinterpretations (77 DIMs #50-56)

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

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

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


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

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

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

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


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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

A monetary sovereign that issues bonds in its own local currency has LESS risk of default; however, that should not be misinterpreted by the MMT community as meaning that those bonds have no default risk at all. Even if issued by a monetary sovereign and denominated in their own local currency (even if denominated in their own non-convertible free-floating fiat currency), there is still a risk of default (there is still an issue of insolvency). Don’t take my word for it, other folks are also (correctly) thinking the same thing:

“Confidence and use of fiat currency are not dictated by the government, so monetary sovereignty is not something the government decides. It is a complete fallacy that a gov’t with monetary sovereignty can issue all the bonds that it needs in local currency without worry of default risk. It is also untrue that because you are a monetarily sovereign gov’t (that because you have the monopoly of issuing the currency) you can issue all the money that you want to finance deficit spending without risk of high inflation. The reason why a gov’t, that is monetarily sovereign, issues bonds (adds debt) that is denominated in a foreign currency—rather than in its own local currency—is not because they don’t understand MMT. It’s because there’s no longer any real demand for their own local currency. If an investor knows that a gov’t will continuously depreciate the currency (if an investor knows that a gov’t thinks it can create its own bonds without risk of default and create its own currency without risk of hyperinflation), then that investor will simply not want that local currency either. The reason why citizens nor investors don’t want their own local currency—the reason why they reject it—is because they don’t want to suffer the currency risk. There is evidence of more than 20 defaults of bonds denominated in local currency of gov’t with monetary sovereignty since the 1960s. In addition, throughout history there are more than 150 cases of fiat currencies, that because of high inflation, have disappeared; and in none of those cases did that gov’t decide to stop creating more currency or issuing more bonds.”—Daniel Lacalle, ‘No, Governments With Monetary Sovereignty Cannot Issue All The Currency And Debt They Want.‘, 09/08/19

In addition, Daniel Lacalle posted a comprehensive database that shows all the worldwide sovereign (government) defaults since 1960. On that list are the most frequent of all, the many defaults on the debt (on the bonds) denominated in ‘Foreign Currency’ (e.g. the US Dollar), as well as more than 20 defaults of debt denominated in ‘Local Currency’. In other words, there have been more than 20 cases of default of a monetary sovereign’s bonds that WERE NOT denominated in a foreign currency; but rather, defaults on bonds that were denominated in that country’s own fiat money. Plus those 152 occurrences of Local Currency that have outright failed—fiat money that no longer exist today—due to excess inflation. Here are the instances of the default of gov’t bonds that were denominated in Local Currency:

  Angola’s 1990 default on local currency debt was the result of a confiscatory currency reform.

 Cambodia’s 1975 default on local currency debt was the result of the Pol Pot regime’s abolition of money.

 Cuba’s 1961 default on local currency debt was the result of a confiscatory currency reform.

 Ghana’s defaults on local currency debt in 1979 and 1982 were the result of confiscatory currency reforms.

 Iraq’s 1990 default on local currency debt stemmed from the actions of Iraq, then the occupying power in Kuwait, in converting Kuwaiti currency to Iraqi currency on confiscatory terms. The 1993 default on local currency debt was the result of a confiscatory currency reform.

 North Korea’s defaults on local currency debt in 1992 and 2009 were the result of confiscatory currency reforms.

 Laos’s 1976 default on local currency debt was the result of a confiscatory currency reform.

 Mozambique’s 1980 default on local currency debt was the result of a confiscatory currency reform.

 Myanmar’s 1964,1985 and 1987 defaults on local currency debt were the result of confiscatory currency reforms.

 Nicaragua’s 1988 default on local currency debt was the result of a confiscatory currency reform.

 Nigeria’s defaults on local currency debt in 1967 and 1984 were the result of confiscatory currency reforms.

 Rwanda’s 1995 default on local currency debt was the result of a confiscatory currency reform.

 Sri Lanka’s 1996 default on local currency debt reflects the suspension of treasury bill auctions and rollover of maturing debt between January and March after the central bank was severely damaged by a terrorist bomb. 

 Sudan’s default on local currency debt in 1991 was the result of a confiscatory currency reform.

 USSR’s (Russia’s) 1991 and 1993 defaults on local currency debt were the result of confiscatory currency reforms.

Vietnam’s 1975 default on local currency debt resulted from the conversion of South Vietnamese currency to North Vietnamese currency on confiscatory terms. The 1978 and 1985 defaults on local currency debt were the result of confiscatory currency reforms.

SOURCE: David Beers, Bank of Canada, ‘The BoC-BoE Sovereign Default Database’


“Argentina has no more dollars. Argentina needs dollars.”—Argentina President Alberto Fernandez, describing his country as being in ‘virtual default’, 12/23/19

On 12/20/19, after Argentina ‘postponed’ a US dollar bond payment, Fitch and S&P downgraded Argentina’s foreign AND LOCAL (FIAT) CURRENCY bonds to Restricted Default. Three days later, Fitch restored the credit rating back to CC (from the deepest area of junk debt to a lesser-deep area of junk debt) but warned of a ‘high probability of default of some kind.’ The real-time lesson for the MMT community here is that the financial constraint to federal gov’t spending using fiat currency isn’t just ‘inflation’. Rising inflation that leads to runaway inflation is just one of the many moving pieces (just one of the many canaries in the coal mine) along with hyperinflation, debt defaults, a depreciating currency, a collapse in production, etc. As Daniel Lacalle (correctly) puts it, the actual financial constraint is when no one wants the local (fiat) money anymore. Instead of swinging and missing when trying to pinpoint exactly what happened to a country that suffered a fiat-money collapse, MMTers should just simply say what happened—the main reason in all cases—was a loss of confidence in the country. In other words, more and more citizens saw their government destroying the purchasing power of the local currency, which snowballed into no one wanting the country’s local currency anymore—period. Just like those ‘Continentals’ during the American Revolutionary War to Argentina right now—nobody wanted the local currency anymore (and yes, you read that right, those ‘Continentals’ were a fiat currency; hence the saying ‘Not Worth a Continental’, which was the very beginning of America’s distaste to ‘printing money’ that was not backed/fixed/pegged). One of Argentina’s main problems is that its people would rather hold US dollars than their local currency, the Argentine peso (a non-pegged non-convertible free-floating fiat currency since 2001). Argentinians would rather sell the local currency for USD and keep those dollars in foreign bank accounts. Which goes full circle to Hyman Minsky who once said that “Everyone can create money; the problem is to get it accepted.” If nobody wants (if no one accepts/if no one wants to keep) your money, THAT’S your financial constraint—in addition to the ‘political constraint’ where your ‘prescriptions’ have to be ‘approved’ by elected policymakers


