Beardsley Ruml, the guy that wrote ‘Taxes For Revenue Are Obsolete’ in 1946 which is quoted by every single ‘prescription’ MMT ‘academic’ from Pavlina Tcherneva to Bill Mitchell, also said this: “The corporation income tax must go, taxes on corporation profits have three principal consequences and all of them are bad.” As chairman of the Federal Reserve in New York, Mr. Ruml insisted that the case for ending the corporate tax was overwhelming. “It is evil…it should be abolished,” he said.
Which begs the question: Why don’t the same MMT ‘scholars’ that love to quote Beardsley Ruml, ever mention that, or ever give the current administration any credit for dropping the corporate tax rate to 21% from 35% which Beardsley Ruml would have approved of (?)
Why don’t MMTers that want a reduction of payroll taxes for the working class, ever give the current administration any credit for the Tax Cuts and Jobs Act that lowered individual income tax rates (?)
Why don’t MMTers that want to raise the standard deduction, ever give the current administration any credit for doubling the standard deduction to 24K for a household (?)
Why don’t MMTers that want to address wealth inequality, ever give the current administration any credit for pinching the rich with a 10K cap on State and Local Tax (SALT) deductions (?)
Why don’t MMTers that want the federal gov’t to deficit spend more, ever give the current administration any credit for substantially growing the deficits now projected to top $1 trillion by 2020 (?)
Why don’t MMTers that know that we won’t default because we can always print the money, who gave then-candidate Trump credit for saying “We won’t default because we can always print the money”, then turn against any MMTer who suggested we call him an ‘MMT candidate'(?)
Why were most MMTers saying that we should have the federal gov’t spend $500B creating non-competitive ‘jobs’ in a Job Guarantee (JG) program, right now, in a labor skills shortage, during The Longest Private Sector Jobs Growth In US History, with record-breaking-low unemployment rates, the lowest jobless claims in 50 years, or in other words, IN THE HEALTHIEST JOBS MARKET IN DECADES? Why do these MMTers prefer that the unemployed become permanent* sharecroppers on a modern-day plantation (a soviet-style Job Gulag which is a UBI with a forced-work requirement) instead of as potential shareholders on a capitalist launchpad (?) (*Dr. Bill Mitchell actually said, quote, “Even if that person stays in that Job Guarantee position forever and no private employer would ever take them on…Huge success”, unquote)
Why didn’t these same MMTers not give the current administration any credit after a White House executive order calling for a federal JOBS TRAINING program, or more specifically, a ‘Training for the Jobs of Tomorrow’ initiative to tackle the challenges posed to the workforce (?)
Why didn’t these same MMTers not give the current administration any credit when 23 companies and associations signed a pledge at the White House on July 19, 2018 committing to expand apprenticeships, to train, re-train and ‘upskill’ more than 3.8 million American students and current workers for new jobs and rewarding careers (?)
Why didn’t these same MMTers not give the current administration any credit after the Perkins Career and Technical Education Act, providing more than $1 billion each year to states for vocational and career-focused education programs, tailored toward secondary and post-secondary students, that will help employers fill the high-skill jobs of tomorrow, was signed into law on July 31, 2018 (?)
The answer is…
…because mommy picked the wrong cereal brand on November 9, 2016, they’ve since ignored the Facts, Math & Data and have become #FAKEMMTERS (!)
Fake MMTers have been promoting their political ideologies with empty promises of guaranteed ‘jobs’ and more free ‘ponies’ (in exchange for votes) under the guise of promoting pure MMT (under the guise of ‘economics’).
Each and every day, it is getting more obvious that, unlike the current (MMT) administration, these #FAKEMMTers are now only interested in pandering to problems (pandering to their choirs) instead of actually solving problems (instead of actually helping them).
P.S. Those fists are not up in the air, those fists are going back & forth in a group circle jerk.
This is the sequel to ‘The Seven Deadly Innocent Fraudulent Misinterpretations’ that I posted in October 2017 which talked about how some ‘prescription’ MMTers (using personal ‘feelings’ and anecdotal ‘stories’) were getting confused with pure ‘description’ MMT (which only uses facts, data & math). Since then there have been more online examples from ‘prescription’ MMTers that are either not fully grasping pure MMT; or who do, but are promoting their ideological narratives (under the guise of promoting pure MMT).
Deadly Innocent Fraudulent Misinterpretation #8: ‘Banks do not create Net Financial Assets (NFA), only the federal government can.’
Fact: Banks can and do create Net Financial Assets (NFA), as well as the federal government.
Whenever we say ‘federal gov’t deficits equal our non gov’t savings’, or we say ‘the gov’t red ink is our black ink’, our technical term for that ‘black ink’, those ‘non gov’t savings’, is Net Financial Assets (NFA). Those that are uninitiated to MMT don’t use the term NFA, whenever the mainstream groupthink talks about the cumulative amount of federal gov’t deficit spending to date, their technical term for it is ‘The National Debt’.
Net Financial Assets (NFA) are USUALLY only created by the federal gov’t when deficit spending, and not by banks, HOWEVER, there is an exception. In a 03/25/17 RP broadcast, Mr. Mosler pointed out that banks CAN and DO, on many occasions, actually add Net Financial Assets (unintentionally) when they have negative capital (when a bank loan defaults). A bank loan default or outright bank failure acts as ‘synthetic’ federal gov’t deficit spending adding NFA because monies were lent out endogenously and never paid back (same effect as exogenous money creation without attached debt).
The Bush economic ‘expansion’ was fueled by ‘synthetic federal gov’t deficit spending’ (questionable private sector subprime loans and financial derivatives that all defaulted).
The Clinton ‘boom’ was fueled by ‘synthetic federal gov’t deficit spending’ (private sector loans that defaulted because of the dot-com bust).
The Reagan ‘miracle’ was fueled by ‘synthetic federal gov’t deficit spending’ (almost a trillion dollars in defaulted private sector loans during the S&L debacle, THE ENTIRE SIZE OF THE TOTAL NATIONAL DEBT AT THAT TIME).
The ‘roaring’ twenties was fueled by ‘synthetic federal gov’t spending’ (private sector loans using leverage that financed stock speculation without margin requirements that all went bust).
Mr. Mosler muses that he “can’t think of a single boom year that WASN’T attributable to either out of control or outright fraudulent bank lending to the private sector that would never have been allowed with proper hindsight!”
In other words, instead of ‘synthetic’ federal gov’t deficit spending (additions of ‘synthetic’ NFAs into the banking system), “we could have had those economic booms legally, easily, and simply, by just increasing federal gov’t deficit spending with proper foresight,” Mr. Mosler added.
MMTers can go beyond the ‘NFAs can only be created by the federal government’ meme if MMTers can accept that synthetic NFAs like in the examples above are possible.
Nick Hionas (“MINETHIS1”) a co-creator of Pure MMT for the 100% (along with co-contributor Charles “Kondy” Kondak), makes an interesting posit that synthetic NFAs, or as he calls them, ‘Net Debt Financial Assets (NDFA)’ are created in the non federal gov’t, by the rest of us, when we borrow dollars (when we deficit spend). The default instances mentioned above, since they were all horizontally created by the non federal gov’t (by the banks in the private sector), are all great examples of ‘NDFA’ (or, ‘permanent NDFA’, that, just like actual NFAs created vertically by the federal gov’t), which are dollars permanently existing in the banking system today because they weren’t paid back (nor will they ever be paid back).
Although it is fact that non federal gov’t borrowing has actual debt attached to the loans (it is fact that all non federal gov’t loans ‘net-out’), the insight here is that the moment bank loans create those dollars, as soon as those dollars go into circulation, they are ‘NDFA’ (or, ‘temporary NDFA’, horizontally created by the non federal gov’t). When the loan is paid off, they are not NDFA.
Thus, all dollars in existence = NFAs + temporary NDFAs + permanent NDFAs
Keep in mind that similar to an unhealthy consumer loan that defaults (becomes permanent NDFA), even the normal loans that do not default (temporary NDFA) are usually not paid off for quite awhile. These assets are circulating in the economy for a very long time. Just like a consumer 30-year mortgage on Main Street in the hundreds of thousands of dollars, or an institutional debt obligation on Wall Street that is perpetually rolling over in the hundreds of millions of dollars, many healthy loans take many years to ‘net-out’.
In the meantime, along with NFAs created by the federal gov’t, these NDFAs created in the non federal gov’t are working their magic, which is helping the bottom line of US households, which at last count have $100T in NET worth.
Note that is a “T” as in trillion and that is a NET amount. That is the amount that US households have AFTER all their loans ‘net-out’ (which is a far greater amount than the current running total of NFAs created by the federal gov’t).
Deadly Innocent Fraudulent Misinterpretation #9: ‘Dollars are Tax Credits.’
Fact: Dollars are the sum of actual tax credits plus pending tax credits.
MMTers should not take the ‘all dollars are a tax credit’ analogy too literally when speaking outside their choirs because one day they may bump into an accountant who will interrupt them (while that MMTer is lecturing on how taxes and spending in the monetary system works) to inform them that there is such a thing as an actual tax credit.
If you have federal taxes withheld from your pay, then a percentage of every paycheck is debited by your employer (those dollars leave private sector circulation) and is credited to the federal gov’t (The US Department of Treasury’s account in the monetary base) against your future federal tax bill for the year. In addition, even more dollars from your pay is most likely getting withheld and sent to your state & local (city) gov’t as well. These dollars withheld from your paycheck, that’s an actual tax credit. The dollars left over, the dollars that have not been debited from your paycheck for federal, state & local gov’t taxes are not actual tax credits. Sticking to the analogy however, we could say that those remaining dollars are ‘pending’ tax credits and therefore all dollars are ‘actual’ tax credits plus ‘pending’ tax credits.
The point being, there are many kinds of actual tax credits that the IRS and other gov’t tax authorities give to individuals and to businesses (for example, under the Tax Cuts and Jobs Act signed in December 2017, the child tax credit was doubled to help families; and under the Affordable Care Act signed in March 2010, you qualified for subsidized Obamacare in the form of an advanced premium tax credit if your annual income fell below 400% of the federal poverty level). So rather than get into an argument over semantics here, this is just a friendly reminder to those ‘prescription’ MMTers (to those who add their political ideology to their MMT unlike pure ‘description’ MMTers who don’t); that you have to be careful, that you have to go beyond the memes, if you don’t want to sound too silly when speaking to experts in the field.
In addition, keep in mind that the other designations for money like ‘bank credit money’, ‘commercial money’, ‘federal money’, ‘reserves’, ‘Fed settlement funds’, ‘base money’, ‘M1’, ‘M2’, ‘HPM’, ‘NFA’, ‘outside’, ‘inside’, ‘exo’, ‘endo’, etc., etc. (which like ‘tax credits’ are all true terminology and all absolutely correct to use), are also all denominated in DOLLARS. So when explaining the concepts of MMT, perhaps it’s better to just keep it simple and stick to calling those dollars ‘dollars’.
Even better, call money ‘dollars in the banking system’. Whether money that was paid for federal taxes has gone out of private sector circulation (it has detoured out of the money supply and into the monetary base at the Fed) or even paid to an overseas merchant (it was deposited into a US relationship bank and either saved as dollars or promptly transferred into a counter-party’s US dollar account a.k.a. ‘exchanged’ by that merchant for foreign currency); that money is ALWAYS in the US dollar dominion. All US money is dollars in the banking system. If ‘prescription’ MMTers say it that way, that accountant above will be less confused. Furthermore, there will be less deadly innocent fraudulent misinterpretations by many others who so often struggle separating their political ideological ‘prescriptions’ from their economics.
Deadly Innocent Fraudulent Misinterpretation #10: ‘Taxpayer dollars do not exist at the federal level.’
Fact: Of course taxpayer dollars exist at the federal level.
What part of the words “Treasury”, “Taxes”, and those dollar signs on the Daily Treasury Statement is confusing anyone?
Taxpayer dollars are debited from one ledger and that debit of taxpayer dollars from the money supply (the ‘private sector level’) simultaneously triggers an equal and opposite credit of dollars (also known as reserves) to the monetary base (the ‘federal level’) into another ledger. That ledger is this Treasury general funding account at the Fed, which is the same account where federal spending is drawn, the same account that, by US appropriations law, must be replenished (MUST BE ‘FUNDED’) in order for the federal gov’t to keep spending.
Rather than not existing anymore, taxpayer dollars simply take other forms, on other ledgers, and are NOT an actual ‘destruction’ (only an annual federal budget surplus would result in paying off Treasury bonds—an actual destruction of dollars in the banking system).
Federal taxes ‘fund’ federal surplus spending (which ‘prescription’ MMTers are still confusing with the ‘financing’ of spending at the household level). At the federal level, ‘fund’ means that federal taxes ‘approve of’, or more specifically, as per laws and the rules of accounting, ‘appropriate’ federal surplus spending (not in a financial sense but in a political sense to maintain the constitutionally-enshrined ‘power of the purse’ of Congress).
Claiming that ‘Taxpayer dollars do not exist at the federal level because all federal spending is the issuance of tax credits’ is another reason why MMTers should heed the advice of #9 above.
Whether MMTers like it or not, the modern monetary formalities (the accounting constructs on the consolidated balance sheets that, albeit unnecessary, are still in place) are getting in the way of the modern monetary theory.
‘Prescription’ MMTers who regurgitate this ‘taxpayer dollars do not exist at the federal level’ meme outside their MMT kiddie pool do so at their own peril. Even if their true motive has nothing to do with promoting pure ‘description’ MMT, but rather to dismantle capitalism and replace it with a Marxist utopia (under the guise of promoting pure ‘description’ MMT), they shouldn’t keep waving ‘bye-bye’ to the facts, data and math. Otherwise they will never know just how ridiculous they sound to tax, law and accounting experts in the field.
Deadly Innocent Fraudulent Misinterpretation #11: ‘A Job Guarantee program would make the federal gov’t an Employer of Last Resort’
Fact: A Job Guarantee program would make the federal gov’t an employer of first resort.
The federal JG program proposal calls for changing our present day unemployment office into an ’employment’ office, meaning the JG facility would be open all-year-round, like a convenience store. That doesn’t sound like the JG is only in the event of an emergency, as a ‘last resort’ (like when the Fed is the ‘lender of last resort’ during an economic crisis), that sounds like the JG will be more like an ’employer of first resort’.
Which is one of many reasons why a federal Job Guarantee program, during The Longest Jobs Growth In US History, is a dopey idea. Imagine disgruntled people waltzing into their friendly neighborhood ’employment’ office (local convenience store) to do some impulse shopping because they don’t like the cubicle at their present employment, and so they’ve come in for a different ‘guaranteed’ job (What could possibly go wrong)?
‘Prescription’ MMTers have not thought through their JG program. The JGers think that they are helping the unemployed, but in reality that worker would only be bringing the same skill set, without any new training (resulting in a ‘job’ that is totally redundant, totally unnecessary, ‘make-work’ labor).
