A Suggestion For MMT

Today we say ‘Gov’t v. Non Gov’t’…

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

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

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

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

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

Take these three entities:

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

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

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

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

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

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





eddie d   <eddiedelz@gmail.com>


President Jackson Demoted



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

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

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

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

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

Not convinced? Take a look at these dates:







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







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

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

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

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

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

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

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


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

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

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



Eddie D  <eddiedelz@gmail.com>

April 15th Tax Day is the “Big blind”

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

All About That Base

Just a thought…

Going back to the start of the Large Scale Asset Purchase (LSAP) program right after the Lehman bankruptcy in Sept ’08…

The reason why those bond ‘kings’ and hedge fund ‘stars’ predicted that so-called QE, QEII, III, etc., would cause massive hyperinflation and sky-high interest rates were so wrong, was because as we (hopefully) now know, there’s a difference between the newly-printed dollars that finance deficit spending (that add net financial assets into the banking system), and the newly-printed dollars that financed LSAP (that do not add any net financial assets to the banking system). The reason why LSAP was not an increase of dollars in the banking system, why it had nothing to do with the money supply at all, and why it had no inflationary bias whatsoever, was simple: The Fed was only swapping newly ‘printed’ dollars (a.k.a. reserves) going into the monetary base (not part of the money supply), for the exact same amount of bonds (also not part of the money supply), that were ‘unprinted’ out from the secondary bond market. If you just understood that, then consider yourself ahead of 98% of the population, ahead of Nobel-laureate economists, ahead of all policymakers, and especially ahead of the Very Smart People of the mainstream media that constantly bark fake narratives relying on outdated, gold-standard-era mentality over the airwaves today…

Outside of normal Open Market Operations (OMO), there are two scenarios where that present * $2.1T balance of reserves that were previously printed by buying Treasury bonds from banks during LSAP could be reduced by selling Treasury bonds to banks. More specifically, when those $2.1T of reserve balances are transferred from that bank’s checking account at the Fed (the Reserve account) into that bank’s savings account at the Fed (the Securities account)…

In the first scenario, a bank purchases more Treasury bonds outright, on its own volition, directly from the Treasury, at initial offering in the primary market, paying for those Treasury bonds with their reserves, reducing their amount of reserves sitting at the Fed, decreasing the net amount of total reserves in the monetary base. ‘Net’ because this is not a bank or financial institution buying bonds from (or trading bonds with) another bank or financial institution, which would only be a reallocation of reserves. Out of a total of approx $4.1T in reserves that were printed during LSAP to buy both Treasury and Mortgage-Backed Securities, this has already been happening to the tune of $2T in total Fed reserves reduced. (Note: This is not saying that the $4.1T in Fed liabilities that were increased during LSAP are no longer on the Fed’s balance sheet, but that instead of being reserves, that $2T has become liabilities in other forms such as increased Federal Reserve notes to meet rising demand for cash currency and reverse repurchase agreements to defend the Fed’s target overnight rate, etc.)…

In the second scenario, a bank purchases Treasury bonds, not on its own volition, but directly from the Fed, in the secondary market, after that bank is ‘assigned’ Treasury bonds, not for OMO, but in an intentional Fed unwinding of LSAP.  Again, those bonds are paid for by that bank’s reserves, reducing their amount of reserves sitting at the Fed, decreasing the net amount of total reserves. (This has not happened, nor will ever, unless the Fed decides to unwind their balance sheet +/or there is a sudden, unexpected US economic boom that is so strong that the Fed needs to slam on the brakes and quickly ‘unprint’ reserves to drive interest rates higher)…

Unless those $2.1T in reserves are not significantly reduced by either of these two scenarios and the banks continue to let their reserves sit idle deep in the monetary base down below, then for reasons beyond LSAP’s good intentions, we shouldn’t expect much change in the money supply up above.

In the meantime, what if we monitored the changes of those total Fed reserve balances that are reported every week. If the balance increased, we should interpret that as financial institutions and investors taking caution (a ‘risk-off’ yellow flag); and if the balance decreased (a ‘risk-on’ green flag), it means they throttled up (?)

If you agree, here are those quarterly numbers:


Consolidated Statement of Condition of All Federal Reserve Banks
‘Other deposits held by depository institutions’  (total reserves at the Federal Reserve bank)
Fed balance sheet liabilities (In millions of dollars):




































06/14/17 FOMC rate hike to 1 to 1-1/4 percent


03/15/17 FOMC rate hike to 3/4 to 1 percent

01/20/17 US President Donald Trump inaugurated

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

12/14/16 FOMC rate hike to 0.50% and 0.75%

11/08/16 Donald Trump elected US President

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

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

‘Helicopter Money’ Won’t Offer Much Lift: Narayana Kocherlakota



This article (link above) entitled “‘Helicopter Money’ Won’t Offer Much Lift” from Bloomberg/Newsrooom appeared today. It was written by Narayana Kocherlakota, now a Bloomberg View columnist, who also is the Lionel W. McKenzie professor of economics at the University of Rochester, and who also was the 12th president of the Federal Reserve Bank of Minneapolis from 2009 through 2015. In this article, Narayana Kocherlakota mentions “global central bankers’ quest for unconventional ways to stimulate weak economies”, with the old idea of dropping “helicopter money” directly to the people, or the gov’t, to spend. Knowing that this idea is more sensation than sensible, Narayana Kocherlakota then makes his most powerful point:The government has all the borrowing and spending power it needs to boost the economy and get inflation up to the desired level, if only it had the will.”

Bingo…In a nutshell, he says exactly what is presently ailing most of the world economies.

