All Your Dorks Are Belong to This

Paul Krugman has another post up about the difference between money and debt.  He raises a relevant question which starts to get to the heart of the real matter at hand:

“My concern is that when saying that money and debt are the same thing, it’s way too easy to lose sight of the real distinctions between monetary and fiscal policy that remain.”

If this were the movie Inception I’d be in the dream sequence one level deeper than Paul Krugman because I don’t quite think he’s asking the right question.  The real question is not about confusion over monetary policy and fiscal policy, but the NEXUS of monetary policy and fiscal policy.  In essence, does it matter whether a government self finances through direct deposit issuance or finances itself by selling bonds to the private sector?

As I explained previously, the design of our system is as such.  Paul buys a bond at auction which gives the government a bank deposit which allows them to spend the deposit into Peter’s account.  In short form, most government spending is bank deposit in (from Paul), bank deposit out (via government spending to Peter) PLUS net financial assets as bonds (to Paul).  If the government were to self finance it wouldn’t sell the bond.  It would just issue a net financial asset to Peter in the form of a bank deposit.  Spending is primarily based on the relationship between current income relative to desired saving so there shouldn’t be much of a difference in all of this on an inflationary front (though one could argue that bonds are slightly less liquid than cash, but I think we’re splitting hairs there).  Peter ends up with a deposit in either case and the private sector ends up with a net financial asset in either case.  No big deal, right?  Not quite.

Paul will still want to save in something that protects him from potential purchasing power loss of cash.  So he’ll go out and search for a financial asset to provide that savings/income need.  Now, the government could issue bonds to meet this need, but then we’re just sterilizing the deposit issuance and nothing is solved from the change in the system via direct deposit issuance.   This is basically what the government does now and it’s hugely supportive to the private equity structure of “rentier capitalism”.   If the government doesn’t issue the risk-free assets then we end up in an Izabella Kaminska world where there aren’t enough risk free assets and banks go crazy supplying the private sector with close (less stable) alternatives.  We all know how that ends up.   It’s inherently destabilizing.

So what this all really comes down to is rather simple.  It comes down to whether we want to have a private sector banking system and a government that supports that system.  Paul Krugman’s original question touches on this, but not quite in the right manner because the Fed, at the end of the day, is a public/private hybrid entity designed to support private banking.  The alternative to this system is to start tearing down the walls of the Fed and start taking a jackhammer to the foundation of private banking.  The government must choose to use the Fed and Treasury to support the capital structure of private banks or it must not support it and accept the destabilizing effects that will inevitably result in bailouts and government intervention.   You can’t have it both ways.

In sum, yes, we could theoretically self finance, but a lack of risk free asset issuance will simply result in a destabilizing banking system.  So we can self finance and issue the bonds, but then why bother changing the institutional structures from what they are today if this all ultimately ends up supporting the private equity structure of private banking in the end anyhow?  It’s not even worth the trouble.  On the other hand, the only way to self finance with direct deposit issuance without also creating an inherently fragile private banking system is to bring the banking system under the government umbrella in that dirty “N word” (no, not your favorite word, Quentin Tarantino).  But then a bunch of bureaucrats end up managing their own form of the shadow banking system….

I’m afraid the best we’re going to do in altering the current system is to better regulate the banks and better understand the actual structure of the monetary system we have.  The platinum coin created a great thought experiment for everyone and hopefully provided some important lessons and understandings about government spending and our monetary system, but this dream sequence is ending and it’s now time to wake up to the reality of our monetary system designed largely around the existence of private banking.  

*  For the real wonks, Scott Fullwiler has the only post up on all of this that displays a total understanding of the concepts at hand, but I’m not sure he’s deep enough in the dream sequence….


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. Wow Cullen, this is already complex enough, and then you have to introduce the conceptual elements of Inception. Thanks.

  2. MMT “not deep enough in the dream sequence”? Dude, they’re off in la-la land. Ha.

  3. Fullwiler is a great source for banking mechanics though… I’ve learned a lot from him.

  4. Honestly, I didn’t understand all the monetary stuff in there, but the cultural references are genius.

  5. Cullen, take a vacation. You’ve been in front of a computer and TV screens too much!

  6. And isn’t government regulation and at crucial times support for the banking system entirely appropriate in a free enterprise oriented mixed economy?

    But the regulatory capture and low price of failure are astounding. A well defined bail in mechanism for long term instrument holders (including derivatives at mark to market valuation) rather than taxpayer support is what is needed in addition to bringing back Glass Stegall. Banking in one supported entity, trading and speculation in a separate, non-systemic entity.

  7. Dorkus,

    “it’s now time to wake up to the reality of our monetary system designed largely around the existence of private banking. ”

    YES let’s.

    Government AND Money are both centered around the HEGEMONY. The top 1/3 of Americans who matter.

    And the VERY DAYDREAM you have that Govt > Money, denies the REASON why “private” banking with govt. backstop occurs…

    To keep you from happening. QED.

    You sound like you discovered that a Parliamentary system would be easier to change country than what our Constitution was built for, and you don’t get down into deep enough, to realize it is ALL INTENTIONAL.

    Look, money starts as barter.