Some might counter that and retort if Walmart posts a ‘Now Hiring’ sign, nobody says ‘Hey wait just a damn minute here, what jobs are we talking about, are these useful, valid jobs, or are they a bunch of make-work jobs?’; but propose that the federal gov’t guarantee a good paying job in communities across the nation for anyone who is willing and able to work and suddenly people scream ‘Hey wait just a damn minute here, what jobs are we talking about, are these useful, valid jobs, or are they a bunch of make-work jobs?’ My response to that accusation of hypocrisy is, if I see a Walmart greeter saying “Hello Welcome To Walmart” for 8 hours a day, I’m thinking heck, if he or she is getting a check from the private sector for only doing that then ‘good for you’. However, if I walk into a Post Office and a greeter says “Welcome To The PO”, I’m not thinking that.
JGers think that the salary for a federal Job Guarantee program would be a “Living Wage”, but in reality it would condemn them into the same debt trap as other low-wage workers (the same process that JGers like to accuse ‘neoliberals’ of doing).
JGers have resorted to taking Mr. Mosler’s comments out of context (Deadly Innocent Fraudulent Misinterpretation #14)and are blatantly lying about the current unemployment figures in the labor market to fit their ‘doom & gloom’ narrative to justify a JG program.
JGers are convinced that by having a ‘buffer stock’ of Americans in a ‘guaranteed’ (crap) job, this will act as an automatic stabilizer. That sounds great in a classroom and looks good on a blackboard. However, has any JGer thought about how a person with one of these ‘guaranteed’ (soviet-style) jobs are going feel about being part of a ‘buffer stock’ (like pieces of corn tucked in a silo on a farm to buffer, to backstop, the other corn, going to market)?
Let’s assume they don’t mind, but has any JGer considered that this ‘buffer stock’ that a federal JG program would be creating, these ‘workers’, are going to be just as productive as those ‘buffer stocks’ of surplus corn sitting in silos around the country doing nothing.
Charles ‘Kondy’ Kondak, another creator here at Pure MMT for the 100%, has federal civil service experience (an actual ‘job guarantee’ program, like the US military, that is already in place, which any ‘new’ JG program would only be bolting on to), making him my ideal go-to guy on the proposed federal Job Guarantee program. Here’s what Kondy had to say in a recent thread debating the unintended consequences of a JG:
“The angle on the buffer stock is that in good times companies would hire more workers from the JG, obviously placing them into entry level positions from the buffer stock; and in lean times company workers would go back to the JG in standby mode for company entry level positions. Also during those good times, companies would hire from their best current entry level employees needed for higher-level positions on a provisional level; and throttle back in lean times. If the JG was paying $15, to attract entry level employees, let’s say companies would have to pay $17.50 to lure workers away from the JG. The company would be under immense labor cost pressures. Since the company cannot lower entry level pay, to try to make up the difference, the next higher level positions will take the hit to contain labor costs. For example, a higher level position might pay $22.50 so the company would set the new wage for that higher level position at $20. In a union shop that would anger employees and the union could face decertification by its membership (withdrawal of the labor union as a collective bargaining agent). Bottom line, what does a JG do? It compresses the wage structure for skilled positions and it busts up whatever is left of unions.”
Deadly Innocent Fraudulent Misinterpretation #12: ‘The Fed’s current policy is to ensure involuntary unemployment.’
Fact: It is not the Fed’s current policy to ensure involuntary unemployment.
Normally this kind of statement would be filed under ‘MMT Kids Say the Darndest Things’, but what makes this particular misinterpretation SO deadly is that it is even regurgitated by the so-called ‘scholars’ of MMT. Thinking that ‘the Fed’s current policy is to ensure involuntary unemployment’ to maintain the labor force is also like thinking that students are being forced to take Fs, to involuntarily fail classes, because the school is targeting a certain level of dropouts to maintain the student body. Where does this bizarre misinterpretation that ‘Fed policy is to ensure involuntary unemployment’ come from?
Charles Kondak: “JGers are blaming stagnant wages on the Engels/Marxist interpretation of capitalism needing a pool of unemployed workers” (from the 1848 political pamphlet, The Communist Manifesto, written by German philosophers Karl Marx and Friedrich Engels).
The ‘Fed is targeting a certain level of unemployment’ may also be a misinterpretation of the Fed’s routine Summary of Economic Projections on future unemployment figures that the FOMC announces after meetings. Perhaps these SEPs and a penchant for Karl Marx have convinced ‘prescription’ MMTers into believing that the Fed is ‘targeting’ unemployment to ‘ensure involuntary unemployment’ (especially because it fits their narrative that the Fed, the free market and the ‘unfair’ capitalist system needs to be dismantled and replaced by a ‘fairer’ Marxist utopia).
Whenever these ‘prescription’ MMTers say that the Fed is behind some secret policy to ensure unemployment, it’s obvious that they have waved ‘bye-bye’ to the fact that the Fed is only taking orders from Congress. The Fed’s dual mandate of price stability and MAXIMUM EMPLOYMENT is a statute of Congress.
Have these ‘prescription’ MMTers also been deluded into believing that Congress is in on this conspiracy to ‘ensure unemployment’ too?
Deadly Innocent Fraudulent Misinterpretation #13: “The American economy is a junk economy.”
Fact: The American economy is not a junk economy.
In a Feb 28, 2018 piece entitled ‘The Radical Theory That the Government Has Unlimited Money’, Stephanie Kelton erred. Although she did a nice job promoting ‘description’ MMT as usual, she also went into ‘prescription’ MMT mode as usual, and was quoted as saying that the US economy is “a junk economy”. Perhaps this was another reason why the article called MMT the “radical theory”. What doesn’t fit this “the US economy is a junk economy” thesis is that 48 hours earlier Fed Chair Powell said “The US economy grew at a solid pace over the second half of 2017.” Powell also added that “there are signs of job market strength, and the strong job gains in recent years have led to widespread reductions in unemployment across the income spectrum for all major demographic groups.” Not to mention a myriad of other record-breaking milestones that the U.S. economy, the world’s largest, has recently reached.
The proponents of a Job Guarantee believe that the US economy is a ‘junk’ economy that only offers ‘garbage’ jobs. They have waved ‘bye-bye’ to the facts, data and math that tells us that our economy is not only strong, we are currently in the Longest Job Growth In US History. The Job Openings and Labor Turnover (JOLTS) figures are now saying that there is approximately just as many job openings as there are unemployed people (an almost 1:1 ratio). If this trend continues, America may find herself having the same problem Japan is having right now, an actual labor shortage (1.5 job openings : 1 unemployed). What the JGers are not grasping (or refuse to believe), is that rather than a lack of jobs, a big part of the problem (as the Fed has said repeatedly) is a SKILLS MISMATCH (read: the unemployed people’s skills are ‘junk’ and the unemployed are ‘garbage’ job applicants). The solution to this devastating problem is NOT to just get the unemployed employed in a ‘guaranteed’ soviet-style job scraping gum off sidewalks and have them become more dependent on another federal gov’t program. The solution is to get the unemployed skilled (‘Give them a fish and they eat for a day, teach them to fish and they eat forever’).
Calling the U.S. economy a ‘junk economy’ may also be a deadly innocent misinterpretation of Michael Hudson. In his book, ‘Killing the Host—How Financial Parasites and Debt Bondage Destroy the Global Economy’, he was talking about one sector of the economy. More specifically, Hudson was referring to the financial, insurance & real estate (FIRE) sector, the largest share of US GDP in 2017 (20.9%), being the ‘parasite’ feeding off the ‘host’ with ‘junk economics’ (NOT that the entire economy was a ‘junk economy’). For example, according to the financial talking heads over the airwaves, the recent Spotify IPO (Initial Public Offering) went well. The headlines screamed that the IPO “Shined In Wall Street Debut” because shares in Spotify went up 13% in their first day of trading, which sounds wonderful (what everybody at cocktail parties were talking about). However, that 13% gain in price really meant something else, that wasn’t so wonderful (what nobody at cocktail parties was talking about). As Hudson (correctly) points out in his book, most IPOs are exploiting the company’s founders, employees and early investors (the original stakeholders) with a ‘predatory’ form of economics. “The underwriting firm, and the speculators it rounds up, get more in a single day than all the years it took to put the company together”, Hudson adds. Fast forward to today, what really happened was that those Spotify shares were under-priced 13% by the IPO syndicate (parasites) to feed off easy profits at the expense of Spotify (the host) under the guise of a ‘successful’ IPO.
Don’t take my word for it, as per the preface of ‘Killing the Host’, “The aim of this book is to pierce this illusion and replace junk economics with economics based on reality.” Note that Michael Hudson isn’t saying to replace junk economies, he is *literally* saying to replace junk economics. “The financial sector has succeeded in depicting itself as part of the productive economy, yet for centuries banking was recognized as being parasitic.” Again note that Michael Hudson isn’t saying the economy is a junk economy, he is saying the economy is a “productive economy” with only a sector of the economy as being part of some “junk economics”.
Deadly Innocent Fraudulent Misinterpretation #14: “Job Training would only be a micro solution that wouldn’t solve the macro problem of not enough amount of ‘bones’ (jobs) for the amount of ‘dogs’ (unemployed) that want them.”
Fact: The above statement by Mr. Mosler was correct for the time (2013) and place (Italy) and the circumstances (the Euro crisis), but is today being used to substantiate a federal Job Guarantee program here in the U.S. right now.
This one really puts the ‘fraudulent’ into the deadly innocent fraudulent misinterpretation because it is being deceptively said by ‘prescription’ MMTers who have not only waved ‘bye bye’ to the current economic data, they are now really taking advantage of their listener’s naivete and have resorted to taking Mr. Mosler’s comments out of context. The above statement comes from a presentation during the Mosler Barnard Tour 2013 ME-MMT at Cagliari (where Mr. Mosler was explaining how Italy could help solve their economic troubles during the Euro crisis).
This is also a misinterpretation of Mr. Mosler’s transitional job guarantee PROPOSAL (the ‘prescription’) written in Part III at the end of his brilliant 2010 book ‘The Seven Deadly Innocent Frauds’ (7DIF) which is found AFTER the pure MMT parts I & II (the ‘description’). At the time of that writing, the US was in an economic crisis. If Mr. Mosler also said what he said in Italy, that we need more ‘bones’ (jobs), for the unemployed (‘dogs’), 10 years ago, during the Global Financial Crisis, the Greatest Recession Since The Great Depression, OK fine; but now (?), in an expanding economy (?), in a strong labor market (?), with 6 million untouched ‘bones’ (Job Openings and Labor Turnover a.k.a. JOLTS) due to a skills mismatch (?)
Right now, in the US, in an expanding economy, with a strong labor market, we have 6 million untouched ‘bones’ (JOLTS) because of a skills mismatch problem with some of the ‘dogs’ (unemployed), NOT A LACK OF JOBS. In 2013, Mr. Mosler proposed the transitional JG idea to Italy, which was in the middle of the Euro crisis. Fast forward to today, anyone proposing a JG program now, during The Longest Jobs Expansion In U.S. History, The Lowest Civilian Workforce Unemployment Claims In History, in what next year may become The Longest US Economic Expansion In U.S. History has a serious timing problem to say the least.
‘Prescription’ MMTers have reduced Parts I & II of Mr. Mosler’s 7DIF to kitschy catchphrases, cherry-picked the proposals they like in Part III, and are now passing that off as ‘MMT’. In other words, MMT has been hijacked. The old saying ‘MMT is the description, not the prescription’ went out the window.
‘Prescription’ MMTers, now peddling a JG (which by the way is not intended for them, it is for ‘THE OTHER’ people), want to treat the other people like children. If you are unemployed today, they want to send you back home (to a JG office) where mommy & daddy (a federally-funded program) will take care of you, your health care, everything, and you are given a chore (a ‘Job Guarantee’) for which you will be paid an allowance (a ‘living wage’) in order to help transition you (help you become an adult).
Meanwhile, ‘prescription’ MMTers will tell you that with their JG program, they’ll reach ‘full employment’, but that won’t be real full employment, that will just be full employment lipstick on a pig.
Furthermore, since the JG cannot ‘compete’ that means the JG creates some inflation with no productivity increase.
Put those together and what have you got? You’ve got a full employment pig WITH garbage inflation; but wait there’s more, the bonus is that while our ‘buffer stock’ is scraping gum off sidewalks watching the world go by, they are falling deeper into consumer debt that will be easily available to them because they have a ‘guaranteed’ income.
The irony is that while all this is happening, the ‘prescription’ MMTers will still be warning us against those plotting, evil neoliberals who are the ones to blame for our bad lot in life.
In conclusion, there is no question that there is ever-increasing wage disparity, and many folks will keep slipping through the cracks, even at full employment if we ever get there, everyone understands that; but only pure ‘description’ MMTers can see that ‘guaranteed’ paychecks scraping gum off sidewalks doesn’t solve their problems (it only panders to them).
Improve America’s problems where necessary, yes; but do not dilute America’s unique greatness. The more you keep handing things out the more you drain the urgency, the enthusiasm, the innovative can-do spirit of We The People, and the more you risk killing the golden goose (or put another way, the more you risk murdering it by proxy). Which is exactly what the premeditated intent of ‘prescription’ MMTers is, to dismantle capitalism and replace it with a marxist utopia.
A big reason for today’s unemployment is the ‘mismatch’ between the skills of the unemployed and the skills needed by employers, not because we need ‘more’ jobs (and bullshit ones at that). Don’t take my word for it, here’s what Logan Mohtashami, who always keeps it pure, has to say:
“We can’t really have job growth openings beyond this point, beyond today’s (Friday 03/16/18) print of 6.3 million JOLTS (Job Openings and Labor Turnover)because we have so many Americans working (155 million people). It means we may soon not have enough labor, not enough people to fill jobs. If job openings grow higher at this late a stage in the recovery part of this cycle (where even high school dropouts and people coming out of jail are getting jobs), we will have a serious job market problem unless we find a way to get those people who still, after all these years since the last recession, prefer to stay home instead of going to work. The excuse that there are no jobs out there or that the wages are not good enough is no longer the reason.”
Rather than a Job Guarantee program, perhaps a better approach would be a Job Training program (where people go in unemployed and come out with vocational certifications) that helps the unemployed cope in a hyper-competitive reality. Let’s give them more dignity and help them become shareholders in a capitalist system instead of condemning them to be sharecroppers on a Marxist plantation.
Gold Standard Airlines flew in the air, in an airplane, and they were flying while ‘fixed’ to gravity.
Post-Gold Standard Era ‘floats’ in space, in a space craft, and they’re floating because they are no longer fixed to gravity like Gold Standard Air.
Post-Gold Standard Era is not as concerned about pitch, roll and yaw in space the same way as Gold Standard Air was. Post-Gold Standard Era doesn’t have to worry about where you are in relation to the horizon, because in space there is no ‘horizon’. Post-Gold Standard Era is not as worried about how much fuel is being used as Gold Standard Air did because Post-Gold Standard Era creates its own fuel on-board. It’s two different paradigms…two different crafts…two different instrument panels…everything is different.
