Deficits Do Matter, But Not the Way You Think

Tuesday, 07/20/2010 - 10:57 am by L. Randall Wray | 58 Comments

life-preserver-150Budget deficits and government spending are necessary to end today’s crisis.

In recent months, a form of mass hysteria has swept the country as fear of “unsustainable” budget deficits replaced the earlier concern about the financial crisis, job loss, and collapsing home prices. What is most troubling is that this shift in focus comes even as the government’s stimulus package winds down and as its temporary hires for the census are let go. Worse, the economy is still — likely — years away from a full recovery. To be sure, at least some of the hysteria has been manufactured by Pete Peterson’s well-funded public relations campaign, fronted by President Obama’s National Commission on Fiscal Responsibility and Reform — a group that supposedly draws members from across the political spectrum, yet are all committed to the belief that the current fiscal stance puts the nation on a path to ruinous indebtedness. But even deficit doves like Paul Krugman, who favor more stimulus now, are fretting about “structural deficits” in the future. They insist that even if we do not need to balance the budget today, we will have to get the “fiscal house” in order when the economy recovers.

There is an alternative view propounded by economists following what has been called “Modern Money Theory”, which emphasizes the difference between a currency-issuing sovereign government and currency users (households, firms, and nonsovereign governments) (See here and here). They insist that the notion of “fiscal sustainability” or “solvency” is not applicable to a sovereign government — which cannot be forced into involuntary default on debts denominated in its own currency. Such a government spends by crediting bank accounts or issuing paper currency. It can never run out of the “keystrokes” it uses to credit bank accounts, and so long as it can find paper and ink, it can issue paper currency. These, we believe, are simple statements that should be completely noncontroversial. And this is not a policy proposal — it is an accurate description of the spending process used by all currency-issuing sovereign governments.

And, yet, there are a number of misconceptions circulating that need to be addressed. Many (often of the Austrian persuasion) interpret this simple statement as a Leninist plot to destroy the nation’s currency by flying black helicopters dumping an infinite supply of bags of money all over the planet. This is usually accompanied by a diatribe on the evils of fiat money, with a call to return to “sound money” based on shiny yellow metal. Others suggest that we are instead proposing to ramp up the size of government, until it completes Obama’s plan to gobble up the whole economy. Almost all critiques eventually produce a lecture on the lessons to be learned from Weimar Germany and from Zimbabwe.

The strangest criticism of all is that we MMT-ers argue that “deficits do not matter”. In a recent exchange in the New York Times, Paul Krugman put it this way: “But here’s the thing: there’s a school of thought which says that deficits are never a problem, as long as a country can issue its own currency.” In that piece he took Jamie Galbraith to task for arguing that “Insolvency, bankruptcy, or even higher real interest rates are not among the actual risks” facing a sovereign government. I won’t go into the details, but Krugman produced a simple model in which ever-larger budget deficits generate ever-rising prices. You can see the rest of that back-and-forth here.  But the strange thing is that Krugman never actually addressed Galbraith’s points that insolvency, bankruptcy, or higher interest rates are non-issues for a sovereign government. Nor did Krugman even try to justify his claim that MMT-ers “say that deficits are never a problem”.

In fact, MMT-ers NEVER have said any such thing. Our claim is that a sovereign government cannot be forced into involuntary default. We have never claimed that sovereign currencies are free from inflation. We have never claimed that currencies on a floating exchange rate regime are free from exchange rate fluctuations. Indeed, we have always said that if government tries to increase its spending beyond full employment, this can be inflationary; we have also discussed ways in which government can cause inflation even before full employment. We have always advocated floating exchange rates — in which exchange rates will, well, “float”. While we have rejected any simple relation between budget deficits and exchange rate depreciation, we have admitted that currency depreciation is a possible outcome of using government policy to stimulate the economy.

A favorite scenario used by the critics is the ever-rising budget deficit that causes the government debt-to-GDP ratio to rise continuously. As interest payments on the debt increase, government faces a vicious cycle of rising deficits, more debt, more interest paid, higher interest rates, and even higher deficits.

Our response is two pronged.

First, OK, let us accept your premise. Will the government be able to make all payments (including interest paid on debt) as they come due? The answer is, of course, “yes — by crediting bank accounts”. Insolvency is not possible when one spends by a simple keystroke. The critic then quickly changes the subject: Weimar! Zimbabwe! You are a destroyer of the currency! Yes, but it was your scenario, not mine. And even in your worst case scenario, the government cannot be forced to default. Instead, Krugman argues “the government would decide that default was a better option than hyperinflation”. In other words, Krugman veers off into politics — government “decides” to default — because the economics does not give him the result he wants.

Second. Your scenario is highly implausible. As budget deficits rise, this increases income (government spending exceeds tax revenue, thus adds net income to the nongovernment sector) and wealth (nongovernment savings accumulated in the form of government debt) of the nongovernment sector. Eventually, this causes private spending and production to grow. As the economy heats up, tax revenue begins to grow faster than government spending or GDP. (In the US over the past two cycles, in the expansion phase federal tax revenue grew two to three times faster than GDP and government spending.) This reduces the government deficit (remember the Clinton boom and budget surpluses?). Even if the government spending is on interest (in Krugman’s model, the deficit is due to interest payments) that generates nongovernment income and spending. In other words, the cyclical upswing will automatically reduce the budget deficit. The scenario ignores the “automatic stabilizers” that cause the budget deficit to swing counter-cyclically.

What if the economy runs up against a full employment constraint, but government stubbornly keeps spending more, driving up prices toward hyperinflation? Even though incomes and thus tax revenues rise, government spending always keeps one step ahead so that the deficit rises. This is Krugman’s “infinite inflation” scenario.

OK, we never claimed that a sovereign government will necessarily adopt good economic policy. The last time the US approached such a situation was in the over-full employment economy of WWII. Rather than bidding for resources against the private sector, the government adopted price controls, rationing, and patriotic savings. In that way, it kept inflation low, ran the budget deficit up to 25% of GDP, and stuffed banks and households full of safe sovereign debt. By the way, Jamie Galbraith’s father, John Kenneth Galbraith, was the nation’s chief inflation fighter. After the war, private spending power was unleashed, GDP grew relatively quickly, and government debt ratios came down (not because the debt was retired but because the denominator — GDP — grew more quickly than the numerator — debt; see here). In other words, Galbraith, senior, used rational policy to avoid the Zimbabwean fate. I do not understand why Krugman prefers to believe that our policymakers would choose hyperinflation over more rational policy. If there is anything that policymakers of developed nations in the postwar period appear to hate, it is rapid inflation. In other words, the policy choice will not be between hyperinflation and default, but rather rational use of inflation-fighting policy should the need arise in order to prevent hyperinflation.