Mosler likes to tell the story of how he cleaned up on Italian lira back in the early 1990s. Italy was spending like a drunken sailor and many people assumed it was only a matter of time before the country defaulted on its massive debt. But Mosler knew, per MMT, that countries can’t default, since they can just keep printing money. He went long the lira and made a bundle when, in fact, Italy didn’t default. (It didn’t default, but the lira collapsed. Eventually, 200 million lira would buy you half a banana. I know, I was there at the time.) A story Mosler doesn’t like to tell is what happened a few years later. Toward the end of the 1990s, Russia took a page from Italy’s playbook and spent wildly. The smart money believed Russia would default, but Mosler, knowing, per MMT, that it couldn’t happen, went long the ruble. In 1998 Russia did in fact default and Mosler didn’t just lose some money, his hedge fund blew up and had to close. (Long-​Term Capital Management also blew up at this time.) But the sorry example of Russia notwithstanding, Mosler proselytized for MMT incessantly, and soon a group of impressionable post-​Keynesians (L. Randall Wray, Bill Mitchell, Stephanie Kelton) found themselves convinced. They in turn, especially Kelton, glommed on to a few radical political candidates like Bernie Sanders and Alexandria Ocasio-​Cortez (both avowed socialists) who saw in MMT the solution to all their spending problems. But is it?”—Greg Curtis, Founder and Chairman of wealth management firm Greycourt, ‘Modern Monetary Madness’, 08/29/19

In hindsight, Warren Mosler—a former hedge-fund trader and now a worthy champion of MMT—shouldn’t have allowed himself to get too lulled into mistakenly believing that a trade is bulletproof—’because MMT’. That’s why MMTers shouldn’t take the ‘insolvency is never an issue with nonconvertible currency and floating exchange rates’—a worthy MMT insight—too literally.

In the early 1990s, Mr. Mosler went ‘long’ on Italy’s gov’t bonds. He was betting on the probability that Italy wouldn’t default on those bonds. He was wagering that there would be no default on those bonds he just bought ‘because MMT’ (because Italy’s currency had just effectively become a non-convertible free-floating currency after the lira was withdrawn from European Exchange Rate Mechanism, a semi-pegged system, on 09/17/92). To Mr. Mosler’s credit, it was a bond trade which became a very profitable trade. As per his book, ‘Seven Deadly Innocent Frauds’ (7DIF), the trade eventually paid off well over $100 million to his desk and his fund’s investors. However, risk and reward run side by side (meaning that the whole truth and nothing but the truth is that it was a very risky trade). In 7DIF he makes it sound like a garden-variety ‘carry’ trade (borrowing the lira at 12% and collecting 14% of Italian gov’t bond interest), that is was “free lunch of 2%” and “easy money to be made only if you knew for sure that the Italian government wouldn’t default” [wouldn’t default ‘because MMT’]. Sure, Italy did not default; but, even though it makes a heroic story, MMT (the theory that there is no default risk on a monetary-sovereign’s local bonds denominated in its own non-convertible free-floating fiat-currency) may have had little to do with it—correlation, yes; causation, no. For example, as all MMTers (including myself) agree, IF the U.S. tomorrow defaulted on its Treasury bonds, it will be done by choice, by nihilistic policymakers (done in spite). Same as other monetarily-sovereign countries using their own fiat currency that have done so (which Italy could have easily done back in the 1990’s and as Argentina may now be doing yet again today) because they intentionally wanted to (e.g. they intentionally wanted to screw over their ‘evil’ creditors). In 7DIF, Mr. Mosler writes: 

“He [a senior official of the Italian Government’s Treasury Department] was probably expecting us to question when we would get our withholding tax back. The Italian Treasury Department was way behind on making their payments [to foreign holders of Italian bonds including Mr. Mosler’s bond desk].”

Why wasn’t Italy refunding the withholding tax? As per Mr. Mosler, “They had only two people assigned to the task of remitting the withheld funds to, and one of these two was a woman on maternity leave.” 

Hmmm…I’ll let the readers decide if that particular ‘the check is—will soon be—in the mail’ was some lame excuse from a debtor on the brink of saying ‘screw you’ to some of their creditors, or was it a case of a monetary sovereign ‘not understanding MMT’? 

On 09/02/98, during the Russian financial crisis (an extension of the Asian Currency Crisis of 1997), the Central Bank of the Russian Federation decided to abandon their semi-peg policy and float the ruble. Perhaps Mr. Mosler then placed his (doomed) bet on Russia (went ‘long’ on the Russian ruble) because he was again convinced that markets were ‘getting it backwards’ and ‘not understanding MMT’ (that traders were ‘not understanding’ that there was ‘no default risk’ for a non-convertible free-floating currency). 