Inspired by this, I emailed him. In lieu of a lack of will by fiscal policymakers, I offered my own unconventional idea for monetary policymakers that I personally believe would immediately work to remove the ‘specter’ of federal government debt, and restore confidence to consumers. This idea, in my opinion, would unleash that pent-up aggregate demand here in the US, and even more so if implemented in Japan, but this idea would not work in the Eurozone. Forget the EZ, with their incomplete setup, without a federal government bond (like the US and Japan), and also without a centralized, fiscal policymaking branch with strong authority (like the US and Japan), the troubles in the EZ will last a very long time…The only hope for any member state is to ‘exit’ the EZ, my guess Italy will be the first (?), get back their ability to issue sovereign currency, and reacquire that needed ‘adjustment mechanism’ that they had lost. I also thanked Narayana Kocherlakota for his public service and he was kind enough to reply back (and polite enough to gently put that he was skeptical of my idea). Here is my message and his reply:

From: <eddie_751@hotmail.com> To: NARAYANA: Agreed that if fiscal and monetary policymakers were in sync, they could work together to generate inflation, but if not, instead of talking about helicopter drops (which would be politically untenable), I have another suggestion: ‘Quantitative Redemption’. The Fed has $2T in Treasury bonds on its balance sheet. Announce that starting today, $167 billion per month, will be, effective immediately, ‘redeemed’. Paid off. Ripped up. One arm of the federal gov’t (Treasury) issued those IOUs and another arm of the federal gov’t (Fed) bought them back. Instead of continuing to ‘impound’ these bonds on the Fed’s balance sheet (Peter paying Paul), by the end of one year, all $2T won’t exist anymore. Anybody that knows Treasury bond markets can guess what would happen next: This outright decrease in supply would bid up prices of Treasury bonds and pressure rates lower (Thus ‘QR’ done sooner would mean ‘QE2’, ‘QE3’, ‘The Twist’, and endless Fed jawboning would not have been necessary). Anybody that knows what Treasury bonds are also knows what this ‘redeeming’ of Treasury bonds means: Decreased ‘National Debt’ which decreases Groupthink’s perceived imminent ‘danger’ to the financial security of the country, and also decreases the need for any more Kabuki theater in Congress over raising the ‘debt ceiling’. Furthermore, anybody that knows what this telegraphed, intentional money creation means, can also guess what would happen next: Consumers and businesses would front run the approaching dilution, or reduction, in the purchasing power of their cash, and start making those purchases +/or investments that they had been postponing since the financial crisis of 2008. Instead of another helping of obstructionism, fiscal policymakers in Congress *could* get in sync with monetary policymakers, assist them by concentrating on boosting the economy, enacting productive, counter-cyclical fiscal policy measures, and generating inflation to the desired level…“If it had the will”.

His reply:

Thanks for the comment.

I should think more about this –

but my first reaction is skepticism.

Suppose the Fed forgives all of this debt.

Would this make the Fed less willing to raise rates, more willing to tolerate inflation?

Maybe – but, as I say, I’m skeptical.

Thanks again.



A Leading Indicator’s Leading Indicator

US private sector dollar adds and drains from1992 to 2015

The US stock market is one of those ten US economic ‘leading indicators’ that usually changes before the economy as a whole changes. The enclosed link above is a very illuminating ‘info-graph’. It’s kinda like a ‘Chutes and Ladders’ game board. The object of this game is to become the first player (Read: fiscal policymaker) to break away from the ‘federal-gov’t-is-the-same-as-a-household’ groupthink…

Just start at the left, follow along up and down with actual amounts of dollars sloshing in to and out of the private sector year over year (what economists call ‘vertical’ or high-powered ‘exogenous money’ and what MMT calls ‘dollar adds’ / ‘dollar drains’). As it all veers upwards, that means dollars getting consistently added to the private sector, as it all veers downwards, that means dollars getting consistently drained from the private sector, and then watch what happens next in the stock market (Spoiler Alert: It did exactly what it was told to do)…

Note that other than just those four ‘Clinton Surplus’ years, all the rest of the years on this graph are, at the same time, running both US budget deficits (the first two bars in each year) and US trade deficits (the second two bars in each year). Can you remember when we were all told that these so-called ‘Twin Deficits’ were so terrible, yet as you can clearly see, the economy and by extension the stock market weren’t always doing so terribly, in fact, there isn’t much of a correlation at all. There is a correlation however, to the economy and the stock market with the other deficit on this graph, the private sector ‘deficit’ (not to be confused with private sector debts like student loans, a home mortgage, or credit card balances due). Federal budget deficits and federal trade deficits are what everyone focuses on, and needlessly worries about, but the private sector deficit is the one and only deficit that we should instead be focused on, and actually be worried about. In the year 2001, the total private sector dollar drain, or their sustained ‘deficit’, since the 1990 recession, reached $1.787 trillion right before the economy fell into recession. This ‘indicates’ that going forward, fiscal policymakers should take action if private sector deficits reach that level again, but look what happened next. After proper dollar adds, or private sector surpluses, the economy recovers, but only a few years later, dollar drains, or sustained private sector deficits pass that $1.787 in the year 2007 again, and by much more. The result was the Great Recession. Only sustained private sector deficits that are allowed to build up are the actual danger to the economy, and only fiscal policymakers, working cooperatively, taking their cue from monetary policymakers, can prevent dollar drains from reaching critical levels. Furthermore, only people watching these private sector deficits as ‘leading indicators’, will have a good idea what that real leading indicator, the US stock market, will do next.