If we can get beyond the fears of national insolvency then there are many issues that can be fruitfully discussed. While inflation will not be a problem for many years, price pressures could return some day. Impacts of exchange rate instability are important, at least for some nations. Uemployment is a chronic problem, even at business cycle peaks. Aging does raise serious questions about allocation of resources, especially medical care. Poverty and homelessness exist in the midst of relative abundance. Simply recognizing that our sovereign government cannot go bankrupt does not solve those problems, but it does make them easier to resolve. We may well need more government spending, and, yes, even budget deficits to tackle some of those problems.

So, yes, deficits do matter, but not for solvency.

L. Randall Wray is Professor of Economics at the University of Missouri-Kansas City.

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58 Comments

  • John M. Keynes, General Theory of Employment, Interest and Money:

    “The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.”

    Why do we, particularly in academia, make an enemy of relatively simple concepts? Is it because understanding and agreeing with how our Modern Monetary Economy operates means refuting decades of hard work by economists from Univ. of Chicago, MIT and Harvard? The rest of us have to suffer because the mainstream economic consensus fails to recognize the major flaws in their theories and refuses to change.

    Oh my.

    Posted by Dennis Kelleher | July 20th, 2010 at 11:56 am

  • Dear Randy,

    I completely agree with your critique of Krugman, who despite his support of deficit spending for short-run stabilization is ultimately still stuck in a quantity theory world. While wearing a Keynesian suit nowadays, I am fearful that he still has Friedman tucked under his sleeves!

    Cheers,

    Mario

    Posted by Mario Seccareccia | July 20th, 2010 at 5:41 pm

  • L. Randall Wray:

    A: “A favorite scenario used by the critics is the ever-rising budget deficit that causes the government debt-to-GDP ratio to rise continuously. As interest payments on the debt increase, government faces a vicious cycle of rising deficits, more debt, more interest paid, higher interest rates, and even higher deficits.

    Our response is two pronged.

    B: First, OK, let us accept your premise. Will the government be able to make all payments (including interest paid on debt) as they come due? The answer is, of course, “yes — by crediting bank accounts”. Insolvency is not possible when one spends by a simple keystroke. The critic then quickly changes the subject: Weimar! Zimbabwe! You are a destroyer of the currency! Yes, but it was your scenario, not mine. And even in your worst case scenario, the government cannot be forced to default.”

    My comment:
    I agree that a government that controls its own issuance of high-power money (notes and central bank balances not backed by taxpayer debt to private entities) can never be forced to default. However do you agree that hyperinflation may occur if such a government issues too much high-power money? In A above you state a common criticism of MMT. You defend against that criticism by saying that default cannot occur (B), yet A does not mention default.

    L. Randall Wray:
    C “Second. Your scenario is highly implausible. As budget deficits rise, this increases income (government spending exceeds tax revenue, thus adds net income to the nongovernment sector) and wealth (nongovernment savings accumulated in the form of government debt) of the nongovernment sector. Eventually, this causes private spending and production to grow. As the economy heats up, tax revenue begins to grow faster than government spending or GDP. (In the US over the past two cycles, in the expansion phase federal tax revenue grew two to three times faster than GDP and government spending.) This reduces the government deficit (remember the Clinton boom and budget surpluses?). Even if the government spending is on interest (in Krugman’s model, the deficit is due to interest payments) that generates nongovernment income and spending. In other words, the cyclical upswing will automatically reduce the budget deficit. The scenario ignores the “automatic stabilizers” that cause the budget deficit to swing counter-cyclically.”

    My comment:
    These relationships are complex, and you make a few logical leaps that are not justified. These are not static quantities that affect one another in predictable linear ways. The terms you use represent just a few aggregates, whereas reality is very much more complex. The closest you would be able to get to justifying these statements is to have someone like Steve Keen generate some dynamic models (including temporal factors usually left out by mainstream economists) that demonstrate the effects.

    A simple argument against C is: in the history of fiat currencies there have been occasions when an increase in government spending have not caused private spending and production to grow. Perhaps private spending always grows in nominal terms, but not always in real terms. So your logic definitely does not hold in all cases. Given this, how would you determine when to apply your methods and when not to?

    The beauty of money backed by debt to private entities is that the necessity to repay debt forms a natural limit on spending, which in turn prevents hyperinflation.

    Posted by Paul Andrews | July 21st, 2010 at 3:38 am

  • Paul,
    So for a Sovereign, would you then agree that Treasury security issuance is a mechanism to prevent hyper-inflation (a mechanism of monetary policy) , not borrowing?

    Resp,

    Posted by matt franko | July 21st, 2010 at 10:06 am

  • Thanx Mario, Matt, Dennis.

    Paul Andrews:
    In part A: Critics start off arguing that deficits can lead to involuntary default. When MMT points out that this is not possible so long as there are keys to stroke, the critic ALWAYS changes the subject–to inflation. OK so in part A I am agreeing that Krugman laid out a logical sequence in which excessive deficits can lead to hyperinflation. Fine. He is not able to show involuntary default–which is where the argument started. There is no model, not even by Steve Keen, that can show involuntary default by a sovereign govt issuing its own nonconvertible currency. Period. So let us stop arguing about that. OK?

    Posted by L. Randall Wray | July 21st, 2010 at 11:56 am

  • Continued for Paul:
    B) OK so now we agree involuntary default is not an issue. so the critic switches to inflation and comes up with a scenario in which govt continues spending, pushes economy far beyond full employment, but still continues to spend, deficit goes to infinity and we get hyperinflation. (Krugman’s little model is based on Friedmanian monetarism but we don’t have to have that. We can keep it “Keynesian”)

    My response. Fine, you created a scenario. Now, is it plausible? I think not. Remember we are talking about plausibility, so this is a judgment call based on our understanding of politics, policy-making, the historical record, etc. Can you explain to me why you think the US President plus Congress will conspire (which would be necessary, of course) to create the budget that will lead to infinite deficits and hyperinflation? Based on everything you understand about US policymaking, today, past, future, just how likely do you think your scenario is? If you think it is likely, why haven’t presidents and congresses since the early 1970s behaved that way?

    Posted by L. Randall Wray | July 21st, 2010 at 2:52 pm

  • continued for Paul:
    C) OK so now we agree that the hyperinflation scenario is highly implausible. The final point was on deficits pumping up the economy, generating private spending that closed the budget deficit. Another reason why the hyperinflation problem is not plausible.

    It just so happens that galbraith, davidson, and skidelsky made exactly my point today at New Deal. Check it out.