On 04/05/15, Mike Norman wrote this about his erstwhile friend: 

“Nevermind that Warren’s been wrong about the euro for years. Non-stop he’s been saying, ‘making the euro harder to get’ so he’s been bullish on the euro since last May. The euro has instead gotten crushed. Then he says, ‘Oh, I was bullish on the fundamentals, I was bullish because MMT, but really I was bearish based on the technicals’. Seriously??? Good luck trading with that. The euro dropped THREE THOUSAND POINTS on ‘the fundamentals’. So what the f___ use is MMT?”

On 11/27/19, after Argentina ‘postponed’ (after Argentina said ‘screw you’ to) paying $9B of interest payments to bondholders, the rating agencies Fitch and S&P downgraded their credit ratings of Argentina debt to ‘Restricted Default’ and said it would consider BOTH Argentina’s foreign AND LOCAL CURRENCY DEBT ratings as “vulnerable to nonpayment”/CCC minus (a level of junk right before default). 

Regardless if any those local bonds actually default or not, MMTers should put themselves in the shoes of the Argentinian citizen holding monetarily-sovereign-issued, Argentine-peso-denominated debt, while watching their money—a nonconvertible currency with a floating exchange rate since 2001—plummet in value.

My guess is that those folks are also (correctly) thinking that ‘insolvency is never an issue with nonconvertible currency and floating exchange rates’ (7DIF page 97) could be a deadly—and quite costly—innocent misinterpretation.

“Confidence. That is the mortar that holds together all fiat systems. There is nothing else behind them. And confidence is a fleeting and fickle thing.”—Wolf Street, ‘Fiat Currency in Revolt: Argentine Peso’, 05/07/18


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

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

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

That was an excellent question.

The answer is both.

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

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

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

There is an exception.

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

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

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

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



WASHINGTON—For the first time since 1986, the U.S. government will begin issuing 20year bonds again in the first half of 2020, the Treasury Department said Thursday (01/16/20).


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

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

“While Non-banks grant credit, it would be misleading to speak of ‘credit creation’ by Non-banks.”—Richard Werner, German economist, ‘International Review of Financial Analysis’, Volume 36, Pages 71-77, December 2014

Richard Werner earned a BSc at the London School of Economics. Further studies at Oxford University were interrupted by a year studying at the University of Tokyo—Japan’s most prestigious university—after which his doctorate in economics was conferred by Oxford. In Tokyo he was also a Visiting Researcher at the Institute for Monetary and Economic Studies at the Bank of Japan; plus he was a Visiting Scholar at the Institute for Monetary and Fiscal Studies at Japan’s Ministry of Finance. Richard Werner popularized the term ‘quantitative easing’. As chief economist of Jardine Fleming Securities Asia he used this expression during presentations to institutional clients in Tokyo in 1994.

In short, Mr. Werner has a superb resume and is definitely one of the great ones, but even the great ones swing and miss sometimes. He says that “it would be misleading to speak of ‘credit creation’ by non-banks” because when the Non-Bank (short for ‘non-formal bank’ like a shadow bank that doesn’t collect depositor money like a traditional ‘formal’ bank) is lending (which by UK law a Non-Bank must always—only—lend with existing money), the Non-Bank gives up the same amount of their cash (-$100) in exchange for the same amount of the borrower’s IOU (+$100).

Thus, as this logic goes, since there is no change in the Non-Bank lender’s balance-sheet totals at the end of the day then that means there’s no credit creation.

Speaking of being ‘misleading’, what about the assets on the borrower’s balance sheet that just expanded—that went up from $0 to +$100? Sure, the borrower’s capital didn’t expand (because the +$100 of borrowed cash on the asset side of the balance sheet ‘nets out’ with the -$100 of new debt on the liabilities side); but that $100—that CREDIT—is an expansion of the balance sheet nonetheless.

Perhaps, in Mr. Werner’s view, when there is ‘credit creation’ (when formal banks lend with newly-created money), that is a different (read: a lower) ‘hierarchy’ of money. He calls newly-created bank deposits ‘fictitious’ and ‘imaginary’. That implies that he thinks only a loan using already-existing money is ‘sound’. Which is an ‘unsound’ argument because it makes no difference whether any money that was lent out was either newly-created (lent by a formal bank) or already-existing (lent by a non-formal bank)—because it mostly has to do with the ‘soundness’ of the person the money was lent to.

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

As per Mr. Werner, it is only when lending is done using newly-created money is it a ‘credit creation’. Apparently, if just lending with already-existing money, that’s totally different, that’s not extending credit, that’s not credit-creation, that’s ‘fronting’ someone money (or something like that).

Which completely ignores the fact that when someone gives you cash out of their pocket for you to borrow, not only do you the borrower receive an asset, so does the lender—and THAT’S the expansion, that’s the creation (of credit). The lender receives a NEWLY-CREATED IOU that goes in the lender’s pocket. Even if there is no actual IOU written out and handed over—if it is just ‘fictitious’ and ‘imaginary’—rest assured, that IOU is a real, economically-potent thing (because it’s a damsel named Faith hooking up with a stud called Creditworthiness).

The only difference is that, unlike a credit creation using already-existing money, a credit creation using newly-created dollars involves a middleman (an underwriter). Whether funded by newly-created money or not, it is that promise to pay back the money with interest, it’s that newly-created IOU, that ‘bond’—that you conjured up out of thin air—that makes ALL borrowing a credit creation. The added account receivable, that asset, that credit creation, is always happening with any bond issuance, with any borrowing—with any extension of credit. When you pay the money back (when you put the bond in the ‘shredder’), that is the destruction. Those bonds being newly-created and newly-destroyed expand and contract the balance sheets. This leveraging v. deleveraging is the ‘beating heart’ and understanding that allows you to feel the ‘pulse’ of the economy.

Since the days of credit creation using tally sticks in medieval England, the lender’s faith in the borrower’s ability to pay back the money is a pillar of the economy. That’s why even to this day, a fiat dollar bill which is not backed by gold is still very valuable and why we say it’s backed by the full faith and credit—because it’s backed by the full faith and credit of the person who printed that piece of paper.

