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The Fiscal Summit Counter-Narrative: Part Five, Inflation and Hyper-inflation

1:46 pm in Uncategorized by letsgetitdone

One of the raps on deficit spending in neoliberal circles is that it will trigger substantial inflation or hyper-inflation. Even when mainstream economists grant the MMT point about the impossibility of the US becoming involuntarily insolvent, they will still insist that sustained deficit spending is a bad idea because it will inevitably lead to unmanageable inflation. A variant of their critique is that especially “pure deficit spending,” I.e. deficit spending without issuing debt instruments to absorb the increase in the money supply created by deficit spending, will be an inflation trigger.

In developing the counter-narrative of the Teach-In to the inflation/hyperinflation risk story, Marshall Auerback Corporate Spokesperson of Pinetree Capital, and a very well-known Modern Monetary Theory (MMT) blogger, gave the presentation on the topic in the title of this post.

Audios, videos, presentation slides, and transcripts for the presentation are available at selise’s site and a slightly different version of the transcripts is available from Corrente as well.

Marshall Auerback’s Presentation On Inflation and Hyper-Inflation

Marshall begins by acknowledging previous work by Rob Parenteau and Bill Mitchell on hyper-inflation in Weimar and Zimbabwe, and calls himself the hack in comparison to Rob, Bill, Randy, and the other panel participants. He then continues:

“So will the US turn into a modern day Weimar Germany? So let’s start, I know some of this is stuff we’ve gone through it before but I’m going to start with a few operational points that been already made, to show that we’re not the only ones making it. I’ve got quotes here from an economist called Abba Lerner, he is often known as the father of functional finance. He was a Keynesian, I think it’s fair to say that he’s one of the progenitors or forbearers of modern monetary theory.

“So his comment, and it is as Warren gave you an illustration of it before, he said, “The modern state can make anything it chooses generally acceptable as money… It is true that a simple declaration,” as Warren showed you, “that such and such money will not do, even if backed by the most convincing constitutional evidence of the state’s absolute sovereignty. But if the state is willing to accept the proposed money in payment of taxes and other obligations to itself, the trick is done.””

LetsGetItDone Comment: That’s the very important MMT idea of tax-driven money. discussed also by Stephanie, and Warren, and in this important post of Randy’s.

“The other point, we talked about the purpose of taxes, we said they serve to regulate aggregate demand, not to raise money so that government can afford to spend. And again, the other idea that I think was a very important insight by Lerner is that he said that, “The central ideas of government fiscal policy is spending and its taxing, its borrowing, its repayments of loans, its issuance of new money,” etc. etc. “should be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrines of what is sound or unsound.” So we look at the impact of policy, the effects of policy. That’s ultimately what we’re looking at. We’re not particularly interested in some vague notion of a debt-to-GDP ratio which is considered unsustainable or the general concept of fiscal unsustainability.”

“The constraint as we’ve said is inflation. It’s not fiscal largesse or fiscal profligacy per se.. . . . “

LetsGetItDone Comment: And this too, is a very essential idea of MMT. When planning fiscal policy or legislation with fiscal implications, try to project the likely impact on real things like unemployment, price stability, crime, poverty, family integration, education, health, etc; not abstract financial indicators such as the debt, the deficit, or the debt-to-GDP ratio, which have no consequences in themselves for Governments like the United States which are sovereign in their own fiat currency. Marshall goes on:

”Okay, let’s go into the history lesson. So when we look at Weimar… let’s take a step back. When we talk about these operational realities that I’ve mentioned earlier invariably, I mean I can tell you 9 times out of 10, ah, you look at the Huffington Post blog yesterday you could, we get comments saying, Well you’re just going to get hyper inflate you’re going to turn this country into a modern day Weimar Germany. So I’ve heard this so many times, and so did Rob, that we decided to actually look at the history. Clearly, Weimar Germany came into existence after WWI, a very damaging war, hugely more damaging in many respects than WWII. The country’s productive capacity was absolutely shattered, and more importantly virtually the entire world was really pissed off with Germany and as a result the war reparations claims that they imposed on the country were extremely punitive.

“And many people at the time, such as Keynes, for example, realized that this imposed a tremendously harsh economic consequences on Germany and that the imposition itself was going to be impossible to be repaid. As I say here in 1919 it was reported that the German budget deficit was equal to half GDP. Half GDP. And what are we talking about in the US today? We’re talking about 8% of GDP I think it may have peaked at 10% and that’s including TARP, so let’s get a sense of perspective here.”

LetsGetItDone Comment: Marshall’s reference above is to one of his slides.

“By 1921 in Germany, war reparation payments equaled one third of government spending. One third. So I think that is an important consideration to look at and I think more importantly is that the payments were demanded in a foreign currency. They weren’t being demanded in Deutsche Marks. They were being demanded in, the governments demanded huge gold reparations.

“Now by contrast as I said in the US you’ve got a fiscal deficit this year, I think it’s projected at, I think the latest out of the CBO is about eight and a half per cent of GDP, assuming that GDP is what everyone thinks it will be.

“So the scale of the fiscal responses, although large, are nothing like they were in Weimar Germany. So there is a big difference right there. Weimar Germany then didn’t have the gold so they had to aggressively sell their own currency, buy the foreign currency in the form of the financial markets. You keep doing that over, and over again, it drives down the value of your own currency, which causes the prices of goods to go ever higher, and that starts the inflationary process. As I said earlier the US does not do this. The US gets to use debt in its own free floating non-convertible currency. You can’t exchange the dollar into anything, much as some people would like that. So there’s no external constraint along the same lines as Weimar Germany.”

Marshall goes on to point out there is also a big difference between the contemporary US and Weimar in the economic and political power of the trade unions to negotiate wage increases to keep up with any inflation that might occur. He intends no negative evaluation of trade unions and says “. . . in fact I think if we had more unions in this country, and stronger unions it would actually be better.” But he makes the point that In Weimar Germany the power of the unions created “. . . . an automatic feedback mechanism from price inflation to wage hikes and it keeps going on and on and on.” He points out that we don’t have that in the US or any other country right now, and that without such mechanisms nominal wage and salary growth can’t keep up with inflation, so if prices go up, deflation, not hyper-inflation will follow. And he continues:

“So what finally broke down Weimar Germany, the straw that broke the camels back was by May 1921, the so-called London Ultimatum. The Germans were asked to make an annual installment in payments of 2 billion in gold or foreign currency, in addition to a claim on just over a quarter of the value of German exports.

“So an extremely punitive measure, it was a condition virtually impossible to fulfill. The Germans attempted to fulfill it. They accumulated foreign exchange by paying with treasury bills and commercial debts denominated in marks, but the mark simply went into free fall. So they finally said, “You know, we can’t pay up anymore.” You are seeing a small parallel to, with that today in Greece, its not to the same degree but obviously its… the positions are reversed, it’s the Germans imposing conditions on the Greeks, saying “You know you have to pay X” even though the Greeks don’t have the money, so they’re trying to get blood out of a stone. But we don’t clearly have hyper-inflation in Greece, but it is an interesting parallel.

So, then French and Belgian troops occupied the Ruhr, a region employing 25% of the German workforce, the largest chunk of its manufacturing capacity, and accounting for very much of its exports, and then sums up by saying that first the War destroyed much of their manufacturing capacity, then the troops take away much of what’s left of their manufacturing capacity, “. . . and then you say, “Now pay us the money.” And you can see why a central bank printing money in that situation, or creating currency in that situation, is not going to be able to do so, won’t be able to call forth goods and services. And you do create the conditions for inflation, and then hyperinflation. So again, it’s a very different situation from what we have today in the US.”

Next, Marshall moves on to Zimbabwe, and gives a history. Zimbabwe had a civil war lasting through the 1960s and 70s. It was a low intensity guerilla war which became more serious and ended when the British brokered an agreement. Mugabe became President in 1980, heading a coalition government, but even then “a large chunk” of its “productive capacity had been destroyed, even before the onset of the land reform.”

Zimbabwe recovered some under Mugabe, at first. Growth was at 11% in 1980, was positive “…. until a severe drought in the early 1990s. Again, there was recovery, and a growing economy in spite of some problems with productive capacity. But Zimbabwe had a legacy of colonialism and the white farmers had “. . . absolutely gorgeous palatial mansions,” lots of staff and “. . . . a cushy life style.”

“And 250,000 whites basically controlled over 70% of the most productive agriculture in the country, a nation of six million people, so that’s clearly a socially unsustainable situation.

“There were many attempts by the government to coax the white farmers into giving up a little then in order to make for a more equitable situation later and there was no give. As an aside, I think we talk a lot about income inequality in this country and to me, if its not something that’s addressed in a decent amount of time, you do get a huge socially unsustainable situation which will beget an even more extreme political response later. So I think it is in that regard the situation of what’s happened in Zimbabwe in terms of the misguided reforms that were subsequently introduced, it’s a legacy of the fact that we didn’t deal with the problem of inequality much earlier in that country.”

Mugabe begins a misguided land reform program. “He seizes land from the whites, gives it to, mostly . . . . his cronies in the ZANU party.” But they don’t know how to run farms, so agricultural production collapsed “. . . by almost 50%.” So, Zimbabwe had to use foreign exchange reserves to import food, and it didn’t have any reserves left to pay for “. . . . raw materials, so manufacturing capacity absolutely collapses and the end result is that you have about 80% unemployment.” Marshall points to statistics “. . . from Bill Mitchell, output fell by 29%… manufacturing output fell by 29% in 2005, 18% in 2006, 28% in 2007. It’s worse than what you had in Latvia over the last few years, again, though self-inflicted.”


– the land reform destroys domestic food production,
– foreign exchange is used to buy food to prevent starvation,
– there’s no foreign currency to buy raw materials, so
– manufacturing output collapses, and
– you have 80% unemployment.
– Mr. and Mrs. Mugabe use foreign exchange reserves for personal shopping trips to London
— the government uses the rest of the foreign exchange reserves to increase net spending without adding to productive capacity
– So, then Mugabe starts printing money, with no productive capacity to back it, and an inability to collect taxes to drive the value of the currency, and we have the famous hyper-inflation.

The situation there, of course, is wholly different from the US case. “There are other examples of this. The loss of taxing authority during the civil war by the Confederacy is another example of a situation where a government’s inability to impose a tax ultimately did create hyper-inflationary conditions.”

And he follows with:

”Any bad government can wreck an economy if it wants to, that’s quite evident. A sensible government using fiscal, the path of fiscal capacity provided by a fiat monetary currency system can always generate full employment and yet sustain price stability. Now I know we’re going to be talking about this later, but one of the things I’d like to talk about briefly is productive capacity.

“We talk about calling forth productive capacity and, as a few people have mentioned earlier, the most effective means of calling forth productive capacity is by ensuring that you have a productive labor force. And one of the means by which you insure that you have a productive labor force is by establishing a government job guarantee program, which I think will be discussed at greater length later. The point is that if you have a government that has shovel-ready labor, ready to be piled back into the private sector when private sector demand arises, not only is this good social policy but it actually means that you do create non-inflationary conditions because it means you are effectively retaining productive capacity, which can be used.

“If you have long-term unemployed, the social pathologies build up and you actually… these types of workers lose their productivity. So in fact even though you might have significant output gaps via unemployment, if you have long term unemployment it does create, it can potentially create difficulties if you don’t have these people in a position where they can actually call something back, bring something back into the economy as a whole. So I think that’s an important conclusion to draw as well.”

Marshall then points out that he and Warren Mosler often talk to people who compare the US to Greece and Portugal and who say that the US will eventually “default” on its debt. They then ask then whether they mean the US will fail to make SS or bondholder payments when due.

The doubters of debt then reply by saying: “No, no what we mean by that is that the currency is going to fall so much that you’re going to get huge amounts of inflation and therefore that is tantamount to insolvency.” Marshall and Warren have heard this from Caroline Baum of Bloomberg, Martin Wolf of the Financial Times, and also Charles Goodheart, and Marshall says:

”The only point I’ve made to these people is that if you buy a credit default swap in a country like the US or Germany, or any country in fact, you don’t get paid out if they run a rate of inflation. It’d be nice, I mean I’d love to, I’d buy credit-default swaps in every single country that I could find, actually, because anytime they run an inflation, any rate of inflation I can get paid. But clearly that’s not the way that we define default. So again, misleading terminology, misleading hints, are all examples. You can always call people on that and I think we should do so much more aggressively in the future.”

LetsGetItDone Comment: So, that’s the answer to the causes of hyper-inflation. “Printing money,” may be one ingredient in causing hyper-inflation; but it is not sufficient to cause it. Also, necessary, is the destruction or loss of a large percentage of a nation’s productive capacity, and, a strong need to get foreign exchange for some essential purpose. In addition, it helps to feed hyper-inflation if labor is in a position to increase wages in response to price increases, creating a feedback loop feeding price increases. Under these conditions, both demand-pull inflation, and cost-push inflation can feed hyper-inflation.

Marshall Auerback’s talk was followed by a Q and A session. I’ll go through that and add comments. But before I do, I’ll provide some follow-up references on the subjects treated in Marshall’s presentation appearing since the Fiscal Sustainability Teach-In. Marshall Auerback hasn’t written very much inflation and hyperinflation that I could find since the Conference. However, Bill Mitchell, Randy Wray, and Scott Fullwiler written some excellent posts. Here, here, and here, are Bill’s posts. Here, here,, and here, are Randy’s.

Scott Fullwiler also made contributions: here, and here. John Harvey and Eric Tymoigne contributed two posts on the quantity theory of money here, and here. Cullen Roche also did an important paper using 10 case studies to examine the claim that printing money causes inflation.

Finally, I’ve done some posts relating to MMT and Inflation too: here, here, and here.

SESSION 4: “Inflation and Hyper-inflation” – Q&A

Warren Mosler:

“Maurice [Samuels] and I went to Rome in 1993, after coming up with the idea that governments don’t default because, in their own currency, because all they’re doing is spending first and then collecting later. The securities function for interest rate maintenance and not to fund the debt. And a paper came out of that called Soft Currency Economics, and afterwards, I ran into Randy and Bill and Pavlina and then they all started looking up the history of these ideas. And so it’s interesting we came up with ideas first and then found the history afterwards. Which is not necessarily normally the way things work. We then discovered Lerner, we discovered Knapp, we discovered Innes.

“Now we’ve discovered somebody last week, Ruml, is that his name? From 1946 the Federal Reserve president of New York, who said the same thing we’ve been saying about quantitative easing. You notice things, we see how they work, then we go back in history and find reasonably prominent people who’ve said the same thing. Secretary of the Treasury Memminger, from the Confederacy, said the same thing about how currency worked and explained that’s how he was going to set it up. So what happens is, I think historians who don’t know how the currency works don’t find these things because they’re not looking for them. You have to have enough knowledge of what, when you’re looking at something, about circumstances to be able to recognize them as any kind of value.

“What’s that thing that was found back, the ball with the holes in it from some four thousand years ago, which they’ve all said was a means of accounting. It was a clay ball with holes in it where pebbles would fit in. And I’m saying no, those were used for money because you would, what you do is you have the clay ball and the stone would fit in when you took it out and spent it that would be the thing you’d accept for taxes. You knew it was the same stone when it fit into that clay ball. Now that’s a monetary mechanism. All the record books show that this thing was an accounting mechanism to keep track of things with these stones you stuck in. I think history is going to more and more find the things we’re talking about.”

LetsGetItDone Comment: This reminds me of a story told of Karl Popper. (I read it, I believe, in work from Bill Bartley, or Peter Munz, but can’t locate it right now. Anyway, it is said that Popper would begin his class on scientific method, by walking to the lecture hall and saying to his students “observe,” and then walking out. Some moments later he would come back into the room and get the inevitable question: “observe what?”

He would then use that as a jumping off point to teach the lesson that “observation” could not be performed without theoretical presuppositions guiding us toward what it is we’re supposed to observe. To observe, we must know what we ought not to see, and what we ought to see. Above Warren tells us that the MMT theory about how currency works leads people to observe and find things they would never have observed otherwise.

Bill Mitchell:

”I think the point about Marshall’s talk is very clear and really easy to understand in terms of the public debate now and the simple way of saying it. Not to say that Marshall wasn’t exquisite in his oratory [laughter] but the simple way of saying it, if you take an economy, you trash about 60 or 70% of its productive capacity then any spending will start to generate inflation. And if you wanted to avoid hyperinflation in Zimbabwe then you would have had to have had mass deaths of the population from starvation. Private investment would have had to come to virtually a sudden halt, because you’ve just lost all that supply side. So, whenever anyone raises at your dinner parties about Zimbabwe. It had nothing to do with demand. It was a supply issue. They trashed their supply.

“And the last I know, in the US you’re doing a pretty good job of trashing your supply at the moment, running down the capacity of your work force and your industrial structure, but you haven’t done it yet and the companies are still out there, there are still workers that will work for them if there’s enough demand for the products and all you need to do is get the production, your supply side working again. In Zimbabwe they lost it. It was non existent. About 60-70% was lost. That’s why they had hyperinflation.”

LetsGetItDone Comment: Bill’s summary is admirably simple. If you trash your supply and then try government deficit spending, then you risk hyper-inflation. But in the two years, since the Teach-In, the US and other industrial nations have been “trashing their supply,” in the name of “fiscal responsibility,” and also avoiding deficit spending which they think will lead to inflation. If they continue to do that for a decade without taking decisive action to create full employment, we may create the preconditions for serious inflation and have only the neoliberals to blame.

L. Randall Wray:

”I’ll add something on the Confederacy because it helps to drive home points we’ve made in every one of these sessions. So yeah, the Secretary of the Treasury was trying to tell the government, look we need the taxes to support the currency, because taxes drive the currency. But the government was saying, well hold it, we’re already putting such a huge burden on our population because they’ve got to fight the war and we’re taking all the resources away from them for the war effort and we don’t want to burden them also with the taxes. Okay, but see, our point is you’ve got to have the taxes in order to match the resources that you’re withdrawing. Okay, it’s in real terms. You’ve got to reduce the demand with the tax system and you also have to have a reason why people will accept the currency. And so people would not accept the currency and that is why they had to just continually print out more and more and more.”

Pavlina Tcherneva:

“On the point of hyperinflation, I think the key components here are a supply shock, a tax collection fall out, but also I think you have to have a ratchet that you could have something that fuels additional expenditure. And in most cases that you observe around the world that have hyperinflation, what was the initial inflationary shock was fueled by some sort of indexation, whether it was of wages or prices. And I think that falling off of the tax base will do that too, but you could fuel it artificially as opposed to what we were saying earlier that you have to let inflation dissipate by one mechanism or another through the economy.”

LetsGetItDone Comment: Pavlina adds the general idea of “the ratchet,” which Marshall talked about in the particular historical case of Weimar Labor Unions. There’s no ratchet in the US with the power to stop the bursting of an inflation bubble long before hyper-inflation is reached.

Next, came two questions from Edward Harrison and the ensuing dialogue. His first question is how the indexing of SS and “things of that nature” plays into the possibility of hyper-inflation. Warren replied that the real issue is whether it causes a shortage of real resources or not due to “over-provisoning” a sector of the population? Randy agrees that it might be a problem in the future once full employment is reached.

Ed’s second question relates to whether a country with a sovereign currency that issues debt could have an increasing interest rate scenario that would cause “imported inflation via currency depreciation”. Warren replied that the Federal Reserve could set interest rates “politically,”and that Japan has kept them “at zero for 20 years.” to which Ed replies:

”Then, you know, they set the short-term rate but the long term rate is effectively the imputed Federal Reserve funds rate going forward.”

Warren Mosler: replies by saying “Right, right. But let me suggest they also can set the long rate if they want to.” Ed, says he just said that, but it is “an ideological, a political decision.” Warren reiterates that if the Fed says that the Fed Funds Rate will stay at zero for 10 years, than a 10-year bond will be at zero. And Ed, again agrees but says that he wouldn’t support that, and lots of other people wouldn’t either, and that he thinks that’s a political problem. And then Warren says:

”Okay, and the Treasury does the opposite when it issues long. It’s setting rates higher than otherwise, so either way the government is setting long-term rates now — either by default or by active policy, or lack of it.”

And then Warren goes on to argue that zero rates are likely to be deflationary. It is a long and good argument and you should see the transcript or the video for it at selise’s site. He ends with:

”A monopolist always sets price and lets quantity adjust. With a currency monopoly we do the opposite. We set the budget and let the price adjust, well of course it’s going to be chaotic like it is, but we have the ability to set price and let quantity adjust. In other words just be on the bid side of the market and not pay the offered side. And that’s where Bill’s JG and Randy’s ELR comes in, where in a market economy you only need to set one price, in this case it’s the price of unskilled labor, and we can get into that later, I think it’s . . . .” [inaudible]

And then Bill Mitchell adds:

”Well if I keep talking I’ll stay awake, so [laughter]. There’s just a couple of points I’d make and Ed, your first premise is disputable. It’s the premise that’s always wheeled out, but it’s not necessarily inevitable.