Mainstream thought is that the federal gov’t is still the same as a household, which is like thinking that an astronaut is the same as a pilot.
The US National “Debt” is a liability, is an obligation, but is not an actual ‘debt’ to the federal gov’t (the issuer of $$$) like an actual debt is for a household (the user of $$$).
Federal gov’t ‘debt’ is nothing more than a running total of how many additional $$$ the issuer ‘supplied’ to the users.
Rather than thinking of the rising amount of the federal gov’t ‘debt’ as a bad thing, think of it as a measure of our incremental growth.
(Not wanting to supply the $$$ needed for that growth, and thinking that we need to ‘offset’ higher federal gov’t spending on the private sector with ‘cuts’ elsewhere in the private sector is the same as telling your child that you won’t buy him bigger pants unless he agrees to wear a smaller shirt).
NOTE: This is only talking about FEDERAL GOV’T fiat money creation (a.k.a. ‘vertical’ or ‘exogenous’ creation of dollars authorized by Congress that is facilitated by the public-sector central bank) when the federal gov’t deficit spends; and this is NOT talking about the rest of us, the non-federal gov’t money creation (a.k.a. ‘horizontal’ or ‘endogenous’ creation of dollars facilitated by the private-sector financial institutions) when households, businesses, state & local governments deficit spend.
In other words, this is a focus on fiat money creation by the ISSUER of fiat money, same as the Monopoly Game, where only the Monopoly Bank (the US federal gov’t) issues and enters additional Monopoly Money (issues and enters additional US dollar ‘Net Financial Assets’) into the Monopoly Game (into the US banking system), and not anyone else (as per the Monopoly Game rules, “No player may borrow from or lend money to another player”).
In addition, similar to the US federal gov’t (or any monetary sovereign issuing its own free-floating, non-convertible fiat currency), the Monopoly Game doesn’t ‘borrow’ Monopoly Money (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”). For both the US federal gov’t and the Monopoly Bank, there is no ‘financial’ constraint to spending.
The only difference is that the US federal gov’t has a ‘political’ constraint to spending and that’s why it still performs the idiosyncratic formality of ‘borrowing’ (only to maintain the constitutionally-enshrined Power of the Purse of Congress because on the federal level, ‘funding’ pertains to the appropriation of, or more specifically, the ‘approval’ of deficit spending).
By eliminating horizontal ‘endo’ creation, the Monopoly Game is a perfect example that helps us distinguish the paradigm distinctions between the vertical ‘exo’ creation of fiat dollars by the issuer (without attached debt) vs. the totally separate creation of dollars by the users (with attached debt). (with attached debt).
So what is meant by ‘Pure’ MMT (Pure Modern Monetary Theory) (?)
The US monetary system began the phase-out away from the gold standard regime in 1933
when President FDR ended gold convertibility to domestic holders of US dollars;
and then the United States completed the process
when President Nixon ended gold convertibility to international holders of US dollars as well in 1971.
However, some remnants of that bygone gold standard era,
some old processes, like federal gov’t accounting constructs and US appropriations laws, still remain in place.
Meaning that the phase out from the gold standard era is NOT totally complete, not quite yet.
Not until these pesky laws and accounting rules are changed.
Not until the mainstream has completely accepted MMT,
and the economics books are being rewritten.
Not until then is the gold standard era completely ended,
and a full-blown MMT, or a ‘Pure’ MMT, is firmly in place.
That’s when our monetary system officially enters the ‘After’ phase.
Meanwhile, there’s still a difference between that ‘After’ phase,
the ‘theory’ in Modern Monetary Theory;
and the “now”, existing, modern monetary ‘reality’’.
Those not-so-modern monetary ‘formalities’, like political constraints,
that are still here in the ‘now’ whether we like it or not.
J.D. Alt, author of ‘The Millennials’ Money’,
has a video that visualizes nicely how our monetary system works using a ‘bathtub’ analogy,
with both a ‘before’ diagram (using gold standard era mentality);
and an ‘after’ diagram (using post-gold standard era mentality).
The first diagrams show ‘Before’,
meaning the gold standard era,
when the federal gov’t was a USER of dollars,
same as a household, and like a household the federal gov’t had to GET dollars first, before spending.
Only once the federal gov’t first collected revenues from taxation or borrowing by selling Treasury bonds,
could the federal gov’t then spend and pay interest on those bonds, pay them off,
and the largest federal gov’t expense being those nasty entitlements;
and the largest revenues coming from someone else,
like China, which adds to that even nastier US National Debt.
Again, the main point is the order of operations, that ‘before’, during the gold standard era,
it all has to start with the federal gov’t getting the money from the private sector FIRST
and then the federal gov’t spends it back to the private sector,
which like just households, puts a squeeze on spending if revenues fall.
Therefore, ‘Before’, during the gold standard era when the federal gov’t was a USER of dollars,
the federal gov’t has a constraint because it has to get the dollars first before spending;
and, there is a solvency risk, of default, because there’s that chance the federal gov’t may not get the dollars.
In his ‘after’ diagrams J.D. Alt shows the paradigm difference after President Nixon closed the gold window,
completely ending the convertibility of dollars.
On that day in August 1971, the federal gov’t was no longer a USER of dollars,
no longer like a household.
After the gold standard era ended, the order of operations switches.
The federal gov’t no longer needs to get its own dollars to spend,
so the beginning step is that the federal gov’t now spends first.
Financing the federal gov’t with taxes takes the back seat.
After the gold standard era ended,
federal tax collections perform other functions,
like maintaining price stability to control inflation.
The key point being that after the gold standard era ended,
rather than being a USER of GOLD BACKED DOLLARS,
the federal gov’t became the ISSUER of FIAT DOLLARS.
The federal gov’t began spending its own fiat currency and most importantly,
the federal gov’t doesn’t need to first get its own fiat dollars from anyone.
The federal government’s power to levy taxes is what creates the initial need for dollars.
Rather than wanting dollars because they are convertible to gold,
households still need dollars to pay taxes which can only be paid in dollars.
Rather than the private sector first needing to supply the federal government’s sovereign spending,
in the post gold standard era, the federal gov’t, the issuer of dollars,
is the sole monopoly ‘supplier’ of dollars to the private sector.
Again, the main purpose of federal taxes now are to prevent bathtub overflow,
to control inflation, they are NO LONGER NEEDED to finance spending…
…and the same goes for federal gov’t bond sales,
they also perform much more important functions,
like defending the target overnight interest rate,
so bond sales as well are NO LONGER NEEDED to finance spending.
The key takeaway,
the MMT pillar is that because the federal gov’t is the issuer of dollars,
there is no financial constraint on federal gov’t spending nor is there any federal gov’t solvency risk.
Federal taxes and bond sales are no longer needed to finance federal spending,
but not that they don’t because even though the gold standard era ended,
and even though the federal gov’t no longer has a financing constraint,
there still remains a political constraint to spending.
So we have the JD Alt ‘Before’ diagram,
and the ‘After’ diagram,
and where we are ‘now’.
AFTER we start calling deficit spending something like “Net Spending Achievement”,
AFTER we start calling the national debt something like “The National Savings”,
AFTER we stop saying ‘deficit spending’
and instead the federal gov’t simply announces how many additional dollars they supplied to the banking system,
AFTER we stop saying ‘surplus’ spending
and instead the federal gov’t simply announces how many dollars they relieved from the banking system,
THAT is the MMT endgame, AFTER, when we are at ‘pure’ MMT.
But we’re not there yet,
there are some remnants,
like a debt ceiling,
that’s our present modern monetary ‘reality’.
So what does would a diagram look like NOW?
In the next video, I’ll add that third diagram, a ‘now’ diagram.
END OF PART ONE
So what is meant by ‘Pure MMT?
Similar to what JD Alt describes in his ‘After’ gold-standard-era diagrams,
Pure MMT is that ‘After’ phase,
when the mainstream stops using gold standard thinking,
such as calling Treasury bonds, ‘debt’,
as if federal ‘debt’ was the same thing as an actual household debt.
Pure MMT is AFTER, when we stop using gold standard terminology like federal ‘deficit spending’
because everyone understands that unlike the deficit spending of a household,
which is a user of dollars,
any deficit spending for the federal gov’t, the issuer of dollars,
just means how many additional dollars was SUPPLIED by the issuer, to the users,
to accommodate a growing economy.
Pure MMT is that day in the not-too-distant future,
when MMT, or modern monetary theory,
how the post-gold-standard, modern monetary system really works,
has gone completely mainstream and a full-blown, or ‘pure’, MMT is firmly in place.
In the book The Wonderful Wizard of Oz,
an allegory that promoted staying on the gold standard,
Dorothy and the others get to the end of the gold-standard era
and enter the fiat-greenback-dollar era. There they find themselves in front of a curtain,
a screen projecting fear mongering narratives that makes Dorothy terrified.
The same goes for today regarding our monetary system
except that curtain is a screen,
like a modern television or a computer screen,
that serves as a façade,
that ‘masks’ the more important functions of federal taxation and bond sales,
as if the federal gov’t was still financed the same way as during the gold standard era.
Same as Dorothy then, groupthink today is easily frightened
and will continued to be played,
by this outdated, ‘federal gov’t is the same as a household’ narrative used by unscrupulous policymakers,
until Toto pulls back that curtain.
MMT is the dog.
Until then, while here in the “Now”,
we still have to play the cards that are dealt,
so similar to that curtain in Oz,
the “Now” diagram,
recognizes the processes from the old system except without the overdramatic bluster.
The paradigm difference between the gold standard era, and “Now”,
is that the federal gov’t doesn’t have to collect dollars before surplus spending or deficit spending.
Since the federal gov’t stopped spending gold-backed dollars, the order of operations switched.
For example, “Now”, the federal gov’t is like the Monopoly Game.
Before starting any game of Monopoly,
the ‘Bank’ passes out $1500 in Monopoly money to each ‘Player’ first.
That is exactly the same as the modern monetary system “Now”.
“Now”, the federal gov’t, the issuer of their own monopoly money,
spends into the private sector first,
and then collects it back from us when we pay taxes.
Same as the modern monetary system “Now”,
the Monopoly ‘Players’ are paid to provision the federal gov’t,
just like at the start of every Monopoly game,
the ‘Players’ are paid $1500 each,
to set up the board, to shuffle the Chance cards, and whatever other work is needed to start the game.
That initial spend by the Monopoly ‘Bank’ is deficit spending that adds Monopoly money to the Players,
which is exactly the same as the modern monetary system “Now”.
Only ‘Bank’ or federal gov’t deficit spending adds additional dollars to the Private Sector,
also known as Net Financial Assets,
only deficit spending adds Net Financial Assets to the banking system.
Let’s say that first Monopoly Player rolls a seven, lands on Chance, and has to pay a $50 tax to the Bank,
meaning $50 is ‘destroyed’ or in other words, ‘defunded’ from the Players,
out from the Private Sector.
So, taxes ‘defund’ Net Financial Assets.
Then the second Player, also lands on Chance and gets paid $50 from the Bank.
That $50 the Bank pays is surplus spending.
Surplus spending does not add dollars to the Players.
Rather than a net addition of dollars to the Private Sector like when deficit spending,
Bank surplus spending only ‘refunds’ a tax destruction of dollars out from the Private Sector.
This is why the newly-created surplus spending dollars does not have an inflationary
bias like the newly-created deficit spending dollars. Furthermore, another key
distinction, is that because surplus spending is ‘offset’ by tax collection,
it does not need to be authorized by Congress, like deficit spending does.
So does that $50 the Bank collected in taxes subtract from a Bank ‘debt’ of $6000 (?)
In the Monopoly rule book there is no mention of the Bank ‘selling bonds’ and going into ‘debt’ to ‘fund deficit spending’
nor the Bank ever having to ‘pay back’ anything.
The Monopoly game is the “After” phase,
where you no longer go through the charade that deficit spending is ‘bond-financed’.
Instead, the Monopoly game is Pure MMT, all federal deficit spending is ‘cash-financed’.
The main takeaway, the MMT pillar,
is that the order of operations has switched,
that because the federal gov’t issues and spends its own fiat dollars,
there is no longer any ‘solvency risk’.
For the federal gov’t, the issuer of dollars, same as the ‘Bank’ in the Monopoly game,
you can never run out of dollars,
there is no ‘financial constraint’ on federal gov’t spending.
in the “Now”,
in the modern monetary reality,
there still remains those formalities,
those political constraints,
the appropriations laws,
the accounting construct that governs federal spending.
As a result, even to this day,
many have a failure of the imagination,
to see past those idiosyncratic formalities being projected on the screens.
In 2017, total federal gov’t spending was just under $4T
and total tax revenue was $3.3T.
Now to just say that 4T came out of the ‘faucet’,
3 trillion odd in taxes went down the ‘drain’
and the difference was added to the bathtub is fine if talking about the “After” diagram,
the modern monetary THEORY,
but that’s too much of an oversimplification for the “Now” diagram,
the modern monetary REALITY.
Since MMT is the unorthodox,
the “Now” diagram needs to help make the MMT case to professionals in the field,
like the lawyers, the accountants, and most importantly, the constituents,
the ones that will help change those pesky laws and accounting rules
to finally get the monetary system from “Now” to “After”, to that Pure MMT.
END OF PART TWO
So, how does the shape of the “Now” bathtub,
meaning the economy, where the dollars are sloshing around, look like “Now”?
The “Now” ‘bathtub’ is not that cozy-looking, evenly-shaped one like in the J.D. Alt diagrams.
The bathtub in the “Now” is quite uneven, so that’s how we show it in the “Now” diagram.
A graph of US household wealth distribution, with a very small part of it being very deep with plenty of water at one end,
and the other end is not so liquid, that graph upside down, that’s your actual bathtub shape in the “Now”.
On the “now” bathtub diagram,
to show those crucial distinctions between deficit spending and surplus spending,
which is as different as hot and cold water,
in addition to the ‘faucet’, the “Now” diagram also has the ‘shower head’.
The faucet is deficit spending. The showerhead is surplus spending.
The water, or the assets denominated in dollars, in the tub takes many forms
For this video, we’re just going to talk about two of these,
Treasury bonds, which has a coupon interest rate and a maturity date;
and cash, which has neither.
We pick up it up where that second Monopoly Player has just been paid $50 by the Monopoly ‘Bank’
which is surplus spending, the newly-created fiat-dollars coming out of the showerhead.
Again, the important difference between surplus spending and deficit spending
is that even though both are newly-created dollars,
these newly-created surplus-spending dollars are NOT net additions of dollars to the Private Sector,
to the Monopoly Players;
because an equal and opposite amount of dollars that are being paid in federal taxation are being ‘destroyed’,
are going down the drain, or more specifically, being debited out from the Private Sector.