    Who can barter? Who needs money?

    NOT the have-nots! They got nothing to barter! People with shit barter, and people without shit, BEG. They literally trade making the other person FEEL GOOD by grovelling, letting the person with shit feel better than them, good about themselves etc.

    Beggars don’t have an over-supply of begging they need use money for.

    There’s no real BARTERING FOR SOCIAL JUSTICE. You either have an extra trade-able valuable thing or you don’t.


    SO, when you get around to pragmatically analyzing money lets start with the FIRST RULE:

    The people who are actually bartering, with their own overproduction, THEY GET TO DECIDE if money gets adopted.

    And they don’t say “Hey let’s listen to Collen, and adopt money as a social good!”

    They say the exact opposite, “I’ll worry about beggars later with some direct penny tossing” BUT FIRST before I adopt the penny, I want the LOWEST POSSIBLE LOSS OF VALUE, the best STOREHOUSE of VALUE I can get my hands on”

    And GUESS WHAT? That’s what money is for: trade and keep value amongst the traders.

    The problem with all you dirty hippies is that you have not the nuts to look reality in the face, and ADMIT government is BUILT EXACTLY THE SAME WAY… by the same people.

    Before the state, think DEADWOOD or the fall of the USSR, is formed, the GUYS WHO HAVE SHIT, are paying big guys to stand around and protect their shit.

    And they form the state for two reasons:

    1. to PROPERTY TITLE their shit, that they own it.
    2. to PAY THE BIG GUYS LESS than they are paying before the state happens.

    If those two conditions aren’t meant – no state forms.

    Now, to get all the beggars, and those without any trade-able assets to go along with following the law, they grant “rights” to people for their acquiescence.

    So, when you want to get something done, think about it like ROADS.

    You are basically SELLING the guys who formed money, and formed the govt. on building roads.

    It isn’t a big democratic vote.

    IF you convince the guys with cash to PAY to build the roads (promise to do it really cheap), THEN the side effect is the poor ALSO get to use the roads they didn’t pay to build for FREE.


    This is a very clear way of weighing how likely the world is to bend to your will.

    Will the people with money go along with it? If you focus on really just convincing them, rather than pretend you have discovered something not known, you’ll better grasp reality with both hands.

    This is why my Guaranteed Income plan actually works – the people with money, the top 1/3 will LIKE IT.

    Anyway, step up your game. There’s no riddle here. There’s no dream state. I just explained to you the ROCK BOTTOM REALITY of it all.

    you are welcome.

  8. Cullen, it seems you’ve distilled some of your recent conversations here (particularly w/ people like Peter)… unfortunately I wasn’t paying enough attention to those, so I’m not getting everything.

    You write “Now, the government could issue bonds to meet this need, but then we’re just sterilizing the deposit issuance and nothing is solved from the change in the system via direct deposit issuance. This is basically what the government does now and it’s hugely supportive to the private equity structure of “rentier capitalism”. ”

    I don’t know what you mean by “sterilizing.” Also, it seems these two sentences contradict one another. The first seems to say “self-finance w/ bonds doesn’t solve the problems of self-finance” (presumably the problems of self-finance over what we have now). The second sentence seems to say, however, “self-finance w/ bonds is no different than what we do now.” So what is it? is self-finance w/ bonds different than what we do now or not?

    This sentence “So we can self finance and issue the bonds, but then why bother changing the institutional structures from what they are today if this all ultimately ends up supporting the private equity structure of private banking in the end anyhow?” seems to be a re-statement of sentence #2 above.

    Or am I just misreading sentence #1?

    Also, the Izabella Kaminska link doesn’t go to a specific article by her. Which one in particular… or did you mean ALL of them?

    OK, thanks.

  9. This website, which I named and is supported by the time and efforts as a life long entrepreneur, is called Pragmatic CAPITALISM. If you think you’re talking to some extreme left wing big govt nut case you’ve jumped to the wrong conclusion. :-)

  10. Not worth it Cullen. I’ve seen him around before: he’s on Scott Sumner’s site all the time. All the peons… the 2/3 of us that don’t matter… we’re all “dirty hippies” with him. It’d be like talking to a wall.

  11. You’re misreading sentence #1. What the govt does now is issue NFA as bonds and redistribute bank deposits. Self financing would just be straight issuance of deposits as NFA. If the govt were to issue bonds to meet demand by those depositors for interest bearing assets the govt could just issue a bond to that deposit owner (kind of like the way QE is implemented except backwards for the non-bank public).

  12. I think I see, so that first sentence really says “nothing is solved over the current system.” True?

  13. Right. We already issue bonds to meet demand for safe assets in essence. Issuing deposits via self financing and then issuing bonds when those deposit holders want safe assets, wouldn’t change anything from what we presently do.

  14. just answer the argument. hegemony > money hegemony > govt.

    I gave you chapter and verse on where both money and govt. come from.

    you have no response. literally NONE.

    Any problem with capitalism is solved with more capitalists.

    We don’t need technocrats. We don’t be to wake up.

    We just have to favor SMBs over Fortune 1000.

    And the rest takes care of itself.


    If you can’t actually go deep on arguing over the creation of money and government, you really are just yodeling in valley.