“First of all, a depreciation in the currency is not inflation. It’s a once-off price adjustment, inasmuch as import prices are weighted in your CPI or whatever your measure of inflation is, it’s just a once-off. For that to become inflationary there has to be some secondary effects where the participants in the real income distribution don’t agree to share the real income loss. . . . .

“Yeah. So depreciation isn’t inflation; that’s a myth. That’s a myth that’s commonly put out there.”

Ed replies with “If your currency goes down, doesn’t that almost naturally mean…: and Bill replies: “It doesn’t naturally do anything.”

There follows an exchange among Ed, Warren, and Bill, about the price of real resources going up. With Bill and Warren pointing out that Ed is talking about a one-time price shift upwards and Warren saying that inflation means continuous rice increases. Ed points out it’s a definitional question, and Warren and Bill agree with this but stick with their definition.

LetsGetItDone Comment: This exchange over definitions didn’t quite get to the point as I see it. Here are some price increase phenomena: 1) one-time price adjustment to a shock to the economy; 2) a constant rate of price increase from one time period to another, say 3%; and 3) an increasing rate of the rate of price increases, say 3%, 4%, 5% etc, every time period. Now, the historical cases we call hyperinflation correspond most closely with 3). When it comes to inflation, historical cases we can point to seem to fit 2). But usually we don’t view 3% a year as “inflation,” no matter how long that rate of increase continues. In fact, we’d probably call that “price stability.” 1) is a price increase. It may be a substantial one. It may trigger 3), but, in itself, it seems a pretty loose use of terminology to call it “inflation.” To do so, seems more like labeling an event with a pejorative, rather than offering a reasonable proposal abut how to use the term “inflation.”

Bill Mitchell expands on the subject of “myths” about inflation.

”. . . That’s one of the myths out there that should be addressed. The second point is that there’s no intrinsic or inevitable relationship between a deficit position of government and the exchange rate. All the empirical work shows that there’s no systematic relationship between the fiscal balance and the exchange rate. And it’s quite plausible that you could have a strengthening exchange rate with very large deficits as a percentage of GDP if those deficits were creating conditions that allowed the capital account to improve. And if you really want to think about a country with — and I think Warren mentioned it — with a very strong currency and huge public debt, the highest in the world, and ongoing relatively large deficits think about Japan. They haven’t had any systematic meltdown in their currency; they’ve had deflation all of those years.”

Ed then points out that the yen did fall to 150 to the dollar and then rose later to 94, and says that’s a reduction in the real income of people, which Warren answers by saying that it was active policy caused by government intervention. When they abandoned the policy it went to 94. Randy Wray then joins in and offers:

“Can I try a different way of responding? Let’s put it in the framework of how does the central bank tend to react to inflation and currency depreciation? I think that you’re correct that they do tend to raise the interest rate, because they accept two — what we’re calling — myths. One is that if you raise interest rates that fights inflation, and that they should fight inflation that could result from currency depreciation and rising price of the commodities that you import for example, because raising interest rates is going to increase government spending on interest. And so you might actually stimulate the economy thinking you’re going to slow it down to fight inflation. And then the second belief is that raising interest rates helps your currency to appreciate and what Bill is telling you — there are no variables out there that economists have ever been able to find that are correlated with the currencies. There is no model that works. So there actually is no evidence that raising your interest rate appreciates your currency and as Bill was saying there’s no evidence that budget deficits are correlated with currency depreciation. Just plot the US budget deficit against our currency and there just isn’t any correlation. Sometimes currency appreciates with a budget deficit, sometimes it appreciates with a budget surplus. There just isn’t a correlation for this. But yes, I agree with you, central banks think this way and so these are to try to dispel.”

Bill Mitchell and Warren then provide a couple of jokes, about Australian currency appreciating, before the next question.

Dennis Kelleher, Rebel Capitalist: “I have a hypothetical question – I don’t know if I should have disclosed that, but – let’s assume that a government has been enlightened and started practicing modern monetary operations and understanding it, and the link between wage growth and productivity was restored. What impact or potential impact would that have on inflation?” Warren then asked Dennis to clarify which “link” he meant, which Dennis then said is the “. . . . linkage between wage growth and productivity,” which was severed in the 70s or 80s.

“It’s the same the world over. And the empirical studies have never been able to come up with a systematic relationship between wage share movements, which is what you’re really talking about, because the wage share is just the ratio of the real wage to labor productivity, and that clearly in all countries has diverged in — depending where you start — but in the eighties and nineties clearly, and there’s never never been… prior to that, you had a very close correspondence with that. I mean that was in a way the capitalists, if you like the terminology, they were smart enough to realize that you had to have someone to buy the stuff, and in the eighties and nineties they worked out a different way and that was to load the workers up with debt, and get a double whammy: steal the productivity in the first place and then load them up with debt so they could still realize the production. But we didn’t have major inflation breakouts in the fifties, in the sixties, in the seventies when there was an extremely close correspondence in all of our countries between real wage growth and productivity growth. The wage share in Australia used to be 62%, now it’s 51%. And that’s been a systematic erosion of workers’ entitlements. And prior — when it was 62% for years — I mean Nicholas Kaldor used to call it one of the stylized facts — the constancy of the wage share. And it’s only in this neoliberal era that that is no longer a stylized fact. We saw no inflation during those periods. Inflation occurs — sorry Warren — inflation occurs if expenditure nominal demand growth outstrips the real capacity of the economy to respond to that.”What’s that? . . . .

“. . . Or a supplier price shock that’s not isolated from the distributional system. And it’s quite possible that if workers are enjoying… You know in Australia we’ve had a system of national arbitration, national wage determination like a Scandinavian system, and it’s always considered that real wage… productivity growth provides the real space for nominal wage adjustments. And as long as the real wages don’t grow faster than productivity growth, you’re unlikely to get nominal demand outstripping real capacity. And the only way you could actually get ongoing aggregate demand growth that will engage your real capacity without indebting your household sector is to make sure real wages do grow in line with productivity growth.”

Warren Mosler:

”Do you know the game theory story? The other thing is, it’s a basic mainstream game model — the first year, week, of game theory tells you that the labor market, whatever that is anyway, isn’t a fair game, because people have to work to eat, and business only hires if they feel they can make an acceptable rate of profit. So the idea is, as the unemployment goes down, then people who are left unemployed, their bargaining power goes up and they’re able to negotiate higher wages, and therefore as we get to lower… you know, there are productivity differences also, but the fact is, if you’re the last guy waiting for a job, and everybody else has one, and you’re offered a job and you don’t take it, you’re still going to starve. So you don’t have any more bargaining power because the unemployment pool is lower. And we saw unemployment fall below four percent in the late nineties even with the core inflation coming down, so that whole idea that there’s this NAIRU, etc – I don’t see the support for it either in the data or in mainstream theory itself, where once you take a look at rudimentary game theory, there’s no reason to expect real wages to do anything except stagnate, unless there’s some kind of support, either through some kind of Australian type of thing, or some kind of support to at least make it more of a fair game.”

Bryce Covert: “Hi, I’m Bryce Covert, I’m with New Deal 2.0, . . . . I understand the differences between the hyperinflation of Zimbabwe and Weimar Germany but in the US, how much of a risk do we have of that, and are there things that should be done or can be done to prevent inflation that we’re not doing? Are we going to run that risk or do you think we’re pretty safe?”

Warren Mosler:

”Let me just say I think we’re very safe. But the risks of inflation are political, they’re not economic. If we’re wrong and inflation goes up to four or five percent, when we thought it was going to go to one or two, we don’t lose any wealth as a nation, we might lose at the ballot box. We don’t lose anything in terms of employment and output, and in fact most studies show it’s actually more likely to improve things. And we don’t get hurt in terms of investment or anything else like that. Again, studies show that it helps those things. But you do lose at the ballot box. So we do come up with policies that will cater to what voters want and how voters feel good about living their lives.”

Marshall Auerback:

”I’ll make an additional point. Jamie Galbraith makes this point very well, I’ve seen him make it a number of times, and he talks about the asymmetry of risk. And he simply says that, look, if you don’t spend enough, there’s a major danger of a relapse and that’s coming at a time when we already have, officially, nine and a half percent unemployment, unofficially by any honest measure it’s close to twenty percent. You have very high debt levels in the US, you still have an ongoing housing crisis. So that’s the… you have a possibility of a significant relapse, 1937 style, if you don’t spend enough. Now, if you spend too much, what’s the risk? Well you’ll get fuller employment, you’ll get a lot more capacity being used, and you might eventually get inflation. Okay, you get the inflation, you can solve that through a tax. It’s a very easy problem to solve. Or you simply stop spending, or, equally likely, the automatic stabilizers start taking care of themselves; the economy begins to grow again, more revenues come into the government, social welfare expenditures come down. So that in itself will start to create a fiscal drag on the economy so it seems to me that risks are so stunningly asymmetric in regard to not spending, and that can be done either through direct government spending or by massively cutting taxes, that if I was a trader making a bet right now, inflation-deflation bet, I think it’s still heavily weighted towards the deflation side for all the reasons I’ve outlined.”

LetsGetItDone Comment: These points by Warren and Marshall are very important. The idea that people who have no job have a weak bargaining position even in a strong economy so long as there is unemployment is right on its face for those sectors of the economy in which there’s no skill shortage. Your bargaining power is about your being able to eat and pay rent without that job offer that’s grossly inadequate.

If you can say no because you’re working for a Job Guarantee program that already pays a living wage and good benefits, then and only then is there any kind of freedom in the bargaining relationship between an employer and a prospective employee. You have to be able to say to the unreasonable employer: “take your job and shove it,” or “freedom” becomes only the freedom of the employer to coerce you.

And Marshall’s point about the asymmetric risk between continuing to have an economy with real UE rates at nearly 17%, rather than having one with zero UE and the risk of inflation at say 5% per year, is an essential one that gets very little attention. During the years between the end of WWII, and the 1970s, the public clearly preferred lower UE and substantial minimum wage rates with a risk of inflation that was not too great, but above 3%, to a stagnating labor market with very little inflation. The oil-driven cost-push inflation of the 1970s scared people, however.

And even though it wasn’t demand-pull inflation caused by Government deficit spending, which under Jimmy Carter was very low. And even though it was made much worse by the ratchet of the Fed under Paul Volcker, trying to control the money supply rather than the interest rates to break the inflation, those points escaped people, and an opening was created to sell people on the idea that inflation was a more important enemy than UE, and that fiscal policy in the form of government deficit spending on job creation wasn’t an appropriate tool for Government to use.

This was successfully done by the market fundamentalists during the Reagan Administration. And that idea has governed politics in most “advanced” Western countries since the Reagan/Thatcher successes made neo-liberalism the economic ideology of choice. Since then very few people have talked about the asymmetric level of risk between maintaining a high level of UE and having FE with some risk of moderate non-accelerating inflation, exceeding 3% annually. It’s a story we have to tell more often, because the imagined enemy of inflation has frightened Americans into accepting the real and much more dangerous enemy of high UE, lower wages, labor market stagnation, excessive inequality, and developing plutocracy.

L. Randall Wray:

”Yeah, see, we really need to get into what we mean by inflation, and we need to distinguish between different things that might cause prices to increase, even sustained price increases. So Keynes had this definition, “true inflation”. True inflation only occurs when aggregate demand is too high, that is where you’ve already fully employed your resources and you continue to increase spending. That is true inflation, and the way to fight that is by reducing aggregate demand. So that is when you need to raise taxes, cut government spending, or somehow get the private sector to stop spending, maybe clamp down on banks so they can’t lend, so people can’t borrow and spend. Okay. That’s how you fight that.

“Now what happens if you have an oil price shock? Do you fight that by reducing demand? No, that would not make any sense. You have to find another method. Now, as Bill keeps alluding to, in the kinds of institutional arrangements we have in the United States, an oil price inflation is going to end itself very quickly, because we don’t have very much indexing of wages in our society, or of government spending in our society, that is going to cause an oil price shock to lead to a wage-price spiral, or something like that. But we could have those and if we did, then the way to fight that is through institutional change, not by clamping down on aggregate demand. You want to change the institutions, maybe centralize wage bargaining would be a way to do it, and figure out how you’re going to share the costs of adjusting to higher oil prices.

“So we really need to identify why we got the inflation. If it’s because the currency is depreciating, again, in the United States this isn’t very plausible; in a country like Mexico, they have very high feed-through impacts of currency depreciation into rising prices, so they’ve got to deal with that problem, something that we don’t have to deal with. And then finally, what everyone is talking about is the current outlook, the current situation in the United States, it’s just about impossible to identify a way that we could get inflation going even if we wanted to. And this is where Japan has been for a very long time. We have to remember that we just had two billion people come into the market economy, and they all want to produce stuff and sell it to us, and they’re willing to work at very low wages, and their firms are willing to sell at very low prices. It’s just not a plausible argument, even if we got closer to full employment, that we’re going to get significant inflation pressures, other than, yes, commodities prices could go up and we could have a very short-term increase of prices, which is what Bill was trying to get to, that’s not inflation, but it is going to cause a redistribution of income.”

Bill Mitchell:

“I think it’s really telling that — and it’s sort of building on Warren’s point — that we’re always talking about inflation threats, when you’ve got, maybe — I’m not sure in America, it’s about 17.2 percent currently, I’m not sure, you use six measures? In Australia it’s 13.2. In some countries, in Spain it’s at least 30 percent once you add in underemployment — of your labor resources unemployed. And we’re worried about inflation. I mean, one of the greatest successes of the neoliberal period has been able to convince us, and as relates to — Marshall said that the risks are just asymmetric, well, so are the costs. The costs of unemployment dwarf any other economic costs you can possibly identify. And this goes back to a famous interchange between the American economists Arnold Harberger and Arthur Okun, and I think it was Tobin who said it, yes?, “How many Harberger triangles can you fit into one Okun gap?” And, for non-economists, the Harberger triangles were these measures of inefficiencies, microeconomic inefficiencies, of the sort that you might get with some inflation. And the Okun gap was the lost output from having unemployment below — above full employment. And the answer to the question, “How many of these microeconomic inefficiency measures can you fit into one macroeconomic inefficiency measure,” the answer is “Lots.” [laughter] And the point about it is that the macro costs of unemployment and lost income and all of the related social pathologies and intergenerational pathologies that follow are massive. And you’re sitting here in this country, and my country, and other countries idly sitting by wasting forever billions of dollars of income generation every day. And the only thing you can come up with is worrying about inflation. Even if inflation was a risk I wouldn’t worry about it right now because the relative costs are just not even commensurate. And that’s the big success of the neoliberal era, to get us to, to disabuse us of the notion that unemployment is a cost, and unemployment should be a policy target. We now under our central banking inflation-targeting, inflation-first type policy emphasis, we now use unemployment as a policy tool. We’re now using the most costly pathology of market-based economies as a tool to discipline something that is nowhere near the scale of cost. And that’s the success of the neoliberal era, and it’s a damn shame.”

L. Randall Wray: “You’re giving our presentation.”

Bill Mitchell: “Sorry.” [laughter] [applause]

Warren Mosler:

“It’s probably fair to say that the losses from unemployment over the last two years just in terms of lost output are far higher than all the costs of all the wars the US has ever fought in its history combined. Seriously. That’s just gone forever. Plus the ongoing losses because it’s all path-dependent. Once you change your path, you’ve lost it, the growth rates have to be much higher to get back onto path.”

Bill Mitchell: “And millions and millions of dollars a day, every day, our countries are forgoing. Millions of dollars a day. Inflation will never go anywhere near that.”

Warren Mosler: “Well, if we have twenty percent unemployment, I known not everybody’s equally valuable, but it wouldn’t surprise me if the losses are twenty percent of GDP every year, or something close to it.”

Bryce Covert: Maybe that’s the graph we need.

Warren Mosler: “Yeah, well, the output gap. So what they do, is when they compute the output gap, is they assume some minimum level of unemployment for inflation control. So even the output gaps, which are huge now, far underestimate what the actual output gap is if they didn’t have that artificial constraint of five percent unemployment, for what they call the NAIRU. And now they’re talking about moving that up to six and seven and eight percent, where Europe’s been at nine for how long? Forever, right? Ten, yeah.”

Unidentified: “I think it was Keynes who used the example of paying people to dig ditches and then paying other people to fill them up again, and I always thought it was curious that it was politically acceptable to discuss something as useless as that in a serious idea, and I gather that one of the reasons for that is that the thought of government paying people to do something useful which would compete with the private sector is kind of what makes you go into that sort of nonsense realm. And basically what I’m thinking is that there is a sort of minimum profit margin that the private sector demands, and they don’t want government competing and employing people and lowering their profit margins. And where I’m going with this is that we have repealed the laws against usury and made profit margins in certain financial endeavors very very high, and everything pales in comparison. People who would become engineers instead become bond traders. And if we’re ever going to focus people on doing useful work at perhaps lower margins, don’t we have to get a handle on usury?”

Warren Mosler: “I’ll be the first to say that the financial sector is, by and large, a total waste of human endeavor [laughter], but I’ll let Randy — my tag line is “the financial sector’s a lot more trouble than it’s worth” — but I’ll let Randy comment on putting Keynes in context. But the other thing is, the size of government is a political choice, how much we want, and it’s there for public infrastructure. Digging holes and filling them in is not public infrastructure. Go ahead and put Keynes in context.”

L. Randall Wray: “He was being sarcastic, he was saying, if you guys are so stupid you can’t think of anything useful for these people to do, we could at least hire them to dig holes and bury money, so that wasn’t his proposal. He wanted to hire people to do useful things. And let me just tell you, the next panel we’re going to talk about the job creation program, and so the people will do useful things. But the other thing is, they won’t compete with the private sector. You want to ensure that they won’t compete with the private sector; you want to complement the private sector. So I just want to clear that up, but that will be addressed in the next panel.”

Unidentified: “Do you have any notion that by repealing the laws against usury is part of what’s wrong?”

L. Randall Wray: “Well of course, what Keynes wanted was full employment, and euthanasia of the rentiers. Euthanasia of the rentiers. He wanted to drive the overnight interest rate down to zero, and I think many of us up here support that. And I think that that is a way to put finance back into its place. It’s only part of the answer. So downsizing finance, we agree with you, well I think we all agree with you, probably all of us.”


If and when the mainstream and the Petersonians accept the MMT view that a government sovereign in its own currency cannot become involuntarily insolvent, then they will still cling to the dogma that “printing money” causes inflation and hyperinflation.

That’s why it was an important part of the development of the MMT counter-narrative to examine this old quantitative theory of money, which Keynes refuted during the 1930s. Marshall’s presentation considered that question and presented plenty of reasons to think that much more is necessary than simply “printing, it also made very plain the very important ways in which the US and other currency sovereign nations differ from nations that don’t have their own sovereign currencies; including most visibly today, the nations of the Eurozone.

I think the most striking thing about this 4th session of the FS Teach-In Counter-Conference of 2010, is the very nuanced MMT view of the causes of inflation and hyperinflation, in contrast to the remarks about inflation you find in the Petersonian narrative, that came out of it. The distinction between demand-pull and cost-push inflation is very important because Government deficit spending or tax cuts are often blamed as sources of inflation and hyper-inflation, but supply problems caused by cartels or monopolies receive little discussion. Institutions which may create supply bottlenecks, and institutions which don’t regulate the development of bubbles in supply markets also don’t receive much attention. Also, the importance of a “ratchet” in keeping inflation going is often a key element in either hyperinflation or serious, but less than hyper cases.

The discussion also pointed out how inflation debates suffered from a regrettable vagueness and ambiguity when the “inflation” meme is used against policy proposals that involve deficit spending. If the types we called 1), 2), and 3) earlier aren’t distinguished, then it’s much easier to sound reasonable when claiming that government deficit spending causes inflation or hyper-inflation. But if one is restricted to type 3), an accelerating rate of price increases from time period to time period, then we can quickly understand that there hasn’t been a historical case of hyperinflation or even serious inflation in a nation like the US since fiat currencies were adopted. It also becomes plain that type 1) really isn’t inflation either; but only a substantial one-off rise in the cost of something that will just work its way through the economic system without triggering a damaging positive feedback leading to a sustainable inflation process.

Finally, the presentation and discussion were very successful in raising the issue of the trade-off between the risk of inflation under full employment vs. the reality of heavy costs paid by working people, when Government supports fiscal policy that allows an unemployed buffer stock to continue to exist. A UE “buffer stock” isn’t just some statistic. It represents millions of people who can’t find jobs for protracted periods of time, who can’t pay rent, who must be dependent on others, and frequently whose lives, education, family life, and future well-being are damaged severely by the experience. If the Government can do something about that, then I think it is obligated to do so, even at the risk of inflation.

