There exists today a slavish devotion to conventional wisdom. We see it in our elected officials, main steam media, TV pundits, and unfortunately, our academic elites. Fortunately, the Internet provides a mostly uncensored medium through which an infinite stream of opinions, facts, and hypotheses can be presented, debated, supported or, discarded.
Here we take a devil's advocate position on monetary policy. That is, who dares to challenge the Federal Reserve's practice of charging the Federal Government interest on "fiat" money?
I re-post articles that challenge and indeed contradict received wisdom from government agencies, and other "self proclaimed authorities."
Please feel free to leave a comment in the Blog Section and even recommend articles that fit this site.
Thanks for spending a few moments examining the true side of the coin.
www.Humaneconomist.com writes,"By concealing the fact that sovereign governments can issue debt-free currency, and thus provide debt-free liquidity, private banks protect their market share and defend their bottom line. The incentive is natural, and predictable, as the system is built in such a way that makes it inevitable. The most powerful opposition to government deficit spending during times of high unemployment, recession, or depression, is inevitably fueled by private banks. As long as banks compete directly with the government in the liquidity market, this opposition will remain. It is inescapable."
Why don't they teach our children, high school students, college and graduate students about the history of money? They learn about some of the principles of money and banking as currently practiced, and that is predominantly --Classical Capitalism, gold standard rubrics and only Keynesian deficit spending. But literally nothing on how, for centuries, the abundance or lack of money was and remains the fundamental cause of the fall of civilizations. Nothing about alternative economic systems, some of which are as good or better than American Capitalism.
Stephen Zarlenga's "The Lost Science of Money" is an excellent starting point since it is the only book which thoroughly presents the subject of money's role in world civilization---the good, the bad, and the ugly.
How such an important factor---as money---in the development of civilizations is now excluded from curricula is not a mystery....it was planned and the plan has worked to keep 99% of Americans in debt slavery, so that they never give thought to the likelihood of a better alternative.
Dr. Ellen H. Brown's "The Web of Debt" is a cogent, entertaining, and creative analysis of how nations have been beguiled into surrendering their sovereignty over their right to issue their own national currency. She presents a brilliant proof on how private banking cartels, having hijacked that sovereignty, then create conditions which rob the nations of its assets, as was done in the Great Depression and, now, during this Great Recession.
L Randal Wray's seminal work "Understanding Modern Money: The Key to Full Employment and Price Stability" is the modern day bible for policy formulation in sovereign currency nations.
Prof. Wray describes the essential policy components needed to achieve levels of national prosperity without inflation and without untenable debt.
A sovereign government that issues its own floating rate fiat currency is not revenue constrained. In other words, taxes are not needed to fund the government. This point is graphically described by Warren Mosler as follows:
what happens if you were to go to your local IRS office to pay [your taxes] with actual cash? First, you would hand over your pile of currency to the person on duty as payment. Next, he’d count it, give you a receipt and, hopefully, a thank you for helping to pay for social security, interest on the national debt, and the Iraq war. Then, after you, the tax payer, left the room he’d take that hard-earned cash you just forked over and throw it in a shredder.
Yes, it gets thrown it
away [sic]. Destroyed!
— The 7 Deadly Frauds of Economic Policy, page 14, Warren Mosler
The delinking of tax revenue from the budget is a critical element that allows MMT to go off the “balanced budget” reservation. In a fiat money world, a sovereign government’s budget should never be confused with a household budget, or a state budget. Households and U.S. states must live within their means and their budgets must ultimately be balanced. A sovereign government with its own fiat money can never go broke. There is no solvency risk and the United States, for example, will never run out of money. The monopoly power to print money makes all the difference, as long as it is used wisely.
MMT also asserts that the federal government should net spend, again usually in deficit, to the point where it meets the aggregate savings desire of its population. This is because government budget deficits add to savings. This is a straightforward accounting identity in MMT, not a theory. Warren Mosler put it this way:
So here’s how it really
works, and it could not be simpler: Any $U.S. government deficit exactly EQUALS
the total net increase in the holdings ($U.S. financial assets) of the rest of
us – businesses and households, residents and non-residents – what is called
the “non-government” sector. In other words, government deficits equal
increased “monetary savings” for the rest of us, to the penny. Simply put,
government deficits ADD to our savings (to the penny).