    I just showed you the bottom line, where it comes from, you can’t skip over creation.

  15. Money’s just a tool Morgan. Resources come from the private sector. Money is just a tool we use to mobilize resources primarily within the private sector, but also from private to public domain.

    I agree, we have a monetary system that is designed primarily around the private sector and exists primarily for private purpose. I think you have me confused with some other socialist. :-)

  16. In the traditional econ sense, sterilization involves reducing the liquidity effect of something. So, a govt might issue money and “sterilize” it by issuing bonds (as though they’re sterilizing the inflationary effect). I’m using it in the traditional econ consistent way, which is probably confusing you because you’re in paradigm with MR. :-) Fun stuff, huh? Just go back to sleep Tom. The dream sequence is better when you don’t try to wake up out of it.

  17. I see the self-financing AND bond issuance scenario as of value only if it got us away from the deficit hysteria. Obviously this is because there wouldn’t be a national debt number to look at anymore. But of course it’d be very hard to get these changes in place. Let’s just raising the damn debt ceiling!

    The system is fine as is – it just needs to be understood properly!

  18. Well done. This is the cleanest exposition of this that I’ve seen. You’ve nicely summarized the real debate. Do we want private banking supported by the government or do we want to run a monetary system designed mainly around public purpose?

  19. Basically, the banks have us all over a barrel and we can choose to support them through publicly issued securities or they’ll blow up the system by creating their own.

    Looks like the nexus of private vs public banking has come into the picture.

  20. FDO, Cullen out of curiosity how are you seeing the UK? I ask as 2 of the big 5 are basically nationalised, 1 escaped it through the skin of its teeth with help from Qatar, the other 2 seem to have managed to escape by some very dodgy practices ie money laundering and breaking sanctions. We have a CB who are nationalised and clearly so, so much so that regulation was taken away from it.
    Not trying to start a row just curious as all through the rows of the last year or so its seemed clearer this side of the Atlantic. Not sure how private banking will be able to carry on as it did which seems to be the main discussion over here (as per IKs posts)

  21. Isn’t this exactly the system that exists in China? All of their official banks are run by the government directly, and the Princelings have their own shadow banking and loansharking firms.

    “On the other hand, the only way to self finance with direct deposit issuance without also creating an inherently fragile private banking system is to bring the banking system under the government umbrella in that dirty “N word”……..But then a bunch of bureaucrats end up managing their own form of the shadow banking system…. ”

    But Cullen,
    there is nothing that says a direct issue system can’t have risk free financial assets. Every citizen could automatically have an account with Treasury Direct to keep all their money, risk free. The government should want to do this as a public good, to ensure stability and government control (and also to prevent banks from creating money on their own). In fact, paper notes could be eliminated and Treasury Direct become the only form of money available to the public. But such accounts would never pay interest. There would be no such thing as a risk free **interest bearing** account or bond in a direct issue monetary system.

    I think the reason we are talking about such things right now is ZIRP, and the current expectation that ZIRP is truly permanent. The example of Japan says as much. If ZIRP is permanent and QE is forever, why shouldn’t we go to a direct issue system? We would get much more political corruption, but we would get rid of “fiscal cliffs”. If no one will ever get interest on savings again anyway, why shouldn’t we do this? At least we will deny the politically connected banksters their fat profits from being able to borrow at zero and lend at 3%.

  22. Well, this is the crossroads we’re at. There is an inherent conflict within a system that uses a social construct for everyone’s benefit, but has the distributors of that construct serving private purpose primarily. The trouble is, do we really want to move towards a nationalized money system where the govt and a bureaucracy starts making all of the decisions on this front? Frankly, I don’t think nationalization is a necessity. I think better regulation is a necessity. But that’s just me.

  23. That was FDO and Cullen.. curious on both of your views, was NOT saying you were the same person!!

  24. The problem is, once we move towards self financing on the direct deposit side you’ll still have the problem of interest bearing assets. No one is going to sit around and accept that most of their deposits are losing purchasing power forever. Especially not the savers or “rentiers”. So you have an inherent conflict. Either the govt builds a nice big base of supply for that need or the private sector does it. If you’re going to keep a private banking system then you NEED to support the capital structure of that system by ensuring that there are plenty of risk free assets for them to operate with and to benchmark their other products around.

    I don’t think a checking account at the govt will work. You’ll still have all the smart cats looking to invest it in something that generates a real return. You could give everyone a savings account at the govt with interest, but that’s basically the structure we have today through t-bonds. The money will still flow to the same places and banks will require a certain amount of safe collateral and asset base to perform their usual operations.

    So a true self financing scheme probably works best by choosing NOT to support private banking in this way and simply turning banks into public utilities. Otherwise, you’re supporting the pvt banking system in a way that’s very similar to what we do today. So, in the end it comes down to one thing. Are we going to use govt to support the capital base of rentiers and primarily banks in a system that maintains private market based control over money issuance? Or are we going to use the money system to focus on banks serving public purpose in a manner that treats banks more like utilities. That’s what this debate really comes down to.

    The UK has obviously made their choice….As have many other nations who are using their banks and central banks more like utilities than private purpose serving entities. Is that better? I don’t know.