Not convinced? Take a look at these dates:







These dates above were the 6 periods in American history when the US federal gov’t had substantial yearly budget surpluses (decreasing total US federal gov’t debt) meaning, at the very same time, and by accounting identity, the US private sector was, to the penny, being subjected to the exact same amounts of yearly ‘savings deficits’ (increasing total US private sector debt). Next look at these dates:







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

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

1823-1836 federal gov’t surpluses and then the 1837 Depression

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

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

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

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


Hardly…Now let’s connect the dots:

The Great Depression was the worst economic downturn in the history of the Western industrialized world, and why?  It was not just because of a stock market collapse, but instead, it was because of a “money supply collapse” (quoting former Fed Chair Ben Bernanke in ‘Courage to Act’). When the federal gov’t is running a surplus, like it did in all the examples above, the federal gov’t is draining dollars from the money supply, out from the private sector. When dollars are being drained from the private sector for a prolonged period, then the private sector must start borrowing, or ‘deficit spend’ to maintain their same level of consumption in order to keep up their same desired level of savings. As you can see, all 6 economic depressions in US history were preceded by prolonged federal gov’t budget surpluses, or put another way, they were preceded by prolonged private sector savings deficits, resulting in prolonged private sector ‘deficit spending’. It is not continuous deficit spending by the federal gov’t that is unsustainable, it is continuous private sector ‘deficit spending’ that is unsustainable…

From the perspective of the private sector, there is no difference between the gold-standard era and the post-gold-standard era, because the private sector is not the issuer of dollars (no matter whether they are backed by gold or they are not). The private sector, because they are not the issuer of dollars, always goes into actual debt when deficit spending. However, from the perspective of the federal gov’t, the issuer of dollars, there is a stark difference between the bygone monetary system that had gold-backed dollars, and the modern monetary system that doesn’t have gold-backed dollars. US dollars today are not convertible to anything. US dollars today are not pegged to anything, they are free-floating, and they are issued by fiat. During the gold standard era, the federal gov’t could not just ‘issue’ gold out of thin air, but now the federal gov’t could just issue fiat out of thin air. Instead of the federal gov’t borrowing gold-backed dollars and ‘monetizing debt’ (financing debt by swapping IOUs for gold-backed dollars), the federal gov’t today issues newly-created fiat dollars and ‘monetizes deficits’ (reconciles deficits with ledger entries of non-convertible dollars). Before, federal gov’t deficit spending added to an actual outstanding debt of gold-backed dollars; now federal gov’t deficit spending instead just subtracts from the purchasing power of outstanding fiat dollars.

Unlike a household, that needs to balance a budget, the federal gov’t needs to balance the economy. Rather than worrying about ‘running out’ of fiat dollars, federal gov’t fiscal policymakers should be concerned about either strengthening a too-weak economy, or weakening a too-strong economy, whichever is needed at the time, to promote balanced growth. An economy with balanced growth creates as many jobs as possible, which then helps the most people as possible to earn dollars to pay for goods and services. In addition, fiscal policymakers must do what is needed to have the resources to be able to provide those goods & services in the future because THAT IS WHAT WE CAN ACTUALLY RUN OUT OF

Today, in the post-gold-standard, modern monetary system, federal gov’t deficit spending ‘finances’ our savings (not the other way around anymore). If the federal gov’t isn’t deficit spending enough, then the private sector must keep ‘deficit spending’ more, meaning keep borrowing more dollars, and since unlike the federal gov’t, the private sector cannot issue dollars, THAT IS WHAT IS ACTUALLY UNSUSTAINABLE

Monetary policy is just the anesthesia, and those monetary anesthesiologists, our central bankers, just keep the patient sedated. However, if those fiscal surgeons, our fiscal policymakers, do not then get to work, do not take productive, counter-cyclical measures, and just dither or bicker at each other while dollars keep draining from that patient, our private sector, then just like ZIRP & Consumption Taxes did in Japan, like austerity measures are doing in the EZ, and what sequestration is now threatening to do here in the US, as history shows, the US stock market will sooner or later follow accordingly.

NOTE: The above info-graph is a modified version of the original created by Chris Brown. Here is his latest updated version:  US asset decline 1992-2015 Revision 7 on FEB 17 2016

Follow Chris Brown at the “Intro to MMT – Modern Monetary Theory” page on Facebook: https://www.facebook.com/groups/introductiontommt/


Make Congress Great Again

On January 29, 2016, Bank of Japan Governor Haruhiko Kuroda announced a negative interest rate, to take effect on Feb. 16, “to spur banks to lend in the face of a weakening economy”…

(Read: To punish banks for not lending.)

Next year, the Japanese gov’t plans to once again increase the Consumption Tax, or national sales tax to 10%, “to balance the federal budget”…

(Read: To punish everyone else with a ‘deflationary mindset’ for not spending.)

The BOJ’s move, “is similar to the ECB’s first foray into negative rates in June 2014 and the tiered measures put in place by the Swiss National Bank”…

(Read: The BOJ’s move is similar to the reeking smell of desperation as in the Eurozone and as in the US, also suffering from weak growth, due to a lack of productive, counter-cyclical fiscal policymaking that has resulted in non-productive, pro-cyclical ‘austerity’ & ‘sequestration’ policymaking.)

P.S. It’s like completely incompetent people are running gov’t…Hmmm, why does that sound familiar (?)

(Read: Why Trump might become president.)

Encl. Here is what all central bankers would sound like (if their fiscal policymakers were also on the same page as them):

1 FEB 2016 BANGKOK POST – Thailand’s central bank, the Bank of Thailand, will forgo further interest rate cuts to “concentrate on stabilizing the nation’s currency, because in the current market, government spending has far more potential to drive economic growth than monetary policy does. In a situation like this, fiscal policy is much more effective than monetary policy for stimulating the economy overall“, Thai central bank Governor Veerathai Santiprabhob said. Thailand Finance Minister Apisak Tantivorawong added, “I believe we are heading in the right direction. If we want to improve the domestic purchasing power we have to focus on ways to boost the purchasing power of the vast majority of people. Moreover, since low-income earners are the most vulnerable sector of society, they are the most deserving of government aid,” he said. Recent measures reflect the Thai government’s concern over the impact of the slowdown of the Chinese economy. Mr Apisak said China’s cooling economy had heavily hit the export sector and affected other sectors along the economic chain, so the Thai government has sought to ease the impact by injecting liquidity mainly to low-income earners and accelerating investment in megaprojects.



eddie d


‘The Big Short’: The Book vs. The Movie

The book: ‘The Big Short’ by Michael Lewis, financial journalist and nonfiction author…


The movie: ‘The Big Short’ directed by Adam McKay, ‘Funny or Die’ website co-founder.