In Part 6, I’ll cover the 5th and last session of the Fiscal Sustainability Teach-In Counter-Conference, in which Professors L. Randall Wray, and Pavlina Tcherneva presented major MMT policy initiatives including the Job Guarantee.

(Cross-posted from

The Fiscal Summit Counter-Narrative: Part Four, The Deficit, the Debt, the Debt-To-GDP Ratio, the Grandchildren, and Government Economic Policy

9:56 pm in Uncategorized by letsgetitdone

The neoliberal austerian ideology often emphasizes the consequences of excessive deficit levels, a high national debt, and a debt-to-GDP ratio. Among those supposed consequences are rapidly increasing and high interest rates in the bond markets, inability to “borrow” to pay for imports, inability to maintain spending levels on entitlements like Social Security, Medicare, and Unemployment Insurance, an increasing threat to government solvency, and a growing national debt burden that will have to someday be repaid by heavily taxed children and grandchildren.

These have been the main themes of the annual Peter G. Peterson Fiscal Summits, the latest of which was held on May 15, 2012. This series is presenting a counter-narrative to the austerian ideology being spread by Peterson and his associates, including David Walker, Robert Rubin, Bill Clinton, and President Obama, who mouth the myths of the austerians frequently and uncritically. The counter-narrative was developed at the Fiscal Sustainability Teach-In Counter-Conference held on April 28, 2010.

In developing the counter-narrative of the Teach-In, Warren Mosler, President of Valance Co. Inc., Financial Management Services, often credited with originating the synthesis of different perspectives that became Modern Monetary Theory (MMT), gave the presentation on the topic in the title of this post. My role at the FS Teach-In was to act as a non-interventionist MC and facilitator of the proceedings. So, I had the pleasure of hearing all the presentations including Warren’s lunch time effort.

At the time, I thought his presentation was very successful and much fun due to Warren’s conversational, and very open manner. But, perhaps, in part, due to my involvement in conference details, I didn’t appreciate its brilliance fully until later when I read the transcript, and perhaps not even then, since I’ve found that writing this review involved a fresh realization of the depth of Warren”s understanding of the MMT paradigm, and the breadth of his knowledge about how financial systems work both in the United States and globally. In the vernacular, Warren did “a bang-up job.”

His presentation refutes a number of popular austerian myths including: the government is running out of money; the Government can only raise money by taxing or borrowing; We can’t keep adding additional debt to “the national credit card”; We need to cut spending and entitlements; our main creditors, like China will cease to buy our debt making it impossible for us to raise money for deficit spending; our grandchildren must have the heavy burden of paying our national debt; Government deficit spending isn’t sustainable because the Government is like a household and that since households sacrifice to live within their means, Government ought to do that too; and “printing money,” i.e. deficit spending without selling debt instruments in corresponding amounts, is necessarily inflationary. Audios, videos, presentation slides, and transcripts for the presentation are available at selise’s site and a slightly different version of the transcripts is available from Corrente as well.

Warren Mosler’s Presentation On The Deficit, the Debt, the Debt-To-GDP Ratio, the Grandchildren, and Government Economic Policy

Warren begins by providing his own take on fiat currency systems. He asks: “How do you turn litter into money?” He goes on to ask if anyone will buy his business cards at $20 apiece. Seeing no takers he asks if anyone wants to stay after his talk, clean the carpet, and tidy up the room and offers to pay one per hour, and then notes there aren’t a lot of takers. But then he adds:

“. . . Look, there’s only one way out of here and there’s a man at the door with a nine millimeter machine gun. Okay? And you can’t get out of here without five of my cards.

“Now things have changed. I’ve now turned litter into money. Now, you will buy these, you will work for these things if you want to get out. The man at the door is the tax man and that’s the function of taxes. Stephanie talked about how taxes do it. But you can recreate that…”

Warren next talks about a currency called the buckaroo introduced at the University of Missouri at Kansas City (UMKC) “ten or fifteen years ago” to replicate a currency to help students understand National Income accounting, currencies, and the idea that currencies can work the same way in small open economies as in large open economies like the US. You earn buckaroos by doing public service or community service. The rate of pay is one buckaroo per hour. The buckaroos are freely exchangeable. There’s a buckaroo tax of 20 per year. And you can get them by working for them or buying them from other students. The schools ran a deficit, and at the end of the first year 1100 buckaroos were earned and 100 buckaroos were paid in taxes. The deficit didn’t affect the school’s credit rating.

The deficit is equal to the savings in buckaroos by the students, the first lesson they learned. “The government’s deficit equals non-government savings of financial assets. To the penny. . . . Was it a problem that more community service was being done than was needed to pay the tax? Of course not.”

Also, Warren points out that the value of the buckaroo has been fixed to the value of one hour of student labor for fifteen years, but in the market where students buy and sell them they started out at $5.00 apiece, and now sell for $15.00 apiece. The price of the buckaroo in dollars and Euros has increased, and the buckaroo has greatly outperformed the S & P 500 over 15 years. So, the buckaroo appreciated because it works for its original function which is “. . . . provisioning the community with student labor — to move labor from the private sector to the public sector. And of course to teach National Income accounting and how a currency works to the students.”

So, Warren moves on to the question: “What is money?” He points out that we’re not the gold standard, but we still think we are, and says that: “There is no such thing as a government saving in it’s own currency.” He again points to the value of the buckaroo rising from $5 to $15 apiece, also says that UMKC has an infinite amount of buckaroos and asks: “Does that mean the School is infinitely wealthy? No. Was the School collecting them from these students to get the buckaroos to be able to pay them? No.”

Warren also points out that UMKC had a Zero Interest Rate Policy (ZIRP) on the buckaroos it issued including the excess 100 issued in his example. “Did that cause hyper-inflation? No, the currency gained in value. It appreciated. It didn’t go down in value. And do we see that happening in the real world? Sure. We’ve had Japan with a zero interest rate policy for twenty years. It’s been one of the strongest currencies in the world. With the lowest interest rates.”

Warren asks next whether UMKC should try to run a surplus in buckaroos if it anticipates paying them out in the future, and then makes another key point of MMT: “There is no such thing as accumulating a reserve in your own currency when it’s a floating exchange rate like that.” And he then asks whether UMKC can even run a surplus, and points out that on day one of the program they could not, because they have to spend first, in order to collect taxes in buckaroos. He points out further, that the Fed has to buy securities the same day its selling them to provide the money people use to buy them at auctions.

Warren then takes up the issue of printing — “the P word.”

”There are three ways to spend with a gold standard: tax financed, debt financed and money financed which was called “printing money.” Tax financed was easy. You taxed and then you’d spend. Debt financed you’d sell bonds and then you’d spend. And the last way was “printing money” and that’s where the term “printing money” comes from. It has no application to whatsoever with today’s currency arrangements but it’s still used and it still has the same connotations.

“The reason they used to debt finance was because if the government spent by printing money and didn’t sell bonds to get that money back — that was a convertible currency, you could get gold from the treasury, you could cash it in. So they were always at the risk of running out of reserves and going broke and that type of thing. So any government deficit spending had to be…. and that’s why the rules that Randy was talking about that are left over from the gold standard include the requirement that Treasury borrow money before it spends. Inapplicable with today’s currency arrangements.”

Warren then gives evidence that we’re still on gold standard thinking.

”Why did the Democrats cut Medicare? Why did the Democrats raise taxes? Why did the Democrats visit China? . . . .

“Why did the Democrats form the bipartisan committee to report back on ways to reduce the deficit? Why did the Democrats put Social Security and Medicare on the table? Why are we here? Right?

“Gold standard thinking. They think the government has run out of money. It’s not because they are worried about inflation, although they are or they might be. They think the government is spending now limited by how much it can borrow from the likes of China, leaving that debt to our children to pay back. We’ve all heard this many many times. We’ve seen President Obama, Secretary of State Clinton, Treasury Secretary Geithner go over to China to negotiate with our bankers to make sure everything is okay because they believe we are dependent on them to fund everything from Afghanistan to health care.”

Warren then emphasizes that the point of the currency is to provision the public sector of a nation. He says there are a lot of ways to do that: a command economy with slaves; a lump on your head and you’re in the British navy. Now the more civilized way to do it is to impose a tax, “. . . . with a man at the door with a 9 mm to enforce it, and then show you what you have to do to earn the money to pay the tax. And that’s how we provision our public sector.”

Warren continues with the point that “taxes create unemployment,” because when taxes are imposed money must be earned to pay those taxes, and there’s no guarantee there would be enough money available to pay for full employment. “We take people out of the private sector, we get their time out of the private sector with taxes. Government spending then employs those we just unemployed. . . . The whole point of getting the students unemployed with the buckaroos was to get student labor to help out in the hospital.”

And he continues:

”If we’re going to tax, and then not hire all of them and leave 20 million people looking for paid work who can’t find it, and because of our monetary system can’t support themselves, and we’re destroying our entire social fabric, why are we doing this? We should lower the taxes. . . .

“Unemployment is the evidence that the budget deficit is too small, that the government has not spent enough to cover the demand to pay its own tax, plus any residual savings demand that comes from that tax liability. Unemployment can always be eliminated with a fiscal adjustment. You either cut the tax and the people go away, or go ahead and hire them to do what you wanted them to do, which is the reason you started the tax to begin with.”

Warren had much more to say:

On monetary operations: “The federal government neither has nor doesn’t have dollars. Government spending: . . . they just mark up the numbers in our bank account. It doesn’t come from anywhere; it doesn’t use anything up. Government taxing: they simply mark down numbers in our bank accounts. They don’t get anything; they don’t pile anything up.”

On Deficit spending: “. . . the guy in Treasury has changed more numbers up than the guy at the IRS has changed numbers down. That’s called the deficit, We can call it whatever we want. The national debt is that difference from the beginning of time, 13 trillion dollars.”

LetsGetItDone Comment: Not from the beginning of time, I don’t think. What Warren defines here is the gap between tax revenue and spending and he equates that to the debt. But there have been times in our history, namely during the Civil War, World War II, and if I recall correctly, for a brief time during the Kennedy Administration, when the Treasury created and spent money without issuing debt. Even today, Treasury revenues come partly, though in small amounts, from coin seigniorage profits. In addition, the national debt, some of which was probably denominated in foreign currency was paid off completely during the Administration of Andrew Jackson. So, any current debt subject to the limit, denominated in US dollars, can only date from 1835.

The more important point here, however, is that the negative gap between tax revenues and spending need not equal the national debt subject to the limit. It only does so when that gap is closed with credits resulting from the sale of debt instruments redeemable in a specified period. If spendable revenue is generated from other sources, then the cumulative deficit, defined as the gap between spending and tax revenues isn’t equal to the national debt subject to the limit. In fact, if sufficient money is created without issuing debt instruments specifying a period for repayment of principal, “the national debt” could be completely retired, while the cumulative deficit could continue to increase as needed to fuel private sector savings. This possibility is illustrated by the buckaroo example where deficits can occur every year, but no debt instruments are ever issued.

Warren then continues by raising the issue of inflation. He offers a slide saying WARNING! OVERSPENDING CAN CAUSE INFLATION!!! and explains that he doesn’t want anyone saying he forgot about inflation, even though he knows they’re going to say it anyway. And then he says that when the Government spends they put money in a checking account at the Federal Reserve Bank called a reserve account so that people can sound professional when they that “. . . our reserve balances went up . . . .“ The national debt is in another kind of account at the Fed called Treasury Securities. That’s a savings account because “You give them money; you get it back with interest. . . . Cash is the exact same information as your checking account but it’s written on a piece of paper, so instead of getting your balance on a computer screen or bank statement, you get to carry it around with you. . . it’s a thing you can use to make payments to the government for taxes.”

”Once the government has spent, that money appears in one of those three forms. So if the government spends without taxing, just spends, that’s called deficit spending, say on day one the government just spends a hundred dollars, it’s going to be one of three places. It’s going to be cash in circulation, or in a checking account, or in your savings account, somebody’s savings account. There’s no other choice: the dollar has no other existence, other than those three places.

“And all of this equals the world’s net savings of dollar financial assets. There are thirteen trillion dollars or so in the savings accounts and checking accounts and cash equal to the penny to the cumulative deficit spending. That’s how much the government has spent and stuck into those accounts, but hasn’t yet taxed and taken out of those accounts. Spending puts the money into the accounts; taxing takes it out. If you put it in and don’t take it out, it’s a deficit; it’s our savings; it’s held by you, me, China, whoever owns Treasury securities.

“A little diagram to explain it here: to see how it works, just to make it graphic, that I did a long time ago. It appears in Randy’s book Understanding Modern Money. Up at the top, you have (I’ll do it from here so I have the microphone I guess). In the middle you have the non-government sectors; that’s all of us, everybody except the government. Now let’s start at the bottom: the government imposes a tax. We have to pay this tax or we can’t get out of the room; we’re going to lose our house and our car. When I say tax, just think of a property tax, because that’s easy. If you start thinking of an income tax, what if you work, what if you don’t work, it works, but you’ll lose track of the rest of what I’m saying. Trust me, it does work, but think of it as a head tax or a property tax, just to keep it simple.

“So the government levies a tax, and now we need the money to pay the tax. Notice I have taxes going out — down into the drain. I don’t circulate them back. There is no such thing. We ship real goods and services to the government — the government’s doing this because it wants to provision itself — and the government gives us the money we need to pay the tax. Goods and services to the government, money to pay the tax, some gets paid in taxes, some gets saved. Where does it go? It goes to the tin shed in Canberra — the warehouse over on the right. In Australia, it’s this tin shed; over here we’ve got a big concrete building. And that’s how it’s held: it’s held in one of those three forms: cash, reserves, or Treasury securities. All that Fed operations do is shuffle around the difference between cash reserves and Treasury securities. When the Fed buys securities from the private sector their securities go down and their cash reserves go up. When the public wants more cash the reserves [sic] go down and the cash goes up. The total is always the same; it’s always equal to the deficit.

“The only place that net financial assets can come from is government deficit spending. This is all accounting; no theory, no philosophy; ask anybody at the CBO, and they’ll say, yeah, that has to add up to the penny, or we have to stay late and find our arithmetic mistake.

“So last year the government spent a trillion and a half dollars more than it taxed, that money went into the warehouse, it’s now held as Treasury securities, reserves, or cash, otherwise known as savings, and sure enough last year savings went up by exactly that amount, to the penny, when you include all the non-government sectors.
“Deficit spending adds to our savings. I think I just said that.”

MMT high-level flow

LetsGetItDone Comment: Sorry for the long quote. But my appreciation for this passage is boundless. It is so clear and down to earth. And it has both the virtue of simplicity and the ring of truth. If you study it and comprehend it, you will have gone a long way toward understanding MMT.

Warren continues his presentation with a simple illustration. I’ll skip it here, but you can go to the transcript for it. The bottom line is: “Government deficits add to savings, to the penny. The deficit clock could be renamed the savings clock. This has already been covered — the same thing.” This last is a reference to Stephanie’s presentation and her world savings clock.

Warren then goes on to review the fiscal sustainability implications of what he says echoing both Bill Mitchell’s and Stephanie Kelton’s views covered in Part Two and Part Three.

“Fiscal sustainability review: Spending is not constrained by revenues. Spending is changing numbers up; putting numbers into our checking accounts. Taxing is changing numbers down, taking numbers out of our checking accounts. Borrowing is moving numbers from our checking account to our savings account. There is no numerical limit to any of this. Paying interest is changing the number up in our savings account. The government can always make any payment of dollars it wants to make. This is all we’re talking about; it’s a nominal system; we’re talking about there are no nominal constraints.

“The risk is inflation, and not insolvency or not-solvency; there’s no solvency risk.“

And then he briefly reviews the self-imposed political constraints discussed in the first two presentations.

LetsGetItDone Comment: So, Warren’s telling us that there is no problem of nominal fiscal sustainability at all. The level of debt, and the level of the debt-to-GDP ratio don’t count at all. And deficits also don’t count from a solvency point of view. Where they count is with respect to inflation. As he says: “WARNING! OVERSPENDING CAN CAUSE INFLATION!!!”

This highlights the more general MMT point about Government spending, including deficit spending. What counts is the impact of such spending on a variety of things including employment, inflation, poverty, crime, social integration, energy foundations, education, and so on. We have to evaluate Government spending by its impact on the real world, not by its impact on purely nominal indicators like the debt subject to the limit and the debt-to-GDP ratio that have no economic importance for a nation sovereign in its currency.

Having said that however, it’s important to emphasize that people have a visceral reaction to the “national debt” notion and the idea of “borrowing” because of the false analogy between everyone’s household budget and the Government’s budget, so even though the debt and the debt-to-GDP ratio aren’t economically important from the MMT point of view they are politically very important because of the way people react to them. It will take years for people to accept that the national debt doesn’t mean anything economically if persuasion alone is involved. But if we can demonstrate that the national debt isn’t important by paying it off using the unlimited currency creation power of the Federal Government, then that will do more than anything else to persuade people that the Government’s budgetary and spending capabilities are very different from their own because the Government is the currency issuer and not just a user of its own currency.

As it happens, and paradoxically, this demonstration can be performed at any time by the President, if he has the courage to do it. All he has to do is use current law to order the US Mint to produce a $60 Trillion dollar coin and deposit it at the Fed. I’ve written about this many times; for example, here and here. The eventual result of his action would be to fill the Treasury General Account with $60 T in electronic credits. This amount can then be used to eliminate the national debt as a political issue and can probably cover all deficit spending for the next 15 – 20 years.

These points also have implications for REAL fiscal sustainability. One of the real effects of misconceived fiscal policy such as austerity, is that if it is applied over a number of years it can degrade the capacity of the economy to produce real goods and services domestically. If that happens then the output gap, the space between what we can produce and what we are failing to produce due to unemployment and inadequate demand, can close over time by destroying our capacity to produce. If that happens, then the capacity of the Government to add nominal wealth to the private sector without causing inflation declines.

So, austerity in Government spending can create REAL fiscal unsustainability, in the sense that lack of Government spending when it’s needed to create full employment can shrink the amount of Government deficit spending that can later be applied without experiencing serious demand-pull inflation. REAL fiscal sustainability is government spending whose effects maintain or increase the ability of the government to spend without causing inflation or other side effects that compromise our economic future. Unfortunately this is not what the President and the other members of “the Peterson Party”, whether Republican or Democrat mean when they talk about fiscal sustainability. Their theory of fiscal sustainability is about the wrong problem. It is about the problem of running out of money. For the US, that can happen. But what can happen is that Government austerity can produce idle and decaying productive capacity, so that the ability of the Government to spend to help create full employment without causing high inflation is severely damaged.

Getting back to Warren’s presentation, he says:

”So now we can get to the main thing, to why we’re here: is Social Security broken? Well, we have to define what broken is: first, what’s the public purpose? What’s the presumed problem; what is the real problem?

“Public purpose of Social Security: Well why do we do this? To provision seniors at a level that makes us proud to be Americans.

And he goes on to talk about the real issues and choices involved in allocating nominal wealth to seniors, pointing out that we have no shortage of food, no high standard of living provided by SS, no housing problems, but many vacant homes, and he points out that we want to provision our seniors at a level that makes us proud to be Americans, but not at a level so high that it’s embarrassing. He also points out that seniors aren’t happy when they to tap their children for money, and their children aren’t happy either. Also, SS gives seniors a feeling of independence, even though they’re getting money from us collectively, and that means some consumption is being shifted to them. And he says that he likes collective provisioning for seniors rather than individual provisioning, and points out that this is a political choice. But he asks:

”So what is the presumed problem? Are they living too well, which is what I was just talking about? Are the opportunity costs too high, that is, are they using resources we need? And the answer to those are no.”

“Is the trust fund a limiting factor? Absolutely not.”

Why not? Because the Trust Fund is just a record resulting from the man at the IRS debiting a private sector checking account and crediting the “Trust Fund.”

”But it’s not “the money”. The government never has or doesn’t have “the money”; there isn’t any such thing; those are not dollars. “Accounting” means a count; it’s record-keeping, it’s a record, it’s not a constraining factor. If it goes negative, it goes negative; a light doesn’t go on and — you know — something breaks open and Bill gets drowned in the flood.”

The real problem, if there is one, is the dependency ratio. That’s the ratio of workers to retirees. “If, in thirty years, we’ve got three hundred million people retired and one guy left working, that guy’ going to be really busy. [laughter] “. . . And so, what do they say, and the mainstream economists agree, they say, therefore, we’ve got to make sure everybody’s going to have enough money to pay this guy, but, uh uh, that’s not going to matter.” The only real thing that will be useful in 50 years is our knowledge and our education. Hardly anything we produce now physically will be “of any value fifty or a hundred years from now. The one thing that we have, that people left us from fifty or a hundred years ago, is our technology, our know-how, our software, and that type of thing. It’s not the hardware.”