Here at arrow 2, is why some MMTers like to say ‘taxes don’t fund spending’.
However, even though *technically* correct, saying that is jumping the gun to the “After” phase,
so Pure MMTers don’t say it that way.
To recognize that there still are political constraints in place in the ‘Now’,
Pure MMTers say ‘taxes ARE NOT NEEDED to fund spending.
As per accounting rules and appropriations laws from long ago,
yet still in place,
here in the “Now”, is the US Treasury’s General Funds Account,
at the Federal Reserve Bank, the same account where all federal taxes wind up
and where all federal spending is drawn from.
Thus, there is no longer any financial constraint to federal gov’t spending
but there is still a political constraint.
It is still US law that federal surplus spending must be “funded” by federal taxes, and by ‘funded’,
it means that the Treasury’s General FUND account must be replenished by federal taxes.
The exact amount of reserves are credited into the Treasury’s GFA
and those reserves are immediately debited
and go full circle when newly-created dollars are credited
and spent back into the banking system
to pay anyone that just provisioned the federal gov’t.
Which gives the appearance,
which continues the gold-standard-era narrative,
that surplus spending,
even in the “Now”,
is “funded” in a financial sense,
when in reality it is only being “funded” in a political sense.
after spending has reached the amount of federal taxes collected,
it is no longer surplus spending,
and deficit spending begins.
The biggest distinction of deficit spending is that UNLIKE surplus spending which,
once tax rates have been set, simply run on automatic pilot and does not need to be authorized by Congress,
all deficit spending must be authorized by Congress;
because also UNLIKE surplus spending,
only deficit spending adds ADDITIONAL dollars to the Private Sector,
only deficit spending increases Net Financial Assets.
This is why only the newly-created dollars of deficit spending has an inflationary bias.
Same as surplus spending,
there is no financial constraint to deficit spending
but there is still a political constraint,
which is, that it is still US law that federal deficit spending must be “funded” by selling Treasury bonds.
Again, this added federal ‘debt’ is not an actual debt like a household,
just a traditional formality to maintain the Constitutionally-enshrined ‘Power Of The Purse’ of Congress.
Same as the separate Treasury Bond pot that is connected to the bathtub pot in the JD Alt diagram,
when you buy a Treasury bond those dollars do not leave the Private Sector,
those dollars simply take a different form.
A crucial distinction with deficit spending is that no dollars are ‘destroyed’,
none are debited out from the Private Sector.
nothing goes down the drain when Treasury bonds are paid for.
Meanwhile the hand of Congress is opening the faucet
and the newly-created deficit-spending dollars being added to the Private sector
are net additions of dollars that adds Net Financial Assets to the banking system.
Same as taxes,
the financing function of Treasury bonds takes the back seat to many more important federal gov’t operations,
like controlling inflation, defending the target overnight rate set by the Fed,
and providing a liquid, risk-free, safe haven for global savings desires.
No matter whether you are talking about “Now” or “After”,
it’s still a charade,
an outdated formality,
a bygone idiosyncrasy,
that the federal gov’t has to ‘borrow’ money to fund deficit spending like a household
END OF PART THREE
P.S. What’s also meant by PURE MMT?
A PURE MMTer plays the cards that are dealt,
and never bothers with ‘feelings’ or ‘hunches’.
To formulate opinion,
rather than relying on anecdotal ‘stories’
or gloom & doom ‘narratives’,
a PURE MMTer uses FACTS, MATH, and DATA.
WHATEVER specific proposal,
from whichever side of the political aisle,
for a policy initiative that you believe
would serve the common good
for the public purpose,
if that gets approved,
if that gets passed and signed in law,
a Pure MMTer avoids having a ‘bias’
towards an ideological proposal promising economic and social justice,
especially a POPULAR one,
disguised in MMT wrappings;
because a Pure MMTer,
just like the person
who is more a parent than a friend to their children,
BITCOIN IS NOT A COIN (!) (meaning it is not backed by the full faith and credit of any federal gov’t like a real coin is); and bitcoin ‘cryptocurrency’ is not a currency (!) (meaning it is not regulated by any centralized authority like a real currency is); and a ‘bitcoin exchange’ is not an exchange (!) (meaning outright trades of bitcoin are not taking place on an actual centralized and heavily regulated entity like the New York Stock Exchange).
“Think of bitcoin as just another pay pal for transaction purposes, but with a floating numeraire.” Warren Mosler (NOTE: Meaning from Day One, Mr. Mosler knew bitcoin was not a coin. The value of bitcoin, or the fractional ‘numerator’, does indeed change just like a fiat currency; but the outstanding float, the ‘denominator’ of bitcoin, unlike a fiat currency, is fixed, making bitcoin more like a ‘virtual’, or digital commodity more similar to a limited collectible, like precious metals).
“Bitcoin grew out of the global financial crisis that began in 2008. At that time, trust in institutions and the governments that regulated them were at an all time low. In the mist of this crisis, someone going by the pseudonym of Satoshi Nakamoto published a paper that outlined how a peer-to-peer electronic cash network could be created without the need to trust banks nor financial institutions. Shortly afterward the published software that allowed people to start building the network began.” (Bangkok Post 12/13/17)
In January 2009, the network came into existence with the release of the first issuance and first open source client…Bitcoin was born.
The market for bitcoin now has two sides. One side compares it to Tulip-mania, while the other thinks bitcoin and other ‘crypto-commodity’ (or ‘digital asset’) markets will continue growing. It is still hard to tell which one of these two competing narratives is right. To help you decide for yourself, here are some of the many milestones of bitcoin, as well as some of the many insights, during 2017:
03/29/17: In another move that highlights the attention that some states are giving to cryptos, the governor of Arizona signs a bill into law that recognizes ‘Blockchain Signatures’ and ‘Smart Contracts’ aimed to make those types of records “considered to be in an electronic format and to be an electronic record”. Multiple state legislatures have taken crytpo-friendly actions that have ranged from requests for further information regarding the technology to an active debate regarding a specific use case.
NOTE: Jack Biltis, who owns Tag Employer Services, an Arizona company that allows employees to be paid in bitcoin and invest part of their 401(k) retirement plans in bitcoin, said “the world will look very different in 20 years, and the people who will be successful are those that embrace the technology now and are on the leading edge of the curve”.
04/01/17: 95% of crypto is traded on Chinese exchanges (better to not be an April Fool?).
05/24/17: Buyers have been piling into cryptos amid speculation that the U.S. Securities & Exchange Commission may overturn its decision to ban the creation of a Bitcoin Exchange Traded Fund.
06/06/17: Bitcoin rose as much as 8 percent to an all-time intraday high of $2,875.34, eclipsing the previous peak reached May 25.
06/15/17: Bitcoin sank as much as 19 percent, putting that cryptocommodity on pace for its worst week since January 2015.
07/16/17: Bitcoin is down 10%, to $1833; and another cryptocommodity, ‘ethereum’ is selling off as well, down 25% to $135.
08/11/17: ‘BITCON?’: The price of a single bitcoin hit an all-time high above $3500 this week, dragging up the value of hundreds of newer, smaller digital rivals in its wake. Does the rising value of bitcoin continue to be based on little or nothing, except how much more the next person will pay for it (the definition of ‘Greater Fool Theory’) (?)
08/11/17: Coinbase raised another $100 million at a private offerings. The percentage ownership sold gave Coinbase a valuation of $1.6B meaning Coinbase became the first bitcoin ‘Unicorn’.
NOTE: There is a fixed limit (a total amount of outstanding bitcoins) which has been set at 21,000,000 (why ‘gold bugs’ or any other haters of ‘fiat’ currency love bitcoin). So far, only 17,000,000 bitcoins have been ‘mined’ (are in existence). Also note: You don’t have to buy a ‘whole’ bitcoin, you can buy a small fraction of one whole bitcoin for just a few dollars. You can buy as little as a single ‘Satoshi’ (1/100,000,000th of 1 bitcoin = 1 Satoshi).
08/11/17: “When you look at the price of bitcoin and the google searches for bitcoin, the correlation is 1, so it just kind of shows you that people are doing a very thin analysis as to why they are buying bitcoin.” Scott Gamm of The Street.
09/04/17: China bans Initial Coin Offerings (ICOs), calling it ‘illegal fundraising’ (an ICO is a glorified ‘kick-starter’, a simple ‘crowd-funding’ increasingly used by blockchain teams to fund the development of decentralized projects), and bitcoin goes down 31% in the next 12 days. Since bitcoin is not regulated and used by shady people for things like money laundering, the Chinese gov’t is now considering shutting down all bitcoin exchanges that operate in the country.
09/13/17: JPMorgan Chase chief executive Jamie Dimon doubled down on his past criticisms of bitcoin today, declaring it a “fraud” and saying he would fire any trader known to be trading cryptos for being “stupid”. Dimon later added that bitcoin “will blow up”, according to CNBC. “It’s worse than tulip bulbs. It won’t end well. Someone is going to get killed,” he added.
NOTE: Two weeks later, Goldman Sachs said they are considering the launch of a new trading operation focused on bitcoin and other digital assets. What does Goldman know that Chase doesn’t? (There is a good reason why Federal Reserve Bank policymakers are often alumni from Goldman Sachs, and not JPMorgan Chase.)
09/25/17: Bitcoin, by and large, is made in China. The country makes more than two-thirds of all bitcoin issued daily. Bitmain China, one of the biggest bitcoin operations in the world, based on prevailing prices, issues about $300,000 a day which accounts for nearly 1/20th of the world’s daily production of the cryptocommodities.
10/01/17: “I do not think it’s going to be the money of the future. I think it’s the bubble of the present.” Peter Schiff
10/10/17: “The price of bitcoin will ‘collapse’ as cryptos face continued regulatory pressure from governments, Harvard economist Kenneth Rogoff said Monday. “My best guess is that in the long run, the technology will thrive, but that the price of bitcoin will collapse,” he added. Rogoff argued that increased efforts from governments to rein in virtual (digital) assets could eventually contribute to a decline in speculative interest.
10/11/17: Bitcoin exchange traded funds (ETFs) are struggling to get off the ground and receive approval from the U.S. Securities and Exchange Commission (SEC). Governments and traditional financial institutions are critical of bitcoin. Other cryptos are also being scrutinized carefully. In Europe there is currently an exchange traded note (ETN) available via the public exchange NASDAQ OMX in Stockholm, but clearing the bar in the US has been more difficult.
NOTE: Laurent Kssis, Managing Director of XBT Provider, the Swedish company that actually launched the first Bitcoin ETN, and now a CoinShares Company, explains that the SEC has been fairly clear about its stance in recent months: “Until there is a professional grade futures market which has the liquidity and depth to supporting the hedging activities of a US based bitcoin ETF issuer, they will likely not be approving applications. So we are not surprised to see this (SEC rejections and registration filing withdrawals).” Laurent Kssis added that the three top reasons European clients like his bitcoin ETN is 1) that they don’t want to have a bitcoin ‘wallet’, just access via a normal broker/brokerage platform to invest, 2) they can invest bitcoin ETN in their tax-advantaged retirement account, and 3) because they are not experts in bitcoin they prefer that someone else is responsible for the security and storage of any bitcoin backing their bitcoin ETN investment. Also note, Bharath Rao, CEO of of digital currency trading platform Leverj believes the SEC has been turning down applications for a bitcoin ETF for some very solid reasons: “Bitcoin is correctly defined as a commodity and ETFs on other commodities such as gold are fairly standard. An ETF may choose to buy and hold the physical commodity held by themselves or a custodian. A cheaper alternative is to buy futures to back the ETF. A bitcoin ETF that holds actual bitcoins is more likely to be approved than one that holds futures. This is because a regulated bitcoin futures market with sufficient history does not yet exist. Even a bitcoin ETF with actual bitcoin is problematic without necessary operational readiness. The ETF would need to ensure that the coins cannot be lost or stolen and the shares issued reflect the amount of bitcoin held. This could be accomplished using multi-signature accounts with on-chain proof-of-audit. Eventually, these pieces will fall in place and an ETF could be approved. The advantage of holding a 100% backed ETF over actual bitcoin are minimal, since bitcoins do not have the transportation, security and storage costs of gold or other commodities. However, a bitcoin ETF is anticipated by the community as an endorsement and a fresh influx of capital, increasing value of each coin.”
10/12/17 “Bitcoin smashed through the $5,000 barrier for the first time ever on Thursday, jumping as much as 7 percent to chalk up its biggest daily rise in over two weeks. Bitcoin, the original and still the biggest cryptocommodity, has been on a tear recently, rallying nearly 75 percent in barely a month. It has chalked up a more than five-fold increase in price since the start of the year.” (Reuters)
NOTE: The players in this buying mania are in one of two main groups: The first group are the compulsive gamblers loving the 24/7 price action, the greedy speculators looking to get rich quick, and the black market criminals looking to hide financial transactions. The second group are those that see the legitimate applications and enormous potential of the blockchain technology, perhaps the greatest financial innovation in 500 years, like Kasikorn Bank (KBank), for example. Thailand’s fourth-largest lender by total assets, in collaboration with IBM, is the first bank in the world to introduce blockchain services (cheaper and quicker remittances, overseas fund wiring, etc etc). Another example, Omise, one of Thailand’s most successful payments start-ups, is an expert in online payment and blockchain technology. Omise secured $25M through an Initial Coin Offering (ICO). The Bank of Ayudhya in Thailand and a member of the Mitsubishi UFJ Financial Group in Japan has invested in Omise. This collaboration is another solid step in Omise’s journey to build on its foundation of payment services and underpin its base not only in Thailand, but in other countries as well.
10/17/17: Robert Shiller weighs in: Bitcoin is a fad, just like bimetallism before it, according to one Nobel Prize-winning economist who compares the cryptocommodities to the bimetallism fad of the late 19th century when both gold and silver were accepted as legal tender. “I’ll take bitcoin, too, because I know I can sell it and get out of it. There seems to be some strange enthusiasm for it,” Shiller said on CNBC’s Closing Bell . “People get excited about things like new monetary standards. Bimetallism went into a fad, everyone was talking about it for a while. And then it faded.”
NOTE: Is all this bitcoin mania just folks simply confusing bitcoin with blockchain technology, thinking that both are the same; just like many confused dot com stocks with information technology, thinking both were the same (?)…Or is bitcoin just like that other widely-misunderstood phenomenon that is here to stay, President Donald Trump (?) Similar to bitcoin, the more that people made fun of the Republican candidate last year, the higher he went.