    First there is a statement of incontrovertible fact: over the past 3 cycles, economic expansion reduced the deficit. OK fine you can argue that the expansions had nothing to do with the deficit spending. But if deficit spending does not cause the economy to grow, how did you and Krugman get the hyperinflations (part B above). Without pushing economy beyond full employment, why is the budget deficit causing accelerating inflation.

    Is it just Friedmanian magic????

    Posted by L. Randall Wray | July 21st, 2010 at 2:56 pm

  • Under this macroeconomic scenario, does NPV matter? I understand the idea that government steps in to lend or spend what banks won’t, but not Keynes’s comment that any expenditure will do, such as burying jars underground.

    One would think that negative NPV destroys economic value, no matter who makes the investment — private, govt, whatever.

    So, setting aside for a moment the political question of whether government can make good NPV choices, I am asking the economics question of whether maximizing NPV should be a goal or consideration in a stimulus action.

    What do you think?

    Posted by Adam's Myth | July 21st, 2010 at 7:26 pm

  • Randy, Thanks for a very clear reply to Krugman amplifying your earlier comment at his NYT blog.

    Posted by Joe Firestone | July 21st, 2010 at 10:17 pm

  • MMT advocates Government spending for the Public Purpose. So not just any expense will do, but Government spending that both produces full employment and produces other value as well.

    For an example of the sort of program MMT has in mind see the ppt and associated audio here: http://www.netrootsmass.net/fiscal-sustainability-teach-in-and-counter-conference/pavlina-tcherneva-l-randall-wray-policy-proposals-for-fiscal-sustainability/

    Posted by Joe Firestone | July 21st, 2010 at 10:22 pm

  • matt franko | July 21st, 2010 at 10:06 am said: “So for a Sovereign, would you then agree that Treasury security issuance is a mechanism to prevent hyper-inflation (a mechanism of monetary policy) , not borrowing?”

    Matt, a security issuance is a contract to pay future tax revenues to a private entity or to the Central Bank, in return for immediate access to funds. A by-product of this contract is prevention of hyperinflation, unless the contract is fraudulent.

    If the Sovereign were to start to issue currency instead of the Central Bank, or if the Sovereign were to attempt to exert control over the Central Bank to issue currency not backed by debt, this would render previous contracts fraudulent (because this will dilute the value of future tax revenues). In this case, the previous security issuance would of course provide no protection against hyperinflation.

    If the contracts are upheld, as morally they should be, then hyperinflation is prevented through free market mechanisms – i.e. private entities will not lend past the point where they believe there is a reasonable chance of being repaid. In this case, yes, security issuance represents borrowing, and as a by-product, a mechanism that prevents hyperinflation.

    This leaves open the question of whether the Central Bank will lend past that point. If the Central Bank becomes a true captive of the government, then of course the Central Bank could lend ad-infinitum, and the security issuance will provide no protection. They would in fact cease to be securities, as the original contracts will have been breached.

    In my opinion, Central Banks in Western democracies are not captives of government. In fact governments may be captives of the private banking interests. Notionally governments could dictate terms to Central Banks, but in reality I believe the opposite is true.

    I believe that banks, central and private, expect that Sovereigns will honour their contracts. If this happens then I believe hyperinflation is not possible.

    Posted by Paul Andrews | July 22nd, 2010 at 3:55 am

  • L. Randall Wray | July 21st, 2010 at 11:56 am said: “In part A: Critics start off arguing that deficits can lead to involuntary default. When MMT points out that this is not possible so long as there are keys to stroke, the critic ALWAYS changes the subject–to inflation. OK so in part A I am agreeing that Krugman laid out a logical sequence in which excessive deficits can lead to hyperinflation. Fine. He is not able to show involuntary default–which is where the argument started. There is no model, not even by Steve Keen, that can show involuntary default by a sovereign govt issuing its own nonconvertible currency. Period. So let us stop arguing about that. OK?”

    I agreed with you on this. My point is that this doesn’t matter, because the hyperinflation is also a terrible outcome. I didn’t mention dynamic models in relation to default.

    L. Randall Wray | July 21st, 2010 at 11:56 am said: “B) OK so now we agree involuntary default is not an issue. so the critic switches to inflation and comes up with a scenario in which govt continues spending, pushes economy far beyond full employment, but still continues to spend, deficit goes to infinity and we get hyperinflation. (Krugman’s little model is based on Friedmanian monetarism but we don’t have to have that. We can keep it “Keynesian”): My response. Fine, you created a scenario. Now, is it plausible? I think not. Remember we are talking about plausibility, so this is a judgment call based on our understanding of politics, policy-making, the historical record, etc. Can you explain to me why you think the US President plus Congress will conspire (which would be necessary, of course) to create the budget that will lead to infinite deficits and hyperinflation? Based on everything you understand about US policymaking, today, past, future, just how likely do you think your scenario is? If you think it is likely, why haven’t presidents and congresses since the early 1970s behaved that way?”

    It is more than plausible, it has happened. Not in the U.S. I grant you. But the U.S Sovereign has not issued its own currency except during brief interludes. Since 1913 the currency has been issued by the Federal Reserve. It is all debt-backed. My point is that if this ceased to be, then hyperinflation would be a plausible outcome. U.S. politicians are the same as politicians everywhere, which is why it is prudent to use a debt-backed currency issued by the Central Bank, out of the control of politicians.

    L. Randall Wray | July 21st, 2010 at 2:56 pm said: “C) OK so now we agree that the hyperinflation scenario is highly implausible”

    For a Sovereign that issues non-debt-backed money I do not agree – hyperinflation is plausible, I would say likely. For a Sovereign that honours its bonds, denominated in a currency issued by a central bank that has private banking interests in mind, I believe hyperinflation is impossible.

    L. Randall Wray | July 21st, 2010 at 2:56 pm said: “It just so happens that galbraith, davidson, and skidelsky made exactly my point today at New Deal. Check it out. First there is a statement of incontrovertible fact: over the past 3 cycles, economic expansion reduced the deficit. OK fine you can argue that the expansions had nothing to do with the deficit spending. But if deficit spending does not cause the economy to grow, how did you and Krugman get the hyperinflations (part B above). Without pushing economy beyond full employment, why is the budget deficit causing accelerating inflation. Is it just Friedmanian magic????”

    I would happily make the same points to galbraith, davidson and skidelsky and read their replies with interest. Deficit spending will always cause the economy to grow in nominal terms, but not necessarily in real terms. Under hyperinflation there is massive nominal growth, but not, of course, real growth - quite the opposite. It is a matter of historical fact that hyperinflation can occur without full employment.