However, because we think it’s a money problem, we think the problem is these guys are all going to need a lot of money, because look at how high the prices for laundry services are going to be when there’s only one guy doing it for three hundred million people, we need to cut back and sacrifice today and run surpluses and tax more than we spend, put twenty percent of our people out of work, and, ironically, the very first thing we cut is the only thing that they would agree they’re going to need, which is education.

“More on Social Security: The trust fund is record-keeping. Social Security contributions are regressive taxes that function to reduce take-home pay and aggregate demand. Why is a Democratic administration supporting a tax that taxes those people at the lowest income levels the most? It’s not even a fair tax, it’s completely regressive. Why are they doing that? They’re not trying to do that, it’s not their agenda. They believe we’ve run out of money.

“Social Security payments are progressive distributions that add to take-home pay and aggregate demand. Why are they cutting these? Why did they just cut 500 billion out of Medicare? Not because they think we shouldn’t have it, or because they think there’s something wrong with a progressive distribution to help aggregate demand. Because they think we’ve run out of money.

“Why are they contributing to the unemployment problem? Who is unemployed? We just grew at 5% for a quarter, at six percent, maybe another five percent this quarter. That’s very high real growth. Well, who’s getting all that real wealth? It’s sure not the people who’ve been losing their jobs or seeing real wages fall. It’s not the lower income group. Well then, who is it? It’s somebody else.

“We’ve seen a Democratic, populist administration preside over the largest upward transfer of real wealth from low-income to high-income people in the history of the world. That is not what they were elected to do, and not what they intended to do. It’s because they don’t understand the monetary system and monetary operations. It’s not even theory. They don’t understand actual operations.”

Warren then moves to inflation, and says that right now (end of April 2010) the risk is deflation in the CPI and in the housing market, and points out that “. . . hyperinflation because somebody spent an extra dollar. . . “ isn’t how it works. And then he drops a bunch of facts.

”If you look at the worst financial collapses in the last twenty years, let’s look at Mexico in approximately 1995, I forget the dates. The peso was three-to-one, something like that, three and a half to one, absolute collapse, the currency up in smoke, no faith in government, no faith in everything, and it went to nine. They had about a sixty percent drop. It didn’t drop to zero, the peso didn’t go to a million-to-one. Russia totally collapsed. The ruble machine was shut down. Everybody turned out the lights, pulled out the plug, and left the central bank for six months. The ruble went from 645 to 28, a seventy-five percent drop. It didn’t hyper-inflate, or do anything like Zimbabwe, or Germany, which Marshall explained, which were entirely different situations. So even in situations far more extreme than anything we can imagine, which were fixed-exchange-rate regimes blowing up, which we don’t have, you don’t get sudden jumps in inflation; there just is no such thing.

“What happens if Social Security checks get too high? What happens if we are over paying? How would we know? Well, unemployment would get too low from all the spending, whatever that means. The economy would grow too fast, whatever that means. Seniors would be living too high. Prices would start going up, we’d start seeing the inflation. And then what happens?”

Then it might make sense to raise taxes or cut benefits, but not right now. He says we only do that when it doesn’t make sense to spend any more. It’s a political choice and doesn’t have anything to do with running out of money. Why are SS cutbacks on the table?

”Our leaders don’t understand the monetary system. They don’t know spending is not constrained by revenues. The think that to spend what we don’t tax we have to borrow from the likes of China, for our grandchildren to pay back. It’s all a tragic mistake of epic proportions.”

And that’s his transition to discussing the issue of “borrowing” from China, and the grandchildren. He asks how China gets their dollars, and then explains that they sell goods in our department stores and the money they get paid goes into their checking (reserve) account at the Fed. At this point we owe them “. . . . a bank statement that shows how much they have in their checking account. Then Treasury auctions off Treasury securities which China buys.. And the Fed do? They move the money from China’s checking account to China’s savings (securities) account at the Fed. So, now we owe China all that money with all that interest.

“How can we pay back the whole 13 Trillion in savings accounts? Just like we do every week when tens of Billions come due: we transfer that balance plus interest back to the checking accounts at the Fed. Paid debt paid back. They have three choices with what they can do with that checking account: leave it alone, put it back in the savings account or spend it.”

LetsGetItDone Comment: Not many know just how much debt we pay back every year. Ben Strubel shows that $437 Trillion was paid back between 2001 and 2011.

Warren goes on. If they spend it they’ll buy something. If they buy other currencies then we transfer their dollars to the reserve account of someone else, and their central bank transfers the currency bought by China into China’s account at that central bank.

”So, what is the problem? What are we leaving to our children and grandchildren? They’re just going to need one accountant like we do to debit and credit these accounts. The whole thing could be done on one spreadsheet. You could run that whole part of the Fed with about $100,000 out of your budget if you wanted to. There’s nothing to it.

“People say, “Well, what happens if China dumps all their dollars and the dollar goes down? Whatever are we going to do?” At the same time, the same people are saying that we need China to revalue their currency. Their currency is under valued by 50%. On the one hand they want us to revalue their currency up, which means have the dollar go down by 50% and on the other hand they are panicked over what will happen if the dollar goes down by 50%. Guys, you can’t have it both ways. Figure out what you want.”

LetsGetItDone Comment: Warren put his finger right on it. Our policies towards China are often schizophrenic. We can’t decide whether we want them to devalue their currency relative to ours and cut those cheap exports, allowing some private sector jobs to come back; or whether we want them to help us maintain “a strong dollar,” to help us fight our wars, import all those cheap goods, keep gas prices down here, and enrich our elites who are benefiting from international trade and finance. So we talk out of both sides of our mouths all the time. We’re as silly as the French and German elites who want to impoverish Greece, but also want to keep exporting goods to the Greeks.

I know what I want. I want us to take that cheap real wealth from abroad, but only on the condition that we implement a job guarantee at a living wage with full fringe benefits here, and only on the further condition, that we don’t allow free trade in industries important for future innovation and national security.

Right now we’re practicing “trade unsustainability.” Not because, it’s financially unsustainable. It is fully sustainable as long as people in foreign nations want to send us real wealth in return for electronically marking up their accounts at the Fed. However our patterns of trade are politically, socially, economically, and culturally unsustainable in that they are causing decay in our politics, our local communities, our economic futures, our levels of social and economic justice, our levels and quality of education, and even our national security, since we have been hollowing out our heavy manufacturing base.

So, in short, while it’s true that in the aggregate, over a specific relatively short period of time, imports are real benefits and exports are real costs, there is an issue of societal sustainability here in the broadest sense of the term. And the side effects of the kind of trade policies we’ve been following aren’t accounted for by the truth that when real wealth is given up in exchange for nominal financial assets in one’s own fiat currency; it’s the real wealth that counts, at least in the short run.

Warren next moves on to “What’s wrong with the euro zone?” He starts by pointing out that Greece is not like the US, UK or Japan, because it is a currency user like all the other euro nations, “. . . revenue dependent like US States, businesses and households.” Warren points out the US has recovered better than Europe, because it had not only a central bank, but also a Congress/Treasury to run deficits which went to the States and the people in them. Without these federal deficits, the deficits of state governments would have been much higher. He points out that the States could not have sustained the kind of deficit spending done by the federal Government.

But the Eurozone States have had to do that. “They’ve been in true ponzi. Ponzi is when you have to pay somebody back from getting the funds from the next person.”

”The US government, Japan — Japan with 200% debt to GDP is not in ponzi — they don’t pay people by getting the money from somebody else. They just change the numbers up like we do. That is not ponzi. Ponzi is when you have to get it from somebody else.

“Europe has put themselves in ponzi from day one. And we’ve been pointing it out from day one. Now, ponzi works on the way up. Madoff went a long time before he collapsed. So did Stanford. It’s on the way down where it all comes apart.

“We’re seeing the back end of this coming apart. . . . “

Warren continues with an account of some the details of the faulty Eurozone structural defects and then ends with:

The shoes will have to fall. They don’t have credible bank deposit insurance. If Greece goes down and people realize they are going to lose their 50,000 euros in their bank account, the rest of Europe can be in a big problem. They are already having runs on the banks and it gets a lot worse. It shuts the whole payment system down.

There is no credit worthy government entity to act counter cyclically…

LetsGetItDone Comment: It’s two years later, now, and Europe’s even worse off that it was then. The ECB and other Eurozone authorities have tried to bail out creditors in various nations while imposing austerity on the other citizens of various nations. Now, all the PIIGS nations are facing increasing difficulties and some are close to collapse. The ECB still seeks band-aids, and there are no proposals on the table yet, that can stabilize market lending to the Eurozone members. Warren recently produced his own proposal for ending the crisis, but it’s too early to say whether it will break through elite filters in Europe.

Warren Mosler’s wide-ranging presentation was followed by a Q and A session. I’ll go through that and add comments. But before I do, I’ll provide some follow-up references on the subjects treated in Warren’s presentation appearing since the Fiscal Sustainability Teach-In. The most important from Warren include the revised version of The 7 Deadly Innocent Frauds of Economic Policy. Warren blogs nearly every day, providing news articles on significant world financial events and policies, and his commentary on them. He emphasizes Eurozone events very heavily, and his evaluations and qualified predictions are always pretty much on target. Here, here, here, here, here, here, here, and here. are updates on the subject matter from Warren.

And: here, here, here, here, here, here, here, here, here, here, here, and here, are contributions from Bill Mitchell, Stephanie Kelton, Scott Fullwiler, Pavlina Tcherneva, and Randy Wray.

And finally, several of my own: here, here, here, here, here, and here.

SESSION 2: “The Deficit, the Debt, the Debt-To-GDP Ratio, the Grandchildren, and Government Economic Policy” – Q&A

Maurice Sanders: “Just a quick question for you, Warren. When you describe the moral hazard in the Eurozone, would your description then be different if there were a political superstructure to encompass all those nations in one political structure?”

Warren Mosler: “Yeah, if the deficit spending was done at the new fiscal authority, call it the European Parliament, then you don’t have the race to the bottom. It’s when you split things up, it makes them compete with each other. For example, if you have federal pollution control laws you don’t have a race to the bottom, but if you have state pollution control laws then the state that allows the most pollution gets the most business. So yeah, that consolidation would take care of it.”

Joe Bongiovanni, Kettle Pond Institute: “When you floated your proposal on your blog about the European central bank paying out a trillion dollars, I asked you the question, “Is anybody going to issue any debt to do that?” And eventually you answered me back and said, “No, there would be no debt issued.” Am I right about that?”

Warren Mosler: It’s just a payment. It’s not a loan, it’s a payment.”

Joe Bongiovanni: “So, does that hold true for deficit spending by us, then? That is to say, our central bank, when we’re going to deficit spend, can they also just make the payment without issuing any debt?”

Warren Mosler: “What I’m saying is, if the federal government pays you money, it can either pay you money or loan it to you. If it pays it to you, you have no debt. If it lends it to you, you have a debt. So when the European central bank pays… makes a per capita distribution of a trillion euro [to] the member nations, it’s not added to their debt, they don’t owe it back to the European central bank. When the Federal Reserve makes a payment, it goes into someone’s checking account. We can call that a debt, if we– it’s how you define which account that money is in. We don’t count that as…”

Stephanie Kelton: “It’s like helping our state governments.”

Warren Mosler:

“Right, right. But if the Federal Reserve makes a payment to anybody, whether it’s a payment to the state of Connecticut or a payment that goes out and buys a box of pencils, it goes into somebody’s checking account. It goes into a reserve account at the Fed, through your member bank. We don’t call that “debt.” It’s only when we move the money from the checking account to the savings account that we call it “debt.” So, what’s called “debt” at the Federal level I would not call it “debt.” I never would have called it “debt” from the beginning. It used to be called “debt” because we owed the gold that were in reserves. Once the gold was gone, it’s no longer debt, it’s payment in kind. It’s just a store of nominal wealth for the other guy. It’s not a debt. The European central bank hasn’t started on a gold standard, so they don’t automatically call something debt that isn’t debt, so they don’t have the problem of creating debt when they spend. It’s a little bit of a technical answer, but the answer is that a payment from the European central bank is not booked as debt anywhere, because they never have booked it as debt. We book it as debt because we have a gold standard tradition that caused us to book it as debt. It’s both– they’re all the same thing.”

LetsGetItDone Comment: I find this an enormously interesting comment. Its implication is that if the European Central Bank does begin to “deficit spend” on direct payments to the member States, then it will not incur any debt in doing so, as other sovereign fiat currency nations do because of their silly hold-over views from gold standard days. So, in that case, the national Governments in the Eurozone will raise taxes and borrow money to fund their spending. And they will also get direct payments from the ECB. The member nations will have “national debts” and debt-to-GDP ratios; but the Eurozone itself will maintain a debt-to-GDP of zero due to its “printing money.” Wanna bet that won’t be a source of inflation in the Euro?

Unidentified: “Question for Warren Mosler: since I’m a foul-mouthed leftist blogger, I’m going to frame this as polemically as I can. Speaking to the question of the Tragic Mistake theory, is there a reason to choose the theory of the Tragic Mistake, as opposed to a theory that this is a deliberate act of policy that’s meant to cause as many people as possible to suffer and die? How would I choose one theory as opposed to the other?”

Warren Mosler: I forget the saying, but it’s better to presume innocence than to– how does that go? You know, my book up there that I’ve got, called “The Seven Deadly Innocent Frauds,” it’s John Kenneth Galbraith’s last book. “The Economics of Innocent Fraud,” and he said it more eloquently than I did, but it’s the idea that when you presume innocence, you’re making a much stronger statement than imputed guilt.

Unidentified: “You would have evidence to back this up?”

Warren Mosler: “Which?”

Unidentified: “Why should we p
resume innocence, based on the record of the last thirty years or so?”

Warren Mosler: “Only as a point of logic, that you’re better off presuming innocence. As part of the argument.”

Unidentified: “As a rhetorical tactic?”

Warren Mosler: “To say the person is… I’m not sure how to… Yeah, sure, as a rhetorical tactic, you presume innocence.”

Unidentified: “As a foul-mouthed leftist blogger I can completely accept that.”

Warren Mosler: “Presuming innocence is more powerful, is a far superior rhetorical technique. Especially if it’s something that’s really simple to understand, because then you’re really throwing the onus on the other guy: “You’re either a complete idiot, or you’re subversive, which is it?””

Bill Mitchell:

“Someone asked me at lunchtime whether the European leaders knew about options to solve their current issue, and I said to them that if you read the documents, and the debates going back to the Delors papers, and then subsequently, you will be left with the unambiguous impression that they know all the options. Most recently, the German Finance Minister was interviewed and it was in German, I couldn’t find it in English. I was going to try to put it in the English version, but it was in German, but fine.

“And what he said in the interview was that when they framed the common currency system, they had a choice. And they had a choice to add elements that would have made the current crisis much less a crisis. And those elements were a system to deal with asymmetric shocks, in other words, a fiscal redistribution system; and also, as Warren said, a single fiscal authority. And he said that that was debated, and if you go back to the original debates you see the debate there. And they chose, as an explicit choice, to exclude those characteristics from the system, the very characteristics that would have made the current crisis significantly less severe. They chose explicitly to exclude them from the system.

“And as soon as the common currency came in, Germany then introduced their so-called Hartz reforms. And these were reforms that — because previous to that, they were able to maintain their export competitiveness through exchange rate movements. Once they lost that capacity because of the common currency, they had to work out another way to stay one up on the other countries, and so they brought in the significant deflationary measures in their labor market: casualized significant sections of their labor market, reduced workers’ real wages and conditions, the whole Hartz agenda. And these were all very explicit choices and decisions they made within the context of the institutional system they were setting up. They knew the alternatives. And they knew that once the crisis hit, then the weaker countries — in a trade sense — would melt down, as they are. So, I’m not so sure I agree with Warren in emphasis. I think that they…”

Warren Mosler: “It’s rhetoric, though, just rhetoric.”

Bill Mitchell: “I understand the rhetoric. I think that I prefer to say that they aren’t innocent. They took an ideological decision. They were scared to death. There’s a cultural animosity within Europe stemming back to the Latin and the Germanic cultures. The second World War’s had an incredible influence on the way they’ve structured the evolution of the European community, and now the EMU, and the ideology surrounding all of that led them … The Germans dominate, they don’t trust the Italians and the Spanish, and particularly the Greeks. And they set up a system that would punish those countries in the event of a crisis, and they deliberately did it, and they know the options. They know all of the options that could reduce the pain, but they don’t want to do it.”

Warren Mosler: “There have been statements out of Greece that they owe us these loans for war reparations. . . . “

LetsGetItDone Comment:Based on what Bill said; perhaps Greece and some of the other PIIGS should sue the Euro zone in the International Court of justice for allowing them to join it while knowing full well that the system would punish them in the event of a crisis?

Bob Hahl, Kilowatt Cards:

“You said that, and it’s pretty clear, that raising taxes reduces demand for goods and services, but it also seems to reduce other kinds of things like greed, or power, unbalanced power — very rich people have enormous influence. I think back to the situation after World War II when the upper tax rate was 90%, and people always talk about that as if there were a lot of people paying 90% marginal rates, and I don’t think very many, if anyone, ever did. I don’t think anyone made that much money. What happened was, faced with a choice, if you’re an employer, of taking money out of your company and giving 90% of it to the government, or distributing some of it to the workers instead, and getting something for it, that was a better choice. And so I can understand the idea of lowering taxes, but at the same time you’re also unbalancing society, and you’re letting people accumulate so much money and we don’t know what kind of crazy thing they’re going to do with it.

“How do you control that? We don’t let people keep bazookas and land mines to protect themselves, but we’re letting people get rich enough to compete with countries.”

Warren Mosler: “Second amendment. No, those are all very legitimate political decisions. Those are political decisions. Those are the consequences of policy, but it doesn’t mean the government’s going to run out of money.”

Unidentified: “How does that jive with the notion that tax rates should be used to regulate aggregate demand?”

Warren Mosler: “We didn’t say tax rates– . . . “

Unidentified: “Ok, taxes. The tax code has been used to redistribute income, and in my opinion, right now it has been hijacked to favor upper-income households. Now we have huge income inequality in this country, so again, how does that jive with this notion of regulating aggregate demand?”

Warren Mosler: “There’s a bigger problem with that, because what also tends to happen is people wind up with the same after-tax money, so when you raise tax rates, and let’s say wages stay the same, tax rates go up, and government stays the same size, that means the higher incomes go high enough to adjust for the taxes. So after the Clinton years, you see, “Oh gee, look, we collected an extra trillion in taxes because of the higher rates.” Yeah, but those people earned an extra $5 trillion in income. So, it’s a moving target as well. There’s a lot of intuition, I guess we called it, and illusion as to what’s going on, when you dig down into it. Everything government does has distributive consequences, and those should be the first and foremost political decisions, not whether we’ve run out of money or not, or whether we’re going to borrow from China.

“What these myths have done is taken our eye off the ball of what I would consider are the important decisions. I did a paper with Randy and James Galbraith, we gave it to the GAO and FASB on sustainability, and we said, “Look, the problem is 100% of your time, money and effort is going into figuring out government solvency, and none of it’s going into the inflation problem. So what you’ve got is 100% of your resources going into the thing that doesn’t exist, and nothing going into the thing that could actually be a problem.” And that’s indicative of what’s going on at all levels of government, because they don’t understand the monetary system.”

Unidentified: “But this is more than hypothetical, more than just political, we are talking economic. Income inequality is an economic issue that is challenging… In my opinion, it’s one of the biggest challenges to our democracy.”

Warren Mosler: “Right. But what I’m saying is it’s not getting the attention it deserves because they’re worried things that shouldn’t be getting any attention. We’re not going to get attention to those issues until we get rid of the things that are taking all of our attention, like China, and the budget deficit. If we stop thinking about those, we’d have time in Congress to talk about something else.”

L. Randall Wray: “I want to add a couple of things. So, we’re arguing taxes drive money, taxes don’t pay for government spending. So that’s the fundamental point. And then the question is, “What kind of taxes?” And Warren said the head tax is actually the best thing to drive currency from inception. But once we–“

Warren Mosler: “I said it’s the easiest thing to understand.”

L. Randall Wray: “It’s also the best thing to drive it. But once we’ve got a monetary economy, then we can use an income tax, we can have an inheritance tax, and so on. So then the question is, “What other things can taxes do?” And so yes, we use taxes to punish certain kinds of behavior, “bads.” And then we can use tax breaks to encourage other kinds of behavior. We could use inheritance taxes to try to prevent accumulation of dynasties of wealth. We could try to use taxes to address income inequality. One word that you said that I don’t like is “redistribution” because we can always raise the income of people at the bottom, without taking from income at the top. The reason is because we don’t really take income and give it, because taxes don’t pay for the government spending. We can always have as much welfare as we want without taxing the rich at all.