The book: One of the ‘shorts’ was Mike Burry @ Scion Capital.

The movie: Christian Bale plays Dr. Michael Burry, an eccentric ex-physician turned one-eyed Scion Capital hedge fund manager, who has traded traditional office attire for shorts, bare feet and a Supercuts haircut. He believes that the US housing market is built on a bubble that will burst within the next few years. Autonomy within the company allows Burry to do as he pleases, so Burry proceeds to bet large against the housing market by first asking Goldman Sachs, and then other banks, to create a derivative known as a credit default swap, or CDS, which is a custom-made insurance policy, on specific subprime debt, hand-picked by Burry. This newly-written policy, this derivative contract, effectively creates an underlying, mirror-image, ‘synthetic’ duplicate of that chosen subprime debt with as much devastating loss potential as those subprime securities that they are insuring, or guaranteeing to cover in the event of default. These CDS would pay off for Burry if the housing market crashes and the subprime debt his policies are ‘derived’ from, become worthless. The banks are more than happy to accept his proposal for something that has never happened in American history, believe that Burry is a crackpot, and therefore are confident in taking the other side of his bet.

The book: One of the ‘shorts’ was Steve Eisman @ Greenwich, Connecticut-based FrontPoint Partners LLC, under Morgan Stanley.

The movie: An errant telephone call to FrontPoint Partners gets information about subprime CDS that are betting against the housing market into the hands of Steve Carell playing “Mark Baum”, an idealist who is fed up with the corruption in the financial industry. “Mark Baum” and his associates @ FrontPoint Partners, an arm’s length under Morgan Stanley, invite “Jared Vennett” from Deutsche bank to explain and possibly solicit these CDS, despite not totally trusting him. In addition, “Mark Baum” further believes that most of the mortgage securities are overrated by the bond agencies, especially now with this new information from “Jared Vennett” that banks are dangerously blending an alarmingly increasing amount of subprime mortgages together with AAA-rated mortgages into bundled debt securities known as collateralized debt obligations, or CDOs.

The book: One of the ‘shorts’ was Charlie Ledley & Jamie Mai @ Cornwall Capital.

The movie: Charlie “Geller” and Jamie “Shipley”, who are minor players in a $30 million start-up garage company called “Brownfield”, also get wind of “Jared Vennett’s” subprime CDS prospectus on the matter. Wanting in on the action but not having the official clout to play, they decide to call an old friend, retired investment banker Brad Pitt playing “Ben Rickert” – actually based on Ben Hockett, a banker who had previously worked at Deutsche Bank – is also pessimistic about the banking industry, and joins forces with his erstwhile neighbors Charlie and Jamie to help out establishing “Brownfield”. These three groups, these three ‘big shorts’, Scion Capital, FrontPoint Partners, and “Brownfield”, work on the premise that the banks are stupid and don’t know what’s going on, while for them to win, the general economy has to lose, which means the suffering of the general investor who trusts the financial institutions.

The book: One of the ‘shorts’ was John Paulson.

The movie: John Paulson, the most notorious ‘big short’, wasn’t in the movie.

The book: One of the ‘longs’ was American International Group (AIG).

The movie: There was no significant mention of AIG.

The book: One of the ‘longs’ were the proprietary traders @ Bear Stearns & Lehman Brothers.

The movie: There was no significant mention of Bear or Lehman’s duplicity in manipulating subprime debt prices, only scenes that described their demise.

The book: One of the ‘longs’ were the German institutional funds in Dusseldorf that were buyers of subprime securities that didn’t beware.

The movie: There was no significant mention of German fund managers that bought these toxic mortgage assets in the movie, except that they too took heavy losses.

The book: Morgan Stanley was also one of the ‘longs’. Firmly believing that wagers on the housing market were safe bets, Morgan Stanley’s Howie Holden was heavily long AAA-rated tranches of CDOs (the slices that were backed by solid mortgages), along with other proprietary traders at the firm, but at the same time, in…

The movie: “Mark Baum” at Morgan Stanley’s hedge fund FrontPoint Partners buys CDS that bet against all mortgage debt, from low-rated subprime debt to AAA-rated mortgage debt from Deutsche bank’s “Jared Vennett”. Meaning “Mark Baum” is betting against his own firm’s long positions in mortgage debt, so his desk’s gains will not only come from the financial carnage of the American people, but his own fellow employees. A scene in the movie depicts him finding out from his previous assistant, now working for Morgan Stanley’s risk department, the extent of the mortgage CDO losses, 10x more than he imagined, of the other traders at his firm. Coming from a family with a history of suffering from depression, this devastates “Mark Baum” psychologically, and even when eventually proven right, he instead sulks, and out of guilt delays taking profits, nor ever says ‘I told you so’.

The book: One of the ‘longs’ was Greg Lipman @ Deutsche Bank. Deutsche Bank’s proprietary trader Greg Lipmann was at first long subprime tainted CDOs along with other desks at Deutsche to initially get involved in the subprime market. Lipmann then, in….

The movie: …goes rogue, unwinds his personal long positions, and starts soliciting Deutsche Bank mortgage CDS soon after getting wind of what Dr. Michael Burry is doing at Goldman. As a savvy proprietary trader at Deutsche Bank, Ryan Gosling playing “Jared Vennett” believes he too can cash in on Burry’s beliefs, and sells “Mark Baum” mortgage debt CDS, despite being bets against Deutsche’s own long positions in subprime tainted CDOs. Furthermore, unlike the CDS that Goldman sold to Dr. Burry, the CDS that “Jared Vennett” sells to FrontPoint Partners was his trading idea, and because the expected windfall will be so large, he shamelessly explains that Deutsche intends to rake in a huge mark-up for themselves when “Mark Baum” unwinds the position. In the movie, talking directly to the camera while smugly showing off his 8-figure bonus check, the cold-blooded “Jared Vennett” of Deutsche feels no remorse whatsoever that he personally profited off the financial ruin of fellow employees as well as fellow citizens.