  25. ” You could give everyone a savings account at the govt with interest, but that’s basically the structure we have today through t-bonds.”

    Almost entirely agree, except for 2 caveats:
    1) The national “debt” all of a sudden becomes understood as a risk free asset provided by the govt to the populace, completely changing the current paradigm
    2) There is still nothing here – it seems to me – that automatically implies that the govt gets into the business of lending to individuals and companies. This could still be a niche for the banking sector with good enough risk management that would make money from lending to credit worthy customers.
    But, yes, a national savings account is equivalent to today’s sales of bonds, more or less. If you make it like a savings and checking account at a regular bank then the whole idea of bonds sterilizing cash becomes even more exposed as a myth.
    I feel that I am still missing something though…

  26. Any dorks out there know of a publication that discuses human progress REGARDLESS the monetary system at hand?

    I mean, we had NO Central bank between 1836 and 1913 and yet we saw Wonderful Inventions from the telegraph and Dynamite to the write Brothers Flight.

    Regardless a lack of central banking, mankind PROGRESSED.

    Would Govt SELF Financing have made even greater progress?
    I would say Nope, because China is going more towards Private money lending VS State Control today so this shows that central control is not as fluid as free will.

  27. By the way, if there are no bonds, why would there be necessarily increase in the amount of risky assets? Could it be that the prices of existing risky asset would go up (reflecting increase demand from savers not being able to park into treasuries), so, the interest rates go down reflecting a lower indifference level between holding “cash” and holding a risky asset? In this musical chair game of cash changing hands the last guy who ends up with cash simply shrugs and puts it in his pocket. ?

  28. Eliminating the issuance of risk free interest bearing assets doesn’t eliminate demand for them. It’s the same principle behind the QE effect which hopes to drive private investment higher by forcing investors out of t-bonds and into corporate bonds. Why do you think corporate bond issuance is at all-time highs? It’s because the Fed is forcing people out of t-bonds. Same thing would happen under a self financing regime with no t-bond issuance. The pvt sector will make up for the lack of supply, but they’ll do so with assets that are less stable.

  29. OK, just read Fullwiler’s post and I have to say I see only re-enforcement of my own understanding: self-financing is basically the ultimate QE which doesn’t result in inflation etc. because of the existence of the banking sector. Really, seeing the same things from a slightly different angle. What Fullwiler doesn’t say is that this necessarily leads to a more unstable banking sector, unless the govt reverses the operation with issuance of bonds. Or maybe I missed the implication.
    I guess this is what you mean, Cullen, by you not being sure “he’s deep enough in the dream sequence”?

  30. Not necessarily. There’s $1.2T of risk free assets flying off govt shelves every year….that the Fed is only soaking up a piece of….But there are definitely plenty of famous credit strategists and investors who see big problems brewing in corporate bonds….Of course, we won’t know until it’s too late.

    But if we stopped issuing t-bonds completely I would be willing to guarantee that the banking sector would become more and more unstable.

  31. That part that confuses you refers to the setup where the govt stops issuing bonds at all, so, Paul does not have a risk free asset that he can buy.

  32. So, arriving at bonds sales from this direction, the debt becomes not the tool needed to finance govt deficits, but a tool the govt uses to stabilize the banking sector. Don’t you think it is a paradigm shift? Without any change in the institutional arrangements? (And I would add, that it is much closer to Mosler’s mantra of “debt is just a reserve drain, what’s the big deal”…)

  33. Peter,

    You want evidence of bank nationalization in MMT. Here is an MMT founder and many of their most prominent supporters. This isn’t just something I’ve made up out of thin air. As always, I provide evidence:

    Bill Mitchell, MMT founder: “nationalisation of the banking system is a sound principle to aim for. ”

    Tom Hickey: “I personally favor nationalizing most “retail” banking”

    Joe Firestone: “As for the present banking system, I’m all for changing it, but I’d just like to nationalize the banks and place them under Treasury.”

    Rodger Mitchell:

  34. It’s simple Peter. If you support the current structure with a Fed and banks as the primary money issuers then you support using the govt as a support mechanism for private banking. And as long as you support that you’re going to have to support this form of “self financing” where we basically bribe the banks to provide funding.

    If you don’t support that system then you move towards a govt based money system that doesn’t lean on its private banking system.

    It comes down to whether you support private banking or not. Do you want a money system designed around supporting private banking or do you want a money system designed around got as an issuer of money. Today’s system is not the system MMT envisions. It is a bank centric, bank dependent and bank supportive system.

    I’m not trying to ruffle your feathers. I am simply describing precisely what I see. And I see a system by banks and for banks. MMT describes a system by govt for public purpose. Sorry, but that’s not what we have.