    Posted by Paul Andrews | July 22nd, 2010 at 4:41 am

  • Paul:

    So all politicians are the same? Idi Amin = George Bush = Barak Obama=Robert Mugabe? All of them want to run the economy up to hyperinflation?

    I am sorry. This is just too silly to respond to.

    Currency backed by debt? Currency is debt. It is backed by the tax system, as are treasuries. Treasuries are currency that pays interest.

    The Fed is part of govt. Check the laws. Yes it has banking interests in mind, as does the treasury. Why else has Timmy been pouring money into Wall Street? You are misled by appearances of independence.

    US has been on a noncovertible sovereign currency since it went off Bretton Woods; No hyperinflation yet by those nasty politicians.

    Posted by L. Randall Wray | July 22nd, 2010 at 11:26 am

  • “. . . a security issuance is a contract to pay future tax revenues to a private entity or to the Central Bank, in return for immediate access to funds. A by-product of this contract is prevention of hyperinflation, unless the contract is fraudulent.”

    Paul, stop mis-stating the facts. When someone buys a TSY there is no “contract” tp pay future tax revenues” to anyone. the contract is to pay USD to the creditor along with the agreed interest. That is it. No other legal obligation exists. No other moral obligation exists either. Investors in Federal Securities like investors in anything else are taking a risk, including a minimal risk that there may be hyper-inflation. If that occurs it is too bad for the investors. There is no risk-free investment. Nor should there be.

    You also say:

    “If the Sovereign were to start to issue currency instead of the Central Bank, or if the Sovereign were to attempt to exert control over the Central Bank to issue currency not backed by debt, this would render previous contracts fraudulent (because this will dilute the value of future tax revenues). In this case, the previous security issuance would of course provide no protection against hyperinflation.”

    Again, there is no such contract. Moreover, the US Government has the constitutional authority to issue currency without issuing debt. It it chooses to so that is a matter of policy, and there is no contractual constraint on implementing or following such a policy due to previous debt issuance.

    Next, you said:

    “If the contracts are upheld, as morally they should be, then hyperinflation is prevented through free market mechanisms – i.e. private entities will not lend past the point where they believe there is a reasonable chance of being repaid. In this case, yes, security issuance represents borrowing, and as a by-product, a mechanism that prevents hyperinflation.”

    Again, there are no such contracts. And to pretend that such contracts do exist and to act to uphold such “contracts” when they do not, is itself immoral.

    And as long as we’re talking about morality, your own morality is in question if you keep on asserting the blatant falsehood that the Government has entered into a contract with private investors never to create money without issuing debt. Again, it is a stubborn fact that there are no such contracts. You cannot point to them. You cannot point to any paper where they exist. You cannot point to any web page or advertisement of the Government’s where such a contract is specified. This “contract” is a figment of your imagination.

    You may wish such contracts existed because that would bind the Federal Government to the bond markets of the wealthy and other nations. But fortunately, the United States is sovereign in its own currency and has not yet been stupid enough to compromise its constitutional authority to create money by concluding such contracts with China, Japan, or wealthy investors.

    Posted by Joe Firestone | July 22nd, 2010 at 3:21 pm

  • Paul, In your reply to Randy at 4:41 AM on the subject of hyperinflation you said:

    “It is more than plausible, it has happened. Not in the U.S. I grant you. But the U.S Sovereign has not issued its own currency except during brief interludes. Since 1913 the currency has been issued by the Federal Reserve. It is all debt-backed. My point is that if this ceased to be, then hyperinflation would be a plausible outcome. U.S. politicians are the same as politicians everywhere, which is why it is prudent to use a debt-backed currency issued by the Central Bank, out of the control of politicians.”

    I think you’re in error. Hyperinflation has never happened to a nation sovereign in its own currency with no outstanding debt denominated in a foreign currency and no peg of its own currency to a foreign currency. Can you cite even one historical instance where this has happened?

    Also, it takes a lot more than failing to issue debt to create hyperinflation. This was discussed at length in the recent Galbraith/Krugman exchange, where Paul K’s quantity theory of money came under serious criticism from a number of quarters including from me here:

    http://seminal.firedoglake.com/diary/60629

    One of the key points is that there won’t be any inflation. much less hyperinflation, short of full employment. Even them hyperinflation is very unlikely because 1) the Government will approach or reach surplus and 2) the Government can increase taxes to drain excess money out of the economy.

    Posted by Joe Firestone | July 22nd, 2010 at 6:58 pm

  • L. Randall Wray | July 22nd, 2010 at 11:26 am said “So all politicians are the same? Idi Amin = George Bush = Barak Obama=Robert Mugabe? All of them want to run the economy up to hyperinflation?”

    I did not say that all politicians are the same. What I do believe is that politicians, in general, are as fallible in the US as they are elsewhere. I’m sure that very few, perhaps no politicians who created hyperinflation actually wanted to, but hyperinflation has happened nevertheless.

    “Currency backed by debt? Currency is debt. It is backed by the tax system, as are treasuries. Treasuries are currency that pays interest.”

    By saying the currency is backed by debt I mean that for each dollar of debt that the Federal Reserve owes (bank note or CB deposit), there is a corresponding debt owed to the Federal Reserve by the government or the private banking system. i.e. the Federal Reserve assets exceed their liabilities. In a sense then, currency is debt, but it is important to keep in mind – a debt of whom, to whom? If the government issued its own currency not backed by bonds, it would in one sense be a debt, but not in the sense of the current monetary system.

    “The Fed is part of govt. Check the laws. Yes it has banking interests in mind, as does the treasury. Why else has Timmy been pouring money into Wall Street? You are misled by appearances of independence.”

    In a sense the Fed is part of the government. The question is, which actors actually wield influence? I think you would agree with me from your statement above that the banks wield a lot of influence. The banks are large creditors of the taxpayers. You would expect them to want to ensure that this can be serviced and paid down at some point.

    “US has been on a noncovertible sovereign currency since it went off Bretton Woods; No hyperinflation yet by those nasty politicians.”

    Yes, because over that period currency has been backed by debt, regulated by a Central Bank.

    Posted by Paul Andrews | July 23rd, 2010 at 4:13 am

  • Joe Firestone | July 22nd, 2010 at 3:21 pm said: “Paul, stop mis-stating the facts. When someone buys a TSY there is no “contract” tp pay future tax revenues” to anyone. the contract is to pay USD to the creditor along with the agreed interest. That is it. No other legal obligation exists. No other moral obligation exists either. Investors in Federal Securities like investors in anything else are taking a risk, including a minimal risk that there may be hyper-inflation. If that occurs it is too bad for the investors. There is no risk-free investment. Nor should there be.”