When it comes to borrowing in the private sector, it is WE who ‘print’ that bond, not the Bank and not the Non-Bank—they are only facilitating YOUR ‘printing’ of credit (represented by your newly-created bond). For example, VISA doesn’t contact you to let you know when they’re ready for you to go out to eat and pay on credit; and VISA doesn’t tell you whether to make the minimum monthly-balance payment, or tell you to pay the balance in full and destroy the credit creation—it’s the other way around. Anyone saying that credit creation is ‘only in the case of when borrowing newly-created money’ is missing the bigger picture. When someone lends, it is a granting of purchasing power—no matter if it involves any actual banks or any actual newly-created money or not. Whether banks are involved, or whether newly-created money is created or isn’t created, that is only a subset of the credit-creation process. As Dr. Steve Keen correctly wrote in his 2017 book, “credit is equivalent to the growth in private debt”. Meaning that EVERY time someone borrows, they are increasing private-sector debt (they are ALWAYS expanding private-sector balance sheets).

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

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

Thanks for reading,

Pure MMT for the 100%

If you want to know how money works, it helps to know how money trades…Follow MineThis1 and his REAL MACRO instructors at

CONTINUED: 77 Deadly Innocent Misinterpretations (77 DIMs #57-63)

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

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

He wrote that because when the Non-Bank (short for ‘non-formal bank’ like a shadow bank) is lending (which by UK law must always—only—lend with existing money), the Non-Bank gives up the same amount of their cash (-$100) in exchange for the same amount of the borrower’s IOU (+$100).

Thus, as this logic goes, since there is no change in the Non-Bank lender’s balance-sheet totals at the end of the day then that means there’s no credit creation.

(Speaking of being ‘misleading’, what about the borrower’s balance sheet that expanded—that went up from $0 to +$100)?

Perhaps, in Mr. Werner’s view, when the opposite happens, when formal banks that are lending with newly-created money, that is a different (read: lower) ‘hierarchy’ of borrowing. He calls newly-created bank deposits ‘fictitious’ and ‘imaginary’. That implies that he thinks only a loan using already-existing money is ‘sound’.

Which is an ‘unsound’ argument because it makes no difference whether any money that was lent out was newly-created or already-existing—because it mostly has to do with the ‘soundness’ of the person the money was lent to.

As per Mr. Werner, it is only when lending is done using newly-created money is it a ‘credit creation’. Apparently, if just lending with already-existing money, that’s totally different, that’s not extending credit, that’s not credit-creation, that’s ‘fronting’ someone money (or something like that).

Which completely ignores the fact that when someone gives you cash out of their pocket for you to borrow, not only do you the borrower receive an asset, so does the lender—and THAT’S the expansion, that’s the creation (of credit). The lender receives a NEWLY-CREATED IOU that goes in the lender’s pocket. Even if there is no actual IOU written out and handed over—if it is just ‘fictitious’ and ‘imaginary’—rest assured, that IOU is a real and potent thing because it’s a damsel named Faith (hooking up with a stud called Creditworthiness).

The only difference is that, unlike a credit creation using already-existing money, a credit creation using newly-created dollars involves a middleman (an underwriter). Whether funded by newly-created money or not, it is that promise to pay back the money with interest, it’s that newly-created IOU, that ‘bond’—that you conjured up out of thin air—that makes ALL borrowing a credit creation. The added account receivable, that asset, that credit creation, is always happening with any bond issuance, with any borrowing—with any extension of credit. When you pay the money back (when you put the bond in the ‘shredder’), that is the destruction. Those bonds being newly-created and newly-destroyed expand and contract the balance sheets. This leveraging v. deleveraging is the ‘beating heart’ and understanding that allows you to feel the ‘pulse’ of the economy.

Since the days of credit creation using tally sticks in medieval England, the lender’s faith in the borrower’s ability to pay back the money is a pillar of the economy. That’s why even to this day, a fiat dollar bill which is not backed by gold is still very valuable and why we say it’s backed by the full faith and credit—because it’s backed by the full faith and credit of the person who printed that piece of paper.

When it comes to borrowing in the private sector, it is WE who ‘print’ that bond, not the Bank and not the Non-Bank—they are only facilitating YOUR ‘printing’ of credit (represented by your newly-created bond). For example, VISA doesn’t contact you to let you know when they’re ready for you to go out to eat and pay on credit; and VISA doesn’t tell you whether to make the minimum monthly-balance payment, or tell you to pay the balance in full and destroy the credit creation—it’s the other way around. Anyone saying that credit creation is ‘only in the case of when borrowing newly-created money’ is missing the bigger picture. When someone borrows, it is a granting of purchasing power—no matter if it involves any actual newly-created money or not.

A bank loan being financed with existing money may not have the same monetary-inflationary bias or blow as many asset-price bubbles that a bank loan being financed with newly-created money would (a legitimate concern for anyone fearing that bank-created money isn’t ‘sound’); however, one should not confuse that with both not being a credit creation. Whether newly-created money is created or isn’t created, that is only a subset of the credit-creation process. As per Dr. Steve Keen in his 2017 book titled ‘Can We Avoid Another Financial Crisis?’, “credit” he writes, “is equivalent to the growth in private debt”. Every time someone borrows, they are increasing private-sector debt and they are expanding private-sector balance sheets.

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

That’s close. Everyone can extend (issue) credit and all borrowing is a credit creation (an expansion denominated in dollars). To believe otherwise is fictitious and imaginary.

Thanks for reading,

Pure MMT for the 100%


If you want to know how money works, it helps to know how money trades. Follow MineThis1 and his REAL MACRO instructors @

Source: ‘How do banks create money, and why can other firms not do the same? An explanation for the coexistence of lending and deposit-taking?’