— The 7 Deadly Frauds of Economic Policy, page 42, Warren Mosler
Therefore, Treasury bonds, bills and notes are not needed to support fiscal policy (pay for government). The U.S. government bond market is just a relic of the pre-1971 gold standard days. Treasury securities are primarily used by the Fed to regulate interest rates. Mosler simply calls U.S. Treasury securities a “savings account” at the Federal Reserve.
In the U.S., MMTers see the contentious issue of a mounting national debt and continuing budget deficits as a pseudo-problem, or an “accounting mirage.” The quaint notion of the need for a balanced budget is another ancient relic from the old gold standard days, when the supply of money was actually limited. In fact, under MMT, running a federal budget surplus is usually a bad thing and will often lead to a recession.
MMT the real problems for a government to address are ensuring growth, reducing
unemployment, and controlling inflation. Bill Mitchell noted that, “Full employment
and price stability is at the heart of MMT.” A Job Guarantee (JG) model, which
is central to MMT, is a key policy tool to help control both inflation and
unemployment. Therefore, given the right level of government spending and
taxes, combined with a Job Guarantee program; MMTers state emphatically that a
nation can achieve full employment along with price stability.
As some background to understand Modern Monetary Theory it is helpful to know a little about its predecessors: Chartalism and Functional Finance.
German economist and statistician Georg Friedrich Knapp published The State Theory of Moneyin 1905. It was translated into English in 1924. He proposed that we think of money as tokens of the state, and wrote:
Money is a creature of law. A theory of money must therefore deal with legal history… Perhaps the Latin word “Charta” can bear the sense of ticket or token, and we can form a new but intelligible adjective — “Chartal.” Our means of payment have this token or Chartal form. Among civilized peoples in our day, payments can only be made with pay-tickets or Chartal pieces.Alfred Mitchell-Innes only published two articles in the The Banking Law Journal. However, MMT economist L. Randall Wray called them the “best pair of articles on the nature of money written in the twentieth century”.
The first, What is Money?, was published in May 1913, and the follow-up,Credit Theory of Money, in December 1914. Mitchell-Innes was published eight years after Knapp’s book, but there is no indication that he was familiar with the German’s work. In the 1913 article Mitchell-Innes wrote:
One of the popular fallacies in connection with commerce is that in modern days a money-saving device has been introduced called credit and that, before this device was known, all, purchases were paid for in cash, in other words in coins. A careful investigation shows that the precise reverse is true…
Credit is the purchasing power so often mentioned in economic works as being one of the principal attributes of money, and, as I shall try to show, credit and credit alone is money. Credit and not gold or silver is the one property which all men seek, the acquisition of which is the aim and object of all commerce…
There is no question but that credit is far older than cash.
L. Randall Wray, in his 1998 book, Understanding Modern Money,was the first to link the state money approach of Knapp with the credit money approach of Mitchell-Innes. Modern money is a state token that represents a debt or IOU. The book is an introduction to MMT.
L. Randal Wray is a Professor of Economics at the University of Missouri-Kansas City, Research Director with the Center for Full Employment and Price Stability and Senior Research Scholar at The Levy Economics Institute. These institutions are hotbeds of MMT research. Wray also writes for the MMT blog, New Economic Perspectives.
Finally, to finish the historical tour, here is how Abba Lerner’s Functional finance is described by Professor Wray:
Functional Finance rejects completely the traditional doctrines of ‘sound finance’ and the principle of trying to balance the budget over a solar year or any other arbitrary period. In their place it prescribes: first, the adjustment of total spending (by everybody in the economy, including the government) in order to eliminate both unemployment and inflation, using government spending when total spending is too low and taxation when total spending is too high.
Given its mixed history it is not surprising that MMT has been given different labels. Some economists refer to MMT as a “post-Keynesian” economic theory. L. Randall Wray has used the term “neo-Chartalist”. Warren Mosler stated, “MMT might be more accurately called pre Keynesian.” Given that Georg Knapp’s work was cited by John Maynard Keynes, the use of “pre-Keynesian” does seem more appropriate than “post-Keynesian”.
But under any category, MMT has been considered fringe or heterodox economics by most mainstream economists. It therefore has been relegated to the equivalent of the economic minor leagues, somewhere below triple-A level. However, that perception is changing.
MMT is slowly seeping into the public policy debate. These days Warren Mosler and others with an MMT viewpoint are frequently being interviewed on business news channels. MMT articles are being published. Recently, Steve Liesman, CNBC’s senior economics reporter, used a Warren Mosler quote to make a point. Liesman said: “As Warren Mosler has said: ‘Because we think we may be the next Greece, we are turning ourselves into the next Japan’.”