  35. If you want a review of this kind of thing for the last 6000 years (from the point of view of the history of debt) I recommend David Graeber’s book “Debt: The First 6000 Years.” He talks about ancient Sumeria, Babylonia, and Israel, and how the sovereign or “temple complexes” essentially acted as … well, I’m going to say “central bank” but I guess that’s debatable. That’s were the “debt jubilee” idea was used on a regular basis to get the economy unstuck and to keep people from selling themselves and their families into slavery or fleeing in the wilderness to avoid their creditors. I guess “debt peons,” slaves, and wilderness dwellers make terrible soldiers for the kings army. This was all before the invention of coins (which happened right before the Greek city states really took off). Coins marked a dramatic change. The “central bank” (or at least central economic authority) was much diminished in the ancient Greek city states as compared to what preceded them, and that’s when you really had the rise of the plutocrats. Interestingly enough the Phoenicians, who made their living primarily though trade and shipping, resisted the onset of the coin economy for several hundred years, preferring instead to keep their credit system in tact (BTW, the Sumer and Babylon both employed credit systems rather than physical money primarily… and barter was apparently NEVER a significant part of ancient, or even modern primitive economies… putting the lie to the economists armchair, evidence free version of events, where everything evolved from barter).

    Since these early, debt based economies (gift based before that), humanity the world over has bounced back and forth between coins and debt as the basis of money. Credit made a comeback after the fall of Rome when nobody was minting coins anymore, yet prices were still fixed using the Roman denominations… only it was an all credit system. A similar thing happened in India. Then coins made a comeback a 1000 years later or so during the rise of Venice as a Renaissance trading power, and we’ve only recently gone back to a credit based system again.

    Graeber doesn’t just focus on Europe, North Africa and the near East, he also talks about China and India and “primitive” societies the world over. Overall, it’s a little philosophical for me, but it does have lots of good concrete examples. Cullen liked the book as well I think.

  36. “Prescriptive” vs “descriptive”, again. For me MMT is not what Hickey says but rather sectoral balances+functional finance. Call it whatever you want. I think govt run savings accounts (or bonds on demand) are a good idea, but govt getting into lending business is a bad idea. I don’t yet see why the two are incompatible.
    Interestingly, at MNE there is also a discussion on this. Frances Coppola – not an MMTer – has some interesting things to say:
    Basically, she also views govt debt as a service to the private sector and thinks that it is therefore necessary.

  37. lluvatar, I’m flattered that you think I could help you with this… and I’ll give it a shot, but… ah, Cullen isn’t far away you know… so anyway, down to business:

    Go back and re-read the paragraph before the one you quote. I think you just got the logic of it wrong. The assumption is, for the paragraph that you quote, that we’re working under the ALTERNATE system where the gov doesn’t need Paul.. it just credits Peter directly, so Paul didn’t buy the bond and is still flush with cash. Does that make sense? … er, OK, looks like Peter D already wrote the same thing, with a lot fewer words! Peter’s right.

  38. Did you get that from Graeber’s book, or from other sources? I have to admit, I’d got a little bored with the abstract philosophizing he did, and I’d “fast forward” to the next juicy part (concrete example) so I may have missed that one!

  39. You can redefine MMT however you like. To me, MMT is not important. What’s important is understanding the way our system is presently designed. And in this system the banks rule the monetary roost. Everything else is secondary and the govt, in particular, is deeply involved in supporting this private money system. MMT does not describe important pieces of this accurately. It instead implies that the govt steers the ship here and that the banks take a back seat. That’s totally misleading.

    I am fairly certain that MMT would like for the govt to take the lead role there and use its powers of influence over the banks and create system that puts the govt in the drivers seat and the banks in the backseat. But they won’t actually come out and say that because it’s politically unpalatable. That’s fine. But you’ll continue to run into skeptics who get a strong sniff of this sort of socialist belief set who grow even more skeptical as you deny deny deny. That’s fine. I’m not here to tell MMT how to promote their theory. But it doesn’t sit right with me and the inconsistencies in many of your views are alarming. The theory will go nowhere without a cohesive message.

    Personally, this bank vs state issue is the center of the debate. MMT is implicitly pro bank by supporting no change in the system and simply claiming that we live in an MMT world. Of course, MMTers aren’t pro bank. They’re pro state. Which is why they want to consolidate Fed and Tsy and many want nationalization. It all adds up to me in crystal clear terms. Not sure why you fight it so diligently.

  40. lluvatar, why do you refer to Cullen as “TPC.” It took me a bit to even figure out that’s what you were doing. I see now it’s in the email address… but what does that stand for? I’m guessing the “PC” is “Pragmatic Capitalism” but what’s the “T” for?

  41. He’s old school. He was around back when I was anonymous and ran the site as “The Pragmatic Capitalist”. I went by the name TPC then.

  42. “In sum, yes, we could theoretically self finance, but a lack of risk free asset issuance will simply result in a destabilizing banking system.”

    What you are describing is theoretically a banking system run amock because of the lack of competition for saving instruments by the govt and still bailed out by the govt, not the end of private banking, but a growing banking system relative to GDP probably. Yes, the banking system can finally blow itself up and become to big to bail, but it can do it now as well.

    I still see very little link b/w the way govt deficits are financed and private or public banking system.