No, I do not agree with anyone that says that the Fed is a private cartel. The Fed is part of the federal gov’t. As the Fed puts it on their website, the Fed is “independent within the federal gov’t”.

To believe otherwise is fictitious and imaginary.



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

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

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

It was not a good February 2019 for political ‘prescription’ MMT (nor for their anti-central bank, anti-capitalist, gloom-and-doom choir).

On February 1st, Keith Weiner wrote a piece titled ‘Modern Monetary Theory Is A Cult’, referencing the real-life islander tribe known as the ‘cargo cult’. Just like a fake MMTer who doesn’t fully-understand concepts like ‘value’ or ‘productivity’, the cargo cult assumed that all they had to do was to build a runway—just ‘keyboard’ it in—and then airplanes full of cargo would come.

Nonfarm Payrolls (monthly unemployment figures) blew away expectations, meaning that the Longest Job Expansion In United States History—now 100 straight months strong—continued. Which (yet once again) kicked the ass of anyone still left that actually thinks a $500B federal program that creates ‘job’ guarantees DURING A LABOR SHORTAGE is a good idea.

‘The Intercept’ dropped this on the gullible MMT community (who still didn’t get the hint after Democrats re-instituted PayGo and Speaker Nancy Pelosi frustrated Green New Deal proponents by not giving them the kind of committee they wanted): “Pelosi Aide Privately Tells Insurance Executives Not To Worry About Democrats Pushing Medicare For All”—Ryan Grim

Which didn’t go over too well with MMT academics: “Democrats, Do you deny that you are the PARTY OF SATAN?”—Bill Mitchell

If Professor Mitchell had fully understood the article, he would have realized that the Democrats had simply made the decision that M4A was a political loser and that for now policymakers should focus their messaging on lowering drug prices. “The comfort level with a broader base of the American people (for single payer) is not there yet,” as per Speaker Pelosi (read: She will be aligned with private insurers and will oppose Big Pharma).

When asked if federal deficits will be mentioned in the February 5th SOTU Address, White House chief of staff Mulvaney said ‘no’ because ‘nobody cares’.

Is it because of that Progressive ‘revolution’ that nobody cares about deficits? 


Here’s why: 

“Republicans…are the biggest MMT people we’ve seen in our lifetime.”—Logan Mohtashami

“One of the funny things that happened is that in a way, the Republicans…kind of advanced the MMT agenda.”—Stephanie Kelton

Then during the SOTU speech, after the president said “We were born free and we will stay free…The United States will never be a socialist nation,” even some over on the Democrat side of the aisle cheered (while Sen. Sanders fumed).

Meanwhile, another bullet hole in ‘bulletproof’ MMT is that, just like the cargo cult, the political ‘prescription’ MMT community has the blinders on when it comes to inflation. They think that consumer prices are the only thing to measure (that only consumer price inflation is the risk) and refuse to see anything else (like asset price inflation being fed by deficits that is worsening wealth inequality). Fake MMTers just look at consumer price inflation and not at the asset price inflation (stocks, bonds, real estate, aka the ‘savings bubble’). Furthermore, they also haven’t figured out that an increasing ‘Debt’ / GDP = a decreasing GDP / ‘Debt’ = a collapse in production = the ratio is going in the wrong direction (just like their ‘poster child’ Japan).

“They are fond of saying ‘deficit spending should be large enough to satisfy the desire of the private sector to save’ as if there is a limit on the price of financial assets.”—Charles Kondak

Bingo…Either the political ‘prescription’ MMT community is not fully grasping how incomplete it is to say that it’s fine to deficit spend ‘as long as there is no (consumer) price inflation’, or they are just bullshitting everyone—again. H/T to Jim ‘MineThis1’ Boukis for being the first one to sound the alarm on the savings bubble imbalance and those deficits that feed it (those Gov’t Deficits that = THEIR Savings). To just say it’s fine to deficit spend ‘as long as (consumer price) inflation is low’ is not only fake MMT, it’s borderline dangerous for the stability of the nation to not include asset price inflation in that federal spending calculus (to not consider creative pen strokes instead of keystrokes). Instead of calling it wealth inequality, perhaps we should call it ‘wealth inflation’ and then maybe these MMTers would get it.

Which is unlikely because MMT was carjacked and the first thing the carjackers did was to throw that pure ‘description’ baby out the window—which ended that era when MMT was The Description Not The Prescription. If asked to pinpoint when this happened, my guess would be April 26, 2018. That was the day when Bill Mitchell (the economist in Australia who—even though Australia has had 28 straight years without a recession thanks to export-led economic growth—says that ‘Exports are a cost’) wrote that “the Job Guarantee is a specific and intrinsic element of MMT.” What really bothers Professor Mitchell and all ‘prescription’ MMTers is that pesky political constraint to federal spending—they can’t stand knowing that we can afford any policy proposal, BUT it still has to be approved. To these MMTers, all their policy proposals SHOULD be approved because all their ‘prescription’ roads lead to the same place: More free ‘this’ for the ‘general welfare’ and more free ‘that’ for the ‘public purpose’ (without considering the unintended consequences of their good intentions). When saying that we should spend on whatever THEY want—and don’t worry about How To Pay For It—’because MMT’—these post-modern neomarxists keep showing their true ideals: Usurp the Power of the Purse of Congress, take away the Fed’s ability to change interest rates, cede control completely away from some private sector industries and slowly dismantle capitalism (to replace it with a cradle-to-grave welfare state). NOTE: There is absolutely nothing at all wrong with believing in that; however, don’t push your ideological agenda (the political ‘prescription’) under a guise of promoting the econ (the pure ‘description’)—if you want to be taken seriously by experts in the field.