MMT is not easy to for many people, including trained economists, to understand. This is probably because of its heavy reliance on accounting principles (debts and credits). Some critics consider MMT nothing more than a twisted Ponzi scheme that is simply “printing prosperity.” Calling MMT a “printing prosperity” scheme, by the way, is the quickest way to send MMTers into spasms of outrage. MMT does not “print prosperty” according to its proponents.
The MMT counter argument is:
it [is] a perverse injustice that, in online discussions, MMT sympathizers are frequently reproached for imagining that “we can print prosperity” when in fact it is us who constantly stress as a fundamental point that the only true constraints are resource based, not financial or monetary in nature. We are the ones insisting that if we have the resources, we can put them to use. It is the neoclassical orthodoxy and others who try to make out that we can’t use resources, even if they are available, because of some magical, mysterious monetary or financial constraint. Just who is it that believes in magic here?
Emotions run hot in the current economic environment, especially on the internet. In some cases the energetic online promoting of MMT has turned into passive aggressive hectoring, hazing,name calling, badgering, and belittling. So be warned, if you write some economic analysis online that disagrees with MMT doctrine you might find yourself attacked and stung by a swarm of MMTers. If you are an economic “expert” and you do not understand monetary basics you may also get mounted on an MMT wall of shame.
A heavyweight Keynesian economist, like Nobel Prize winner Paul Krugman, has felt the sting of MMT. But the quantity and quality of his criticism of MMT, so far, has been featherweight. He could not land a solid glove on the contender, Kid MMT. Krugman only proved that he does not understand MMT, so his criticism was weak (see MMT comments) and his follow-up even weaker. MMT economist James Galbraith did a succinct breakdown of Krugman’s major errors.
Another school of economics feeling the heat from MMT are the Austrians. Austrian economist Robert Murphy recently wrote an article critical of MMT, calling it an “Upside-Down World“.MMTers lined up to disassemble and refute Murphy’s essay. Cullen Roach at the Pragmatic Capitalist blog shot back this broadside::
We now live in a purely fiat world and not the gold standard model in which Mises and many of the great Austrian economists generated their finest work. Therein lies the weakness of the Austrian model. It is based on a monetary system that is no longer applicable to modern fiat monetary systems such as the one that the USA exists in.
Does MMT really offer a path to prosperty? Or did the ancient Roman, Marcus Cicero (106 BC – 43 BC), have it right when he said: “Endless money forms the sinews of war.”? The debate will only intensify. If you value those green, money-thing, government IOU tokens in your wallet then it pays to learn what all the commotion is about.
Because of MMT’s growing popularity it might be helpful to present a quick start guide so beginners can get up to speed and understand some of its fundamental elements. As a starting point here are some basics of Modern Monetary Theory (MMT) compared to some other principles of money and economics that might be considered conventional wisdom or old school wisdom.
1. What is money?
Modern Monetary Theory: Money is a debt or IOU of the state [The] history of money makes several important points. First, the monetary system did not start with some commodities used as media of exchange, evolving progressively toward precious metals, coins, paper money, and finally credits on books and computers. Credit came first and coins, late comers in the list of monetary instruments, are never pure assets but are always debt instruments — IOUs that happen to be stamped on metal…
Monetary instruments are never commodities, rather they are
always debts, IOUs, denominated in the socially recognized unit of account.
Some of these monetary instruments circulate as “money things” among third
parties, but even “money things” are always debts — whether they happen to take
a physical form such as a gold coin or green paper note.
— Money: An Alternate Story by Eric Tymoigne and L. Randall Wray
“money is a creature of law”, and, because the state is “guardian of the law”, money is a creature of the state. As Keynes stated:
“the Age of Chartalist or State Money was reached when the State claimed the right to declare what thing should answer as money to the current money-of-account… (Keynes 1930)…
— Chartalism, Stage of Banking, and Liquidity Preference by Eric Tymoigne
John Maynard Keynes in his 1930, Treatise on Money, also stated: “Today all civilized money is, beyond the possibility of dispute, chartalist.”
Old School Wisdom:
Money is essentially a
device for carrying on business transactions, a mere satellite of commodities,
a servant of the processes in the world of goods.
— Joseph Schumpeter, Schumpeter on money, banking and finance… by A. Festre and E. Nasica
Money is any object or
record, that is generally accepted as payment for goods and services and
repayment of debts in a given country or socio-economic context.