10/23/17: Bitcoin, which is unarguably the world’s most prominent digital asset, today just broke through one of the most important milestones ever, vaulting to over $6000 and over $100 billion in value, proving that cryptos, in all likeliness, are here to stay. Let’s look at other reasons driving bitcoin demand. Today’s Bangkok Post had an article about Venezuelans mining bitcoin to escape inflation (that according to the IMF could reach 720% this year) which has intensified since the collapse of oil prices in 2014 (which accounts for 96% of the country’s revenue). Having no confidence in the bolivar and struggling to get US dollars, many Venezuelans are buying machines (for $2800 online from China) which are basically modified computers to perform complex computations (essentially book-keeping for worldwide crypto transactions) for which they earn commissions in bitcoins. Caracas office worker ‘Veronica’ says her boss (neither a computer geek nor a financial wizard) installed 20 of these data-crunching machines, some of them bringing in as much as US$800 equivalent a month, very profitable, especially where electricity to run these power-hungry computers is heavily subsidized (practically free). Bitcoin gains are helping to buy food and medicine that are currently in acutely short supply there. The point being that many people are (legitimately) buying and/or mining bitcoin to simply escape a crippling economic and political crisis. Add citizens of Venezuela to the shady folks using bitcoin (to evade taxes), to the investors saving bitcoin in retirement accounts (to avoid taxes), to the action-craving speculators and to the hedging gold-bug ‘stackers’ to the growing, worldwide appeal of bitcoin which is increasing the price against the USD. Throw in the overseas bitcoin players, who would love to see ‘King Dollar’ get knocked down a peg or two from the top of the global reserve-currency hill.
NOTE: When the facts change, so should your opinion. As we can see, there are socially conscious use cases alike to buy bitcoin. Another specific example, Africans in Paris use it to send money home to their families in crisis. There are other legitimate reasons. Remi Coux, 33, recently invested in bitcoin and other cryptos (ethereum & litecoin) to “repatriate my funds to France without paying those high bank fees”, said the New York University geneticist who explained he was dismayed at the cost (approx 3% of the amount) of conventional bank wire transfers overseas. So there are many smart people that are buying bitcoin as a store of value; as a hedge against fiat currency; and as a payment method for economies without widespread credit card or banking access. These are not unsound, unethical nor nonsensical actions, these are justifiable reasons to be buying bitcoin, these are pragmatic diversification plays. Therefore, just like we shouldn’t insult people who buy gold (as long as it’s not much more than around 5% of their portfolio), neither should anyone mock anyone nibbling on bitcoin as an alternative asset (as part of a well-balanced investment portfolio). However, we should still warn folks not to get conned into buying bitcoin because they think the “bitcoin” “cryptocurrency” is an actual coin or an actual currency. Bitcoin is an asset, yes; a coin or a currency, no. Bitcoin is a crypto-asset, or more specifically, a crypto-commodity, the same asset class as plain gold, or any other (precious) metal. An actual coin, an actual currency, is backed by the full faith and credit of an issuer. Just like gold, bitcoin is not backed by any issuer or any centralized authority like a monetary sovereign backing actual coins or currency. Bitcoin is just another variation of a digital commodity with a newfangled twist. The only difference between a DIGITAL commodity (aka ‘derivatives’) like a gold futures contract for example, is that all gold futures contracts are backed, or ‘derived’ from an underlying PHYSICAL commodity that would be ‘delivered’ if so desired. For that reason, a gold futures contract will never become worthless. Furthermore, all coin & currency deposits under 250,000 U.S. dollars held at commercial banks, because they are guaranteed by the federal gov’t, will also never become worthless, so BUYER BEWARE (you can’t say that for any of the cryptos).
10/25/17: Similar to the launch of ‘Bitcoin Cash’, bitcoin further split yesterday, starting the process of creating a new currency called ‘Bitcoin Gold’. In principle, bitcoin users on the bitcoin exchange bitFlyer Inc will receive an equal number of Bitcoin Gold (BTG) and the exchange will start supplying and trading BTG from Nov 1. The aim of BTG is to decentralize bitcoin transaction records processing (aka ‘mining’). MINETHIS1 of the Pure MMT for the 100% Facebook page correctly points out that these so-called forks (and also these brand-new cryptos going online practically every week), are punching a hole in that ‘scarcity trade’ thesis that buyers of crypto are depending on.
NOTE: As per MINETHIS1, another gigantic misconception is that buyers of different kinds of cryptos are being led to believe that they are ‘diversifying’ when in reality, no matter how many different cryptos they buy, they are still in the exact same asset class.
10/28/17: China’s crackdown in September (ordering Beijing-based crypto-‘exchanges’ trading crypto-‘currencies’ to close) has resulted in Japan regaining its title as the world’s largest crypto-market winner in the past weeks (Japan’s crypto-friendly decision in April allowed bitcoin as a legal payment method and officially recognized eleven crypto-‘exchanges’ as long as they register with the gov’t). Japan, South Korea, HK and Singapore (safe havens because of favorable gov’t policies) are now where startups (where their servers) are being newly located. “Making up to half the global trading volumes, digital currencies are very popular with many retail investors in Japan and S. Korea who have given up their jobs to trade them full time.” Bangkok Post
NOTE: Newspapers calling bitcoin a ‘coin’ or calling crypto a ‘currency’ only adds to the crypto-buying frenzy. Online articles saying that Japan recognized bitcoin as ‘legal tender’ also adds to the confusion that bitcoin is a ‘currency’. Just because the gov’t of Japan allows bitcoin to be used to settle debts (the definition of ‘legal tender’) or just because Thailand allows bitcoin to be used to pay a tab at a noodle shop in Bangkok doesn’t mean that those countries have declared that bitcoin is a ‘currency’ (for the same reason why the American colonies which allowed commodities like beaver skins, wampum necklaces, cotton & tobacco bales as legal tender to settle tax debts were not considered ‘currency’ either). Another reason why bitcoin is a commodity and not a ‘currency’: Washington DC allowed the trading of bitcoin futures at the Chicago Board Options Exchange (Cboe) and the Chicago Mercantile Exchange (CME), which are regulated by the C o m m o d i t y Futures Trading Commission. In addition, all the voices over the mainstream media calling the online websites where bitcoin trades an online ‘exchange’ is another dubious stretch. An actual exchange, where outright buying and selling takes place, is a centralized, heavily regulated entity that, by law, is fully compliant with local securities laws and ‘knows its customer’, like the CME, like the Cboe, or like the New York Stock Exchange (so as to prevent criminal activities or a fiasco like the collapse of an entity only posing as a ‘exchange’ —like Mt Gox).
10/29/17: “I believe there is still a nontrivial chance bitcoin goes to zero, but each day it does not, that chance declines as more venture capital flows into the bitcoin ecosystem and more people become familiar with bitcoin and buy it.” Bill Miller, whose crypto position has been a major contributor to this year’s very strong performance in his Miller Opportunity Fund (up 19% YTD).
11/01/17: The world’s largest futures exchange, the Chicago Mercantile Exchange (CME), announced today that it plans to launch bitcoin futures by the end of the year, pending regulatory review. “We have decided to introduce a bitcoin futures contract which will be cash-settled and based on the CME CF Bitcoin Reference Rate (BRR),” Terry Duffy, CME Group chairman and CEO, said in a statement. Bitcoin rose to a record high above $6,400.
11/07/17: More insight on CME’s decision to launch bitcoin futures: “Bitcoin is a new asset class, not a crypto-currency. It is likely to become a new asset class in its own right, such as gold or stocks, which can be traded by major investors and regulated”, as per Chicago Mercantile Exchange (CME) group’s Chairman Emeritus Leo Melamed. While he was initially skeptical about bitcoin, “I too went from not believing (in bitcoin) to wanting to know more,” he said. We will regulate, and make bitcoin not wild, nor wilder. We’ll tame it into a regular type instrument of trade with rules,” Melamed, 85, told Reuters.
11/13/17: In the news today, bitcoin had extended its recent drop to 29 percent from the record high (due to a cancellation of a technology upgrade to increase its block size). At the heart of the debate is how bitcoin’s underlying technology can accommodate rising transactions as its popularity booms. While increasing its block size would help, opponents argue it would only concentrate mining power, undermining the decentralized nature of bitcoin.
NOTE: Just to give you an idea of the roller coaster ride bitcoin is, the next morning bitcoin was recovering, it was up $557.93 (UP 9.05%).
11/17/17: It took just four days for bitcoin to make back last week’s loses and reach another record high close of $7843 yesterday. In the news today, in anticipation of the launch of bitcoin futures trading by establishment firms (Cboe and CME) which will give bitcoin even more legitimacy as an alternative asset for investors, bitcoin trading firms are aggressively seeking top Wall Street talent, from back office to front office, to build-out infrastructure for the now-booming ‘cryptocommodity’ space.
11/21/17: “Bitcoin’s market cap of $160 billion just passed McDonald’s. The same McDonald’s with 37,000 locations, 375,000 employees, and $24 billion in revenue.” Logan Mohtashami / Charlie Bilello
NOTE: Don’t compare the ‘market cap’ of bitcoin to an actual market cap of a real business with real earnings (yet another crypto misconception out there that folks get easily played by, which simply adds to the speculative frenzy). For an apples to apples comparison, better to measure bitcoin’s aggregate value against other commodities. For example, compare bitcoin’s $160 billion in aggregate value to gold, which has an aggregate value of approx $10 trillion (“The world’s gold stock is about 170,000 metric tons. If you molded all of it into a cube, it would be about 68-feet per side, about the size of a tennis court, which would fit comfortably in the middle of a baseball infield.” H/T Warren Buffett)
11/22/17: ‘BITCOINS ARE THE LADYBOYS OF INVESTMENT’…Another heads up for anyone considering hooking up with a bitcoin (thinking it is a coin). BEWARE especially of the other ‘coins’ out there as well. I attended a seminar hosted by Paul Gambles, Managing Director of the MBMG Group investment advisory held at the Foreign Correspondents Club in Bangkok last night. Before the main speech on Artificial Intelligence and ‘Machine Learning’ portfolio management applications in legitimate Digital Financial Analysis services, Mr. Gambles warned that there are signs of ‘pump & dump’ price action taking place in the crypto space. Sites like ‘Pump My Coin’ are a “Crypto-voting community that will choose the next coin to pump”. Remember folks, none of these ‘coins’ are regulated, meaning that any pumping and dumping, painting the tape, churning, and/or manipulating is NOT illegal! In the Bangkok Post today, Mr Gambles was quoted saying “I just keep trying to make the point that I see the scope for blockchain. I can’t envisage a way to design cryptos that rely on the trust of the users AND ensure absolute anonymity – if they’re totally anonymous, I just don’t see how they won’t get gamed – especially if (unregulated) therefore perfectly legal! Bitcoin, I’m afraid, is just as much a pump & dump as any other manipulated crypto. That doesn’t mean there aren’t opportunities to profit, but just as here in Bangkok after dark, things aren’t always as you’d expect. The lack of regulation is evident. Our research led us to discover that there are quite open pumping and dumping websites, and that users of Russian communication App ‘Telegram’ are actively and brazenly banding together to choose which crypto to pump & dump each week. These scams typically involve parties with hidden identities, who are acquiring a low value amount in assets and then bid up the price in such a way that genuine investors get tempted to part with hard earned cash for fake promises. Sometimes these actors are shells, registered for the sole purpose by pumpers; sometimes they can be legitimate innocent actors suffering setbacks causing the value of their assets to fall sufficiently that allow the bad actors to acquire a sufficient float to further manipulate the price.”
11/26/17: Bitcoin prints $9,000. In the news, Coinbase, the largest bitcoin exchange in the U.S., added about 100,000 accounts around Thursday’s Thanksgiving holiday, bringing their total customer base to 13.1 million. Also in the news, remember ‘Blue Horseshoe loves Anacott Steel’? Now it looks like Ms. Watanabe loves bitcoin. The bitcoin (BTC) / Japanese yen (JPY) pair has the largest share of total trading in the cryptocommodity space. The bitcoin / U.S. dollar (USD) pair trading volume accounts for 24 percent, and the bitcoin / South Korean won pair comes in third at 10 percent.
NOTE: In Japan, housewives make up approximately 25% of the nation’s vast retail forex-trading market. They are such a force, that during the prolonged recession of the 1990s, the market gave them a name: ‘Mrs. Watanabe’, a common surname.
11/29/17 Bitcoin prints $10,000 (that’s a gain of 945% YTD) at 10AM during Asia morning trading hours, and then at this writing, was already up another $1200 (+12%) to $11,156 only 12 hours later at 10PM (Bangkok time). In the news today, the Vanguard Founder said “Avoid Bitcoin Like the Plague…Did I make myself clear?” As per Jack Bogle, 88, who started the first index fund in 1976, “You know bonds have an interest coupon and stocks have earnings and dividends. There is nothing to support bitcoin except the hope that you will sell it to someone for more than you paid for it so it’s crazy to invest in the digital asset”, he added. “Bitcoin may well go to $20,000 but that won’t prove I’m wrong. When it gets back to $100, we’ll talk”. HOWEVER, Max Keiser, born in NY in 1960, who went to New York University, and is now a journalist living in London, hosting The Keiser Report, has this take: “Bitcoin is unique…It answers two questions at the same time. Gold is the case study. Gold is also used as a store of value and a means of exchange as well…Bitcoin is gold 2.0…It does the same functions as gold…It’s true it takes a lot of electricity to mine bitcoin, but it also takes a lot of energy to produce gold as well. Everything in the protocol to make bitcoin, the proof of work, everything involved, makes bitcoin the perfect crypto over the other coins (which are like the silver, bronze, and the other collectibles that are not as popular as gold). Bitcoin is the mother-load…It is taking over global finance…It’s putting fiat money out of business and it has the bankers on Wall Street running scared. Jamie Dimon is peeing in his pants at this point because he knows he’s going to be out of a job in five years. We don’t need the Jamie Dimons of the world ripping us off…We don’t need Wells Fargo stealing money out of everyone’s accounts…We don’t need HSBC funding drug lords in Mexico to the tune of billions…We don’t need those bad actors in society and bitcoin gets rid of all those financial terrorists. It’s about time that someone stood up and did battle because the government is not doing it, the academics aren’t doing it, so we have bitcoin to do it.” Keiser is the creator, co-founder, and former CEO of HSX Holdings/Hollywood Stock Exchange, later sold to Cantor Fitzgerald. Alongside Michael R. Burns, he co-invented the ‘Virtual Specialist’ platform on which the Hollywood Stock Exchange operates. This technology allows traders to exchange virtual securities, such as “MovieStocks” and “StarBonds”, with convertible virtual currency called the “Hollywood Dollar”.
NOTE: I doubt bitcoin ‘gets back to $100’ nor will bitcoin ‘put fiat money out of business’ and if anyone actually believes that bitcoin gets rid of the ‘bad actors’ then they better google ‘Mt. Gox’ ‘NiceHash’ ‘Youbit’ ‘Coincheck’ or ‘Silk Road marketplace’.
12/08/17 “A dizzying week for bitcoin, with the price soaring 82% during the past seven days (2,200% during the last year). The action has been so volatile lately that by the time you read this, any price changes I note as I’m writing it will assuredly be obsolete.” Rick Newman Yahoo Finance. “At one point today (Dec 7) various exchanges quoted bitcoin prices that varied by more than $2,000, from a low of $15,592 to a high of $18,259 — all at the same time. On established financial markets, there can be very minor discrepancies in prices quoted simultaneously on various exchanges— but never in the range of 15% of a security’s entire value” he added.