    But that is no obligation at all! Why would a creditor enter into such a one-sided arrangement?

    I disagree, but I perceive that you will not be convinced. The monetary system works because these obligations are real. As soon as they stop being real, the monetary system will stop working.

    Posted by Paul Andrews | July 23rd, 2010 at 4:39 am

  • Joe, try China 1937 - 1948, after the government took control of the previously private banking system: http://www.financialsensearchive.com/fsu/editorials/dollardaze/2007/0306.html

    Posted by Paul Andrews | July 23rd, 2010 at 10:32 am

  • Paul, I said:

    “I think you’re in error. Hyperinflation has never happened to a nation sovereign in its own currency with no outstanding debt denominated in a foreign currency and no peg of its own currency to a foreign currency. Can you cite even one historical instance where this has happened?”

    You said:

    “Joe, try China 1937 - 1948, after the government took control of the previously private banking system: http://www.financialsensearchive.com/fsu/editorials/dollardaze/2007/0306.html

    Paul, I said a nation “sovereign in its currency.” During those years Nationalist China was partly occupied by Japan, and partly governed by the Communists. So, Nationalist china had no monopoly over its currency. Furthermore, are you telling me that no debt was owed to foreign governments in a foreign currency. How about US loans to China? Also, wasn’t China’s currency in the immediate post-war period pegged to the value of US currency. And finally, wasn’t Chinese productive capacity destroyed during the War, so that the money supply vastly exceeded productive capacity?

    I think all these factors made China non-sovereign in its currency and also much more like Zimbabwe than any modern State with a fiat money system.

    Posted by Joe Firestone | July 23rd, 2010 at 4:04 pm

  • Paul at 4:39,

    You ask:

    “But that is no obligation at all! Why would a creditor enter into such a one-sided arrangement?”

    They enter into such agreements everyday. Why they do it is because they think an investment in a US bond is safer than other investments. But we don’t guarantee that it is safer. That is the investor’s calculation and the possibility that it is less safe is the risk. You also say:

    “I disagree, but I perceive that you will not be convinced. The monetary system works because these obligations are real. As soon as they stop being real, the monetary system will stop working.”

    Yes, but that is not say that these are legal obligations like the United States has to redeem the Bonds issued in return for FICA collections used by other Governmental agencies. The only legal obligation that exists is for the Government to pay back the principal and interest on the bonds in USD at the time they come due.

    Now moving to the question of the monetary system working. Of course it won’t work if we have hyper-inflation, but if the Government spends at a high enough level to create full employment in the United States it is very unlikely that this will affect the value of the dollar very much. In fact, as we approach full employment, the automatic stabilizers will end the deficits or at least make them very small, and if the spending doesn’t exceed our productive capacity there will be no demand pull inflation at all. So, we will be fulfilling both our moral obligations to those investors as well as our moral and legal obligations to our own working citizens who both need jobs and also need their government to fulfill its legal obligations, which it has not done for the past 30 - 35 years to do all it can to create full employment.

    Posted by Joe Firestone | July 23rd, 2010 at 4:17 pm

  • Joe: good comments. I am pretty sure Paul is pulling your leg.

    How else can you possibly explain his belief that Fed IOUs that are “backed” by a treasury bond make a good, high quality, hyperinflation free “money”.

    But treasury money that is backed by, well, by the treasury itself, is a bad, hyperinflationy money.

    And we have had no hyperinflation since BW because the Fed has been in charge of the money supply, but now we will have hyperinflation because….well, because MMTers are explaining how sovereign currency works!

    Because we have made it clear we are NOT advocating any policy change. We are just explaining how the money system works. But that immediately leads to the charge that we are all Leninist hyperinflators.

    So it is pretty clear Paul does not mean to be taken seriously. Sadly, enough.

    Posted by L. Randall Wray | July 24th, 2010 at 1:34 pm

  • Did i just read these posts correctly? LOL.

    Posted by Dave | July 24th, 2010 at 9:40 pm

  • I am certainly not pulling anyone’s leg. If those in power believed your theories and acted in accordance with them, the consequences would be dire for all of us. My comments are intended to point out the logical flaws in your theories. If I can prevent just one person from falling prey to them I will consider the time spent worthwhile.

    I am sure your intentions are good, and I am sure many people want to believe that we can somehow beat the natural credit cycle and never have to suffer unemployment. This is what makes the theories attractive. However the MMT theory is complex, ill-defined and far from proven, whereas the fact that credit expands and contracts is as old as credit itself. A reneging on credit when there is no need to do so is not the answer - quite the opposite. (Note: I mean reneging in the sense of treating government bonds as if they were not really bonds).

    L. Randall Wray: “but now we will have hyperinflation because….well, because MMTers are explaining how sovereign currency works!”

    This is not what I have been saying. My position is that MMTers have an incorrect description of how money works in a Central Banking system. MMT-ers assume a pure-fiat Sovereign Currency, and that is not what we have. We have a debt-backed currency. If the situation changes and elements of pure-fiat currency appear, then there is a high danger of slipping into a hyperinflation. I don’t think that will happen however.

    Posted by Paul Andrews | July 24th, 2010 at 9:42 pm

  • I’d just like to add a big thank you for supporting free speech on this site, and for allowing this discussion to continue.

    I respect the good intentions of MMT people, even though I disagree strongly with MMT literature.

    Posted by Paul Andrews | July 24th, 2010 at 9:45 pm

  • @Paul,

    ” incorrect description of how money works ”

    Money doesnt ‘work’, people work. I think this is perhaps the basis for where you start to depart from the accurate systemic description that MMT provides. A ‘dollar’or “money” is just a unit of accounting on the big IT system called ‘the banking system’ here in the US. Im getting the feeling from your posts that you perceive ‘money’ as a sort of an ‘ exogenous’ entity. Meaning ‘from without’, that ‘money’ is “out there’ and the govt has to ‘get it’ to be able to spend. This is not the case here in the US.

    Its like if you had a power outage at your residience and since the utility comapany billed you in kilowatt-hours you would call them up and say “hey, my kilowatt-hours isnt working, can you get it fixed?” Its just a unit, not the system.

    If I have product for sale and the govt credits my bank account for the amount I am offering my product for, I will ship the product, this is how it works. I dont care if they tax somebody, issue bonds, or deposit seignorage at the CB; all would be separate from my transaction. If I get the balances, I ship the product.

    You seem to valuing the financial sectors desires above the real economy, that somehow, what the financial sector perceives, or what the financial sector may have concerns about is somehow more important than the real economy.

    Try to bring it around to this, see it this way: The world doesnt exist to have a financial sector, rather we have real businesses that utilize the financial sector (like a utility) to get real things done.