“Then just the final point I would make, I’ll just state it as a claim, and I think that you said this: in fact, taxes never reduced income at the top. It does not work. They have too much political power. They get the exceptions written into the tax laws. So you never achieve the 50% tax rates on the rich. So we should think about a different way to prevent income inequality, I don’t think the tax system will work. Prevent the income in the first place, that’s the best way to do it.”

The next issue raised was how there could be a stronger voice out there to spread the word about MMT. Marshall Auerback then proceeded to outline what MMT advocates had been doing up to that time to get MMT views “out there.” I’ll leave you to read that exchange in the transcript. But since the FS conference, efforts to spread the word have accelerated along with the number of people blogging about MMT and the number of MMT videos and presentations being created. In the two years since the conference, MMT has received some mainstream attention, some of it dismissive; some of it favorable, but either way the frequency and intensity of MMT-related communications seem to be increasing exponentially.

The Q & A session ended with this statement of Roger Erickson’s

Roger Erickson:

“I want to get back to the question that was raised by the person that was behind me, “How do we protect our systems against these kinds of disconnects?” And actually, if you go outside the narrow field of economics, there is very rich literature on this very question. If you look at the field of ecology, systems theory, anthropology, many others, and all the way up to military operations, there are literally thousands of tomes and books and theories, mathematical models, physics models written about this, and what ties them all together is system stability. So eventually, as people are saying, we’ll wake up and we’ll realize that things are going south. The general response about how you protect it is, the simple answer is, that in any complex system, what keeps system stability is eventually interaction, and the knowledge throughput, the data shared throughout the system.

“So the simple mantra that comes out of this is “Interaction drives awareness.” Until we have more crosstalk among these different professions, our electorate and our elected officials are not going to have a general consensus on it.”

LetsGetItDone Comment: I think this comment is very important because it emphasizes the complex adaptive system context of macro-economics, and also suggests that spreading the MMT paradigm in such a way that it can replace the destructive neo-liberal paradigm may well depend on our creating new systems of interaction that allow both distributed problem solving and rapid communication of the new knowledge created to all in the complex adaptive system who need it. Roger Erickson posted more on interaction and awareness very recently,
and I’ve done some posts on this in the series ending here, as well.


In the introduction, I pointed out that Warren’s presentation refutes a large number of popular austerian myths including: the government is running out of money; the Government can only raise money by taxing or borrowing; We can’t keep adding additional debt to “the national credit card”; We need to cut spending and entitlements; our main creditors, like China will cease to buy our debt making it impossible for us to raise money; our grandchildren must have the heavy burden of paying our national debt; Government deficit spending isn’t sustainable because the Government is like a household and that since households sacrifice to live with their means, Government ought to do that too; and “printing money,” i.e. deficit spending without selling debt instruments in corresponding amounts is necessarily inflationary. These myths are at the heart of the austerian message being delivered by the deficit hawks and the whole range of Peterson efforts including his annual fiscal summit conferences.

So, the importance of Warren’s presentation to the counter-narrative cannot be over-estimated. His refutation of so many myths, along with his placing them in the context of both the buckaroo experiments and so many real world events, provides a great deal of the counter-narrative needed to defeat the austerian paradigm and adopt a more rational economics as the framework for policies that will help us build a society that delivers social justice, and turns away from plutocracy and back towards democracy.

The presentation and Q & A thereafter also reinforce the aspects of the counter-narrative given previously by Bill Mitchell and Stephanie Kelton, so all three together provide a coherent view in opposition to the Peterson/neoliberal line, showing that there is no fiscal sustainability problem for the US in the sense that insolvency can involuntarily happen because of accumulated debt or present deficit spending. Instead, if there is any REAL fiscal sustainability problem at all it lies with the possible effects of government austerity, since it can reduce the room for future deficit spending by destroying real private sector productive capacity, so that fiscal efforts produce inflationary effects sooner then they would have, before austerity was implemented.

In Part Five I’ll cover Marshall Auerback’s presentation on “Inflation and Hyper-inflation.” We’ll see how his version of the MMT counter-narrative strengthens and extends what we’ve already learned from the proceedings of the first three sessions of the Teach-In, while also responding to one of the most common attacks on MMT, which is: “OK, OK, so there is no solvency problem, but continued spending and “printing money” will surely lead to the kind of hyperinflation we’ve seen in Weimar and Zimbabwe, so we still can’t keep on running deficits. Marshall’s presentation will directly confront that very popular criticism.

(Cross-posted from

The Fiscal Summit Counter-Narrative: Part Three, Are There Spending Constraints On Governments Sovereign in Their Currencies?

8:29 pm in Uncategorized by letsgetitdone

An issue at the core of all the fuss about fiscal sustainability is Government solvency. The deficit hawks and doves believe that Governments sovereign in their own currency can run out of money if they keep deficit spending, and keep borrowing to do it. They believe that if deficit/debt levels are high enough, then Government insolvency can occur, because eventually the burden of interest on the public debt will crowd out all other public spending and investments. So, they are for working towards debt/deficit reduction, “reforming” (i.e. cutting) entitlement spending, and raising taxes, though not necessarily on the rich.

The counter-narrative of Modern Monetary Theory (MMT) is that such a currency issuer can never involuntarily run out of money, though it can default voluntarily from an excess of stupidity. And because such nations can’t run out of money and can buy anything for sale in their own borders, including all labor resources, that means that their governments can spend what they need to spend to help solve the problems they encounter. They can afford job guarantees for anyone wanting full-time work at a living wage with a full package of fringe benefits, universal single-payer health insurance for all, a first class educational system, re-inventing their energy foundations, cleaning up their environments, re-creating their infrastructure, and doing anything else necessary to create good, democratic societies. For Governments sovereign in their own currencies, running out of money is never an issue. The real issues are resource constraints, political constraints, and constraints of poor decision making. But they are not fiscal in nature.

So, the critical issue of government financial solvency was a major topic in developing the counter-narrative of the Teach-In. Stephanie Kelton, Associate Professor of Economics at the University of Missouri, Kansas City gave the presentation on this topic. It was a model of clarity. Audios, videos, presentation slides, and transcripts for the presentation are available at selise’s site and a slightly different version of the transcripts is available from Corrente as well.

Stephanie Kelton’s Presentation On Spending Constraints

Stephanie began by point out that the name Modern Money Theory is not a name the MMT economists gave to their approach. Instead people following what they were doing “started referring to us as the Modern Money School and to our ideas as Modern Money Theory” (MMT). Stephanie also said that this is unfortunate:

“. . . because it is something of a misnomer. What we’re doing is actually not modern at all. The ideas are not theoretical, and they aren’t particularly modern. What we’re doing is simply describing, operationally, the way government finance works. It’s not a theory; we do not make assumptions, . . . . but rather . . . attempt to simply describe the way in which the institutional arrangements are set up, and the accounting identities and what happens in a balance sheet framework; when one side of the equation moves, what happens on the other side of the equation?

“What we didn’t do, I guess, a lot of this morning is really to talk about money, and what is money. And, while there were some references to accounting, and blips on a screen and button pushing and so forth, we didn’t really distinguish what we’re talking about in Modern Money Theory from what most of the textbooks describe and what our students end up getting taught in most economics programs across the globe.”

After a brief discussion of some of the historical sources of the approach in the work of Georg Friedrich Knapp, John Maynard Keynes, and Abba Lerner, Stephanie turns to accounts of the origins of money. She describes the theory that currency arose spontaneously out of a need to transcend barter as a means of exchange in markets.

“The private sector figures out that there’s a more efficient way to conduct exchange. They choose to use money. They decide what money is. And this all happens without imposition from any authority, no state, nothing like that. So the money is stateless. And, then of course, over time, money evolves (I’m still in the textbook story) from things like primitive money to gold and then to paper with gold backing. People take paper in exchange for real goods and services and the argument is – well, but at the end of the day, it’s as good as gold. So they continue to accept the paper.

“Then the story gets more difficult to explain, for this group. Sometimes we call them the Metalists because, when you have a pure fiat money system, why do people accept currency, that is intrinsically worthless, backed by nothing of value, and yet people will beg, borrow, steal, toil away the day, in order to get these otherwise worthless pieces of paper?”

So, then Stephanie counterposes the MMT theory of the origins of money, tracing “the nature and origin of money to the early authorities . . . the money does not emerge spontaneously by the will of the people, but it is imposed on them.”

”How is it imposed on them? It is dictated by the authority. It is chosen. The authority establishes that you all must pay something to me. I define the unit of account. In the United States, the unit of account is the dollar. So I say in what unit you must pay obligations to me and then I tell you what you have to do to eliminate those debts. And so, I impose a tax liability on you. I make you indebted to me. Now you need to do something to eliminate your obligation to me. And I tell you how you can do that. In the United States, you can earn dollars. You pay your tax obligation to the state in U.S. dollars. That gives value to the government’s otherwise worthless pieces of paper, and allows them to move real resources from the private to the public domain.

“So the Modern Money approach accepts that the currency derives its value from the state’s willingness to accept it in payment to the state, to eliminate obligations to the state. Now there are lots of things that obviously circulate as money things. The government’s money is not the only thing out there. And there is some ordering, or hierarchy of money things. Some are more generally accepted than others.”

And she also says: “The State’s IOU “. . . is at the top of the hierarchy . . . because it is the most generally accepted and it gains its acceptability by virtue of the state’s proclamation that we all need it in order to eliminate our tax liability.”

”So, Modern Money Theory stresses the relationship between the government’s ability to make and enforce tax laws on the one hand, and its power to create or destroy money by fiat on the other. I would define as a sovereign government, a government that retains these powers, that they are sovereign in their own currencies. Among others, examples of governments with sovereign currency, the United States, Canada, UK, Japan and Australia, all sovereign in this regard, by this definition.

“So the question then becomes, for a sovereign government, how much can it spend? Can it afford Social Security? Medicare? Tax cuts? Is the current path sustainable? Isn’t inflation going to be a problem? Will we bankrupt our children and grandchildren? What if the foreigners decide they don’t want to hold our bonds? I am only going to answer a couple of those questions in this talk because many of those are designed to be answered by other panelists later today.”

So, we have the household/ government analogy which teaches that governments have budget constraints analogous to households. Like households they can spend what they take in in revenue, plus what they can borrow, but no more.


“. . . . when it comes to buying things in the United States there’s really only one way to make final payment. When you purchase something, at the end of the day, the only way to pay for it is with the government’s money. There is no other way.

“How does that work? And so here’s an example. Suppose that you go out to dinner and you purchase your meal with your Visa card. Is that the final payment? No. You get a bill in the mail from Visa, and what do you do? You write them a check. Is that the final payment? Well, maybe the last time you see anything happen, but it’s not the final payment. At the end of the day, Visa doesn’t want your check. It doesn’t want what you’ve written down. What it wants is a credit to its bank account and that happens as that check goes through a clearing process and Visa’s bank account is credited with reserves. What are bank reserves? Government IOUs. Federal Reserve money. government money. Only the government’s money can discharge a payment as final means of payment. We are the users of the government’s currency.

“In contrast, the government is the issuer of its currency. It is not like a household. It doesn’t have to raise money by borrowing or collecting taxes in order to spend. Those of us in the private sector have to earn or borrow dollars before we can spend. The government must spend first. And we say this, and sometimes people have a hard time understanding that. How can the government spend first? How can it not spend first? How could the government collect taxes, in dollars, first? It first had to have spent those dollars into existence. The spending has to come before the payment or the collection of taxes. The government must spend first. Government spending is not (we use this term a lot) operationally constrained by revenues. It doesn’t need tax payments and bond sales in order to fund itself. It is not operationally constrained. The only relevant constraints are self-imposed constraints. We talked a little bit about this earlier, things like debt ceilings. That’s a self-imposed constraint. Rules that prevent the Treasury from running an overdraft in its account at the Fed. That’s a self-imposed constraint. It is a constraint that is imposed by Congress. Rules that prevent the Fed from buying Treasury bonds directly from the Treasury, so-called monetizing the debt, is a self-imposed constraint.”

LetsGetItDone Comment: It’s true that the constraints mentioned by Stephanie Kelton just above are self-imposed constraints, from the viewpoint of the government as a whole, since Congress is part of the Government. But there are also political/fiscal constraints imposed by one part of the Government, Congress, on another, the Executive Branch, and the Treasury Department. If these constraints were the last word, then the Executive would have limited ability to spend Congressional Appropriations beyond what the credits in the Treasury General Account (TGA) allow and further income from taxing, borrowing, fees, and asset sales.

However, that isn’t the whole story. Due to a law passed by Congress in 1996, the Executive Branch can use Proof Platinum Coin Seigniorage (PPCS) to fill the public purse to any desired amount, including an amount great enough to retire the full amount of the current debt subject to the limit and to remove the need for issuing further debt subject to the limit for the foreseeable future, except possibly for issuing very short-term debt which would be repaid immediately at the end of the short-term involved.

Stephanie goes on to explain how the Government actually spends and explains that when it spends it creates money and that when it taxes it destroys money. I won’t go into the details, but highly recommend the transcript of the presentation if one wants to understand the actual mechanics of the interaction between the government and non-Government sectors when the Government spends. She also points out that there

“. . . . is an attempt to coordinate the government’s spending with taxes and bond sales and it creates the illusion that what’s happening is that the government is taking money from us and using it to pay for the things that it purchases. But that’s not really what’s going on. As Warren likes to say, the government neither has nor does not have any money at any point in time. It is simply the scorekeeper. . . . ”

And as the scorekeeper it can never run out of “points” (i.e. dollars) to assign to entities in the government sector. So, since the Federal government doesn’t need our money to spend,why does it collect taxes at all? In doing this it’s only taking its own IOUs back, which it can issue in unlimited amounts anyway.

”So, why do it? Two reasons. One is, and this goes back to the Modern Money Theory that I began with, one is that taxes give value to the government’s money. If they were just to say, ‘We don’t need taxes in order to spend, so let’s suspend all collection of taxes’, that would undermine the value of the currency. It would take away the need that we have to acquire the government’s money. Why would we work and produce things for the government? Why would the government be able to move resources from the private sector to the public domain if it can’t get us to do that by virtue of the fact that we are willing to work and provide things to get the government’s liabilities? So, taxes maintain a demand for the government’s currency – that’s important – and the other thing they do, is they allow the government to regulate aggregate demand. Too much spending power can be inflationary, too little causes unemployment and recessions.”

LetsGetItDone Comment: There’s also a third reason. That reason is political, and only indirectly economic. It is that economic inequality has become so great in the United States that it is a threat to democracy. The accumulation of wealth over the past 40 years, in a relatively few hands, has resulted in the corruption of the presidency and Congress as representative bodies. One reason for very progressive taxation of income, wealth, and property is to help restore the more balanced inequality of the 1960s and early 1970s, which would leave a lot less free money available to the 1% to corrupt the political system.

Stephanie next goes on to explain what the function of bond sales is. Bonds are no more than a “savings account” at the Fed. The saver moves dollars out of their checking (reserve) accounts today into a ‘savings account” and receives “dollars plus interest at a future date” back in those “checking” accounts.

So looking at:

“. . . . the national debt clock, the sum total of all of the outstanding bonds that the Treasury has issued. . . . what we would argue is we shouldn’t call that the national debt clock; we should just rename it. It’s the national world dollar savings account. All it does is keep a record of the total amount that’s invested in savings as opposed to checking accounts at the Fed.”

And back again to the solvency question

”Something about the issue of solvency, the tipping point problem. Can the government run out of money? The U.S. government can’t run out of money any more than the Washington Nationals Baseball team stadium can run out of points. Every time a ball game is played at Washington National Stadium, some team scores some points and they appear on the screen and then the other team scores and some more points appear on the screen. And there’s nobody behind the screen going, ‘Hey Johnny, we’re running out of points here’, you know, right? Look in the trust fund. That’s not the way it happens. You just add the points.

“Same exact thing with the way the government operates. And this is the quote that Marshall brought up earlier and the one that Warren likes to use a lot, and I like it too. So here it is in writing so that you know we didn’t make it up. This is Ben Bernanke in an interview on Sixty Minutes just last year when Pelley asked him, “Is that tax money the Fed is spending?” And Bernanke says, “It’s not tax money. The banks have accounts at the Fed much the way that you do, have an account at a commercial bank. So when we want to lend to a bank, we simply use the computer to mark up the size of the account they have with the Fed.

“It’s exactly like putting points on the screen at the baseball game. Just mark up the balance. Can you run out of points? Can the government run out of money? No. There is no solvency issue when you are the issuer of the currency. OK, this is a quote from Alan Greenspan saying largely the same thing. “A government cannot become insolvent with respect to obligations in its own currency. A fiat money system like the ones we have today can produce such claims without limit.””

And then Stephanie addresses the question of why Europe is in the middle of a crisis, which, of course, has gotten more and more serious in the two years since the Teach-In. She explains that none of the nations of the Eurozone are currency issuers. They are all currency users like the American states, because they all gave up their own fiat currencies. From the national perspective, the Euro isn’t their fiat currency. It’s the fiat currency of the European Central Bank, “a non-convertible, stateless currency.” So, default risk, potential insolvency, are real problems for the states using the Euro, especially the fiscally weaker states in the PIIGS group, but, to a lesser degree, for all the others too.

”They must borrow or raise taxes; they must collect money before they can spend. It’s the only way they can do it. They are all users of their own currency. They are the users of their currency, much like California, Illinois, New York, New Jersey – they’re just like states in the United States. They’re in the same relationship relative to the currency as are individual states in this country.

“This is the hierarchy of money. So the entire thing in Euroland is denominated in Euros. For any particular government, look at the hierarchy of money. What is it that sits at the top of the hierarchy? It’s the Euro. What is the relationship between the currency at the top of the hierarchy and the government? In this example, the government does not control the currency that sits at the top of the hierarchy. And that turns out to be a huge problem for Greece.”

And now there are problems with all the PIIGS nations. Greece is farthest along in their crisis, but Ireland has been devastated, Portugal and Spain are in dire straits, and Italy isn’t very far from a crisis, while France and the Netherlands are seeing serious political stresses resulting from Euro-related austerity policies. Stephanie also points to Mexico in 1995, Russia in 1998, the Southeast Asian currency crisis in ’97. She points out that “Every one of these countries had fixed exchange rates. And, as a result, every one of their governments became the users rather than the issuers of their currency. “ And she says further:

”I don’t know of a single example of a currency crisis or a debt default by a sovereign government that has issued obligations in its own currency when it has flexible exchange rates in a non-convertible currency. I don’t know of one. The U.S. can control its currency and therefore, by implication, its economic destiny.

“There is a relationship between the power the state has in the monetary sphere and the power that it can exert in the political policy sphere. There is no revenue constraint for governments that control the money that sits at the top of the hierarchy. Does that mean that we should spend without limit? No. No. Emphatically no. As the economy recovers, spending will need to be regulated to prevent inflation. But I would argue, and I think what we’re all here to argue today is that it’s time to stop allowing the monetary system to limit our range of policy options. It is causing unnecessary human suffering and it’s time for us to begin to recognize the advantages of a Modern Monetary System. Thank you.”

Professor Kelton’s presentation was followed by a panel discussion and then a Q and A session. In the interests of space, I’ll telescope these as much as I can and also introduce comments of my own on the questions and answers. But before I do, I’ll provide some follow-up references on the subject of Stephanie Kelton’s solvency presentation appearing since the Fiscal Sustainability Teach-In. Here are some from Stephanie: here, here, here, here, here, and here.

And some from Randy Wray, Warren Mosler and Bill Mitchell: here, here, here, here, here, here, here, here, and here.

And finally, a few of my own: here, here, here, here, and here.

SESSION 2: “Are There Spending Constraints on Governments Sovereign in their Currency?” – Q&A

Unidentified: “I have one question, can you explain the difference between what happened in Argentina and what happened in Russia? Because Russia defaulted voluntarily on its domestic debt versus Argentina had a problem with US dollar debt.”

Warren Mosler, “So… If any of you have been to the Fed, you know you start everything off with “So.” So what happened in Russia [he laughs] was that they had a fixed exchange rate, the ruble was fixed at 645 to 1, and they were borrowing dollars in order to keep it going because people were— would rather have their dollars than a ruble. When you have a fixed exchange rate, the dynamic is, if you get paid in rubles, you have three choices: You can do nothing, you can buy ruble securities, or you can cash them in for the reserve currency, which was dollars. So with a fixed exchange rate the treasury competes with the option to convert, and you see that all the time, and so with fixed exchange rates, the interest rates are actually controlled by the market. And so what happened in Russia is as the treasury competed with the option to convert, interest rates went up and up and up, and finally they were paying 200 percent and there was no interest rate where people would rather have the rubles than the dollars and they ran out of reserves, couldn’t borrow any, and defaulted on their conversion obligation. Now, at that point in time, what most countries would do would be just to float the currency and say, Okay, look, there are no more dollars for now and the ruble’s floating and just keep the money— the central bank operational. What they did in Russia, when they ran out of dollars, they just turned out the lights and went home, shut off the computers, didn’t open for up four months later. When they did open up, they went in through the hard drives, and sure enough, the ruble balances were still there, and they were — they basically honored them. There was a little bit of restructuring, but nothing particularly serious on the interest-rate side. And so it was a fixed-exchange-rate collapse, or blowup, and they just shut everything down.