Perhaps one of the biggest whoppers overheard during February was that oft-repeated, wishful-thinking that ‘MMT is getting more mainstream’. In other words, while peddling their political ‘prescription’ MMT (that has little chance of seeing the light of day) under the guise of promoting pure ‘description’ MMT (that has a big chance of seeing the light of day), the MMT community is now getting pissing on—while MMT academics are telling them that it’s ‘raining’ (that it’s ‘mainstream’).

Here’s some more examples of the ‘mainstream’ that is now pouring down on the legs of the political ‘prescription’ MMT community:

FEB 07: Noah Smith (Bloomberg Opinion and former assistant professor of finance at Stony Brook University): “So until the Green New Deal proposal is substantially revamped, every Democrat’s answer to the question ‘Do you support the GND?’ should be NO.”

FEB 08: Tucker Carlson: Why would we ever pay people quote ‘unwilling to work’?

Robert Hockett: We never would. AOC has never said anything like that. I think you’re referring to some sort of doctored document that someone other than us has been circulating.

Tucker Carlson: That was from the backgrounder from her office.

Robert Hockett: No. She actually laughed at that, she just tweeted out that apparently some Republicans have put that out there.

Tucker Carlson: Ok, good, thank you for correcting me. That seems a little ridiculous. Almost as ridiculous as the idea that we’re going to build enough rail to make airplanes unnecessary which I think is actually from the plan.

Robert Hockett: I don’t know where you got that from either Tucker. I’m not clear on where that ‘airplane disappearance’ is coming from.

Tucker Carlson: This is the Frequently Asked Questions released by her office and I’m quoting from it. Maybe this is fraudulent and I hope you’ll correct me. It says, and I’m quoting, the Green New Deal will totally overhaul transportation, building out high-speed rail at a scale where air travel would stop becoming necessary. Hawaii Democrat Senator Mazie Keiko Hirono responded by saying that would be hard for Hawaii—so I don’t think that’s made up.

Robert Hockett: It’s being misunderstood. We are talking about expanding optionality, not getting rid of anything.

Tucker Carlson: I’m now being told that the ‘unwilling to work’ thing, that is absolutely confirmed, that was in the backgrounder that her office released.

Robert Hockett: No, no, definitely not.

Tucker Carlson: It was in the overview document.

Robert Hockett: It’s the wrong document.

Tucker Carlson: We’ll follow up on this next week. That ‘unwilling to work’ line that you are obviously embarrassed by, you should be embarrassed, it was in the document.

Robert Hockett: No Tucker, it’s not embarrassing, it wasn’t us. We’re not embarrassed by what’s not ours.

Tucker Carlson was right. It wasn’t a doctored document put out by the Republicans. The actual resolution (the legislation) submitted to Congress that outlined the Green New Deal didn’t include the ‘unwilling to work’ part; but the overview document (the accompanying FAQ document), released by New York Rep. Alexandria Ocasio-Cortez’s office, did include the ‘unwilling’ language…and they were embarrassed by it—AOC’s staff was forced to take the gaffe-riddled summary of the bill off their website. Robert Hockett later tweeted “Typo in a draft doc that went up by mistake and was taken down once noticed.”

Included in Ocasio-Cortez’s original FAQ document was the promise of “economic security to all who are unable or unwilling to work,” it called for a “build out of high-speed rail at a scale where air travel stops becoming necessary,” it said that we “plant lots of trees” to reduce emissions, it laid out the goal to “move America to 100% clean and renewable energy” within 10 years and it explained how the resolution submitted to Congress used the term “net-zero emissions, rather than zero emissions” because “we aren’t sure that we’ll be able to fully get rid of cow emissions and airplanes that fast.”

FEB 09: “For all I know, we might populate the moon, equip every U.S. citizen with a Ferrari, or fill Lake Meade with champagne, technically speaking. But I’m quite certain we can’t afford to. My criticisms of Professor Kelton’s op-ed are, I hasten to add, not criticisms of the Green New Deal per se. Perhaps the programs it entails are worth whatever sacrifices they might involve; and perhaps they, or some of them at least, will ultimately pay for themselves by enhancing productivity, as Professor Kelton also believes. Finally, I don’t doubt that many will find Professor Kelton’s arguments comforting. According to one of her many Twitter admirers, she is giving the public hope. Perhaps. But she’s doing so by promising them the moon.”— George Selgin, director of the Center for Monetary and Financial Alternatives at the Cato Institute, ‘The Modern New Deal That’s Too Good to be True’

FEB 12: Bill Gates called modern monetary theory (MMT) – which asserts that because the government controls its own currency, there is no need to worry about balancing the budget some ‘crazy’ talk. “Well, that’s crazy. I mean, in the short run actually because of macroeconomic conditions, it’s absolutely true that you can get debt even to probably 150 percent of GDP in this environment without it becoming inflationary. But it will come and bite you.”

FEB 16: No question that things are NOT going well for political ‘prescription’ MMT when even Breitbart agrees with Mayor Bill de Blasio (about Rep. Alexandria Ocasio-Cortez being too far to the left).