  43. Cullen, these articles are very enlightening (for me as a non-economist). Slowly everything starts to get more clear. One thing I’m still going back and forth on is the concept of public debt and how I should percieve that. On the one hand, as the above discussion shows, public debt is a safe saving vehicle for the private sector. So that’s good. On the other hand, there is still the question, can there be too much public debt? As you say, governments don’t self-finance. Governments (like the US) still have to borrow money from the private sector. I ask this because I still don’t have a good answer to other people (non economists) when talking about public/government debt. On the one hand, you could say a government with its own currency can not run out of its own money. However, it still has to borrow that money. So it’s still unclear what the real restrictions are. And how exactly you should explain what government debt is and what it’s role is. Hope you can go into this a bit more.

  44. Too Dorkish for my taste…………its all becoming one long wank.

    Just produce Greenbacks and take their leverage power away….simple.

    No need for this double entry stuff with the big central bank which represents the banks anyway.
    No to more monetary masturbation.
    Its time take the banks out of the power loop.

  45. Matthijs, that’s a good question. Just thinking about it a bit, if bond yields are equal to or exceed the inflation rate (and they kind of have to), then at BEST (the “equal to” case) you’ll have linear growth in NFA’s in the economy, and eventually all those tight-wad bond investors are going to die and leave it to their profligate children and grandchildren (think Paris Hilton) who WILL spend it, and cause havoc (inflation). Just to provide Paris and her pals with the cash they demand will require massive action by the Fed. If bond yields exceed the inflation rate (at all) then you’ve got growth of NFAs that can be represented by a difference of exponentials (e.g. e^(2*t) – e^(t)). That’s a very very bad thing (MUCH worse than linear growth) and will certainly lead to such a bloated amount of bonds in the economy over cash that the situation will be highly unstable. Probably the best you could hope for is that Paris’ generation will come along sooner rather than later, and bring the system to its knees, so you essentially have to start over again. Cancel the debt, haul people off to gulags, hang a few politicians, endure a revolution or two.. you know the usual. The sooner you get it over with, the better. Let it go on too long, and it will just be worse. Wait, … Paris’ generation is already here!… )c:


  46. Right now what we do is nationalize savings. We have a savings system in which the government agrees to pay rich people guaranteed interest on their savings.
    Sort of like socialism for savers.
    The notion that we could ask savers go out and find a *private* vehicle to get safe return is supposed to fill us with panic, as if that would destabalize the system, never mind that issueing $1 trillion of future obligations every year to rich people i something to be preserved. Right now, middle class people have to back those bonds either with their taxation or production.

  47. I think part of the confusion here is discerning the difference between what CAN be done and what SHOULD be done. The US government can self finance any level of spending it chooses, but should it use that as an excuse to waste money trying to “fix” an economy that, in many ways, is impaired by its own actions? It is a philosophical discussion rather than a mechanical one (at least for me).

  48. Just one point on your comment and I don’t mean to take your thread off track. However, regarding the civil war, and the states right to secession. A state’s right to secede is definitely a constitutional and legal question that I do not have the background to make a determination on its validity. However, the civil war was about states’ right to secede to continue the institution of slavery. Google “Declaration of Causes of Secession”. These states attempted secession because they thought it was the only way for them to keep slavery.

  49. The assumption in these pages is that savers will continue to save, and that when Paris Hilton wants to cash her bonds, other savers will be there to buy her bonds.
    In other words, the assumption is that the debt can be rolled and carried forever.
    But I share your concern that bond issuance will grow much faster than economic growth and cause some unforseen problems. It’s the unknown unknowns that are the problem.

  50. That’s totally naive. You don’t think your money market account or savings account is backed by treasury issuance? Yon’t think having “rich people” go out and try and bid up other, not riskless, savings vehicles isn’t incredibly destabilizing?

  51. Ok, I think some recap is needed because I am at this point a bit lost as who who said what and who implied what and to who mislead about what.
    The whole discussion started with a premise that govt stopping issuing bonds would result in nationalization of the banking industry. One argument was that this is the unintended (but actually intended!) consequence of no-bonds proposal by some perfidious MMTers. To which I reply three-fold:
    1) I cannot see how even nationalization of savings/checking accounts – which is not exactly but closely related to continual issuance of bonds – necessarily drives the govt into lending business, (not to mention capital management, investment banking and other aspects of banking)
    2) Intended obfuscation by some MMTers is irrelevant unless a very likely reason offered as to why this is bound to happen. In other words, the fact that some MMTers favor nationalized banking doesn’t mean that no-bonds proposal would lead to nationalized banking just because of that.
    3) Many MMTers are just fine with the current arrangements as long as the self-imposed constraint of debt ceiling is abolished and the debt is understood in its proper context of the govt proving the private sector with a risk free asset (closely related to Mosler’s mantra of the debt being the equity in the private sector’s credit structure).
    Recall as well that on the one hand you claimed that once the people realized the money “grew on trees” they would demand free money, but then in another place you claimed that realizing that inflation – not solvency – is the ultimate constraint (both in no-bonds world and in current world) would not change anything – these positions are hard to reconcile. I personally believe that realization of the ultimate constraint of inflation + the redefinition of debt as the national risk free asset as per above isa huge deal and is bound to change attitudes a lot but not mainly in the direction of demanding more hand-outs from the govt – as we will still need to have political institutions that ensure that spending is beneficial for the public purpose.
    And this brings us back to the realization that govt deficit=private surplus, that corporate profits are impossible – absent trade surplus or private sector leveraging – without the govt deficit etc all as discussed between us here, and all of which is not MMT original insight but which just happens to be brought to public attention by the tireless MMT advocates on the web (so, whoever shrugs MMT off as “nothing new” should consider the fact that this all this knowledge was guarded like a state secret from the people until the load-mouthed MMTers appeared.)
    I admit that your point that the banking would become more unstable without the risk free assets supplied by the govt is something that I did not consider before and I admit that it looks very solid to me. But this only reenforces the proper look of t-bond as a service to the private sector, as a stabilization instrument instead of the burden as it is seen now by most.