“Now in Mexico they had the same kind of blowup and they just — what was it, three to one, three and a half to one, or something like that? Was it three? Three to one back in about ’95, they were supposed to honor these tessa bono obligations, where you were able to turn these in, they were at an index to U.S. dollars, where you could turn in and get— and they were guaranteed you could get enough pesos where you could convert those instantaneously into 40 billion dollars. Well, there was no amount of pesos that could be converted into 40 billion dollars, so the whole thing collapsed, and they wound up dishonoring their promises, rolling some into Brady Bonds, and they let the currency float, they just— and so the peso went to nine to the dollar or somewhere around there. And they kept business as usual with the— as a floating exchange rate. Okay, so I don’t know if that answers your question or not, but that’s what happened.”

LetsGetItDone Comment: I think this contrast between Russia and Mexico by Warren is both instructive and compelling and shows the importance of having a non-convertible fiat currency with a floating exchange rate.

Unidentified: “I was asking about Argentina…”

Warren Mosler: “Argentina. Yeah. Argentina was fixed one-to-one to the U.S. dollar. Same type of thing: Interest rates went up because of the option to convert, they ran out of dollars, and one night in a deflationary mess that followed with after thirty-two dead in the street one night Buenos Aires they reopened with the floating exchange rate, they let the peso float. Okay, Russia, the difference was, when it blew up they just turned the lights off and went home. They could have kept it going if they wanted to, they didn’t know what buttons to push at the central bank, or they were afraid for their lives, the central bankers, and just left, okay, which is the story I’ve heard also.”

LetsGetItDone Comment: And this further underlines the point. If you don’t have a sovereign fiat currency, then your capacity to adapt to economic changes is severely crippled.

Unidentified male: “Just one corollary follow up question. Can you explain how this relates to the Rogoff Reinhart book? That is the debt in foreign currency versus in on your own currency and what these magic numbers, 90% debt-to-GDP means.”

Stephanie Kelton: “Yeah, I think the lesson to be drawn from the arguments that I made are that the debt-to-GDP ratio is largely irrelevant so long as the debts have been written in a currency that you have a monopoly over the issue of. So the U.S. Government can always meet, on time and in full, any payment that comes due in U.S. dollars, *period*. Okay? If you’re borrowing in a currency that you do not control, you cannot create, like Greece cannot create the Euro. . . So they can’t always, necessarily, serve as on-time and in-full obligations that come due; it’s not a sovereign currency.”

Warren Mosler: “Let me just add to that, if you look at Italy back in the eighties, they had one of the best economies in the world with debt-to-GDP ratios well over 100 percent and inflation rates in double digits. So the problem with inflation is not that there’s any real economic problem, it’s a political problem. People don’t like it, and you will get thrown out of office if you allow inflation. Not because it’s not good for employment and output, it’s just considered immoral. It’s the government robbing us of our savings, and hidden taxes and all these types of things. And it has to be respected, and democracy reflects the will of the people.”

Stephanie Kelton: “Keep in mind also that Japan’s debt-to-GDP ratio is roughly 200 percent, but as long as the borrowing is done in yen, it’s not a problem.”

Bill Mitchell: “If you read their book carefully, you’ll see — and you go through each case and trace the currency systems being run, the circumstances surrounding the default, you’ll only find one example of a sovereign, truly sovereign government in modern history that has defaulted, and that was Japan, and it was during the war, and the reason they defaulted was because they said they weren’t going to pay back debts to their enemies, and it had nothing at all to do with the question of solvency, it was a political decision. And so, you know, I think the book is being used very frequently now by commentators as, See, this is the definitive piece of research, and in actual fact it’s highly limited research and applies to a very small number of circumstances that we don’t find in very many countries.”

LetsGetItDone Comment: So, what can you say about Reinhart/Rogoff’s failure to distinguish nations sovereign in their currencies from nations that are not? You can’t say anything, but that their work is a great example of ideological pseudo-science incapable of making correct predictions about fiscal sustainability across the board.

Warren Mosler: “Look, I’ve had very strong conversations with David Leibowitz of Standard & Poor’s about this, separating the difference between ability to pay and willingness to pay, and the last time on that last go-around I sent you a copy of that, but they have stopped downgrading on ability to pay, I believe, they are now downgrading on willingness to pay, which is what happened with Japan. So what we’re saying is, there’s always the ability to pay; there may not be the willingness to pay. Very different things.”

Pavlina Tcherneva: “Just to add on to the Argentina story, it’s instructive for another reason. Argentina actually is a very good case study of how you launch a currency. When the state was bankrupt, the provinces were bankrupt, what they did is they actually issued their own IOUs. They issued [patacornes?? lecops?? foreign terms], the varieties of local currencies. Now, our states are prohibited from doing that, but in Argentina they could, and so you get back to Stephanie’s point, Why do you trust the currency you didn’t have before, you didn’t use before, the vast majority of people are not using, you know, there’s no trust that was built in the system, and the reason was because the states taxed the population in these LECOPs and they negotiated that you could pay your utility bills in patacones. And so, although everybody was up in arms and saying, you know, You can’t be using this system, and, granted, it didn’t last very long, you go to Argentina and you see every store says “Aceptavos patacones.” It is very effective to launch this currency. Once they floated, they had no need for them anymore.”

Warren Mosler: “In Russia, after the central bank shut down, they traded what they called arrears, which is I thought a fantastic word for what things are. So the states with the— whole corporations would trade arrears with each other.”

John Lutz: Asked Stephanie to explain Zimbabwe and Weimar Germany. She and Marshall Auerback replied by saying that Marshall would explain those cases in his afternoon Teach-In session on Inflation and HyperInflation.

LetsGetItDone Comment: To be reviewed in Part Five of this series.

Roger Erickson: “Another question about getting back to treasury bonds. We’ve all heard, most of us have heard now that we went off the gold standard under Nixon in 1971. The question that rarely gets asked is, “Why does anybody bother selling Treasury bonds anymore, at least very many of them,” and a follow-up is, “Is there any country in the world that doesn’t bother doing that to any extent?””

Roger’s question elicited comments from Marshall Auerback, Warren Mosler, Randy Wray, and Bill Mitchell in what proved to be a lengthy and illuminating exchange. The answers included that it was the law (Auerback); it’s what countries do when they become countries (Mosler); it’s a legacy of the gold standard years caused by the failure of Congress to amend laws based on gold standard thinking (Auerback); it’s an interest-bearing alternative to holding reserves (Wray); selling term securities raises interest rates (Mosler); decision makers are caught in an ideological tangle and believe that issuing debt voluntarily supports fiscal sustainability (Mitchell); and they may want to sustain higher mortgage rates (Mosler); or perhaps know what they’re doing but want to benefit bondholders.

Roger Erickson: then followed with a comment that the past 30 years seem to have de-regulated everything, but, inexplicably hyper-regulated our monetary system.

Bill Mitchell: “No, it’s not inexplicable at all, because they wanted to — the whole paradigm and the whole ideology was to create freedom, so-called freedom, for the private sector and hamper the government sector from having any freedom, ’cause you can’t trust the public sector, you can only trust the private sector, because the rhetoric is that the private sector is market-disciplined and the public sector isn’t. It’s entirely consistent.”

To which Professor L. Randall Wray adds that he thinks that financial people may well understand how things work but want to continue to create myths or frauds about how it works because they want to constrain politicians, and voters, who they don’t trust, from growing the government. It’s also about their mistrust of democracy.

LetsGetItDone Comment: I agree very much that this is about ideology and about opposition to democracy. Even more, I also think it’s about the emergence of plutocratic oligarchy. See here, and here.

After a brief question about why the US retains gold and an answer from Warren about it being another asset of the Government it holds on to, Teresa Sobenko: asked whether the euro is a scheme or whether people are just not aware of the problems with it. Marshall Auerback replied that he thinks they were aware of the problems when they formed the monetary union, but hoped that it would lead eventually to a political union. There was further discussion about the politics of the situation originally leading to a much-expanded Eurozone.

Edward Harrison: followed up on the issue of the need to issue treasury bonds, and asked whether if one prefers monetary to fiscal policy “don’t you need a constant flow of treasury securities in order to keep on the run securities constantly coming in order to keep a liquid market in that vehicle”? Warren Mosler replied that the Fed could just trade Fed funds at a particular rate and that would be enough to target interest rates. Ed replied by saying that doing “that would never fly” from “a political perspective.” Warren agreed with that and emphasized that he was just saying that as an operational matter all the Fed has to do to set interest rates is to “set the overnight rate in terms of a bid and an offer, which is what they do in Canada and Australia, . . . “ and “you don’t need treasuries for that. . . then he points out that with our present “. . . institutional structure, where the Fed has to use a repo market where they’re doing overnight loans back and forth where they’re required to use treasury securities as collateral, then you’re correct in that sense, but again, that’s a self-imposed constraint, . . . “ which after the middle of 2008 they overcame using a variety of tools, but never getting politically to the point of actually just trading in Fed funds to control the interest rates.

Next, Bill Mitchell: made what I thought was a priceless statement:

“Just two points on that. In ’90–’96 we elected in Australia a conservative government — Warren will know this story I’m about to tell I think — and for the next ten out of eleven years they ran surpluses increasing, and they sold it to the public as rail bridges started to crumble, public education started to crumble, hospital waiting lists started to increase, they sold it to the public as getting the debt monkey off their backs, and because they were now obviously retiring debt as it became due, and by 2001 the bond markets were so thin that there was a huge outcry. Now who did the outcry come from? Well, it came from the Sydney futures exchange at the beginning, and all of the other traders that were using the government debt as what I call corporate welfare, basically as a guaranteed annuity in which they could price their risk off, and this led to the government having an official inquiry —remember that Warren? — they had an official inquiry onto what the size of the bond market should be, and they were blithely running surpluses all the time, and they agreed, they caved into the pressure particularly from the Sydney futures exchange, they caved into the pressure and announced that they would continue to issue debt at an agreed amount, they came up with an agreed amount of millions per quarter, even though they were running surpluses, they continued to issue debt. I thought that was a really… Do you remember that, Warren?”

And then Warren and Bill referred to a paper they co-authored in 2002 describing:

”. . . all of the special pleading from the top end of town on why the government had to issue debt even though they were running surpluses, despite two facts. One is that at the same time the recipients of the corporate welfare were leading the charge to deregulate the welfare state for the workers and deregulate the wage system and get rid of social security, and secondly, despite the fact that the top end of town were the ones that were leading the myths about the onerous debt burdens the deficits they used to run were causing. . . . ”

LetsGetItDone Comment: which clearly makes the point that the “top end of town” is about “lemon socialism” at least, and perhaps about fascism, itself, but never really about the “free market.” That’s just for the peasants, not for entitled folks like them.

Jeff Baum: next raised the issues of inflation and its distributional consequences and pointed out these raised political questions, so he thinks that “just changes the question from: “But we can’t afford this” to “What are we going to spend it on?” and maybe there is a big question there, as Randall was saying, that once the voters figure that out it turns into a big political fight. . . . Do you have any kind of summary about how this turns into a political question, and what are the distributional consequences of that?”

L. Randall Wray then replied: “. . . I think that what the public needs to understand is if you’re saying you want the government to do this, you want the government to spend on this, that means we’re going to devote real resources to this. Do you really want the government to devote our nation’s capacity to supply you with this, and if you do, then democracy wins and we do it. But you got to realize that means less resources here, okay, so to get it out of the deficit hysteria, the affordability, and so on, it’s a real issue. Do we want to devote an ever-rising share of our nation’s output to be put to taking care of aged people? Put it that way, and let the population vote on it. They might vote yes, they might vote no . . . okay? That’s democracy.”

Marshall Auerback: then followed with: “Two points I’ll make. One is that if we get the debate along the lines that you’ve suggested, then we’ve effectively won the argument, because we’ve always said ultimately it’s a political argument. . . . And the other point I would make is that even the notion of affordability, it’s applied in a very, very selective way, as I’m sure you’ve noticed. I mean, when we declare war, we don’t sort of say, “Well, we’re running a budget surplus and can we afford to go to war?”, we just do it. Or we don’t say, “Well, we’re going to buy this aircraft carrier, so we’d better check with our bankers in China as to whether we can afford it or give them a line item and see if they want to red-line anything.” Nobody actually ever does that, but that’s the logic of their position, if you follow it through to the conclusion. But somehow when we get onto a subject like health care or Medicare or Social Security, it’s like, Oh, well, affordability becomes an issue, so I think it’s more a reflection on our skewed value system than anything else, actually.”

LetsGetItDone Comment: which reveals one of the core purposes of MMT, which is to get past the mythology of insolvency or “we can’t afford it,” and get to the real political issues, the neoliberal elites are trying to avoid. They know that if the debate becomes full time employment vs. the possibility of inflation, then they’ll lose. They know if it becomes Medicare for All or bailout of the insurance companies without the “we can’t afford it” coming up, then they’ll lose. They know that if it becomes debt jubilees for home owners and college students, then they’ll also lose, as they will if it becomes reinvented vs. crumbling infrastructure. There are so very many issues they’d lose on, and democracy would win, if “we can’t afford it” is gone.

Stephanie Kelton: “Just one point on the distributional issue, one of the things that you hear a lot about now is the growing size of the national debt and the growing interest burden, and we really need to make that a distributional topic, because it goes directly to this argument that we’re passing this on to the next generation and the generation after that, becomes a generational argument, which it absolutely is not, okay? All of the interest payments will be made by the people who are alive at the time the interest payments come due, and what we’re talking about is a shift of income from those paying taxes to those receiving payments because they’re bondholders. And so the bigger the share of the interest, relative to the size of the economy, the bigger the command of the goods and services the bondholders can wield against the rest of us. And so that becomes a discussion that we definitely would want to have.”

LetsGetItDone Comment: Especially since the austerity myths have been used to transfer wealth from poor people and the middle class to the richest people for 35 years or more now, accounting for the danger to democracy we are now seeing.


MMT ideas about the origin of money, the fiat nature and origin of money, the idea of a Government sovereign in its own currency, and the idea that such a government cannot become bankrupt involuntarily are central to MMT and are enormously important. Their importance was underlined to day in a post by J. D. Alt at the New Economic Perspectives blog, on how MMT ought to be framed to persuade people Alt says:

”The interesting thing here is that it appears the way modern money actually functions today is extraordinarily beneficial to everyone! It occurs to me that the first sovereign country that politically understands this, and is able to align its fiscal policies accordingly, will become so wealthy and prosperous it will rapidly dominate all other economies. It will be able to have the finest, most advanced medical and health services industry, the most efficient and convenient transportation system available, the most beautiful and comfortable housing imaginable, the healthiest and tastiest foods that can be grown and prepared, the most effective education and school systems, the best and most stylish shoes and apparel, the healthiest and most diverse natural ecosystems, and the most leisure time—including the most wonderful, fun, and satisfying places and ways to spend it. What politician, in her right mind, couldn’t get behind that? What voter, in his right mind, wouldn’t vote for it? And how could a platform of sour-faced austerity even begin to compete?”

Both Bill Mitchell’s (see Part Two) and Stephanie Kelton’s presentations and the accompanying panel and Q & A sessions at the Fiscal Sustainability Teach-In explained MMT foundations relevant to actual, rather than faux fiscal sustainability, and government sovereignty in its own currency that explain why J. D. Alt’s vision of open possibilities with MMT makes sense.

The sky really is the limit if we can get our economic thinking straight and stop our victimization by the austerity/deficit hawk narrative being kept alive by the Peterson Foundation, Peterson’s various other outlets, as well as his other network allies such as Bowles and Simpson, and President Obama himself, who has used the austerity rhetoric from the very beginning of his administration as much as anyone else. On the other hand, if we can’t end the dominance of that narrative, the future of the United States is likely to be very dark, since we may not be facing a lost decade, so much as a lost generation whose futures are destroyed by a false economic ideology. Frankly, I don’t know if American Democracy, already greatly weakened by the mindless reaction to 9/11, will be able to survive that outcome.

In Part Four, I’ll cover more MMT foundations from Warren Mosler’s great discussion of “The Deficit, the Debt, the Debt-To-GDP ratio, the Grandchildren and Government Economic Policy.” We’ll see how his version of the MMT counter-narrative strengthens and extends what we’ve already learned from the proceedings of the first two sessions of the Teach-In.

(Cross-posted from

The Fiscal Summit Counter-Narrative: Part Two, Defining Fiscal Sustainability

2:44 pm in Uncategorized by letsgetitdone

(Cross-posted from

'Reject Fear: Austerity Stops Here' sign at a protest.

Austerity / Household Tax protest. Photo by William Murphy.

One of the most irritating things about the deficit hawk/austerity literature, is that it uses the ideas of “fiscal sustainability” and “fiscal responsibility” in an ideological way, without ever really analyzing or explaining these labels. It’s almost as if the austerians know that if they clearly and directly stated what they meant by these terms, and how their meanings were actually related to the ideas of “sustainability” and “responsibility”, then flaws in their whole ideological and policy framework would be very clear to everyone else.

Of course, if you read any of the austerian literature you soon learn that they think fiscal sustainability and responsibility both relate to the impact of government spending on the federal deficit, the public debt subject to the limit, and the debt-to-GDP ratio, and to no other impacts of fiscal policy.” But the austerians never really explain why these three numbers are relevant for fiscal sustainability and responsibility. Instead, they take the relationship as obvious to all, and start evaluating fiscal policies on the basis of past and projected deficit, debt, and debt-to-GDP ratios. Invariably, regardless of the nation in which you find them, they end up advocating for lower taxes for the wealthy, less regulation for corporations, and sacrifices of Government programs and the social safety net; all this based on the ideas of fiscal sustainability and fiscal responsibility that they’ve never even explained to an incurious and uncritical media, but very bought media, or to the public.

Because of the very great importance of the fiscal sustainability/fiscal responsibility/fiscal crisis/solvency rhetoric, the first session of the Fiscal Sustainability Teach-In Counter-Conference covered the topic “What Is Fiscal Sustainability?” and the primary speaker was Professor Bill Mitchell of the University of Newcastle. Audios, videos, presentation slides, and transcripts for the presentation are available at selise’s site and a slightly different version of the transcripts is available from Corrente as well.

Bill Mitchell’s Presentation on Fiscal Sustainability

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The Fiscal Summit Counter-Narrative: Part One

8:58 pm in Uncategorized by letsgetitdone

(Cross-posted from

Well, it’s Springtime in DC. Time for the Peter G. Peterson Foundation’s annual event. The Fiscal Summit, to be held on May 15, better named the Fiscal Cesspool of distortions, half-truths and lies, is a propaganda extravaganza designed to maintain and strengthen the Washington and national elite consensuses on the existence of a debt crisis, the long-term ravages of entitlement spending on America’s fiscal well-being, and the need for long-term deficit reductions plans to combat this truly phantom menace. The purpose of maintaining that consensus is to keep an impenetrable screen of fantasy intact in order to justify policies of economic austerity. that have been impoverishing people and transferring financial and real wealth to the globalizing elite comprised of the 1% or far less of the population, depending on which nation one is talking about.

Austerity Road Sign

Photo by 401K


The 2010 Fiscal Summit

The first “Fiscal Summit” was held in Washington, DC on April 28, 2010. It was lavishly funded by the Peter G. Peterson Foundation, and included many “big names” associated with “fiscal sustainability” and “fiscal responsibility,” including Bill Clinton, who appeared along with personalities from Peterson’s stable of deficit hawks such as David Walker, Alice Rivlin. Robert Rubin, Alan Simpson, Erskine Bowles, and Paul Ryan. Its purpose was to spread the deficit hawk message of Peter G. Peterson, including various myths of the world-wide austerity movement:

The 2011 Fiscal Summit

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Ending Austerity: Getting Free of Debt Subject To the Limit

7:31 pm in Uncategorized by letsgetitdone

It’s hard to listen to the doomsday rhetoric of Austerians like Paul Ryan and intermittently the less hysterical, but equally mythical narratives of the President when he talks about deficit/debt reduction, when you know better; when you know that both are talking about a bogeyman that doesn’t exist. Here’s Ryan, the Republican wunderkind:

“We face a crushing burden of debt. The debt will soon eclipse our entire economy, and grow to catastrophic levels in the years ahead.”