12/10/17: Bitcoin futures begin trading on the Chicago Board Options Exchange (Cboe Global Markets Inc’s Futures Exchange) tomorrow. Chicago’s two largest derivatives exchanges are battling for the US bitcoin futures trade market. Both companies say that deals will be settled in cash the day after the contracts expire. It remains to be seen what the introduction of US futures trading will do to bitcoin. The speculative buzz is that the influx of institutional investors could spur bitcoin even higher; while others say that the ability to short bitcoin will crash the market. Brian Quintenz, the CFTC Commissioner, has warned that “it is incumbent on market participants to conduct appropriate due diligence to determine whether these products, which have at times exhibited extreme volatility, are appropriate for them.”
NOTE: Here’s the difference between the two exchanges. First, CME plans to limit investors to 1,000 contracts, while the Cboe will set the limit at 5,000. Second, CME prices will derive from four different Bitcoin exchanges, while Cboe contracts will be based on prices from Gemini, the crypto-commodity exchange run by the Winklevoss twins. Cameron Winklevoss is the chief executive officer and co-founder; his brother Tyler Winklevoss is the chief financial officer and co-founder of Gemini Trust Company LLC. The Winklevoss twin brothers (portrayed in the movie ‘The Social Network’) sued Mark Zuckerberg, claiming he stole the idea for ‘The Facebook’. They settled the legal battle for $65 million ($20 million in cash, $45 million in Facebook stock) and invested $11 million of the cash payout in 1% of the entire float of bitcoin in 2013 (then trading at $120). When the price of bitcoin traded over $11,500 recently, it was reported that with a combined net worth of $1.2 billion, the Winklevoss twins could be the first ‘bitcoin billionaires’. However, even the twins themselves have noted that older bitcoin aficionados probably have larger holdings. A likely candidate: the mysterious father of bitcoin, known as Satoshi Nakamoto. It is estimated that the person behind the Nakamoto pseudonym holds about 980,000 bitcoin (Today that would be worth over $11 billion). Cameron Winklevoss thinks the crypto-commodity’s blazing gains this year are just the start. He predicts it will rise as much as 20-fold as investors come to view it as an upgrade to gold.
12/12/17: Bitcoin futures first trading session on the Chicago Board Options Exchange was a success. “This is a very big victory for bitcoin last night,” said CNBC’s Jim Cramer, who like many folks, has been a vocal critic of bitcoin, warning investors that it’s like ‘Monopoly Money’ and people would be better off going to Las Vegas. The Winklevoss twin’s claim that bitcoin could eventually replace gold as a repository also helped “mightily”, he added. Meanwhile, U.S. Securities and Exchange Commission Chairman Jay Clayton warned investors of the dangers of putting money into cryptos, as crypto-mania swept markets with the launch of bitcoin futures. Clayton said in a statement that trading and public offerings in the emerging asset class may be in violation of federal securities law. The warning came as the SEC intervened to halt a $15 million initial coin offering. Munchee, a food review app, on Monday cancelled its ICO which was aiming to raise $15 million, after the company failed to register it as a security.
NOTE: Overheard on LinkedIn: “The bitcoin ‘bubble’ argument seems weak…The global shifts to cheaper, transparent and efficient payment methods is real. I’ve stopped watching stock and bond markets because of the ridiculous ‘bubbles’ created in those markets by global central banks. Boy, if there were a ‘bubble’ anywhere that’s where it is.” Ken Yagami
12/18/17: After bitcoin set a new record of $19,666 on Sunday, Singapore’s central bank joined other central banks worldwide and issued their own warning the next day. “Cryptocurrencies are a digital commodity rather than a digital currency” the central bank said. ( READ : B I T C O I N I S N O T A C O I N )
12/22/17: BITCOIN BULLS V. BEARS: In the worst selloff since 2015, bitcoin plunged 30% on Friday, as the frenzy surrounding it faced one of its biggest tests yet. Bitcoin and most other crypto-commodities clawed their way upward the next day on Saturday, halting the four-day tumble that drew worldwide attention to the unregulated $500 billion market that is frequently being called a bubble.
NOTE: Many of the recent news stories and market moves connected to bitcoin and the crypto-space continues appearing to carry hallmarks of garden-variety, bubble mania; while at the same time more news keeps coming out that the crypto-craze is here to stay. For example, also this week, shares in Long Island Ice Tea Corporation, a ready-to-drink iced tea company, rose as much as 289% after the unprofitable, Hicksville NY-based company renamed itself ‘Long Blockchain Corp’; while at the same timeGoldman Sachs confirmed that they are setting up a trading desk that will be operational by June to make markets in crypto.
12/28/17: BOTTOM LINE: Here’s my last entry (since this post is just for the bitcoin highlights of 2017). I hope there was enough information above for readers to make their own decision whether to be a bitcoin bull or a bitcoin bear (and like all the rest of your financial decisions, not let someone else make them for you). I hope one of the takeaways readers get out of this post is that if anyone is a bitcoin bull, hopefully they aren’t confusing buying bitcoin with actual investing. IMO, the rising price of bitcoin is mainly due to 1) Hedging (folks with ‘gold-bug mentality’ that don’t have faith in fiat currency +/or centralized gov’t); 2) Short-term speculating (folks driven by greed, Fear Of Missing Out, or an endless craving for ‘action’, etc etc); and 3) Long-term speculating (folks buying for very legitimate reasons and holding because they believe bitcoin is here to stay which could very well be true). I personally have no problem with anyone trying to make money buying bitcoin. There is nothing wrong with people going to the track, picking horses and having fun watching them run as long as they know they are gambling (with great skill perhaps, but gambling nonetheless); AND as long as they are only using ‘play money’.
Full disclosure, after hearing both sides, I am personally leaning slightly bitcoin bullish but I never bought any. I presently live in Bangkok, I tried to buy bitcoin, but so far the online sites I tried will not yet accept American citizens to open accounts (most likely because they have not yet met US regulations & compliance requirements). My understanding, the only way for a US citizen in Thailand to buy bitcoin is by cash, a so-called ‘cash exchange’, after which your bitcoin goes into your bitcoin ‘wallet’ (instead of going into your account at a so-called ‘online exchange’). Meaning that a ‘cash’ bitcoin trade is a person-to-person (P2P) transfer, which is sort of like a glorified ‘Craigslist’ or ‘eBay’ arrangement that you make with people that didn’t need to show any ID to become the counter-party (which I’m not comfortable with). So for now, I will keep watching bitcoin from the sidelines and wishing I was long bitcoin, especially when that day in the not-too-distant-future (around June 2023*) when that 21st millionth bitcoin is ‘mined’ and the scarcity games actually begin.
NOTE: *At the end of 2017 there were about 16.7 million bitcoins already in existence out of the 21 million bitcoins in total that will be ‘mined’ (that will be created), meaning that about 4.3 million bitcoins are not yet ‘mined’ into circulation yet (are still to be created). 12.5 bitcoins are created every 10 minutes, so that comes to approximately 6.5 years.
I will end this post with a quote from Andrei Popescu, co-founder of the Crypto-One-Stop-Solution (COSS) exchange. This is my favorite bitcoin quote of all of 2017, especially the last line, which goes for any market (heck for life itself): “There is no right current price to reflect the current right valuation of bitcoin. Buying bitcoin into a long term projection is right. Selling bitcoin and taking profit is also right. You don’t have to be right, just less wrong than the rest.”
P.S. In Thailand, a royal decree effective 05/14/18, defined ‘cryptocurrencies’ as digital assets and digital tokens. Part of the 100-section law required that all market participants including Initial Coin Offering (ICO) issuers, digital exchanges, broker-dealers, etc., involved with digital asset or digital token transactions are required to register with the Securities Exchange Commission (SEC) of Thailand within 90 days and must also receive the Finance Ministry’s approval to conduct digital asset business or face a jail term of up to 2 years.
Pure ‘hawk’: “I judge that it is appropriate to continue to remove monetary policy accommodation (RAISE RATES) gradually.” New York Fed president William Dudley
Pure ‘dove’: “If we go too far in our zeal to normalize (RAISE RATES) we might push inflation expectations down further and that might hinder our ability to hit our target.” St Louis Fed president James Bullard
Pure ‘moderate’: Others were more on board with the December rate increase, though they also offered some skepticism. Atlanta Fed president Raphael Bostic, the newest of the 12 Fed presidents, believes the US central bank should (RAISE RATES) by the end of the year, though he is “not wedded” to that position and continues to track the data closely. Robert Kaplan, chief of the Dallas Fed said inflation “is likely building” given the low unemployment rate, which would make the case for further hikes (RAISE RATES).
‘Pure’ MMT is the day when all fiscal policymakers talk like this too. All that fiscal policymakers need to do is to take the above thought processes and replace ‘raise rates’ with ‘INCREASE SPENDING‘…
Rather than clinging to the old-outdated-idiosyncrasies from a bygone debt-denominated-in-gold-backed-dollars era (like the amount of the quote-US-National-Debt-unquote), the main determinate of fiscal policymaking decisions in our modern monetary system (where there is no such thing as the US federal gov’t, a monetary sovereign, being in debt of their own fiat US dollars) should be inflation expectations (same as in all monetary policymaking thought processes and decisions)…
In a perfect (‘pure’) MMT world, all the households, businesses, local & state gov’t, any ‘user of currency’, is concentrating on balancing their budget (to maintain prosperity); while all federal monetary policymakers, all federal fiscal policymakers, any ‘issuer of currency’, is concentrating on balancing their economy (to widen that prosperity).
Deadly Innocent Fraudulent Misinterpretation #1: ‘Federal taxes are a destruction’…
Fact: Only federal taxes paid after a certain point has been reached is an actual ‘destruction’.
Saying ‘taxes is a destruction’ is not entirely accurate. It misses a much more important concept that only MMTers who are fully grasping the distinctions between surplus spending, which doesn’t add dollars to the banking system (doesn’t add net financial assets because it is funded* by taxes); and deficit spending, which adds dollars to the banking system (adds net financial assets because they are not funded* by taxes). NOTE: Federal gov’t (issuer of currency) spending must be funded* in a ‘political constraint’ sense, not to be confused with household (user of currency) spending that must be financed in a ‘financial constraint’ sense.
After federal taxes are paid (with a check made payable to ‘The Treasury’), those taxes are ‘destroyed’ (debited) from ONE ledger, triggering an equal and opposite ‘creation’ (credit) of reserves to ANOTHER ledger, the Treasury’s General FUNDS Account (GFA) at the Fed, the same Treasury account that all federal spending is drawn from.
There are two ways that injections of newly-created reserves to the GFA are decreased:
1) Those reserves are debited from the GFA and newly-created dollars are spent towards on-budget federal expenditure (a bygone remnant known as ‘surplus spending’). If those reserve amounts have accumulated to the point where there is no deficit spending needed at all for the fiscal period (the Clinton years), then…
2) …those reserves are also debited from the GFA and newly-created dollars are credited to individual Treasury bondholders INSTEAD of to people that provided goods or services provisioning the gov’t. In other words, the reserves are ‘spent’ towards ‘paying off’ the national ‘debt’ (that idiosyncratic, gold-standard-era throwback to the fiscal-year ‘budget surplus’).
NOTE that in the first scenario, there is NO permanent ‘destruction’ of net financial assets from the banking system (the surplus spending ‘refunds’ a temporary ‘destruction’); and in the second scenario, there IS a permanent destruction because there are less of those non-federal gov’t savings accounts. Sustained fiscal year budget surpluses result in less of those non-federal gov’t assets that we still call US Treasury bonds (aka the national ‘debt’ by those still using not-so-modern monetary ‘mentality’)…
If at the end of a fiscal year, the federal gov’t had a budget deficit, that means that there was a creation of net financial assets. If at the end of a fiscal year, the federal gov’t had a balanced budget, that means that there was no creation. If at the end of a fiscal year, there was a budget surplus, there was a destruction.
This crucial distinction, this ACTUAL DESTRUCTION, is why all six depressions in US history were preceded by sustained, fiscal year federal gov’t budget surpluses.
Fact: Gov’t deficits can also equal non gov’t deficits.
‘Gov’t deficits equal non gov’t surpluses’ isn’t entirely accurate because the non gov’t is comprised of two sectors, so in the post-gold standard, POST-NAFTA, modern monetary system, we need to be careful when blurting that out.
First of all, I suggest never saying ‘government v. non government’ because it is too easy to confuse a local gov’t or a state gov’t as being part of the ‘government’ rather than being part of the ‘non government’. Whenever explaining MMT to the uninitiated, I always say ‘federal government v. non federal government’. Once you have hard-wired ‘federal government v. non federal government’ into your MMT thinking (into your listener’s MMT thinking), trust me, it is much easier to separate out the federal gov’t from the households, the businesses, the local governments, the state governments (and even the foreign governments) in the non federal government.
As all MMTers are aware, the non federal gov’t consists of two sectors, the ‘non federal gov’t / Domestic’ (aka the private sector) and the ‘non federal gov’t / International’. As per the Sectoral Balances chart, the federal gov’t deficit always equals the two non federal gov’t sectors COMBINED, yes; but sometimes a federal gov’t deficit results in a deficit for the non federal gov’t / Domestic as well. Case in point, in each of these following years, while the federal gov’t had run a fiscal year budget deficit, the ‘non federal gov’t / Domestic’ had run a deficit as well (h/t Chris Brown ‘Sectoral Balances info-graph of US Private Sector Dollar Drains & Dollar Adds Since 1992′)…
$107B federal gov’t deficit in 1996:
$170B surplus to the non federal gov’t / International
(-$63B) deficit from the non federal gov’t / Domestic
$22B federal gov’t deficit in 1997:
$181B surplus to the non federal gov’t / International
(-$159B) deficit from the non federal gov’t / Domestic
$157B federal gov’t deficit in 2002:
$532B surplus to non federal gov’t / International
(-$375B) deficit from the non federal gov’t / Domestic
$378B federal gov’t deficit in 2003:
$532B surplus to non federal gov’t / International
(-$154B) deficit from the non federal gov’t / Domestic
$412B federal gov’t deficit in 2004:
+$655B surplus to non federal gov’t / International
(-$243B) deficit from the non federal gov’t / Domestic
$318B federal gov’t deficit in 2005:
$772B surplus to non federal gov’t / International
(-$454B) deficit from the non federal gov’t / Domestic
$248B federal gov’t deficit in 2006:
$647B surplus to non federal gov’t / International
(-$399B) deficit from the non federal gov’t / Domestic
$161B federal gov’t deficit in 2007:
+$931B surplus to the non federal gov’t / International
(-$770B) deficit from the non federal gov’t / Domestic
$458B federal gov’t deficit in 2008:
+$817B surplus to the non federal gov’t / International
(-$359B) deficit from the non federal gov’t / Domestic
We all remember what happened in 2008.