2. Why is money needed?
MMT: Money is needed in order to pay taxes
Money is created by government
spending (or by bank loans, which create deposits) Taxes serve to make us want
that money – we need it in order to pay taxes.
— The 7 Deadly Frauds of Economic Policy, Warren Mosler
The inordinate focus of [other] economists on coins (and especially on
government-issued coins), market exchange and precious metals, then appears to
be misplaced. The key is debt, and specifically, the ability of the state to
impose a tax debt on its subjects; once it has done this, it can choose the
form in which subjects can ‘pay’ the tax. While governments could in theory
require payment in the form of all the goods and services it requires, this
would be quite cumbersome.
— Money: An Alternate Story by Eric Tymoigne and L. Randall Wray
Money, in [the
Chartalist] view, derives from obligations (fines, fees, tribute, taxes)
imposed by authority; this authority then “spends” by issuing physical
representations of its own debts (tallies, notes) demanded by those who are
obligated to pay “taxes” to the authority. Once one is indebted to the crown,
one must obtain the means of payment accepted by the crown. One can go directly
to the crown, offering goods or services to obtain the crown’s tallies—or one
can turn to others who have obtained the crown’s tallies, by engaging in
“market activity” or by becoming indebted to them. Indeed, “market activity”
follows (and follows from) imposition of obligations to pay fees, fines, and
taxes in money form.
— A Chartalist Critique of John Locke’s Theory of Property, Accumulation and Money… by Bell, Henry, and Wray
Money is needed as a medium of exchange, a unit of account, and a store of value.
Old School Wisdom:
Money is needed because
it could “excite the industry of mankind.”
— Thomas Hume, Hume, Money and Civilization… by C. George Caffettzis
Old School Tony Montoya, aka Scarface, Wisdom: money is needed for doing business, settling debts, and emergency situations…
Hector the Toad: So, you got the money?
Tony Montana: Yep. You got the stuff?
Hector the Toad: Sure I have the stuff. I don’t have it with me here right now. I have it close by.
Tony Montana: Oh… well I don’t have the money either. I have it close by too.
Hector the Toad: Where? Down in your car?
Tony Montana: [lying] Uh… no. Not in the car.
Hector the Toad: No?
Tony Montana: What about you? Where do you keep your stuff?
Hector the Toad: Not far.
Tony Montana: I ain’t getting the money unless I see the stuff first.
Hector the Toad: No, no. First the money, then the stuff.
Tony Montana: [after a long tense pause] Okay. You want me to come in, and we start over again?
Hector the Toad: [changing the subject] Where are you from, Tony?
Tony Montana: [getting angry and supicious] What the f**k difference does that make on where I’m from?
Hector the Toad: Cona, Tony. I’m just asking just so I know who I’m doing business with.
Tony Montana: Well, you can know about me when you stop f**king around and start doing business with me, Hector!
Hector the Toad: You want to give me the cash, or do I kill your
brother first, before I kill you?
Tony Montana: Why don’t you try sticking your head up your ass? See if it fits.
Frank Lopez: [pleading]
Please Tony, don’t kill me. Please, give me one more chance. I give you $10
million. $10 million! All of it, you can have the whole $10 million. I give you
$10 million. I give you all $10 million just to let me go. Come on, Tony, $10
million. It’s in a vault in Spain, we get on a plane and it’s all yours. That’s
$10 million just to spare me.
— dialog from Scarface, the movie
Note: The comment about the $10 million stashed in a Spanish vault highlights a small chink in MMT’s armor. If the taxing power of the sovereign state is sabotaged, or there is widespread tax evasion, then MMT falls apart.
3. Where does money come from?
MMT: The government just credits accounts Modern money comes from “nowhere.”
Conventional Wisdom: Money comes from the government printing currency and making it legal tender.
4. Government Spending: any limits?
MMT: government spending is not constrained.
a sovereign government can always spend what it wants. The Japanese government, with the highest debt ratio by far (190 per cent or so) has exactly the same capacity to spend as the Australian government which has a public debt ratio around 18 per cent (last time I looked). Both have an unlimited financial capacity to spend.
That is not the same
thing as saying they should spend in an unlimited fashion. Clearly they should run
deficits sufficient to close the non-government spending gap. That should be
the only fiscal rule they obey.
— Bill Mitchell
Conventional Wisdom: government spending should be constrained
One option to ensure that
we begin to get our fiscal house in order is a balanced budget amendment to the
Constitution. I have no doubt that my Republican colleagues will overwhelmingly
support this common sense measure and I urge Democrats to as well in order to
get our fiscal house in order.