  52. Iluvatar, I was taking a time off but now looks like I am getting sucked right back into all this :)

    OK, from Cullen’s post, note the emphasis:

    If the government were to self finance it wouldn’t sell the bond. It would just issue a net financial asset to Peter in the form of a bank deposit. …
    Paul will still want to save in something that protects him from potential purchasing power loss of cash. So he’ll go out and search for a financial asset to provide that savings/income need. “

    Is it clearer now?

  53. On these pages in general perhaps, but I was pointing out, that even with linear growth, when Paris & pals decide to cash out simultaneously, we’ve got a problem, and that’s where the Fed comes in… but perhaps you understood my position, and I’m just running my electronic mouth here ;)

    However, my “analysis” is pretty off the cuff, and I wouldn’t take it too seriously. But surely somebody else must have put some thought into these long term growth rates.

  54. Minor point too: that diff of exponentials is in addition to the linear growth… but that will hardly matter, once the exponential becomes dominant.

  55. Cullen, you should have said “Hate?! That’s some very strong language!… I just can’t believe you feel that way about Alexander Hamilton!” ;)

  56. … also should say “linear growth in inflation adjusted NFAs” … we’re all pretty used to exponential growth (with small exponents) in prices. But now add something in the economy growing with a bit larger exponent, and eventually it will dominate.

  57. Perfidious and intentional obfuscation might be overreach on my part. But I just don’t see how the founders don’t see all of this. They’ve been at this 10X as long as I have and I feel like I am already seeing the future before they are even trying to rationally consider it. Frankly, the amount of forethought and modelling of the future within MMT leaves MUCH to be desired. Again, I am not making this personal and I am not out “to get” MMT. I just connect the dots and am trying to explain how I see the world.

    The bottom line is this.

    If you support the current system, which is essentially self financing with support of a private market based money system then you MUST be in favor of private banking and support of the banking rentiers. You aren’t going to “definancialize” the private system to any substantial degree without destabilizing it. Plus, the inherent profit motive will only increase its size. THERE IS NO FIGHTING THAT TREND! Randy Wray’s desire to shrink banking is totally incompatible with the private market based system. It will NEVER happen because the equity structure and private profit motive will never support it. That means bailouts, govt support, safe asset issuance to support the private equity structure of banks, a Fed system as we have now, massive and expanding shadow banking, etc.

    If you want self financing without support of private banking then you start changing many things. The banks don’t need to serve private purpose which means they can be transformed into utilities, downsized, nationalized, etc. The fed can be moved under Treasury and the govt can become the true money monopolist.

    But you can’t have it both ways. The existence of a private for profit banking system is inherently at odds with the idea of not supporting rentier capitalism. MMT is trying to fit a square peg in a round hole. It’s really simple in my mind. And as long as private banking exists we’ll continue to see MMTers claim we exist in their system “already” while they rail against private bankers. Ie, we don’t have a full MMT world as long as govt is used to support private bank rentiers.

  58. … which, BTW, could be the economy itself! So it could be the Fed would be busy pumping more money in the economy just to meet a healthy economic growth rate, in which case my whole point is moot (because the growth of the economy becomes the dominant “mode” (if the Fed continues to do its part) and dwarfs the growth of bonds). Ha! So I guess the question is: Will GDP growth outperform bond interest rates? Then, of course, I’ve overlooked the growth of gov… that could become the dominant mode as well. Thoughts? It seems to me this is a classic dynamic system, and we could get some insight from Steve Keen’s differential equation based macro models.

  59. I’m not a bit naive, and perhaps becoming radicalized by this debate.
    We have a system designed to protect the assets of the top 10 percent, maybe even as slight as the top 1 percent.
    To wit: If a guy in Detroit forecloses on a house because his job was outsourced to China, the system is designed to protect the lender and not the borrower.
    What’s all this fear about ‘destabilizing things.’ We are already unstable.
    I want a banking system that makes loans and pays interest on deposits — not a banking system that merely trades money around.
    Cullen says that ‘Resources come from the private sector’, but what appears to be happening is that the banking system is allowed to create resources independant of actual production.

  60. What if we let everything as it is, except we get rid of debt ceiling, maybe even move the debt issuance to the Fed that will decide on the size of the debt based on demand at the auctions – so, no automatic coverage of deficit by debt, but rather making it obvious that issuance of debt is a service to the private sector? I don’t think this would drive the Tsy or the Fed into the lending business and I think this will be enough to reframe the debate and understanding as to the role of the govt in all this.