The result of sustained private sector (non federal gov’t / domestic) deficits.
Unlike federal gov’t deficits, counter-intuitive to mainstream belief, only private sector deficits are the deficits that are actually unsustainable.
In all these years above, the non federal gov’t / International’s ‘black ink’ was the non federal gov’t / Domestic’s ‘red ink’. If you take a step back from the picture and think about that, in effect, all those years above, from the perspective of the US private sector, those years had the same exact debilitating consequences as if the federal gov’t, by proxy, ran sustained budget surpluses.
All previous depressions in US history were preceded by sustained federal gov’t surpluses. As per Warren Mosler, using old metrics (before the 1990s when the federal gov’t sliced up unemployment into multiple ‘tranches’ from U1 to U6), the definition of a depression used to be if unemployment hit (averaged over) 10%. According to the Bureau of Labor Statistics (BLS), a unit of the US Department of Labor, at the end of the last (‘Great’) recession, in June 2009, unemployment (the ‘U3’ official unemployment rate) was 9.5 percent. In the months after the recession, the unemployment rate peaked at 10.0 percent (in October 2009). Mr. Mosler was onto something. Calling the last economic downturn a ‘recession’ was sugar-coating the reality. The ‘Great’ recession, the ‘Worst Economic Downturn Since The Great Depression’ (as we were told), was a depression, and for practically the same reason as all the others (sustained private sector deficits).
My guess, when MMT goes mainstream, focusing on the accumulated amounts of these private sector deficits (instead of focusing on the accumulated amounts of federal gov’t deficits) will not only be considered another leading economic indicator, but will serve as a much better guide for fiscal policymakers when making deficit spending decisions.
Deadly Innocent Fraudulent Misinterpretation #3: ‘The subway token doesn’t fund the subway’…
Fact: This is a misinterpretation of 7DIF Fraud #1. The subway token and the stadium ticket analogies only mean that the monetary sovereign issuing its own pure fiat currency won’t ever run out of tokens or tickets (no solvency risk, no constraint on spending), not ‘the tokens don’t fund the subway’.
This misinterpretation is a classic example of MMT ‘academics’ confusing the modern monetary ‘theory’ (where we will be in the not-so-distant future) with the not-so-modern monetary ‘formalities’ still existing (albeit unnecessarily) in our not-so-modern monetary ‘reality’ (where we are right now). Of course subway systems don’t pay subway employees in tokens (which makes the utterance *technically* correct), but instead of saying ‘the tokens don’t fund the subway’, perhaps it’s better to say something like, “The tokens are part of the transfer mechanism and the subway company controls the transfer mechanism by feeding it with tokens at will” (h/t Teo Teodorescu).
The MMT ‘academics’ that keep using this meme have no idea how ridiculous they sound when they say this outside their choir (to someone who has actually bought a subway token or a stadium ticket). “They insist on reducing MMT to useless platitudes, all over this stupid term ‘fund’” (h/t Vernon Etzel).
My question to these ‘academics’ who wave bye bye to double entry accounting each time they say ‘the subway token doesn’t fund the subway’ is: Does the subway rider also get ‘destroyed’ when he puts the token in the turnstile?
Of course not.
The ‘destruction’ (The debit) of tokens (of tax credits) triggers a ‘creation’ (triggers a credit) of riders (of reserves) into the subway car (into the Treasury’s General FUNDS account at the Federal Reserve Bank) and travel (and are electronically key stroked) in a special tube underneath the city (via the monetary base) which those riders soon exit (which soon get debited) out from the subway (out from the GFA) and go back into (and credited to) the city (the money supply) from whence they came (from whence they came).
Deadly Innocent Fraudulent Misinterpretation #4: ‘All federal spending is financed by High Powered Money’…
Fact: ‘Newly-created’ money finances all spending, but ‘newly-created’ money is not the same as ‘High-Powered’ Money.
While a Ph.D. candidate in 1998, Stephanie Bell wrote a paper entitled ‘Can Taxes and Bonds Finance Gov’t Spending?’ As per Stephanie Bell (now Dr. Stephanie Kelton), “Modern federal governments finance all of their spending through the direct creation of new High Powered Money”. In an 04/21/09 Billy Blog titled ‘Money multiplier and other myths’, Dr. Bill Mitchell writes that HPM “is the sum of the currency issued by the state (notes and coins) and bank reserves”. In other words, he thinks that all of the reserves in the monetary base is HPM and they both think that all federal gov’t spending which is financed by ‘newly-created’ dollars is HPM.
Here’s why thinking that all reserves are HPM and that all spending is HPM isn’t entirely accurate: The Federal Reserve Bank is independent, and the reason why, was the result of a public spat in 1948 (the end of WWII / beginning of the Korean ‘conflict’) between the Fed and the Treasury that was eventually resolved in the ‘51 Fed-Treasury Accord. That argument, between the Fed (Marriner Eccles, Chair of the Federal Reserve since 1934) and the Treasury (Secretary of Treasury Henry Morgenthau) started because the Treasury wasn’t fully grasping the difference between ‘newly-created’ money and ‘high-powered’ money (HPM) either. The Fed won that fight but it cost Eccles his job.
At the time Eccles had this rift with Treasury, the Fed (unlike today as a result of the ‘51 Accord) could buy Treasury bonds DIRECTLY from the Treasury (with newly-created dollars a.k.a. reserves). Those newly-created dollars were High Powered Money because same as during federal deficit spending today, before 1951 when the Treasury instructed the Fed to buy Treasury bonds at initial primary offering, that was both an addition of newly-created Treasury bonds AND newly-created dollars entering the banking system (additions of Net Financial Assets, a.k.a. NFAs).
In those days, instead of holding auctions, the Treasury would simply set the coupon rate of new Treasury bonds as low as possible while the Fed fumed (because the Treasury was only concerned about cheap financing for the war, while Eccles at the Fed was only concerned about stoking post-war inflation which would ultimately increase the cost of the war). If the public didn’t buy them (with existing dollars), the Treasury would tell the Fed to support the interest rate peg and buy the bonds (with newly-created dollars), which Eccles knew was a dumb idea.
As per Chair Eccles, the inflation between VJ Day and the Korean War was NOT caused by armament production (most of the weapons were already made), nor large deficits (the gov’t was in near surplus), it was caused ONLY by the Treasury department’s low-rate easy-money debt management policy.
Saying ALL federal spending “is financed through the direct creation of new HPM” is similar to saying ‘all federal spending is endogenous money’, another deadly innocent misinterpretation. The Exo (‘exogenous’-created, or ‘vertically’-created money) v. Endo (‘endogenous’-created, or ‘horizontally’-created money) question comes down to whether money is newly-created by the former, in other words, by the issuer (no corresponding liability attached); or by the latter, one of the users (corresponding liability attached). All federal gov’t spending is ‘newly-created dollars, yes, and when the federal gov’t adds newly-created dollars, that’s the Fed’s doing (aka ‘Inside Money’), sure, but that only appears to be endogenous. Keep in mind, when the Fed creates reserves that are added to the Treasury’s spending account where all federal spending is drawn, that is the Fed acting ONLY as the agent (for the Exo guys over at Treasury & Congress).
All federal gov’t spending is newly-created money (newly created reserves into commercial banks which in turn become newly-created dollars into the money supply), absolutely; BUT the newly-created money of surplus spending is not an addition of net financial assets, it is only making whole a future ‘destruction’, a federal tax collection (‘defunding’) of net financial assets. Rather than thinking HPM equals all federal spending and HPM equals the monetary base, better to think HPM = NFA. Only deficit spending adds dollars to the banking system, only deficit spending increases net financial assets, so we should only be calling the newly-created money of deficit spending (only 15% of total spending in 2016) High Powered Money, not total spending (100%). Unlike surplus spending, only deficit spending, only additions of NFAs, has the inflationary bias, and why Eccles feared HPM in 1948.
During the credit crisis after the Lehman bankruptcy, should those $4.2T in ‘newly-created’ reserves that financed all that federal government spending on Treasury & MBS bonds that the Fed bought from banks for quantitative easing (QE), sitting in the monetary base, be considered HPM? That answer depends on which MMT academic above you ask; however, I would say no, because UNLIKE the bonds bought by the Fed prior to the ‘51 Accord, those Treasury bonds bought by the Fed during QE were previously bought with EXISTING dollars at initial offering in the primary market by the private sector (thanks to Chairman Eccles).
Those newly-created reserves for federal gov’t spending during QE were not HPM (they did not have an inflationary bias), because those newly-created reserves were merely a ‘swap’ trade (same as the newly-created money for any surplus spending). On the other hand, unlike QE (and unlike surplus spending), DEFICIT spending is not a ‘swap’ trade. Deficit spending is an ‘outright’ trade. Unlike QE (and unlike surplus spending), only Congress can authorize an outright trade. Deficit spending is an outright increase in net financial assets, meaning that ONLY deficit spending, unlike QE (and unlike surplus spending), results in an outright addition of ‘hot’ money into the banking system that has an inflationary bias, and that’s why Fed Chair Eccles coined that money ‘HPM’.
I highly recommend all MMTers, after reading Warren Mosler’s 7DIF, next read Beckoning Frontiers by Marriner Eccles, our Fed system’s first chairman, from whom all the ideas of FDR’s New Deal came from, and whom the Federal Reserve System’s building in Washington, D.C. four blocks from the White House, is named after.
Fact: Banks don’t lend reserves as loans to retail clients, not that they don’t lend reserves at all.
Saying ‘banks don’t lend reserves’ was accurate before the credit crisis (when there was only $42B in non formal bank reserves), but not entirely accurate post-LSAP.
“Banks do, in fact ‘lend reserves’ all the time. It’s called the overnight market” (h/t Vernon Etzel).
Agreed…Trading desks at non formal banks are *literally* lending their Fed reserves in the repo market to the tune of a half a trillion in notional value today:
Statement of Condition of Each Federal Reserve Bank (The Fed balance sheet):
06/26/08 Before LSAP (‘Q.E.’)
Fed total liabilities = $1.044T ($989B cash currency in circulation ;
$42B Non formal bank reverse repurchase agreements;
$13B Formal bank reserves held on account at the Fed)
09/28/17 After LSAP (‘Q.E.’)
Fed total liabilities = $4.2T ($1.533T cash currency in circulation;
$0.455T Reverse repurchase agreements with the Fed which are reserves being “lent out” for collateral at 1.00% aka the FFR ‘floor’;
$2.178T Formal bank reserves at the Fed earning 1.25% aka the FFR ‘ceiling’)
“Banks don’t need deposits from outside the banking system to make loans to the private sector. Bank lending to the private sector creates reserves within the banking system. These reserves are traded through interbank bank lending (overnight market) to meet the reserve requirements (of other commercial lenders). Perhaps, the defensible ‘meme’ is: “Banks don’t need deposits to make loans” (h/t Charles Kondack).
“The phrase is meant to attack fractional reserve lending– and in that sense it’s true; but it is not a tautology without further qualification. Platitudes like ‘banks don’t lend reserves’ are useful in a brawl with the radical fringe, but useless in persuading common people to a pro-deficit position” (h/t Vernon Etzel)
Deadly Innocent Fraudulent Misinterpretation #6:‘Bank reserves held at the Fed don’t enter the economy’…
Fact: Bank reserves held at the Fed do enter the economy.
Banks in aggregate can reduce their reserves which can actually enter the economy only to the extent that they initiate new lending and the public demands more physical currency (cash) that flow into the economy as new banknotes.
Statement of Condition of Each Federal Reserve Bank (The Fed balance sheet):
06/26/08 Before LSAP (‘Q.E.’)
Fed total liabilities = $1.044T ($989B cash currency in circulation;
$42B Non formal bank reverse repurchase agreements;
$13B Formal bank reserves held on account at the Fed)
09/28/17 After LSAP (‘Q.E.’)
Fed total liabilities = $4.2T ($1.533T cash currency in circulation;
$0.455T Reverse repurchase agreements with the Fed which are reserves being “lent out” for collateral at 1.00% aka the FFR ‘floor’;
$2.178T Formal bank reserves at the Fed earning 1.25% aka the FFR ‘ceiling’)
Deadly Innocent Fraudulent Misinterpretation #7: ‘Taxes don’t fund spending’…
Fact: In the post-gold standard, modern monetary system, because taxes now perform other more important functions, taxes ARE NOT NEEDED to fund spending (not that they don’t at all).
This is the worst of the seven deadly innocent misinterpretations. It is often regurgitated by MMT ‘academics’ and those in their choir especially because Dr. Bill Mitchell, Professor L. Randall Wray and Professor Stephanie Kelton love to say it too. Don’t get me wrong, Mitchell, Wray & Kelton are the great ones; however, even the great ones do swing and miss sometimes, and saying ‘taxes don’t fund spending’ is a miss.
Warren Mosler has explained many times before why MMTers shouldn’t say ‘taxes do not fund spending’. The MMT pillar is ‘taxes ARE NOT NEEDED to fund spending’ (not that they don’t). Warren Mosler doesn’t say ‘taxes don’t fund spending’ because in his words, “it’s ambiguous.” Furthermore, Mr. Mosler also says “tax liabilities are not…revenue PER SE” (he doesn’t say that they aren’t AT ALL).
Saying ‘taxes don’t fund spending’ shows a lack of banking experience and a confusion with simple financial concepts like funding (which gets ironically weird if MMTers are saying ‘taxes don’t fund spending’ while lecturing other people on banking and finance).
Whether we like it or not, the simple fact that doesn’t fit the ‘taxes don’t fund spending’ narrative is that all federal taxes paid are a ‘destruction’ (debit) from our commercial bank account, yes; but that’s only the half of it (only one ledger side of the double entry ledger). Those taxes simultaneously trigger an equal and opposite ‘creation’ (credit) to the Treasury’s General FUNDS Account at the Fed (which is the exact same account where all federal spending is drawn from). Until those accounting rules and appropriations laws are changed, ‘taxes don’t fund spending’ remains the ‘theory’ in Modern Monetary Theory, so if you say it, you are jumping ahead at best; or at worst, you are unwittingly admitting that you haven’t fully grasped MMT.
“The whole bit about taxes not funding spending is this: Reserves are destroyed upon receipt by the Fed, and newly created upon spending. That is the thrust of the (Stephanie Bell) paper, and I’m not disagreeing with that. It’s just an accounting thing; reserves don’t “exist” in the interim between receipt and spending, so the reserves used to pay taxes cannot be used to spend. It’s an esoteric point, because the numbers do show up as an addition to Treasury’s account. I think that it’s important to understand what ‘taxes don’t fund spending’ really means, and I think the discussion should have been a useful exercise – but people are getting up in arms about it, instead of learning” (h/t John Biesterfeldt, Founder of Intro to MMT – Modern Monetary Theory).