— House Majority Leader Eric Cantor (R-VA), June 23th, 2010
5. What is Quantitative Easing?
MMT: It is an asset swap. It is not “printing money” and it is not a very good anti-recession strategy.
Quantitative easing merely involves the central bank buying bonds (or other bank assets) in exchange for deposits made by the central bank in the commercial banking system – that is, crediting their reserve accounts… So quantitative easing is really just an accounting adjustment in the various accounts to reflect the asset exchange. The commercial banks get a new deposit (central bank funds) and they reduce their holdings of the asset they sell…
Invoking the “evil-sounding” printing money terminology to describe this practice is thus very misleading – and probably deliberately so. All transactions between the Government sector (Treasury and Central Bank) and the non-government sector involve the creation and destruction of net financial assets denominated in the currency of issue. Typically, when the Government buys something from the Non-government sector they just credit a bank account somewhere – that is, numbers denoting the size of the transaction appear electronically in the banking system.
It is inappropriate to call this process – “printing money”. Commentators who use this nomenclature do so because they know it sounds bad! The orthodox (neo-liberal) economics approach uses the “printing money” term as equivalent to “inflationary expansion”. If they understood how the modern monetary system actually worked they would never be so crass…
So I don’t think
quantitative easing is a sensible anti-recession strategy. The fact that
governments are using it now just reflects the neo-liberal bias towards
monetary policy over fiscal policy…
— Bill Mitchell
Conventional Wisdom: Quantitative Easing is “money printing”
James Grant, editor of Grant’s Interest Rate Observer, says Quantitative Easing Is Just Money Printing
6. What is the view on personal debt?
MMT: personal debt is not dangerous
Americans today have too
much personal debt. False. Private debt adds money to our economy. Though
bankruptcies have increased lately, that is due more to the liberalization of
bankruptcy laws, rather than to economics. Despite rising debt and
bankruptcies, our economy has continued to grow. The evidence is that high
private debt has had no negative effect on our economy as a whole, though it
can be a problem for any individual.
— Free Money: Plan for Prosperity ©2005 (pg 154), by Rodger Malcolm Mitchell
Note: Rodger Mitchell is an MMT extremist. He calls his brand of MMT, “Monetary Sovereignty“. Not all of his views may be in sync with mainstream MMT doctrine.
Conventional Wisdom: too much debt is dangerous
The core of our economic
problem is, instead, the debt — mainly mortgage debt — that households ran up
during the bubble years of the last decade. Now that the bubble has burst, that
debt is acting as a persistent drag on the economy, preventing any real
recovery in employment.
— Paul Krugman, NY Times
Old School Wisdom: debt is always dangerous “Neither a borrower, nor a lender be” — Polonius speaking in Hamlet, by William Shakespeare
7. What is the view on foreign trade?
MMT: Exporters please just take some more fiat money and everyone will be fat and happy!
Think of all those cars Japan sold to us for under $2,000 years ago. They’ve been holding those dollars in their savings accounts at the Fed (they own U.S. Treasury securities), and if they now would want to spend those dollars, they would probably have to pay in excess of $20,000 per car to buy cars from us. What can they do about the higher prices? Call the manager and complain? They’ve traded millions of perfectly good cars to us in exchange for credit balances on the Fed’s books that can buy only what we allow them to buy…
We are not dependent on China to buy our securities or in any way fund our spending. Here’s what’s really going on: Domestic credit creation is funding foreign savings…
Assume you live in the U.S. and decide to buy a car made in China. You go to a U.S. bank, get accepted for a loan and spend the funds on the car. You exchanged the borrowed funds for the car, the Chinese car company has a deposit in the bank and the bank has a loan to you and a deposit belonging to the Chinese car company on their books. First, all parties are “happy.” You would rather have the car than the funds, or you would not have bought it, so you are happy. The Chinese car company would rather have the funds than the car, or they would not have sold it, so they are happy. The bank wants loans and deposits, or it wouldn’t have made the loan, so it’s happy.
There is no “imbalance.”
Everyone is sitting fat and happy…
— Warren Mosler, The 7 Deadly Frauds of Economic Policy
Old School Wisdom: Trade arrangements will break down if a currency is debased
“Sorry paleface, Chief say your wampum is no good. We want steel knives and fire-water for our beaver pelts.” — American Indian reaction after Dutch colonists debase wampum in the 1600′s