The book: While practically everyone was somehow long or short during the housing boom, in a comically-tragic yet impressive display of financial engineering, Goldman Sachs played both sides of the subprime market to perfection. With newly-created, subprime credit default swaps (CDS), not only did Goldman ‘replicate’ the risk exposure of the most toxic of subprime debt by writing contracts insuring it to sell to their clients, the shorts, wanting to bet against it, Goldman then took these CDS contracts that they wrote, that placed Goldman at risk, and fraudulently laundered that risk TO THEIR OWN CLIENTS. By cleverly inserting Goldman’s newly-created subprime CDS inside legitimate, prime AAA-rated collateralized debt obligations (CDOs), so-called ‘Synthetic CDOs’…and immediately turning them around…selling them to their other clients…the longs, wanting to bet on subprime debt…Goldman was profiting from both the buyers and the sellers in the subprime mortgage market…the whole time…without taking any risk! Here’s how that worked: CDS, or financial insurance, is not the same as traditional insurance. You can write and sell a CDS, insure a financial product, to a person who is not the owner of the ‘property’ being insured. On Main Street, you cannot do that, you cannot insure a house against a fire and offer to sell the policy to someone other than the owner of that house, like an unfriendly neighbor, for obvious reasons. By law a home fire insurance policy must have what is known as ‘insurable interest’, but on Wall Street you can write a CDS, insure any bond, any debt instrument, owned by one person, and not only sell that contract to the owner of that bond, but to anyone else, and write as many contracts and sell them to as many people as you want. As a newly-created replication of that original debt, a newly-created ‘synthetic’ risk, these newly-created CDS multiply the loss potential. This is because the buyer, or holder of the original bond that the CDS is derived from (why they call CDS a ‘derivative’), plus all the sellers, or writers of any additional CDS contracts insuring that debt, all of those people lose money, a potentially devastating amount, if just that one, single, underlying bond defaults. Dr. Mike Burry asked Goldman to insure particular subprime debts that he had researched and concluded had the best chances of defaulting, not because he owned that debt, not because he had an ‘insurable interest’ in that debt, not to wisely hedge against that debt, but only because, like a cunning and unfriendly neighbor, he just wanted to bet against that debt. Worse than the guy that yells “Fire” in a crowded movie theater that isn’t on fire, this is like a guy that doesn’t yell “Fire” in a crowded movie theater that IS on fire because he would rather call his broker and make money off the carnage. Burry and Goldman couldn’t care less about the worldwide financial damage those subprime mortgages would inflict after burning down, only how could they multiply the damage, to profit immensely from it. To be fair to Burry and the other ‘big shorts’, at least they were taking a position, they had ‘skin in the game’, they were exposed to losses, the entire principal amount that they invested, if they were wrong about betting against the mortgage market, but Goldman cleverly was not taking any risk at all. Goldman wrote this insurance, this CDS, and sold it to Burry, the CDS holder. As the seller, or the writer of this insurance policy, this CDS contract, Goldman effectively created a replication of that debt, and Goldman was now temporarily exposed, Goldman was at risk, for this ‘synthetic’ debt, as well as, just as much as, the original holder of that subprime debt, that low-rated bond underlying Goldman’s contract. Goldman, instead of carrying this risk, this ‘synthetic’ exposure, that they just created for one client that wants to short subprime debt, then needs to lay it off on another client that wants to go long subprime debt. So the trick for Goldman was to devise a way to get clients to take, to become the writers, of these contracts. No client would ever agree to write a fire insurance policy on a single movie theater that had smoke coming out of it, but a client could be duped into doing just that if that very same contract was buried deep inside a diversified portfolio of randomly-selected high-grade bonds. That is exactly what Goldman did, they took actual AAA-rated mortgage CDOs that were paying bond interest from prime mortgage bond debt, inconspicuously blended in their newly-concocted CDS contracts insuring junk debts specifically picked by a ‘big short’, and unloaded it on another client that thought they were just investing in, going long on, mortgage debt. Previously AAA-rated CDOs, renamed ‘Synthetic CDOs’ because they contained newly-created ‘synthetic’ CDS contracts that were insuring subprime debt, was sold to Goldman clients like American International Group (AIG). That was Goldman’s grift, that was what you could call The Big Con. Instead of buying plain-vanilla CDOs yielding (mortgage bond) interest payments, a Goldman client, the mark, like AIG, were unknowingly buying financial weapons of mass destruction that were actually paying subprime CDS (insurance policy) premiums. Same difference if you were an investor seeking income and you were bullish on subprime debt, right (?) Sure, until the day that investor finds out after it’s too late that the CDOs that they just bought…from Goldman’s traders…contain risk on subprime debts…that were hand-picked by Goldman’s other client, a hedge-fund expert…who was convinced they would default….because those specific debts had the greatest probability to default….so that expert shorted those particular subprime risks… by replicating that dangerous risk…disguising it as an innocent little CDS…created inside Goldman’s laboratory…and because Goldman didn’t want to touch it with a ten-foot pole…quietly slipped that toxic subprime CDS into your CDO. While everyone from the buyers of these securities, to the regulators of these securities, to the credit rating agencies getting paid pretending to know how risky these securities were, Goldman kept profiting, with no skin in the game, as long as everyone kept drinking that housing-boom Kool-Aid…

The movie: Goldman Sachs is portrayed as only a counter-party, as Dr. Michael Burry’s broker, and that the Synthetic CDOs that Goldman later created and sold to lay off their own exposure to subprime debt was just an innocent ‘side bet’, like ‘people standing behind blackjack players making personal wagers.’