FEB 25: “MMTists make dubious semantic claims, such as that taxes and borrowing don’t actually ‘fund’ government spending. In a modern banking system, all credits require debits. The only entity that can credit without debiting is the one authorized to issue the money. Expenditure is carried out by the Treasury, so let’s start there. The Treasury is not authorised to issue the money that is actually used for spending—called bank reserves—and I believe MMTists will agree with me so far. The Treasury has to secure this money in order to spend it [or else there’s a gov’t shutdown]. Which it does by debiting its spending account [its Treasury General Account] at the central bank [at the Fed] in order to credit other accounts. An important point is that the Treasury cannot overdraw from its account [from its TGA]. It is currently illegal [since 1981] for the Treasury to have an overdraft with the Fed. The Treasury can only spend by first ensuring it has adequate funds in its account with the central bank. How does it do this? By collecting taxes and selling bonds. Thus, taxing and borrowing does indeed fund Treasury spending specifically. MMTists dismisses such legal obstacles as ‘self imposed constraints’, but this is a red herring. Ultimately all economic institutions are largely composed of ‘self imposed constraints’. It is by these constraints that we define how our present economic institutions govern [it’s our modern monetary reality that keeps getting in the way of their modern monetary theory]. For the sake of argument, since money is ultimately created by the government (by the central bank) in the first place, it didn’t need those taxes or borrowing—so does it then make sense to say that taxes/borrowing funds spending? The answer is yes, in practice, it does make sense. Whether MMTists want to admit it or not, while the central bank is an agent of the government, it does still operate independently. When the government wishes to spend, it cannot simply demand funding from the central bank directly or even indirectly—it has to engage in borrowing and taxation. Now let’s move onto ‘real’ funding. By this I mean providing the real resources necessary to purchase or deploy real goods and services. Both MMT (and most of the mainstream) essentially agree that governments have finite fiscal space—that is the ability to utilize idle resources to achieve its goals without competing with and bidding up already utilized resources. Here again many MMTists tend to argue then that government spending is simply the process of acquiring and utilizing resources and that the purpose of taxation/borrowing is for when the government is close to an idle resource constraint but needs more resources. To claim that taxation or borrowing here should not be considered funding is manifestly absurd. It is quite clear that in a real sense, a government’s ‘funds’ ARE its fiscal space (defined as idle resources in real terms); and the only way to acquire more fiscal space than is already available—without reducing its own outlays—is to take it from others. In other words, either by taxing them or by borrowing from them. Ergo, in real terms, taxing and borrowing unequivocally funds the government.”—Upholding Economics, Feb 25, 2019, ‘What’s wrong with MMT?’

FEB 26: In testimony before the Senate Banking Committee on Capitol Hill, Fed Chair Jay Powell said this:

“Let me say I haven’t seen a carefully worked out description by what is meant by MMT. It may exist but I haven’t seen it. I have heard some pretty extreme claims attributed to that framework and I don’t know whether that’s fair or not. I will say this. The idea that deficits don’t matter for countries that can borrow in their own currency, I think is just wrong. I think US debt is fairly high, at a level of GDP and much more importantly than that, it’s growing faster than GDP, significantly faster. We are not even close to ‘primary balance’, which means the deficit before interest payments. So we’re going to have to either spend less or raise more revenue. In addition, to the extent people are talking about using the Fed as a sort of [financing], our role is not to provide support for particular policies. That’s central banks everywhere. Our role is to achieve maximum employment and stable prices—that’s what it is. Decisions about spending, about controlling spending and about ‘paying for it’, are really, for you.”
—Fed Chair Powell, 02/26/19

FEB 27: In the next day’s testimony before the House Financial Services Committee, Fed Chair Jay Powell pushed back on the MMT ‘prescription’ (on Mr. Mosler’s 7DIF Part III Public Purpose proposal) to anchor the federal funds rate to 0% (to completely take away the Fed’s ability to quickly respond to either an economic crisis or an approaching crisis like a dangerously overheating economy):

“There is a new sort of focus on modern monetary theory that says taxes can better fight inflation than monetary policy. Do you have a basic philosophical view on that?”—Rep. Steve Stivers (R-Ohio)

“That aspect of it would be a complete change. I would say the reason why the Fed does that is that we can move quickly with our tools (we can move immediately), and to give the legislature that responsibility—in principle you can do that—but we have a system, that’s got lots of checks and balances.”—Fed Chair Powell, 02/27/19

Notice that most of the MMT criticism during the month of February 2019 was not questioning the politics of the proposals—it was mostly questioning the validity of the economics. Meaning that if you are getting the economics (the ‘description’) wrong, you are making it harder for the world to take your pet policies (your ‘prescriptions’) seriously. Political ‘prescription’ MMTers may also want to rethink their constant bashing of the federal gov’t. Every time these MMTers mock the White House, mock the Treasury, mock the Fed (who have the ‘peddles backwards’); these MMTers are melting the ice under their own ‘prescriptions’—that calls for giving more control to that same federal gov’t.

Finally, during the month of February 2019 when Econ Ph.D Stephanie Kelton was again tweeting that Gov’t Deficits = OUR Savings (that THEIR red ink is OUR black ink), Warren Buffett disclosed in his annual Shareholder Letter that Berkshire had $112B in US Treasury bills (which is almost 1% of the entire $15.5T US marketable Debt Held by the Public).

In conclusion, it’s fine if you think that we need a ‘JG’, a ‘GND’, ‘M4A’, +/or student debt forgiveness—the more policy suggestions the better. It’s even fine if you hate the president—everybody goes through that political phase (just like we all go through that phase in sports when we think that ‘our’ team is ‘great’ and the ‘other’ team ‘sucks’).

Here’s some advice for the ‘prescription’ MMT community: If you mix your politics with your economics, you dilute your expertise in both at the same time—so stop naively buying into every dopey MMT meme.

In an age of ‘fake news’, you need to go Beyond The Memes—you need to become your own journalist. Don’t be afraid to do some due diligence on your own about the veracity of the claims made by MMT academic ‘scholars’ (before you too sound like someone that spent their entire lives in a classroom).

Meanwhile, until morale improves (until MMT returns back to being The Description Not The Prescription), the beatings will continue.