”The next generation will inherit a stagnant economy and a diminished country.”

Why? Because the burden of public debt payback will too heavy for the next generation to bear. This is ridiculous, of course, because we can always roll over previous debt and pay interest on it as it comes due. In fact, during the past 11 years as Ben Strubel shows, we’ve rolled over $437 Trillions in debt. And as Mike Norman says, we’ve rolled over $32 Trillions thus far in Fiscal 2012 alone.

We’ll always be able to roll over our public debt if that’s what we choose to do because a debt instrument is the functional equivalent of a savings account, and frequently those who hold USD including foreign nations have the effective choice of keeping their USD in a reserve account or buying a debt instrument. They’d rather buy the debt instruments because they earn interest. However, low the rate of interest is, it’s better than the rate they’ll get if they keep their USD in their reserve account, unless the Fed decides to pay Interest-On-Reserves (IOR).

Can our national debt increase indefinitely? The short answer is: yes it can. The reason is that a Government like the United States with a fiat non-convertible currency, a floating exchange rate, and no debts in any other nation”s currency, has no solvency risk because it can always create money to pay its obligations. Its debt instruments therefore are nearly risk-free. They’re a safe harbor for investors who’d rather earn a return on the USD they hold, then content themselves with keeping it in a reserve account, that typically earns no interest.

The real problem with the debt subject to the limit is political

Even though there’s no real fiscal sustainability problem with the public debt, good luck trying to persuade the public that there is none, by using an argument like the one I just offered. The view that the Federal Government is like a giant household has been drummed into people for years. Also, everyone knows that local and State governments, as well as even very large corporations have real debt constraints (so long as the Government doesn’t bail them out). So, to persuade people that the Federal Government is different than other institutions isn’t easy, especially when the economic mainstream still contends that the Government has fiscal sustainability problems.

Proponents of Modern Monetary Theory (MMT) like myself often point out that Congress can always allow deficit spending without issuing debt instruments if it wants to, and has always had that power. Since it doesn’t do that it follows that the very existence of the “national debt” is Congress’s fault in the sense that the Government has issued debt instruments to close the gap between spending and tax revenues only because of the voluntary constraints Congress has placed on the Executive Branch.

This argument is also correct. But the prescription that the problem should be solved by getting Congress to get rid of these constraints and allow “pure” deficit spending with no debt issuance requires convincing Congress to do this. In the near term that’s not a practical prescription. Republicans and most Democrats have a vested interest in not recognizing that the debt is Congress’s fault, because they want to claim the mantle of “fiscal responsibility” by advocating for balanced budgets or long-term debt reduction, or reduced spending on the programs they don’t like.

So, neither Party will support “pure” deficit spending without a radical change in political understanding of what is possible for the Government brought about by a demonstration,within the limits of the current legal structure, that we can get free of the public debt subject to the limit any time the President wants to, without a by-your-leave from Congress.

The easiest way to get free of debt subject to the limit

The easiest way under current law to get to the point where there are no debt instruments outstanding is to persuade The President, or his successor, to use Proof Platinum Coin Seigniorage (PPCS), provided for under existing law, to generate the revenue needed to pay off the debt. Any other course to remove current constraints on “pure” deficit spending, will need Congress’s approval, which probably means it will also require overcoming the filibuster. The filibuster can be overcome for certain things, but not for major changes like the moving the Fed to the Treasury, or explicitly allowing “pure” deficit spending when it appropriates. In fact, to enact such a major change, it may be easier to get rid of the filibuster itself, since that requires only 50 + 1 votes, on the way to getting the major change.

So, from a political point of view, it is much easier to do PPCS for awhile than to get other alternatives done to overcome the “political debt problem.” Also, in effect, PPCS would subordinate the Fed to the Treasury anyway, since allowing the gap between tax revenues and spending to be closed through seigniorage would dictate the Fed’s actions in using IOR to hit its target interest rates.

In this post, I proposed minting a $30 Trillion proof platinum coin to accomplish getting rid of debt instruments and filling the public purse sufficiently to change the fiscal background so no one could use the argument that we don’t have the funds to spend on x, or y, or z, if these fulfilled aspects of public purpose. I also argued that minting that coin wouldn’t be inflationary in itself. Scott Fullwiler amplified that argument very thoroughly in a later post.

Later, I changed my proposal to minting a $60 T coin to increase the time horizon we would have to change public understanding, bring the Fed inside Treasury, and end the charade that the Government can’t create as much money as it needs to solve problems. That was done in three posts here, here, and here. There were also other posts in the same time frame using the $60 T assumption.

That level of PPCS hasn’t been met with great enthusiasm from my MMT compatriots. I suspect it’s because most think that the $30 T and $60 T proposals makes us sound crazy. Well, maybe it does, but that part of it is about messaging, and I think an eloquent President could sell it as a stop gap to get us out of our self-imposed fiscal constraints until Congress sees the wisdom of moving the Fed inside Treasury. The President could begin selling the $60 T coin with a speech like the one envisioned here.

Many people would be heartened and persuaded by a speech like that; but the President involved would certainly get charged with insanity for using PPCS in the way I’ve proposed. Rush Limbaugh, Laura Ingraham, and much of the mainstream press would probably join them along with other organs echoing the outrage of Peter G. Peterson’s deficit hawk/”fiscal responsibility” minions. But I think most of the firestorm would be ended within a week, if the President retires all the Intra-governmental debt, including debt held by the Fed within that time.

A news conference held immediately after that could announce that the debt subject to the limit was reduced by 40% in a week. Then at the end of every quarter the President could announce further reductions. The posts linked to above by Ben Strubel and Mike Norman suggest that over 4 quarters the President could report elimination of nearly all the debt subject to the limit other than a relatively small amount exceeding one year in duration. I haven’t tried to locate the precise number involved, but say it’s $2T. Then after a year, the President would be able to report that most (about 87%) of the public debt was gone, and he could also provide a schedule for fully paying the rest of it off, without either cutting spending or raising taxes.

If Scott Fullwiler and I are right and that no inflation would result from using PPCS, then no one would call he/she crazy because they used PPCS after that year of payback. It will have been demonstrated that the debt subject to the limit is a faux problem that can always be solved at will, and that the Government’s capacity to deficit spend with no solvency concerns is unlimited.

Deficit hawkism justified by solvency fears would be dead by demonstration, and a new era of deficit hawkism justified by a new round of inflation hysteria would dawn. We would be swamped by Weimar and Zimbabwe cautionary, Calvinist fairy stories told by the defenders of the 1%. This, however, is an improvement over their present insolvency fairy tales, because fiscal policy could be guided by actual, observable measures of impact, rather than by indicators that have only a tenuous connection to inflation or hyper-inflation at best.


So, summing up. I think progressives, including MMT economists, ought to support use of massive PPCS by the Executive Branch to pay off the debt, and change the political situation. We must fight to persuade the White House.

We can say that “the perfect” policy to get rid of the debt is to change the law and bring the Fed under the Treasury; but failing that, a “good” policy is to end any talk of fiscal solvency problems caused by the faux debt subject to the limit, by using massive PPCS. Since the President knows that “the perfect is the enemy of the good,” perhaps he’ll appreciate our practicality in being willing to accept PPCS in place of “the perfect.”

But regardless of whether he does so or not, at least we will be making the clear point to the White House and to everyone, that any “debt” problem we have from then on, will be, and for that matter is now, due only to the President’s unwillingness to use his legal powers to solve it. So, if everyone is as concerned about the debt, as they purport to be — concerned enough that they prioritize it above the social safety net for the poor, the middle class, working people who have lost their jobs and homes due to speculation by our feckless and fraud-committing financiers, the elderly, and the ill, and also prioritize it ahead of education for the young, reconstruction of the energy and infrastructure foundations of this country, and growing climate-change crisis, then why don’t they direct their concerns and place their blame where they both belong — namely at a President who will not use the powers Congress has given him to get rid of that public debt that is evidently so noxious to them? And, in the process, to take this silly faux issue, that has harmed so many people for so long, off the political table forever.

(Cross-posted from

The WaPo MMT Post Explosion: Matthew Yglesias’s MMT

11:54 pm in Uncategorized by letsgetitdone

Matthew Yglesias posting in Slate, also gave us a few words on Dylan Matthews’s post about Modern Monetary Theory (MMT). He starts with this thought:

”Is the inflation of the 1970s a myth? I don’t think it was, but something Dylan Matthews’ excellent overview of Modern Monetary Theory illustrates is that some people think it was. That to me is a mistake, and people should try to separate the merits of heterodox macroeconomic theory (which I think are considerable) from a handful of incidental political commitments that its adherents have. The core point of MMT is that if you have a freely floating fiat currency then the sovereign can’t “run out of money” and the point of taxes is to regulate demand not to finance government activities. But even though this is a “heterodox” view, I think few mainstream people would actually deny it. Instead they think that talking in these terms will lead to dangerous inflation. I think that fear is overblown, but not as overblown as Jamie Galbraith thinks it is.”

The 1970s Inflation

Reading this, I had the definite feeling that the old aphorism about people who fight new paradigms and ridicule/marginalize their adherents, and often opine later that there is nothing new there, is all too true. Matty ought to give everyone a break and admit that the mainstream has been beating the drums of insolvency terrorism since shortly after the Obama Administration began and still is. So, mainstream people have been saying that there can be an insolvency problem in very large numbers, and if they are doing so less now, it’s only because any fool can plainly see that austerity is failing all over the world, as MMT predicted when the austerity craze started, and also because many more people are reading MMT blogs than was the case two years ago, and they are beginning to pick up some of the core insights.

To say that “. . . few mainstream people would actually deny it. Instead they think that talking in these terms will lead to dangerous inflation” is to to imply that most mainstream people are elitist liars who have been engaged in deficit terrorism because they thought it was a more effective political tactic than using the inflation bogeyman.

That may, in fact, be true. But I wonder what the mainstream would have to say about Matty’s implication, that its economists haven’t really been being ignorant and dumb; just elitist, dishonest, and manipulative.

I lived through the inflation of the 70s, and I can attest to its reality, and severity for some people, but relatively mild impact for others. I also think that the causes of that inflation were not simply increases in nominal unit labor costs, but increases in interest costs caused by the Federal Reserve’s policies, the actions of the oil cartel, and particularly the Saudis, the activity of speculators, the constraining regulations on Natural Gas production, and the failure of the Carter Administration to employ price controls and rationing due to its neoliberal biases.

The other factors I’ve mentioned were much more important in causing the inflation than rising nominal labor costs, which were primarily reactive to the cost-push inflation caused by the other factors. Government deficit spending had almost no role in the 1970s inflation, which was due much more to cost-push than to demand-pull factors.

Types of Inflation

Matty next quotes Galbraith from Matthews’s article pointing out that we haven’t seen a serious demand-driven inflation since WWI and that one occurred under very unique circumstances unlikely to happen again.

”I think this contains some insight. Unfortunately the standard concept of “inflation” runs together two very different scenarios. In one kind of “inflation”, China abandons Maoist economic policies, its population gets richer, as it gets richer they start eating more meat, and this pushes the worldwide price of meat, dairy, and grains upward. That’s a real thing and it hurts real people in their pocket books, but these kind of global commodity price fluctuations aren’t effectively addressed by demand regulators. And one story some people have about the seventies is that it was just a global commodities issue. OPEC pushed up the price of oil, so we got “inflation” but this is nothing like the World War One case where dodgy government financial practices eroded the value of money.”

To me, this was really an “off the wall” response to Galbraith’s view, since Galbraith was clearly talking about the likelihood of demand-pull inflation inflation occurring in the United States, and was also implying that the Weimar and other WWI aftermath inflations had nothing to do with that policy. Also, in referring to “dodgy government financial practices” in the last sentence, Matty seems to be saying that the Weimar Government was guilty of such practices, but given the size of their Versailles-imposed reparations to be repaid only in goldmarks or foreign exchange, what could the German Government have done to recover from the War, except try the money-printing strategy to try to get the foreign exchange needed? If anybody was guilty of “dodgy financial practices” it was the Versailles peacemakers who, in imposing a Roman peace on Germany, insisted on payment conditions that the Germans could not possibly meet, especially since the French and Belgians seized control of the Ruhr and with it much of Germany’s industrial capacity in 1923.

But, that aside, Matty glosses over the fact that demand regulators can’t very well control worldwide demand-pull inflation in the international economic system from a legislative foundation in a single country, as long as they’re committed to maintaining a free market in the commodities that are the object of such inflation. That is, the China example basically says that when people in many nations other than the US and the previously developed nations get wealthy enough to create greater effective demand on certain commodities in a relatively free market, and that demand outruns supply, then price increases that hurt people will result.

But why is this a criticism or reflection on the MMT view, or what Galbraith had to say? Galbraith and the MMTers have clearly been talking about regulating demand-pull inflation in the United States caused by excessive deficit spending.

Moving to Matty’s example, MMT would certainly predict that when an economic system has no common currency, but a relatively free market in certain commodities, and also limited supply, then increasing demand might well result in inflation. As for the ’70s oil inflation, that wasn’t the result of either a free market or increasing worldwide demand for oil, but rather of the factors I called out above being called into play by the Oil Cartel’s control of the world supply of oil. So, that inflation was an instance of cost-push, not demand-pull inflation, and requires different measures to control.

I hesitate to say what MMT might recommend in the two cases of increasing world-wide demand, highlighted by Matty, because I’m not sure that all of us would say the same thing, nor am I one of the economists developing the MMT approach. But, speaking as someone who’s been researching MMT for some time, in the ’70s case, I would have placed domestic price and wage controls on commodities except on foreign sales to oil exporting countries, where prices of exports would have been pegged to increases in the prices of their oil exports. I would have also recommended de-regulating natural gas, and oil rationing to cut demand for the cartel-restricted supply. I would not have implemented higher interest rates as the Fed did. Until the very end, when the economic system was driven into recession, that only “fed” the inflation fire, while creating “stagflation.” I think such measures, consistent with MMT as I understand it, would have “choked off” the ’70s inflation in a much shorter time than the policies followed in the 1970s and the early 1980s.

As for the present increasing demand on the world’s food supply, that’s certainly not being caused by deficit spending by an International currency issuer, since there is none. And the only remotely similar entity to that is the ECB which is gradually choking off economic activity in the Eurozone to save its financial elites. I think commodity inflation must be fought by Governments legislating and enforcing existing laws against speculation, preventing cost-push inflation of the kind we saw in the 70s using the measures outlined, and by allowing commodity markets to adjust to the need for more supply, or producers to create substitutes for commodities in short supply. I also think control of speculation and market forces will probably suffice to relieve the pressure we’ve been seeing in commodities.

If that fails, however, then Governments whose economies can produce abundant supplies will have to place export controls on commodities necessary for their own populations in order to contain domestic inflation. That will not be popular. But we do still live in a nation state system, and the first responsibility of national governments still is to the general welfare of their own populations. Of course, such measures will result in other nations placing their own export controls on abundant commodities, and nations will have to negotiate bilateral agreements to serve their respective populations.

Unit Labor Costs

Matty Yglesias continues with his remarks about inflation:

”That’s why my favorite indicator of inflation is “unit labor costs”:

“Unit labor costs are basically wages divided by productivity. It’s not the price of labor, in other words, but the price of labor output. If productivity is rising faster than wages, then even if wages themselves are rising, unit labor costs are falling. Conversely, if wages rise faster than productivity than unit labor costs are going up. Clearly there’s nothing wrong with a little increase in unit labor costs here or there. But over the long term, growth in unit labor costs needs to be constrained or else it becomes impossible to employ anyone. And you can see that in the seventies it’s not just that gasoline got more expensive, we had an anomalous spate of high unit labor cost growth. That was inflation and it’s what led to the regime change that’s governed for the past thirty years.”

Now that way of putting things is strange. Not that the general point is wrong, but if real unit labor costs exceed real labor productivity over the long term, that would create survival pressures for business. But, if there was an anomalous rise in labor costs in the 1970s, there was also an initial anomalous rise in the cost of oil before that rise, and later there was an anomalous pattern of interest increases implemented by the Fed that hasn’t been seen before or since, as well as anomalous rises in commodity prices. To read the quote above, one would think that the rise in unit labor costs was itself inflation, rather than just an adjustment of the cost of labor to all the price increases going on around it.

The truth, again, is that the inflation of the ’70s was caused by a complex of inter-related phenomena and the rise in unit labor costs was only one of these. It may have been the one that neoliberals focused on in the ’80s to avoid pinning the blame for what happened on the Cartel, the failures of the Carter Administration and the Fed’s policies, and to claim that the inflation was due to demand-pull factors, but that doesn’t mean that their analysis was correct.

Today, we know that Paul Volcker and Jimmy Carter handled the 1970s inflation incompetently, and we also recognize that the behavior of the Cartel, and the excessive regulations on natural gas made this a cost-push and not a demand-pull inflation, and that the Fed policy of targeting the unit cost of labor as a trigger for raising interest rates for the next 30 years or so was part of its low inflation at the cost of high unemployment policy that it illegally engaged in, in violation of the Humphrey-Hawkins Act. In his post, critiquing Matty’s missive, Steve Randy Waldman (SRW), had the following to say:

“. . . Yglesias has fallen into a trap. Unit labor costs are not “basically wages divided [by] productivity”. That’s not the right definition at all. [See update.] Unit labor costs are nominal wages per unit of output. With a little bit of math [1], it’s easy to show that


An increase in unit labor costs can mean one of two things. It can reflect an increase in the price level — inflation — or it can reflect an increase in labor’s share of output. The Federal Reserve is properly in the business of restraining the price level. It has no business whatsoever tilting the scales in the division of income between labor and capital.

Yet throughout the Great Moderation, increases in unit labor costs were the standard alarm bell cited by Fed policy makers as an event that would call for more restrictive policy. And all through the Great Moderation, except for a brief surge during the tech boom, labor’s share of output was in secular decline. (More recently, the Great Recession has been accompanied by a stunning collapse in labor share. Record corporate profits!)”

SRW continues his discussion in this vein pointing out the Fed’s hawkishness on unit labor costs has had a heavy constraining influence on the presidency because Presidents have wanted to be very careful about economic policies that might increase unit labor costs and cause the Fed to activate contractionary reactions. He says further:

“. . . . In this environment, the decline of labor unions and their shift in focus from wage growth to working conditions was understandable. If workers won on wages, they would lose when the recession put them out of work. As long as wages were contained, monetary policy was “accommodative”, and workers could supplement their purchasing power with borrowings and asset appreciation. During the Great Moderation, wage growth was rendered obsolete. A superior means of middle class prosperity had been invented. Or so it seemed, until we experienced the toxic after-effects in 2008. Now we have grown skeptical of debt-fueled pseudoprosperity. But the covert hostility to wage growth that underpinned Great Moderation monetary policy remains unchallenged.

“I imagine some readers saying to themselves, “But still. If the labor cost of ’stuff’ is allowed to grow, how can that not be inflationary? It’s common sense.” And that’s true, as far as it goes. But if the capital cost of stuff grows, that must also be inflationary. Suppose we define the complement to unit labor costs, unit capital costs. Unit capital costs might be defined as “business profits per unit of output”. Would it be politically tolerable in the United States to have a central bank that prevented expansions of business profit per unit sold? Is restraining profitability of investment a proper role for a central bank? If suppressing returns to capital would be improper, why on Earth do we tolerate a central bank that opposes returns to labor?”

Very good questions. Why have we allowed the Fed aided by presidents to implement policies that increase returns to capital, but suppress returns to labor? Is this what Americans think has been going on and what they approve, or has this been made possible only because of “the independence” of the Fed, its systematic lack of transparency to the public, and the unwillingness of Presidents to contest the power and “independence” of the Fed either legally or informally?

Time for a Change in Regimes?

Even though Matty Yglesias seems convinced of the importance of increases in nominal unit labor costs as a primary cause of inflation needing to be constrained in the long run, he, nevertheless agrees with SRW and I that the approach to constraining such costs that the US has followed for the past 30 years and more cannot be continued. He says:

”In the wake of the Great Recession, I think we need another change in regime. We can’t continue with an approach that always delivers on price stability but frequently leads to prolonged spells of mass unemployment. But I think to push for that regime change credibly, people need to acknowledge what went wrong in the past and need to explain why it won’t happen again. I would say, for example, that one of the great virtues of the more globalized economy of 2012 rather than 1972 is that the freer flow of goods across borders makes inflation much less likely.”

I agree that the approach we’ve been following won’t do, and with SRW’s notion that Fed policy should not be biased in favor of returns to capital and against returns to labor. It is very plain to me that the severe economic inequality that has developed in the United States, and that now threatens our democracy, is in great part due to the Fed’s policies in past decades and to its fixation on inflation control. But I also think that changing these policies to ones that would be more neutral won’t work to redress the inequality that has already been created. What needs to be done instead, is to positively bias Fed policy toward returns to labor for some time to come, as part of a more comprehensive policy to lessen the levels of economic inequality that beset the American social, economic and political systems.