The book: Morgan Stanley proprietary traders avoided taking bigger losses on their long CDO positions by using inside foreclosure trend information to front-run the market. Merrill Lynch was able to sidestep losses in their long CDO positions by colluding with other banks to help “bespoke”, or freeze market prices of CDS at grossly inflated levels long enough until they could dump most of their losing positions on their own clients.

The movie: doesn’t specifically finger any bank, just ‘the crooks at the banks’. In separate scenes showing each of three big shorts exasperated and even terrified they were being conned while it took so long for the prices of their CDS positions to reflect actual market conditions.

The book: For the crimes committed that caused the 2008 Credit Crisis, ONLY ONE PERSON went to jail.

The movie: predicts that the blame would go to ‘the immigrants and the poor people’ who caused the housing bubble and shows the only person, Kareem Serageldin, an Egyptian-born trader at Credit Suisse, the only person that went to jail for crimes committed in the 2008 World Financial Credit Crisis.

Meanwhile, over in Staten Island, NY, a black man named Eric Garner died. He choked to death…while resisting arrest…on the charge of selling loose cigarettes…for a dollar each. (Take a knee and ponder that.)

NOTE: This is not an exact description of the events leading up to and causing the 2008 Credit Crisis, only my side-by-side comparison of both the book and the movie, The Big Short, which pushes a narrative that the ‘big shorts’ were geniuses, or even prophets. In reality, many other people also knew that there was a dangerous housing bubble, over-inflated with borrowed money, about to burst, and positioned themselves accordingly (i.e. for every single home buyer during the housing boom that was convinced home prices would go higher, there was a seller that wasn’t). The ‘big shorts’ were just good at their jobs, and were even better at timing their bets…

The movie also veers away from incriminating any of the banks, unlike the book, which puts most of the blame for the nationwide, unbridled greed just on the banks, and especially Goldman. At the end of the day, the actions of the banks may not have been criminal, but they were certainly mistakes, and the banks have been punished for those mistakes…

In April 2016, Goldman agreed to pay a fine of $5.1 billion to the US Department of Justice, part of a January 14, 2016 settlement reached with the US federal gov’t for Goldman’s role in “miss-selling” mortgage securities in the run-up to the financial crisis. As per the Justice Department, the settlement also “preserves the government’s ability to bring criminal charges against Goldman and does not release any individuals from potential criminal or civil liability.”

In October 2016, the US Department of Justice demanded that Deutsche Bank pay an additional $14B fine for “miss-selling” toxic mortgage securities to investors including mortgage giants Fannie Mae and Freddie Mac. According to Bloomberg, since 2008, Deutsche Bank had already paid US authorities more than $9B in fines for foreign-currency rate manipulation, interbank interest rate manipulation, precious metals pricing manipulation, and whether it facilitated transactions that helped investors illegally transfer billions of dollars out of Russia, a US sanctions violation. The threat of this additional $14B fine (an amount almost as much as Deutsche’s entire value) pushed the bank’s shares to record lows. The following month, officials at Deutsche reached a $7.2B settlement, the largest amount ever paid to resolve charges against a single entity for misleading investors in residential mortgage-backed securities, according to the US Department of Justice.

In July 2017, The Royal Bank of Scotland (RBS), still 72% owned by the British government after a bailout during the financial crisis, agreed to pay $5.5B to the US Federal Housing Finance Agency to resolve claims and settlements related to its underwriting and sale of toxic mortgage securities to Fannie Mae and Freddie Mac. For sales of mortgage-backed securities to other damaged parties, RBS is still under investigation by the US Justice Department and will also pay further penalties presently estimated to be an additional $10B.

For breaching a variety of financial regulations that led to the 2008 credit crisis, twenty of the world’s biggest banks have paid approximately A QUARTER OF A TRILLION DOLLARS in compensation in the last seven years, according to Reuters. Aside from “miss-selling” mortgage securities, these banks and other financial institutions were fined “for misdeeds ranging from manipulation of currency and interest rate markets and compensating customers who were wrongly sold mortgages in the US or insurance products in Britain.”

P.S. This is a case study why you can’t give the free market’s ‘Invisible hand’ full control over the sword of capitalism.

Thanks for reading,

eddie d


Buy and Hold

Bearish market sentiment is at a five-year high, so should you be feeling the same?

Look at the previous peaks on this graph:  Short Interest near five year high

The US Treasury bond downgrade in August 2011…The Euro zone crisis in ’12…Last week’s and last summer’s Shanghai Composite Index selloffs.

Market sentiment is usually considered as a contrarian indicator, a good thing to bet against, especially when it is more extreme. Very bearish sentiment is usually followed by the market going up more than normal. Buying low-cost, broad-based, index funds when they are on sale is an easy way to get rich.

‘Clinton Surplus Myth’ Myth

There are tons of delusional things said on the airwaves these days. Most are a simple variation that rhymes with a similar doomsday theme. One example, since our federal government’s debt is so unsustainable, before the entire US economic apparatus implodes, we should abolish the Fed, and go back to a gold standard, blah, blah. Sometimes I can’t tell the difference if these people are actually serious, or are they just hoping for ‘likes’ on their Facebook page, looking for orders on their websites, playing us for ratings, or maybe even pandering for primary election votes. If that’s the case, then I think these people are brilliant marketing geniuses…


That is not always the case with some claims, however. A bizarre statement I heard recently to substantiate an accusation of federal financial finagling was that the Clinton surpluses were a hoax, and that instead of those four years of surpluses, each of them were deficits. If you search ‘Clinton surplus myth’, you will see that there are many people that actually believe this. The main rationale of the ‘Clinton surplus myth’ mentality (which defies accounting reality) is that in each of those four Clinton surplus years, the total public debt, commonly known as the national debt, increased, and thus, that cancels out any ‘surplus’. How could there be a federal budget surplus, they claim, if total federal gov’t debt rose? How could the gov’t borrowing more money in one year be called a surplus in that year? More specifically, they ask how can the gov’t say there was a Clinton surplus of $237 billion in fiscal year 2000, if the total national debt that year increased $18 billion?