Sure, saying ‘Taxes don’t fund spending’ is *technically* correct, so why don’t MMTers instead say ‘Taxes don’t *technically* fund spending’ (same as it says in the Stephanie Bell paper)? Even better, if an MMTer really wants to sound like they are truly comprehending both ‘pure’ modern monetary theory plus the not-so-modern monetary reality, say this:
Surplus spending ‘refunds’ a future decrease of net financial assets…
Taxes ‘defund’ net financial assets…
Deficit spending ‘funds’ net financial assets…
Saying ‘taxes don’t fund spending’ also shows a lack of understanding, that, even though we left the gold standard, and we are now a monetary sovereign, some remnants, several old processes, many accounting constructs, US appropriation laws, of the past monetary system, ARE STILL IN PLACE. We need to recognize these complexities. Remember, MMT is the heterodox. We cannot afford to make mistakes when explaining MMT (especially to folks that are suspicious of our intentions). If we want to make the MMT case to experts in the field (the folks we need to change these pesky accounting rules and US laws), oversimplifications are not good enough for them.
“Saying ‘Taxes don’t fund spending’ is an excellent sermon to preach to the choir… not gonna fill the pews with new converts though” (h/t David Swan).
Agreed…but I’d be even more blunt. If you are having trouble keeping your listeners on the MMT bunny slope over at ‘academic’ hill awake during your lectures, then keep saying ‘taxes don’t fund spending.’ If you are promoting some product or promoting yourself under the guise of promoting MMT, then say ‘taxes don’t fund spending’. If you are selling some amateurish double-down trading system to compulsive gamblers trying to get rich quick, say ‘taxes don’t fund spending’. If you are speaking to a simplistic flock of lost souls and lonely hearts that ‘like’ you, ‘share’ you, and ‘heart’ you, (will vote for you) because you’ve sold them on the notion that their bad lot in life is someone else’s fault, and that you’re going to get them free stuff in a Marxist utopia, then say ‘taxes don’t fund spending’. If, however, you are truly speaking for the MMT cause, then take the hint from Warren Mosler, so for everyone’s sake (mainly yours), stop saying it.
Don’t get me wrong, by suggesting that MMTers go beyond the memes and use better verbiage, I’m just trying to help the MMT cause. Whatever politics someone has, whatever spending on public purpose anyone wants, for the common good, for the country, is fine by me. Please know that I understand when any MMTer says any of these seven gimmicky catchphrases (misinterpretations), they mean well. There is no doubt in my mind that all MMTers understand that description of “the workings of the monetary system, what’s gone wrong and how gold standard rhetoric has been carried over to a nonconvertible currency with a floating exchange rate and is undermining national prosperity.” Warren Mosler 7DIF
The funny thing about that Large Scale Asset Program (‘QE’) is that if you think about it, it was a dry-run of a not-too-distant, completely-accepted-by-mainstream, full-blown modern monetary theory (MMT). During those years, one arm of the federal gov’t was selling $2.4T of so-called debt (as it it still known by those using not-so-modern monetary ‘mentality’ from a bygone gold-standard era) and another arm of the federal gov’t was buying it back. $2.4T of that federal gov’t deficit spending, usually ‘funded’ by bond sales, was *literally* not funded by bond sales. In other words, rather than going through the outdated, unnecessary and idiosyncratic modern monetary ‘formality’ of that $2.4T of federal gov’t deficit spending being ‘bond-financed’, every single penny of that $2.4T of deficit spending was just simply ‘cash-financed’ (it was ‘Pure’ MMT).
How Does The Federal Government Actually Spend?Professor L. Randall Wray, on with Steve Grumbine of Real Progressives, explaining what actually happens when the Treasury spends. Wray goes through a simplified version that leaves out some intermediate steps, but these intermediate steps all cancel out of the final process, and the end result is exactly what he describes. (Sort of like how if I gave something to you to give to your cousin for me, the net result is that I gave something to your cousin).When the Treasury goes to spend, it tells its bank, the Federal Reserve, to credit (turn a number into a larger number) the reserve account of a bank (banks all keep "reserve accounts" with the Federal Reserve, which they use to settle payments), and then the bank credits the checking account of whomever is receiving the payment. So, the Fed credits a bank's reserves and a bank credits a customer's account.The reverse happens when the Treasury receives a tax payment. The Federal Reserve debits (turns a number into a smaller number) the reserve account of a bank, and the bank debits the checking account of whomever sent the payment. The net result here is that federal government spending adds to the quantity of reserves and deposits, while taxing decreases from it (as do bond sales, aka government "borrowing"), and it all happens via keystrokes. Or in short, the government does all of its spending by simply crediting bank accounts. It is not "spending tax dollars," it is changing numbers on spreadsheets. There is no possibility of it being unable to make a payment, no possibility of it being forced into bankruptcy or default, no possibility of interest rates being forced up because of government deficits (on a floating exchange rate), and no purely financial limit on government spending, only real resource limits.If you want to know more details about the exact procedure, all of the steps, as well as citations to back it up, check out these links:The Greatest Myth Propagated About The Fed: Central Bank Independence (Part 2): http://neweconomicperspectives.org/2014/01/greatest-myth-propagated-fed-central-bank-independence-part-2.htmlTreasury And Central Bank Interactions: http://neweconomicperspectives.org/2016/02/money-banking-part-6.htmlTreasury Debt Operations: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1825303And see how this incorporates into a broader heterodox worldview on the nature of money, as contrasted with the establishment orthodox views: http://neweconomicperspectives.org/2013/12/essays-monetary-theory-policy-nature-money.html—Watch the whole video here: https://www.youtube.com/watch?v=OCNXfNTAez0Follow Deficit Owls on Facebook and Twitter:https://www.facebook.com/DeficitOwls/https://twitter.com/DeficitOwlsAnd follow our sister page, Modern Money Memes:https://www.facebook.com/ModernMoneyMeme/https://twitter.com/ModernMoneyMeme
If you hear an MMTer (proponent of Modern Monetary Theory) say ‘taxes don’t fund spending’, assume either the speaker is simplistic, or the speaker thinks the audience being spoken to is simplistic.
How do we know that what Professor L. Randall Wray says here is being ‘simplistic’? Here you go, right from the horse’s mouth, the very first line in the video: “It’s complicated, but it can be simplified”…”and so I’m going to simplify it but the way I’m simplifying it is not at all misleading.”…”What I’m saying is a simplification but it is not dishonest at all”…”it’s not misleading you.” (When someone says something like ‘no bullshit’, 3x in a row, right before saying something, take a wild guess what’s coming next).
“If you go back to the colonies, every time, say the Colony of Virginia, they would pass a law authorizing the colonial gov’t to print money (paper Treasury notes), they also would pass a law to impose taxes…and the tax they imposed was equal to, would generate the amount of revenue, equal to the amount of (paper Treasury) notes they were going to issue”…”Do you know what they did with the paper notes they got back in tax collection?”…”They burned them.”…”That makes it very clear how it worked.”…”Did the Colony of Virginia need the tax revenue to make their payments?”…”Clearly not.” (Bullshit…What happened in Virginia was ‘clearly’ the exact opposite of that. In 1755, not only did taxes have to fund spending in Virginia, they had to start funding spending in England for the Seven Years War (a lot of more spending). British pound sterling, personal bills of exchange, promissory notes, Spanish silver coins, other gold coin specie, and even tobacco, beaver skins or wampum, were all accepted for payment in the colonies, were all considered ‘real money’, ‘hard money’, or ‘commodity money’ (what all combined then we today call ‘legal tender’). So what would happen if money in the colonies was put on a boat and sent to England to fund spending in Europe instead of funding spending in the colonies? Any ‘drain’ like that can create destructive deflationary forces. The solution would be to introduce another form of legal tender money of an equal amount of these lost tax revenues to reflate the money supply. Which is exactly what other colonies had done while paying military expenses for England’s other military expeditions before, and is exactly what Virginia did for this one in 1755).
“They needed the taxes to get the money back to burn it, to remove the notes from circulation, to prevent inflation, it was not to allow them to spend the revenue, they didn’t spend it, they burned it”…”Taxes clearly didn’t fund spending in Virginia in 1755.” (Bullshit…Taxes paid in paper Treasury notes were burned to prevent price inflation, yes, but that’s not the whole story. The rest of the story is that taxes paid in hard money funded (Virginia commonwealth) spending and some taxes paid in hard money was also sent to England to fund (European military) spending. How this worked: When any Virginia tax was paid in hard money like British pound notes or tobacco, which was 20% of taxes paid during the Seven Years War, most of that hard currency would be sent to England to fund spending. So to resupply that lost money, new paper notes would be printed and spent into the economy to maintain the stability of prices. If any Virginia tax was paid with the paper Treasury notes, which was 80% of taxes paid during the Seven Years War, because those paper Treasury notes were only legal tender in Virginia, only spendable in Virginia, those paper Treasury notes wouldn’t be leaving Virginia. A payment of Virginia taxes in paper Treasury notes meant no ‘drain’ of hard money from Virginia (no *literal* voyage of hard money away from Virginia’s economy), meaning an unchanged local ‘money supply’ of hard money. Therefore, a payment of Virginia taxes in paper Treasury notes meant no new paper notes were immediately needed to be issued and spent into the economy (to re-supply anything lost); so since those notes served their purpose, they were burned, a.k.a ‘redeemed’ (similar to the IRS today shredding any tax payment made in cash). Unlike the urgent need to issue new paper notes if taxes were paid in hard money (to control deflationary forces), the Commonwealth of Virginia may or may not have needed to issue new paper notes to replace taxes paid in paper notes (to control inflationary forces). What was really happening here, the actual teachable moment, was that this was the prototype of 20th century Fed open market operations that maintains price stability. Depending on whether the Virginian taxpayer made a payment in hard currency or not, the issuing and burning, the adding and draining, the easing and tightening of colonial Treasury notes, of money, to maintain price stability in 1755, was the precursor to the Fed buying and selling modern day Treasury notes from the secondary bond market for a similar reason).
“It was NOT to allow them to spend the revenue, because they never spent the tax revenue”…”They burned all the tax revenue.” (Bullshit…Professor Wray leaves out an inconvenient fact that doesn’t fit the ‘taxes don’t fund spending’ narrative, which is that they ONLY burned the paper Treasury notes, and NOT the tax payments made in British pound notes or tobacco bales that was also collected. They didn’t burn the personal bills of exchange or promissory notes that was also used to pay Virginia taxes, nor did they ‘destroy’ the Spanish silver coins plus other gold coin specie, those hard money payments of TAXES, WHICH FUNDED SPENDING in both Virginia and England starting in 1755).
“The Fed was created in 1913, we were an unusual country, we didn’t have a central bank, we got by without one.” (Bullshit……We weren’t ‘getting by without one’. Our country was suffering numerous banking panics and prolonged economic depressions without one. The Fed was the fourth attempt at a central bank that finally stuck. Sure, there was not a central bank in 1913, but what about those three other central banks we had earlier, the precursors of the Federal Reserve System, that because of populist opposition, did not have their charters renewed? Alexander Hamilton, our first Treasury Secretary, oversaw the chartering in 1791 of the First Bank of the United States, our second attempt at a central bank, which assumed all the Revolutionary War debt, and started collecting excise TAXES, WHICH FUNDED SPENDING).
“The Fed was created to be the Treasury’s bank, so instead of the Treasury just printing up notes in order to spend, and then receive them back and burn them, what the Treasury will do is have the Fed make their payments for them, so the Fed, since 1913 makes all the Treasury payments”…”If you’re a contractor selling something to the gov’t, the Treasury, they tell the Fed ‘please make a payment to this guy’s bank account’, the Fed credits you, the Fed credits your bank’s reserves, that’s how the Treasury spends”…”Now when you on April 15th pay your taxes, you write a check to the Treasury, the Treasury then tells the Fed to ‘please debit this guy’s bank account’, the Fed debits you, the Fed debits your bank’s reserves”…”So the Treasury spends by the Fed crediting bank reserves and the Treasury receives tax payments by debiting bank reserves, it’s functionally equivalent to burning the paper notes, so nothing I just told you is misleading.” (Bullshit…When you pay your taxes to the Treasury, before your tax dollars are ‘burned’ from your commercial bank, the Treasury tells the Fed to credit, to FUND, the Treasury reserves account at the Fed in the exact amount, to the penny, of your tax payment. It is a misrepresentation at best, or you sound like a fool at worst, telling people that their federal tax dollars just go *poof* and don’t trigger credits to other accounts. The MMT pillar is that since the federal gov’t is no longer spending gold backed dollars, and now spending fiat dollars, those taxes ARE NOT NEEDED to fund spending…not that they don’t. The paradigm difference is that in the post-gold standard, modern monetary system, for any issuer of fiat dollars, revenues as a financing operation takes the backseat).
The last line in the video: “That was beautifully simple…” (AGREED…It was beautifully simplistic).
Thanks for reading,
P.S. Another thing, the Commonwealth of Virginia in 1755 was a USER of currency (just like the State of Virginia today), so any MMTer that likes to say ‘taxes don’t fund spending’, may want to rethink ‘going there’ when talking about Virginia (no matter what time in history). Don’t get me wrong, Professor L. Randall Wray is one of the great ones; however, even the great ones do swing and miss sometimes, and saying ‘taxes don’t fund spending’ is a miss. Please know that I understand when any MMTer says it, that they mean well. There is no doubt in my mind that all MMTers understand that description of “the workings of the monetary system, what’s gone wrong and how gold standard rhetoric has been carried over to a nonconvertible currency with a floating exchange rate and is undermining national prosperity” (Mosler 7DIF). Warren Mosler, the father of MMT, has explained many times before why saying ‘taxes do not fund spending’, is wrong because the MMT pillar is ‘taxes ARE NOT NEEDED to fund spending’ (not that they don’t). Warren Mosler doesn’t say ‘taxes don’t fund spending’ because in his words, “it’s ambiguous.” In other words, saying ‘taxes don’t fund spending’ shows a lack of banking experience and a confusion with simple financial concepts like ‘funding’ (which gets ironically weird if MMTers say ‘taxes don’t fund spending’ while lecturing other people on banking and finance). Saying ‘taxes don’t fund spending’ also shows a lack of understanding that even though we left the gold standard, and we are now a monetary sovereign, some remnants, several old processes, many accounting constructs, US appropriation laws, of the past monetary system, ARE STILL IN PLACE, and we need to recognize these complexities. If we want to make the MMT case to experts in the field (the folks we need to change these pesky accounting rules and US laws), oversimplifications are not good enough for them. Whatever politics someone has, whatever spending on public purpose anyone wants, for the common good, for the country, is fine by me. I’m just trying to help the MMT cause by pointing out how ridiculous any MMTer sounds when saying ‘taxes don’t fund spending’, no matter how simplistic the choir (and how silly that choir looks when not challenging anyone sounding ridiculous).