    Myself and my assoicates in non-financial businesses all loathe the financial sector. They were always seen as a parasitic element, and now fraudulent/deceptive ones.

    hang in there! Resp,

    Posted by matt franko | July 25th, 2010 at 7:22 am

  • OK Paul, sorry to misread your intentions. It sure appears that you are toying with us, misreading my original post, handwaving about hyperinflation, changing the meaning of terms, and so on.

    So, if you are serious please understand:
    1. what i originally posted was not theory nor policy. It was description. It was an attempt to show that involuntary insolvency is not possible for a sovereign issuer of the currency.
    2. I agree that bad policy can generate inflation and depreciation. hyperinflation is another matter entirely and I argued it is extremely implausible that such will happen in the US.

    OK you see hyperinflation as possible, even likely if policymakers understand how sovereign money works. So will you:
    a) name names
    b) describe the policy
    c) describe the process
    that will give us the hyperinflation.

    No more handwaves about Weimars and Zimbabwes and Occupied China or Japan, or American confederacy.

    Please try to remain focused. We are talking about the US, today, not in a world war or civil war, not burdened with reparation payments (that Keynes of course argued germany could not possibly pay–hyperinflation was the inevitable result of trying to do so).

    So do not bring up armageddon–where all bets are off. Don’t bring in an invasion by space aliens that suck our precious body fluids. Let us talk about something close to a real world situation, with the sort of politicians we have today. Exactly who in congress is going to adopt the policy, and what is the policy, that is going to get us hyperinflation. Black helicopters dropping bags of cash is ruled out by assumption. How else can we get there?

    Posted by L. Randall Wray | July 25th, 2010 at 9:23 am

  • “Money doesn’t work, people work”

    This sounds like “Guns don’t kill people, people kill people”. A very empty attempt at misdirection.

    Obviously people with guns kill more people than people without guns.

    A system with people and money works a hell of a lot better than a system with people but no money. Pure-fiat is not real money. Debt-backed money is.

    Posted by Paul Andrews | July 25th, 2010 at 5:21 pm

  • L. Randall Wray:
    I haven’t mentioned most of the things you’ve attributed to me in your comment.

    Posted by Paul Andrews | July 25th, 2010 at 5:29 pm

  • “what i originally posted was not theory nor policy. It was description. It was an attempt to show that involuntary insolvency is not possible for a sovereign issuer of the currency.”

    Your original post is a theoretical description of a theoretical entity. It is theory, it is description, and it is aimed at influencing policy. The terms are not mutually exclusive.

    Your post refers to a “sovereign issuer of currency” which the US government is not.

    A. The US has a central bank which is required to keep its Assets greater than its Liabilities. If this central bank were to start issuing pure-fiat currency, this would add to the Liabilities side without adding to Assets.

    B. If the US government were to start printing USD’s - “Federal Reserve Notes” this would equate to adding to the central bank’s liabilities without its consent, and would have the same effect as A.

    For the US to become a “Sovereign Issuer of Currency” it would need to repeal the Federal Reserve Act, so that the above restrictions are removed. Until they do that, your description refers to a theoretical entity only.

    Posted by Paul Andrews | July 25th, 2010 at 11:37 pm

  • Ok Paul, you simply do not understand government spending processes. I guess you have not been paying attention to MMT.

    As my dissertation supervisor Hyman Minsky always said: “try disciplining that with balance sheets”. Try carefully writing out the balance sheets for what you have said. Then compare that to reality. It is the Treasury that credits bank accts when it spends; It is the Fed that credits bank reserves when it spends.

    I won’t go through a detailed “he said, you said” with you as your memory appears to be not so good. You said: “U.S. politicians are the same as politicians everywhere,” and then you denied that you ever said it when I challenged you. And so on.

    We’ve passed the point of diminishing returns, as some economists like to say.

    Posted by L. Randall Wray | July 26th, 2010 at 12:25 pm

  • Paul,

    Federal Reserve Act
    Section 15. Government Deposits
    “1. Federal Reserve Banks as Depositaries and Fiscal Agents of United States
    The moneys held in the general fund of the Treasury, except the five per centum fund for the redemption of outstanding national-bank notes may, upon the direction of the Secretary of the Treasury, be deposited in Federal reserve banks, which banks, when required by the Secretary of the Treasury, shall act as fiscal agents of the United States; and the revenues of the Government or any part thereof may be deposited in such banks, and disbursements may be made by checks drawn against such deposits.”

    Key words are “may” and “when required”. This implies that Treasury already has the ability to make different arragements than current arrangements. No changes to FRA required. Treasury already retains certain seignorage powers.

    Resp,

    Posted by matt franko | July 26th, 2010 at 12:37 pm

  • L. Randall Wray said: “It is the Treasury that credits bank accts when it spends; It is the Fed that credits bank reserves when it spends”

    That comment is very imprecise. You asked me to spell out balance sheet entries, but don’t apply that same standard to yourself. Show me in the MMT literature where the balance sheet entries are spelled out.

    L. Randall Wray said: “You said: “U.S. politicians are the same as politicians everywhere,” and then you denied that you ever said it when I challenged you”

    So that readers don’t need to scroll back - here is what we said:

    Paul: “U.S. politicians are the same as politicians everywhere, which is why it is prudent to use a debt-backed currency issued by the Central Bank, out of the control of politicians.”

    L. Randall: “So all politicians are the same? Idi Amin = George Bush = Barak Obama=Robert Mugabe? All of them want to run the economy up to hyperinflation?”

    Paul: “I did not say that all politicians are the same. What I do believe is that politicians, in general, are as fallible in the US as they are elsewhere”

    I won’t comment further - I will leave that for readers to consider.

    Posted by Paul Andrews | July 26th, 2010 at 6:00 pm

  • Matt Franko,

    I didn’t say that the Treasury couldn’t deposit money anywhere other than the Fed.

    What I said is that they cannot print money independently.

    The clause you reproduced doesn’t allow the Treasury to “make other arrangements” in a general sense, just in the sense of where they keep their funds.

    Posted by Paul Andrews | July 26th, 2010 at 6:09 pm

  • Paul: your comments have devolved to absolute silliness.

    You say all politicans are “the same” then say you did not say all politicians “are the same”. Is english one of the languages over which you have some command? What is a reader to thinK?

    Ok I have challenged you to detail two things:
    a) a plausible hyperinflation scenario
    b) balance sheets showing your preferred view of government finance as it exists.

    I take it that you cannot do either.