I will attempt to explain why, first, with a short answer. The reason why, is that instead of the US federal gov’t borrowing that $18 billion from someone else, the US federal gov’t borrowed that $18 billion from itself. The US federal gov’t has two books, or two set of ledgers, one that counts debt borrowed from others (“on-budget”), and another that counts debt borrowed from itself (“off-budget”). Spending $18 billion that you got from someone else’s pocket in exchange for an IOU that went into someone else’s pocket (“on-budget”) is an outright loss of money, and considered a liability, but spending $18 billion from your own pocket in exchange for an IOU that went into your own pocket (“off-budget”) is considered both an asset to yourself and a liability to yourself of equal amounts that, at the present moment, cancel each other out. ‘At the present moment’ is the key to why the Clinton surpluses were real. If you spend money today, money that is in your own pocket, but money that is earmarked for something else, some future expense, then that is not deficit spending, it’s not a loss, nor a liability, not yet, not until that day, that day when that pending “off-budget” expense is realized. For example, if you won at poker, but before you spent the winnings, your wife made you write an IOU for the same amount payable to her, does that ‘intra-household’ IOU negate your winnings (?) It’s the same accounting construct on the consolidated federal balance sheets. Social Security and the federal gov’t, are two different pockets, but on the same pair of pants. That is why that “off-budget” debt in the year 2000 was not part of the “on-budget” surplus calculation, because that $18 billion increase in total national debt was not borrowed by the federal gov’t from others (which is an immediate liability), it was borrowed by the federal gov’t from itself (which isn’t yet a liability). When the federal gov’t ‘borrows’ from Social Security, it is ‘borrowing’ from itself, not from others, and why pending “off-budget” debt doesn’t negate any actual “on-budget” surplus.


Now here is the long answer. The US federal government has a legislated accounting construct that is quite complex. Being hard to understand, like many other issues today and throughout time, it naturally tempts a certain amount of people to be suspect of it, especially if it fits their subjective narrative. First of all, deficits and debts are two separate things. Deficits or surpluses reflect current cash flow, like entries on an income statement. Debt is a cumulative measure, like entries on a balance sheet. The US national debt ($19 trillion at this writing) is a sum of two separate things. The US national debt is the sum of public-held debt ($14 trillion) and intra-gov’t-held debt ($5 trillion). These two ‘debts’ are not both liabilities, and why they are posted separately in two different “on-budget” and “off-budget” ledger books.


The facts:


The US federal gov’t fiscal year begins on October 1st and ends on September 30th. In the fiscal year ending September 30, 2000, the US federal govt had a surplus of $237 billion, as per the front page of the Treasury Department’s ‘Monthly Treasury Statement of Receipts and Outlays of the United States Government’:  https://www.fiscal.treasury.gov/fsreports/rpt/mthTreasStmt/mts0900.pdf

The total US national debt was $ 5.655 trillion on September 30, 1999 and $ 5.673 trillion on September 30, 2000, so that was an annual increase of $18 trillion:         https://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt.htm

The total US national debt is the sum of the debt held by the public (“on-budget”) and the debt held by the gov’t (“off-budget”). The debt held by the public (owed to others) was $ 3.232 trillion on September 30, 1999 and it was $ 2.992 on September 30, 2000, so that was an “on-budget” decrease of $240 billion (The Clinton surplus). The debt held by the gov’t (‘owed’ to itself) was $ 2.423 on September 30, 1999 and $ 2.681 on September 30, 2000, so that was an “off-budget” increase of $258 billion, meaning a net $18 billion increase of both together, or, an $18 billion increase in the total US national debt:   ftp://ftp.publicdebt.treas.gov/opd/opds092000.pdf (if that link doesn’t work try https://www.treasurydirect.gov/govt/reports/pd/mspd/mspd.htm or just google search “monthly statement of the public debt of the united states september 30, 2000” and in the TreasuryDirect website click 1999, click September, click Summary Adobe Acrobat, repeat for 2000)

The ‘Clinton surplus myth’ movement points out this net $18 billion increase in total debt, and of that total $258 billion increase in govt-held debt, they specifically finger a $246 billion entry figure found in the same Monthly Treasury Statement. To find it, scroll to ‘Table 6. Schedule D’, “Net Purchases”, “Fiscal Year to Date”, “This Year”, “Grand total”. This $246 billion is that year’s increase of intra-govt debt of off-budget items, mainly Social Security. What that means is the US Treasury took that year’s “off-budget” Social Security surplus, gave the Social Security trust fund an IOU in exchange for that cash money, and spent that cash money for other “on-budget” expenditures. The myth movement says that the federal gov’t surplus of $237 billion in 2000 would not have been possible without ‘borrowing’ the Social Security surplus. Only by ‘borrowing’ that fiscal year’s $246 billion off-budget surplus and by Treasury ‘trickery’ could that be called a fiscal year ‘surplus’. According to them, if there was an actual surplus, the national debt in 2000 would have come down, instead of going up $18 billion.