I also agree with Matty Yglesias’s call for people to acknowledge what went wrong in the past and to explain why it won’t happen again. But as I said earlier, my thinking about what went wrong in the ’70s, and also MMT thinking about it are both very different from his. As a result, I think corresponding explanations of why it won’t happen again are likely to be very different also. Again, I don’t think what we have to acknowledge is that increases in unit labor costs caused the ’70s inflation.

In fact, I think that is a very partial, and therefore false narrative of what happened then. And I’m afraid I also think that Matty ought to take his own advice and acknowledge the roles of 1) the Cartel, 2) the Federal Reserve, and 3) the Carter Administration as all being much more important in the severity of that cost-push inflation then the rise in unit labor costs was.

And, I think an explanation of why that is unlikely to happen again, will have to be conditional on the wisdom of future Federal Reserve Governors and Presidents in providing the right responses to any reconstitution of the Cartel, or aggressive moves by the Saudis and oil speculators to drive prices up. If the ’70s are not to happen again, it will not be enough to rely on the more globalized economy of 2012, with its cross-border competition among workers, creating a race to the bottom in wages, and untoward returns to capital.

The Federal Government will have to be much more aggressive in implementing a response, recognizing that an inflation like that in the 70s would be cost-push and not demand-pull. And that to manage it, policies that choke off government deficit spending, and tighten credit, will be much more costly than policies involving trade retaliation, price controls, rationing, substitution of commodities subject to cost-push, and above all continuous and very substantial investments in government programs developing alternative energy sources.

(Cross-posted from

WaPo Covers MMT, But Does Its Usual Bad Job: Part Four, The MMT Victory

10:02 pm in Uncategorized by letsgetitdone

This post concludes my critical evaluation of Dylan Matthews’s, post published on Ezra Klein’s blog called “You know the deficit hawks. Now meet the deficit owls.”

Dylan’s post is in some ways typical of what one finds in WaPo these days. What was once a proud example of journalism has descended into a “he said/she said” format with only two sides to every question and a kind of parroting back of talking points the journalist or columnist constructs which she/he believes are associated with the two sides. Dylan’s article addresses the question of what we ought to do about the deficit by viewing it from the perspective of the deficit hawks vs. the deficit owls. However, there aren’t just deficit hawks and deficit owls in the economic aviary. There are also deficit doves as well.

Matthews ignores that position as a distinct one, even though he cites a deficit dove like Paul Krugman when it suits his purpose. So what is the deficit dove position? How does it differ from the other two? We don’t know based on his post. But there are MMT posts on this subject that Dylan might have and I think should have, researched.

In addition, the ping-pong talking point format of the post leaves one with a very superficial analysis of what hawks and owls and different people believe. The excuse for this, of course, will be lack of space in a short blog form. But that doesn’t change the fact that even though the journalist or writer involved makes an attempt to be neutral toward the contending parties, no real objectivity involving a deep understanding of the contending positions is presented. Only caricatures on the incomplete fair critical comparison set of positions survive the journalistic malpractice of faux objectivity.

Reading the post, you get the impression that MMT questions the mainstream with very distinct and opposed policy positions, and that the mainstream has counter-arguments to MMT. But you really can’t get any sense of the underlying deficit hawk, deficit dove, deficit owl reasoning behind their policy positions.

You don’t learn that the hawks are viewing the Government from the viewpoint that it is like a giant household, and that some of the doves share that perspective.

You don’t learn that the hawks often claim that the Government can run out of money.

You don’t learn that the hawks accept the Quantity Theory of Money, or that both hawks and doves, but not the owls believe in the existence of an Inter-temporal Governmental Budgetary Constraint (IGBC) on spending.

And most important of all you don’t learn about the Sectoral Financial Balances (SFB) Model, and how it works from the hawk, dove, and owl points of view.

In other words, from reading the Matthews piece you don’t learn anything about the depth of the owl position, relative to the others, and you also don’t get an impression that Dylan really understands the deficit owl position, and that he is capable of assessing with reasonable fairness how well it stands up to the criticism from the hawk or mainstream approaches.

So, in the end, even though people who like MMT were very happy to have the coverage from WaPo, and very happy that the post was relatively friendly as these things go, I think we have to conclude that Dylan’s wasn’t a good post, but another indication of WaPo’s decline as a paper of record. Nor am I alone in having a negative view of this post. Michael Hudson has recorded a strong reaction to it, as well, in a note to Stephanie Kelton which was blogged at Mike Norman Economics by Tom Hickey.

So, I call for WaPo to try again. People need an MMT post from WaPo written by one of the MMT leaders, alongside parallel posts from leading deficit hawks like David Walker and deficit doves like Paul Krugman, Jared Bernstein, or Dean Baker, with a concluding post recording extensive debates among the representatives of the major approaches. If we had that then all of the readers of The Post would be better able to judge for themselves which approach has the most to offer in the way of policies for setting our economy on a course that doesn’t waste people and that is culturally, socially, politically, economically, and environmentally sustainable in the foreseeable future. I’m sure that’s what we all want, but I’m afraid that this opening bid on MMT by WaPo didn’t get us very far down the road toward that result.

Having said all this about what was wrong with Dylan’s post, however, I will now end on a positive note, which perhaps explains why so many MMT supporters have a positive view of the post. There’s one very important and very beneficial thing that Dylan Matthews did that deserves a real shout-out!

For many years now, MMT economists and others who write in support of them have been trying to make a very important point to the mainstream. And that is that the claim:

The Government is running out of money,

is a myth, a fairy tale, or a deadly innocent fraud.

Dylan doesn’t say that in so many words. But he and the economists he cites, even Greg Mankiw grant this very important MMT/deficit owl point in passing.

If this post is any indication, mainstream economics, and certainly deficit doves, and hawks like Mankiw, now acknowledge that a nation like the US which is sovereign in its own fiat currency can never run out of money, or be prevented by the pure fiscal aspects of any situation from paying its debts or buying whatever goods and/or services it needs that are available for sale in its own sovereign currency.

So, that part of the great debate is now over. It will be very hard from here on, for the deficit hawks to maintain their deficit/insolvency terrorism in the face of the general recognition in economics that the Federal Government is not like a household, because it can never run out of the currency that it has the sole legitimate power to issue.

If they try, they will now be the ones facing ridicule and marginalization. And, increasingly, those politicians who try to claim we are running out of money, will also face ridicule and be viewed as ignoramuses by others.

That may not bother many of the Republicans coming from districts resistant to the realities of modern life. But, increasingly, “serious people” in Washington will stop repeating the myth about coming insolvency and move on.

Dylan’s post already does that by assuming that the real issue about MMT vs. the mainstream isn’t about solvency, but about excessive deficit spending causing either inflation or hyperinflation. Every critic of MMT cited in the post raises the objection either implicitly or explicitly that MMT policy proposals will lead to worrisome inflation, or hyperinflation. Now, that’s progress, because unlike the level of one’s national debt, or the size of one’s deficit in the abstract, or the nonsense debt-to-GDP ratio, which means nothing in itself, inflation is a real issue, not an artifact of some economist’s fevered theories.

More generally, the real issue is the generalized consequences of Federal fiscal policies and the programs associated with them. They have employment consequences, inflation/deflation consequences, environmental consequences, safety net consequences, medical consequences, educational consequences, inequality consequences, climatological consequences and all the rest. The position of MMT is that alternative fiscal policies need to be evaluated in terms of our best estimation of their impacts on our societies, cultures, polities, environments, and futures, and not in terms of their narrow, purely fiscal impacts on present and future Federal budgets.

Changes in unemployment and in inflation are two such real impacts, but we need to go beyond them to other real impacts. We need to evaluate the whole thing. Let the hawks put forward their budgets, and the doves theirs, and we owls will put forward ours, and then let everyone evaluate what consequences are likely for all of the alternatives, and which alternative is best overall in terms of real consequences and in terms of public purpose and not in terms of arbitrary debt, deficit, and debt-to-GDP ratio targets, that, in themselves have no meaning for people.

In other words, let’s get real. Let’s talk about real problems of real people that can be alleviated through fiscal policy and Government programs. Let’s stop taking about fairy tales, myths, and bogeymen. And let’s get on with the job of rebuilding the United States for our children and grandchildren and using every tool we have, including our fiat currency system, to realize the blessings of liberty and equality of opportunity for everyone.

(Cross-posted from

WaPo Covers MMT, But Does Its Usual Bad Job: Part Three, Banking, and Default vs. “Hyperinflation”

3:25 pm in Uncategorized by letsgetitdone

This post continues my critical evaluation of Dylan Matthews’s, post published on Ezra Klein’s blog called “You know the deficit hawks. Now meet the deficit owls.”

Other Issues

Here’s the next exchange envisioned by Dylan:

“According to Galbraith and the others, monetary policy as currently conducted by the Fed does not work. The Fed generally uses one of two levers to increase growth and employment. It can lower short-term interest rates by buying up short-term government bonds on the open market. If short-term rates are near-zero, as they are now, the Fed can try “quantitative easing,” or large-scale purchases of assets (such as bonds) from the private sector including longer-term Treasuries using money the Fed creates. This is what the Fed did in 2008 and 2010, in an emergency effort to boost the economy.

“According to Modern Monetary Theory, the Fed buying up Treasuries is just, in Galbraith’s words, a “bookkeeping operation” that does not add income to American households and thus cannot be inflationary.

“It seemed clear to me that . . . flooding the economy with money by buying up government bonds . . . is not going to change anybody’s behavior,” Galbraith says. “They would just end up with cash reserves which would sit idle in the banking system, and that is exactly what in fact happened.

“The theorists just “have no idea how quantitative easing works,” says Joe Gagnon, an economist at the Peterson Institute who managed the Fed’s first round of quantitative easing in 2008. Even if the money the Fed uses to buy bonds stays in bank reserves — or money that’s held in reserve — increasing those reserves should still lead to increased borrowing and ripple throughout the system.”

Evidently, Gagnon has no idea that increasing the amount of reserves does not lead to increased borrowing, because banks don’t need more reserves to make loans. All they need are credit worthy borrowers and access to the Fed discount window to make whatever quantity of loans they want to. This is one of the main points about the banking system MMT makes. Put simply: lending is not reserve constrained! It’s constrained by bank willingness to lend to credit worthy borrowers.

Dylan’s next point is:

“Mainstreamers are equally baffled by another claim of the theory: that budget surpluses in and of themselves are bad for the economy. According to Modern Monetary Theory, when the government runs a surplus, it is a net saver, which means that the private sector is a net debtor. The government is, in effect, “taking money from private pockets and forcing them to make that up by going deeper into debt,” Galbraith says, reiterating his White House comments.

“The mainstream crowd finds this argument as funny now as they did when Galbraith presented it to Clinton. “I have two words to answer that: Australia and Canada,” Gagnon says. “If Jamie Galbraith would look them up, he would see immediate proof he’s wrong. Australia has had a long-running budget surplus now, they actually have no national debt whatsoever, they’re the fastest-growing, healthiest economy in the world.” Canada, similarly, has run consistent surpluses while achieving high growth.”

Gagnon must be kidding, or at least totally ignorant about Jamie’s background, and the major contributors to the MMT synthesis, Of course, Jamie is quite familiar with Canada having close ties to the land of his father’s birth, and MMT economists know all they need to know about Australia, since MMT leader Bill Mitchell is constantly writing about the Australian economy and its various tragedies. However, the point here is that Gagnon doesn’t see that these two nations show that MMT’s Sectoral Financial Balances (SFB) model is exactly right in its explanations, since they are able to run surpluses without disaster, only because, unlike the United States, the foreign sectors of their economies run deficits (that is Canada and Australia run trade surpluses) large enough to accommodate the private sector savings desires of Australians and also the Government’s desire to run a budget surplus. The US however, currently has a need to run Government deficits of 10% to support both our private sector savings desires of 6% of GDP, and our foreign sector’s desires to export 4% of US GDP to US consumers so they can accumulate US dollars in the form of electronic credits.

Default vs. Hyperinflation?

“But MMT’s own relationship to real-world cases can be a little hit-or-miss. Mosler, the hedge fund manager, credits his role in the movement to an epiphany in the early 1990s, when markets grew concerned that Italy was about to default. Mosler figured that Italy, which at that time still issued its own currency, the lira, could not default as long as it had the ability to print more liras. He bet accordingly, and when Italy did not default, he made a tidy sum. “There was an enormous amount of money to be made if you could bring yourself around to the idea that they couldn’t default,” he says.

“Later that decade, he learned there was also a lot of money to be lost. When similar fears surfaced about Russia, he again bet against default. Despite having its own currency, Russia defaulted, forcing Mosler to liquidate one of his funds and wiping out much of his $850 million in investments in the country. Mosler credits this to Russia’s fixed exchange rate policy of the time and insists that if it had only acted like a country with its own currency, default could have been avoided.

“But the case could also prove what critics insist: Default, while technically always avoidable, is sometimes the best available option.”

Well, this last is a mouthful. Yes, Warren Mosler made a lot of money on his “bets” on Italy, and lost a lot on Russia. But what this shows is that Governments can voluntarily default if they choose to. MMT economists have always said this and still say it. So why is political stupidity or perfidy counted against the truth of the MMT proposition that Governments sovereign in their currency have no fiscal solvency problems, only voluntary constraints and political problems?

On the contrary, I think the Russian case is one of the primary illustrations of a point that deficit owls have been trying to spread far and wide. Namely, that sometimes default is due to stupidity and perfidy and not to economic forces and that citizens in a democracy need to be aware of that, and of the full capabilities of currency sovereign Governments to always pay debts incurred in their fiat currency and to spend whatever is necessary to enable full employment in their nations. They are never, never, out of money except by choice. So, the real questions are:

– why are they choosing to default?
– Who will benefit from this political choice?
– And who will be asked to pay the price?

And how does the Russian case “prove” that: “Default, while technically always avoidable, is sometimes the best available option”? Is Dylan, through this quote from Gregory Mankiw suggesting that “public purpose” in Russia was better served by its voluntary default than it would have been if the Russians repaid their ruble debts in the rubles they might have created had they wished to? I’m afraid that both Dylan and Mankiw will have to prove that statement to me, since Russian citizens seem to have suffered quite a lot by taking the default choice and accepting austerity when they didn’t have to do so.

WaPo Covers MMT, But Does Its Usual Bad Job: Part Two, Inflation/Hyperinflation

10:06 pm in Uncategorized by letsgetitdone

This post continues the critical evaluation of Dylan Matthews’s, post published on Ezra Klein’s blog called “You know the deficit hawks. Now meet the deficit owls.”

The Inflation/Hyperinflation Bogeyman

“And while Modern Monetary Theory’s proponents take Keynes as their starting point and advocate aggressive deficit spending during recessions, they’re not that type of Keynesians. Even mainstream economists who argue for more deficit spending are reluctant to accept the central tenets of Modern Monetary Theory. Take Krugman, who regularly engages economists across the spectrum in spirited debate. He has argued that pursuing large budget deficits during boom times can lead to hyperinflation. Mankiw concedes the theory’s point that the government can never run out of money but doesn’t think this means what its proponents think it does.

“Technically it’s true, he says, that the government could print streams of money and never default. The risk is that it could trigger a very high rate of inflation. This would “bankrupt much of the banking system,” he says. “Default, painful as it would be, might be a better option.”

Well, Krugman has argued there is a danger of hyperinflation where deficit spending lasts for many years, but in a really balanced piece, the counter-arguments of MMT economists to his conjecture would at least be mentioned. Dylan doesn’t say what these counter-arguments are.

And as for Dylan’s reference to Mankiw, it’s easy to wave off MMT by saying there is a risk of inflation in using deficit spending to create full employment, but it is entirely another matter to say what the level of risk is, and to provide compelling arguments about why that risk is appreciable, and more costly than the effects of chronic unemployment in a stagnating economy. This Mankiw doesn’t begin to do. I think Dylan should have pointed this out, rather than just mentioning Mankiw’s opinion. Who cares about his opinion? It’s his arguments, his theories, for expecting inflation that we care about. So, why doesn’t Dylan outline what these are and critically evaluate them?

When Mankiw tells us that default might be a better option than risking inflation by printing money, he is going way beyond his claimed area of expertise in economics. The 14th Amendment to the US constitution prohibits even questioning Government debt, much less defaulting on it. Mankiw in his capacity as an economist is unqualified to say whether a violation of the US constitution is a better option than taking the risk of triggering hyperinflation by “printing money.”

“Mankiw’s critique goes to the heart of the debate about Modern Monetary Theory — and about how, when and even whether to eliminate our current deficits.

“When the government deficit spends, it issues bonds to be bought on the open market. If its debt load grows too large, mainstream economists say, bond purchasers will demand higher interest rates, and the government will have to pay more in interest payments, which in turn adds to the debt load.”

Well, this is what the mainstream says. But what do MMT economists say in return? Why doesn’t Dylan mention that?

What MMT replies is that bond issuance isn’t an inevitability, but a result of choices made by the US Congress and the Executive Branch of Government. The Congress could place the Fed under the authority of the Treasury Secretary in the Executive Branch, and then no debt would have to be issued to deficit spend, since the Fed could just mark up the Treasury General Account (TGA) under orders from the Secretary.

MMT also points out that the Fed controls the Federal Funds Rate which, in turn, heavily influences all bond rates. If the Fed targets a near zero FFR, and the Treasury issues no bonds longer than say, three months in duration, then bond interest rates can be kept near zero no matter how much debt is issued. Japan has proved this is the case since its debt-to-GDP ratio is now in excess of 200% while its interest rates are very near zero on short-term debt instruments.

Finally, Mankiw seems not to know that even if neither of these alternatives is pursued, the Executive Branch still has options to avoid further borrowing and paying higher interest rates and ro repay debt without either cutting spending or raising taxes. Here, I refer to Proof Platinum Coin Seigniorage (PPCS).

As I’ve outlined in numerous posts including this one, the President at his option could require the Treasury and the US Mint to create a coin of arbitrary face value and deposit it at the Fed. The coin’s value is limited only by the President’s specification. For example, a $60 T coin might be minted. The Fed must provide $60 T in electronic credits in return for the US Mint deposit of the coin in its Public Enterprise Fund (PEF) account. The Treasury can then “sweep” the PEF for the difference between the Mint’s cost in producing the coin and its face value, and place that difference in the Treasury General Account (TGA). Treasury could then use this “seigniorage” to repay all US debts as they fall due, and to implement all spending in excess of tax revenues appropriated by Congress. Using the PPCS option would require no new legislation. The President can use it at will to fill the public purse awaiting Congress’s appropriations providing authority to spend the electronic credits already in it to secure goods and services from the non-Government sector. Of course, there’s no possible inflationary effect of purse filling as long as Congress’s appropriations and the ensuing deficit spending aren’t inflationary.

Next, Dylan says:

“To get out of this cycle, the Fed — which manages the nation’s money supply and credit and sits at the center of its financial system — could buy the bonds at lower rates, bypassing the private market. The Fed is prohibited from buying bonds directly from the Treasury — a legal rather than economic constraint. But the Fed would buy the bonds with money it prints, which means the money supply would increase. With it, inflation would rise, and so would the prospects of hyperinflation.”

Again, Dylan only tells the mainstream side of the story and not the MMT reply to it. If the Fed buys bonds with money it prints, this will increase reserves in the private sector, but it won’t increase Net Financial Assets (NFA), because buying the bonds is just an asset swap. So with no new NFA being added to the private sector by the Government, this sort of Fed operation won’t be inflationary, as its massive QE programs have just demonstrated empirically. In fact, by removing the payment of interest on bonds from the private sector, and given that most of the Fed profits are returned to the Treasury, some MMT economists say that the end result of such operations may well be deflationary.

Dylan continues:

“Economists in the Modern Monetary camp concede that deficits can sometimes lead to inflation. But they argue that this can only happen when the economy is at full employment — when all who are able and willing to work are employed and no resources (labor, capital, etc.) are idle. No modern example of this problem comes to mind, Galbraith says.

“The last time we had what could be plausibly called a demand-driven, serious inflation problem was probably World War I,” Galbraith says. “It’s been a long time since this hypothetical possibility has actually been observed, and it was observed only under conditions that will never be repeated.”

Note, that Jamie refers to demand-driven inflation above. He doesn’t say that cost-push inflation can’t happen as the economy approaches full employment. MMT economists recognize this possibility, and consider that the 1970s inflation was of this type, but point out that cost-push inflation has little to do with Government deficit spending per se, and must be combated with anti-speculation law enforcement, price controls, targeted taxation, and sometimes even de-regulation (See: [01:03:29] and [01:03:47]) in the effected or related sectors, rather than by raising taxes or cutting spending.

(Cross-posted from