    As to your claim that MMTers have not offered the balance sheets–that only displays your supreme ignorance of the literature. I will offer two references, not because I believe you will look at them, but because others might want to. There are many other authors who have gone through the balance sheets, including my colleague Prof Kelton as well as Scott Fulwiler and Bill Mitchell. Also many at the Fed have provided similar analyses.

    “Fiscal Effects on Reserves and the Independence of the Fed” (with Stephanie Bell), Journal of Post Keynesian Economics, Winter 2002-2003, Vol 25, No 2, pp. 263-271.

    LR Wray, Journal of Post Keynesian Economics, Issue: Volume 26, Number 2 / Winter 2003 / 04 Loanable funds, liquidity preference, and endogenous money: do credit cards make a difference?

    QED, as they say. I will not respond to you any more. You are lazy and (apparently) blissfully ignorant. Sorry to find you were indeed just toying with us.

    Posted by L. Randall Wray | July 26th, 2010 at 9:06 pm

  • L. Randall,

    If I say US politicians are the same as politicians everywhere, this clearly means that the class of US politicians is roughly equivalent to the class of all politicians, not that every individual politician is the same as every other individual politician.

    I will respond regarding the references - thanks for providing them.

    Posted by Paul Andrews | July 26th, 2010 at 9:39 pm

  • L. Randall,

    Your paper in Volume 26 (Loanable funds…) does not refer to the balance sheet entries that would occur if the Fed were to start issuing pure-fiat currency.

    The balance sheet entry in such a case would be simple, a Credit to the Government’s Reserve Account at the Fed, (or to a private bank’s account at the Fed) with no corresponding debit. It doesn’t even make accounting sense.

    If there were a corresponding debit, this would not equate to pure-fiat currency creation because the created HPM would be offset by an asset.

    I just spent $30 on your paper, so before I go and spend more on the other paper, I’d like to know whether it specifically refers to what we have been discussing, namely the constraints that the Federal Reserve Act places on the Government that prevents it from issuing non-debt-backed currency.

    Perhaps you could just give us the entries here? If the Government does indeed issue pure-fiat, non-debt-backed currency, what are the actual balance sheet entries, if they are not as I have described above?

    If I am wrong I will gladly admit it, and will be thankful for a new-found understanding. I can see that I have in some way upset you, but I am only attempting to communicate my version of the truth. If that is proved wrong, good for me, I will have learnt, and good for your readers who are following the debate as they will also have clarified their understanding. If it cannot be proved wrong, then it will have added something for people to consider. There’s nothing to be lost by open and honest debate.

    Posted by Paul Andrews | July 26th, 2010 at 10:04 pm

  • Sorry, part of that last comment was not quite right. Of course the Fed would credit an Expense account, so it would make accounting sense. However if they were to keep doing this, Liabilities would eventually exceed Assets and the Fed would need to be recapitalised by the Government (through the issue of new bonds).

    Posted by Paul Andrews | July 26th, 2010 at 10:09 pm

  • Sorry again - should be “debit an Expense account”

    Posted by Paul Andrews | July 26th, 2010 at 10:10 pm

  • Paul,

    When you say: ” namely the constraints that the Federal Reserve Act places on the Government that prevents it from issuing non-debt-backed currency.”

    This is similar to what some MMT advocates ( myself included) call “a self-imposed constraint” that the govt sector places upon itself. IOW, when you say the line above, its means to me that the Treasury has to maintain a positive balance in its account at the Federal Reserve, Treasury cannot go into “overdraft” if you will. So it can appear that the Treasury “borrows” in the bond market to get balances in its account at the Fed before Treasury can spend.

    I have been looking for where this is specifically directed by law and have been unsuccessful in my search so far, I have reviewed the Federal Reseve Act and did not see it, perhaps I overlooked it when I wen thru it a while back.

    Can you point me to the Section of the Act that mandates this? It would help me advance my understanding. Section 15 is the only Section I found that covers Government Deposits.

    From my excerpt above at the end of the paragraph it states : “disbursements may be made by checks drawn against such deposits. ” Which implies that Treasury can only draw from its FR account against previous deposits, this is as close as I can come to a ‘mandate’ in the FRA.

    Also, if there is language in the Act that states like you say: ‘the Govenment cant issue non-debt backed currency’ that would also be of interest to me. There is a lawyer at another blog who is trying to develop legislation for submittal to a sypathetic Congrssman that would remove this “self-imposed’ constraint and Im trying to help him identify all current related legislation.

    Resp,

    Posted by Matt Franko | July 26th, 2010 at 11:39 pm

  • Matt,

    I believe the Treasury can go into overdraft. That’s not what I was saying.

    I was saying that the assets of the Federal Reserve must exceed liabilities - i.e. it must be solvent. The direct effect of this, and the fact that bank notes and HPM are liabilities of the Fed, is that neither the Fed nor the Treasury can issue non-debt-backed currency. It doesn’t say in the act that “the Government cannot issue non-debt backed currency”, but that statement is a straightforward logical deduction from the terms of the act.

    One exception: they could temporarily do it in a sense (e.g. if the Fed did become insolvent through mismanagement), but this would need to be resolved via recapitalisation, meaning that the Treasury would need to issue bonds to cover the shortfall, and the excess HPM would become debt-backed once more.

    The only way to remove the “self-imposed constraint” in my opinion would be to move away from the Central Banking model. It just would not make sense to have a Central Bank if you were just going to let it be insolvent. Of course, it could happen, they could pretend it was solvent when it wasn’t, and ignore the act. That’s obviously not a great state of affairs though, and I believe far from the situation at present. I don’t think tinkering with the act will achieve your objective, because the very nature of solvency is intricately tied in with the very nature of a bank.

    By the way, as there are multiple powerful actors with different interests, I think “self-imposed constraint” is an oversimplification.

    Also I think this constraint, self-imposed or not, is something that essentially holds the whole system together. We all need constraints, and probably none more so than this one.

    Posted by Paul Andrews | July 27th, 2010 at 3:54 am

  • Matt,

    Just to clarify some things above that may not be clear:

    The Treasury has its own assets and liabilities.

    The Fed has its own, separate, assets and liabilities. In one sense these are owned by the Government, but they are assets and liabilities of a separate institution, not the Treasury.

    The Treasury’s main “bank account” is its account at the Fed. If this has a positive balance, it is an asset of the Treasury. This same balance is a liability of the Fed.

    If Treasury were to overdraw this account, it is in effect a liability of the Treasury - money it owes to the Fed. In this sense it has a similar effect on money supply as the issuance of a bond - it is still debt-backed money because the balance is an asset on the Fed balance sheet.