There is a difference when the federal gov’t has borrowed from itself (isn’t a liability), and when the federal gov’t has borrowed from others (is a liability), or more specifically, there’s a difference between “on-budget” and “off-budget” federal gov’t debt. What confuses everybody is that these two different types of debt are added together and called the national debt which makes them seem like the same types of debt. How are these debts different? During current “on-budget” operations, if the federal govt receives less money from individual federal tax withholding, corporate federal tax, etc., than it pays out while provisioning itself, running the country, etc., that “on-budget” deficit spending is financed with newly-created money. That newly-created money was approved by Congress and also was accounted for to the penny by selling additional “marketable” securities, or Treasury bonds, to the public. These additional Treasury bonds increase the federal gov’t debt “held by the public”. Furthermore, when the federal gov’t receives more money from “off-budget” operations, like Social Security payments deducted from paychecks, above what it pays out to those “off-budget” operations, like Social Security recipients, by law it must use that surplus to buy “non-marketable” Government Account Series securities, or what I personally like to call ‘pending’ Treasury bonds. These ‘pending’ Treasury bonds increase the federal gov’t debt “held by the govt”. These ‘pending’ Treasury bonds are placed in the corresponding trust fund for future redemption, and that surplus off-budget cash money is promptly spent on current on-budget expenditures. The sum of both those Treasury bonds issued and sold by the Treasury to finance on-budget deficit spending (debt held by the public), plus all those ‘pending’ Treasury bonds posted in off-budget trust funds (debt held by the gov’t) is the total public debt, or the national debt. The key difference is, only the marketable Treasury bonds issued that coincided with the newly created money to finance on-budget deficit spending are liabilities (because they already monetized an on-budget deficit). The non-marketable securities, or ‘pending’ Treasury bonds that are sitting in trust funds like the Social Security trust fund are not liabilities until they are redeemed by the trust fund (because they have not yet monetized an off-budget deficit)…


In other words, Treasury bonds held by the public and ‘pending’ Treasury bonds held within the federal government are both considered a debt, but both are not a liability. Only debt held by the public that financed on-budget deficit spending is reported just as a liability on the consolidated financial statements, the balance sheet of the United States government. Debt held by government accounts, or the intra-gov’t-held debt, is not (yet) reported just as a liability on the consolidated balance sheet of the United States government (not until it is redeemed by the trust fund). Using basic rules of accounting, not trickery, debt held by government accounts, or the intra-gov’t-held debt, is at the moment both an asset (to those trust funds) and a liability (to the Treasury), so they presently offset each other on the consolidated balance sheet, and why that fiscal year 2000 off-budget debt is separate from that fiscal year 2000 on-budget surplus.


So how does ‘pending’ off-budget debt (which isn’t counted in the 2000 surplus) become actual on-budget debt (that is counted in the 2000 surplus)? When any off-budget trust fund has a deficit in any given year, that trust fund needs to ‘finance’ that deficit. To finance that deficit, the trust fund will hand over some of their ‘pending’ Treasury bonds to the Treasury, and the Treasury will hand over newly created dollars. Newly created dollars means deficit spending, so just as in any on-budget federal gov’t deficit spending, those newly created dollars will be accounted for to the penny with a coinciding issuance of Treasury bonds. Those previously ‘pending’ Treasury bonds will become actual Treasury bonds. That previously ‘pending’ debt held by intra-gov’t will become actual debt held by the public. That previously ‘pending’ off-budget liability (caused by trust fund surplus savings) will become an actual on-budget liability (caused by trust fund deficit spending). Whether that given fiscal year has a total annual surplus or deficit will depend on actual liabilities (which depend on that year’s actual economic performance), not ‘pending’ liabilities (which depend on a future year’s hypothetical economic performance). To see the total debt, you look at the balance sheet, which is the entire, all-time, financial picture of the US federal gov’t from the very beginning. This total debt is the cumulative total of all the years up to the year 2000, made up of both the actual liabilities, or on-budget debt held by the public (money borrowed from others), and the ‘pending’ liabilities, the ‘pending’ off-budget debt held by gov’t (money ‘borrowed’ from itself). Conversely, to see the actual cash flow, you look at the income statement, which is the actual cash money flowing in and the actual cash money flowing out, or just the current, on-budget, actual cash flow that occurred in the year 2000. The bottom line of that US federal gov’t income statement shows that in that year 2000, the amount of actual cash money the federal gov’t took in was large enough to result in an on-budget fiscal year surplus. An increase in the total debt (+$18 billion) which includes a future-day ‘pending’ debt that is posted on the consolidated balance sheet doesn’t change the yearly income statement’s present-day bottom line cash surplus (+$237 billion). A cumulative balance sheet and a current cash flow statement are separate measures, of separate values, in separate time frames, and using separate rules of accounting. Comparing them together is like comparing apples to oranges.


The Clinton-surplus-myth mentality is yet another variation of the same theme, which is a gold-standard mentality that trips up many people when talking about the federal government. This outdated thinking from a bygone era contributes to a ‘federal-government-is-the-same-as-a-household’ groupthink (patterned behavioral and self-reinforcing group dynamicthat is widely pervasive today. Since leaving the gold standard for good in 1971, the federal gov’t is no longer like a household. In the post-gold standard, modern monetary system, when the federal gov’t, the issuer of dollars, ‘borrows’ dollars, it is not the same as when a household borrows dollars. As the saying goes, you can have your own opinions, but not your own facts. According to the Treasury Monthly Statement, in fiscal year 2000, the United States government had receipts of $ 2.025 trillion and outlays of $ 1.788 trillion and “the final budget results and details a surplus of $237 billion.”  As per the nonpartisan Congressional Budget Office, the US federal budget was in surplus and the Public Debt, or “debt held by the public” (money borrowed from others) was decreased during Clinton’s second term. Rather than grasping this hard reality and instead preferring to deny the accounting science, the Clinton-surplus-is-a-myth movement wants to engage you in a childish ‘What came first, the chicken or the egg’ argument. It bothers them that Clinton took a Social Security surplus and shamelessly used it to get his budget in surplus.


I have a compromise to offer to The-Clinton-surplus-is-a-myth folks: I’ll admit to them that Social Security being in surplus gets all the credit for putting Clinton’s budget in surplus if they’ll admit that the American economy under the leadership of President Clinton was so strong that it put Social Security in surplus. If anyone says or posts otherwise, well, they won’t get a ‘like’ on their Facebook page from me.



eddie d   <eddiedelz@gmail.com>