Thanks for reading,

Pure MMT for the 100%

If you want to know how money works, it may help to know how money trades. Follow MineThis1 at Real Macro for the 100%:


“Let me say I haven’t seen a carefully worked out description by what is meant by MMT. I have heard some pretty extreme claims attributed to that framework and I don’t know whether that’s fair or not. I will say this. The idea that deficits don’t matter for countries that can borrow in their own currency, I think is just wrong. I think US debt is fairly high, at a level of GDP and more more importantly than that, it’s growing significantly faster than GDP. In addition, to the extent people are talking about using the Fed…our role is not to provide support for particular policies. Decisions about spending, about controlling spending and about paying for it are really for you.”—Jerome H. Powell, Chairman, Board of Governors of the Federal Reserve System, testimony before Congress, 02/26/19

“One of the questions Fed Chair Powell was asked was about modern monetary theory. This is a new slogan that has just come up which says, I guess, that you can run deficits indefinitely. I think it’s kind of another fad slogan that has appeared at this time that might be politically useful to some people.”—Economist Robert Shiller, 2013 Nobel Laureate, best-selling author and presently serving as a Sterling Professor of Economics at Yale University, 02/27/19


On February 28th, former Fed Chair Alan Greenspan did not sound too enthused with the ‘prescription’ MMT proposal to curtail the Fed’s role as ‘price setter’ and the notion that we should leave all that up to fiscal policymakers because the Fed doesn’t know what they’re doing (because the Fed ‘has the pedals backwards’).

As per the Maestro, if you shut down the Fed’s ability to immediately respond to changing economic conditions (if you take away the Fed’s agility at influencing prices with changes in interest rates); then while you’re at it, to stop the stampede out of the US dollar, you should probably shut down our foreign exchange market as well—so that nobody will be able to dump their dollars (even after it’s too late for them to save themselves):

Bloomberg’s Mike McKee: “There is a theory out there, modern monetary theory, MMT, a lot of people are debating it. It suggests that a country that prints money in its own currency doesn’t have to worry about deficits as long as inflation isn’t breaking out, if it does, then the fiscal agent comes in and raises taxes [+/or cuts federal spending]. What do you think of that idea because it’s being rooted as a way to spend more money, on infrastructure, on the Green New Deal, things like that?”

Former Federal Reserve Chairman Alan Greenspan: “You’d have to shut down your foreign exchange markets. How do you exchange (laughs)? People will be trying to fly out of your currency and if there’s no vehicle in which they can do it, it doesn’t happen.



Matt Bruenig: Advocates of Modern Monetary Theory (MMT) say that we should understand all government spending as being funded by seignorage, which is the technical term for when a government creates new money and then spends it. For instance, both Mosler and Kelton have suggested that we could do Medicare for All without raising taxes, and even suggested we might need to cut taxes to do it. But if we eliminated all private spending on health care and printed new money to replace it, then that would mean individuals and businesses would now have money in their pockets equal to the current level of private expenditure on health care. Private spending on healthcare is currently 8.8 percent of GDP, or $1.8 trillion, or $5,500 per capita. Thus, using seignorage to pay for Medicare for All without offsetting taxes would be equivalent to paying out a $5,500 UBI with newly created money every year. You could argue of course that we are currently so far below capacity that, along with the small disemployment effect of Medicare for All, a $5,500 UBI will not be inflationary in the extremely short term. But do they really mean to say we could sustain such a UBI over the medium term without increasing taxes?

If so, then they are at odds with their prior statements on inflation:

“The value of the dollar is determined on the margin by what must be done to obtain it. If money ‘grew on trees’, its value would be determined by the amount of labor required to harvest money from trees. In an ELR [Employer of Last Resort] program, the value of the dollar is determined on the margin by the number of minutes required to earn a dollar working in the ELR job. Assuming that BIG [Basic Income Guarantee] provides a payment of $20,000 per year to all citizens (equivalent to a JG [Job Guarantee] job paying $10 per hour for a maximum 2000 hour working year), the value of the dollar on the margin would be the amount of labor involved in retrieving and opening the envelope containing the annual check from the treasury, divided by 20,000. For a couple of minutes of labor effort, you get $20,000. Obviously, the purchasing power of the dollar in terms of labor units required on the margin would be infinitesimally small. Remember that everyone gets this check. It might not happen overnight, but this would be your mom’s equivalent to money growing on trees, and would raise the price of labor (or devalue the currency—depending on how you want to look at it).”— Randy Wray

“If the [basic income] program is implemented as an ‘add-on,’ rather than a replacement for existing government programs, spending on UBI could be as high as 20–35% of GDP annually. UBI would be an enormous fiscal impulse by any measure. The worry is not that it would compromise the government’s budget, but that the expenditure represents vast purchasing power and command over real resources, equivalent to a fifth or more of the US economy. Would the economy produce the needed additional output to satisfy this new demand? If not, how would the resulting real resources be distributed and priced, in order to soak up the additional purchasing power? If output does not adjust sufficiently, the program would prove to be inflationary.”— Pavlina Tcherneva

“If you start multiplying [the basic income amount] across the number of people who would receive that, this is a huge share of GDP. And so if you push [basic income advocates] and say ‘how are you going to put that much money into people’s hands and fuel spending in the economy without setting off a massive inflationary problem?’”—Stephanie Kelton

Once again, MMT is pointless word games—to make people believe in things that even MMT advocates themselves do not believe.—Matt Bruenig, ‘What Do Modern Monetary Theorists Think About Inflation?’, 03/02/19




“She [Cortez] said she was open to Modern Monetary Theory, a burgeoning theory among some economists positing that the federal debt is not an economic restraint for the US. She said the idea, which holds that the government doesn’t need to balance the budget and that budget surpluses actually hurt the economy, ‘absolutely’ needed to be ‘a larger part of our conversation.’ So in her world, the deficit is only something we should be worrying about when it’s shrinking, apparently. If it sounds bonkers, that’s because it is. The University of Chicago’s Booth School of Business’ IGM Poll asked a panel of top economists two questions about MMT; one regarding whether it’s true that countries shouldn’t have to worry about deficits because they can always print more money, and the second on whether or not money printing enables endless government spending. Zero percent of economists agreed.”—Matt Palumbo, March 23, 2019