    Posted by Paul Andrews | July 27th, 2010 at 4:05 am

  • Paul,

    “If Treasury were to overdraw this account, it is in effect a liability of the Treasury - money it owes to the Fed. In this sense it has a similar effect on money supply as the issuance of a bond - it is still debt-backed money because the balance is an asset on the Fed balance sheet.

    Then why issue bonds at all?

    Welcome aboard!

    Resp,

    Posted by Matt Franko | July 27th, 2010 at 7:46 am

  • Matt,

    They issue bonds because an overdraft cannot be sold to the private sector.

    Posted by Paul Andrews | July 27th, 2010 at 5:26 pm

  • Paul goto http://www.moslereconomics.com for better dabate. Very little of what you are saying makes any sense.

    Posted by bubbleRefuge | July 27th, 2010 at 6:11 pm

  • Paul,

    Then, I see, it is a political issue…. not a financial one.

    Welcome aboard!

    Resp,

    Posted by Matt Franko | July 27th, 2010 at 7:10 pm

  • bubbleRefuge,

    Please point out which specific comments do not make sense.

    Posted by Paul Andrews | July 27th, 2010 at 8:25 pm

  • Matt,

    There are political and financial aspects to the issue.

    Part of the politics is, should we continue with the current financial paradigm or not?

    Each individual when forming their political opinion should do all they can to inform themselves of what the current financial paradigm is. Only when they have formed a self-consistent understanding of the current paradigm can they really make a positive contribution in the debate as to whether the paradigm should be retained or discarded.

    I feel that my understanding is self-consistent, and hopefully close to reality, and I believe that the paradigm as I understand it has served civilization well and should be retained. I haven’t seen anything in these comments that invalidates the understanding that I have, but I am open to that occurring.

    Posted by Paul Andrews | July 27th, 2010 at 8:36 pm

  • bubbleRefuge,

    Just checked out moslereconomics.com quickly - may look in more depth later.

    This is in the page header:

    “MOSLER’S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.”

    Do you agree with this?

    Posted by Paul Andrews | July 27th, 2010 at 8:41 pm

  • Broadly speaking yes I agree.
    I don’t agree with
    “assets of the Federal Reserve must exceed liabilities ”
    ” neither the Fed nor the Treasury can issue non-debt-backed currency”

    Goto http://www.moslereconomics.com thats the best place to engage.

    Posted by bubbleRefuge | July 28th, 2010 at 12:40 pm

  • Paul,
    I understand most of your points but what Im trying to get you to see, and I think you do see it based on the fact that you know that a Treasury overdraft in its Fed account is financially equivalent to issuance of a Treasury bond, is that Treasury issuance is not “borrowing” and that there are other financial arrangements that our govt can set up. Once you (and again I think you may already have) and most others see this, we can lose our preoccupation with so called govt “debt” and really open up the fiscal channel to implement consistently supportive (think SS and Medicare/Healthcare/Job Guaranty) policies during ‘normal’ periods and counter-cyclical policies that will lead to better economic outcomes for ALL of our fellow citizens in periods such as the one we are suffering thru now.

    The broad view that Federal govt securities are “borrowing” is really spiritually damaging to our country and its citizens. We deserve better.

    Resp,

    Posted by Matt Franko | July 28th, 2010 at 1:46 pm

  • Matt,

    A bond is a borrowing, that is the definition of a financial bond. If MMTers think they have a new definition they should give it a name - perhaps “phony bond” fits the bill.

    We don’t deserve better - we already got a whole heap of goods and services we couldn’t afford, and now some of us don’t want to pay for them.

    Goods and services don’t just appear when you create money - capital and labour is needed to produce them. For too long taxpayers have happily accepted these from the private sector in exchange for bonds. Now some taxpayers don’t want to uphold their end of the bargain. If this is allowed to happen, the private sector will slowly but surely refuse to supply capital and labour. They are not silly.

    There is no perpetual motion machine. There is no free lunch. When push comes to shove, if you want something you are going to have to help make it, not trick people into giving it to you.

    Posted by Paul Andrews | July 28th, 2010 at 6:47 pm

  • bubbleRefuge,

    “I don’t agree with
    “assets of the Federal Reserve must exceed liabilities ””

    This is quite a statement. Do you have any evidence for this?

    Posted by Paul Andrews | July 28th, 2010 at 6:49 pm

  • bubbleRefuge,

    I previously had some communication with Warren here:

    http://www.nakedcapitalism.com/2010/06/deficit-doves-the-gift-that-keeps-on-giving.html

    Interestingly, the site owner (Yves), whi I think is also a MMT proponent, blocked me from posting further comments, and removed some comments that she, Warren and I made.

    Nothing untoward, just polite but robust debate, but somehow freedom of speech is curtailed somewhat on that site. Good to see it doesn’t happen here.

    Posted by Paul Andrews | July 28th, 2010 at 6:59 pm

  • Paul,

    No new name is required, they are uniquely called US Treasury Bonds.

    We already got a heap we couldnt afford: Urban Legend

    We dont deserve better: Enjoy your alternative universe.

    Resp,

    Posted by matt franko | July 28th, 2010 at 8:30 pm

  • Matt,

    A US Treasury Bond is still a Bond, and is therefore still borrowing. If MMTers think they have a new definition they should give it a name - perhaps “US Treasury phony bond” fits the bill.

    “We already got a heap we couldnt afford: Urban Legend”

    Take the example of a worker who helped build a road for wages that he saved and invested in a US Treasury Bond. The taxpayers didn’t provide the labor - they took a loan from the worker so they could enjoy the road now, not later. They got stuff now that they couldn’t afford now, in return for their commitment to pay for it later. Now some taxpayers, having had the enjoyment of the road, think they can treat that US Treasury Bond as somehow not being borrowing. In effect this is saying that guy that did the actual work, who built that road, does not deserve reward for his effort. Is that what you think?

    Posted by Paul Andrews | July 28th, 2010 at 9:38 pm

  • Can anyone point me to the definitive text, or set of texts, that define the Modern Monetary Theory?

    I’m reading an article by Bill Mitchell called “The fundamental principles of modern monetary economics” - is this a definitive text?

    Posted by Paul Andrews | July 29th, 2010 at 5:18 am

  • Paul,

    ‘ a worker who helped build a road for wages ‘ : Paul, he got paid, his bank account went up, that is the end of the story. Dont over-think it.

    Resp,

    Posted by matt franko | July 29th, 2010 at 9:23 am

  • Matt,

    I don’t think you can reasonably deny that there is more to it than that.

    I think we’ve gone as far as we can go on this thread.

    Thanks for reading and responding - if you have a link to the definitive MMT texts requested above, please leave a link here.

    Posted by Paul Andrews | July 29th, 2010 at 9:41 pm

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