  61. Those would be, in my opinion, relatively minor changes to the current system. What’s the point aside from eliminating the silly fearmongering over the debt (which will transform to fear over inflation). In essence, you’re not really changing much. Liberals will say the govt spending is good, conservatives will say it’s a misallocation, inflationary, etc. We don’t really move the ball forward with that. Know what I mean?

  62. First, this doesn’t happen as you get not only inflation but also population growth – so, more savers are born – as well as a huge financial sector willing to absorb the debt the govt supplies it with. So for any bond seller there will be probably many more bond buyers. The spending decisions are driven by income and it is true to some extent that Paris’s income could have been less in the absence of the interest on the bonds. But then you have a lot of savers with legitimate desire to save in bonds for the rainy day or retirement, so, what’s wrong with Paris enjoying the money her parents left her seen in that light? Or are you talking about inequality?
    Seen from the aggregate point of view, the absence of bonds in itself does not turn people from savers into spenders. True, the interest component might be adding to the income and thus make bonds somewhat more inflationary cet. par. but this is true of any govt spending. Who said spending on Social Security is more important than spending on interest on bonds for the savers? So, the balancing act of too much spending versus too little will have to continue in any case with all the loaded questions of redistribution of resources and taxation etc…

  63. Exponentials evolving over time are what differential equations are made for! I’ve argued everything above as if all these exponentials are uncoupled from one another, which I’m sure is totally false. So I think the thing to do here (to play out various scenarios) is to write the macro economy as a coupled, multi-variate, differential equation. First we need to agree on a set of states that describe the space… balance sheet entries are a natural, but any equivalent linear combo of them is fine too, as long as the number of states is the same and still “spans” the space. Perhaps additional states are needed. If our N states are the vector x, then you can write the equation as x(t)’ = A(t,x(t))*x(t) + B(t,x(t))*u(t), where x’ is the differential of x wrt time (dx/dt) Forget about B and u (that’s the input to the system… but we can consider it closed for the moment). Then the trick, once we have our vector x, is to determine the NxN matrix A. That’s going to be the hard part!!! Here’s where you’ll need to get economists to agree to PRECISE definitions of terms and relationships in the economy. You almost certainly will have to resort to torture for this step! Anyway, each row of the equation x’ = A*x will look something like this (dropping the parameter “t” from most variables): xi’ = Ai(x,t)*x, where xi is the ith element (state) in x, and Ai is the ith row of A. This is the general non-linear differential equation that has been so successful in describing dynamic systems in nature. Do I think it will enable us to predict what will happen in the future? No.. but it *may* enable us to play out some of these arguments with mathematical precision, and a LOT less typing!

    What I’ve described above (with my talk of ‘modes’) is more like x’ = A*x where A is fixed and non-zero only on the diagonal (uncoupled states). Even if A were a function of time: x’ = A(t)*x, we could still bring an ENORMOUS quantity of results to bear, since this is a “linear system” which is what 99% of the literature is about. Unfortunately, adding the ‘x’ to A’s argument makes it tougher to analyze (it makes it non-linear), but it’s still very easily simulated in a computer, which is what Keen is doing.

    Probably no one will read this post… because I’m being a total dork! Hahaha

  64. I think you might be too blasé about the stopped fear mongering about the debt. Definitely in the times of huge output gaps like today there would be much more acceptance of the need for higher spending or lower taxation or both than it is today on both sides. The liberals could stop fretting about payroll tax holidays (that supposedly make SS/Medicare insolvent) and conservatives could stop fretting about unemployment insurance and food stamps. The accents would be changed. If you are afraid of inflation then you have little leverage when inflation – even expected – is benign. Sort of like preventing a driver of going above 40mph when you are afraid he’ll eventually go about 75mph – doesn’t make much sense.

  65. My comment seemed to have disappeared into the black hole of the cyber space. Basically, I believe I you’re too nonchalant about the consequences of people stopping worrying about debt and understanding the system better. whenever I step into the comments sections of non-MMT/MR blogs I see astonishing numbers of people repeating accepting as absolute common place the meme of us facing a debt crisis. I like to think that MMT/MR made a dent there but sometimes it is damn hard to see.
    It is also much easier to explain why increased deficits are necessary when you have slack in demand and how they don’t lead to the feared inflation when there is output gap. Fear of bond vigilantes is what prevents people from telling their ass from their elbows, seriously!
    If your fear is inflation then you watch inflation. You wouldn’t prevent a driver from going above 40 mph just because you are afraid he’ll go above 75 mph – would you?

  66. We’ll see what happens in Japan.
    Aging population, declining population … perhaps we’ll see savers begin to cash their bonds resulting in more bonds being redeemed than purchased.
    I would guess on reflection that this will not happen.
    Bond issuance is going to continue to risk because of government obligations, and primary dealers can buy bonds even without on-selling them, right? Or the central bank will buy the bonds.
    So the pool of bonds will continue to rise. Since the supply of inside money is infinite, bonds can be issued with no limits, right?

  67. Yes, the fed could buy the bonds and save the day… but think what that would do if those funds weren’t put right back into new bonds! Perhaps you’re correct and that will never happen, but I’d think if it did you really could get some inflation going. I have no clue really… its difficult for me to keep all these “moving parts” going in my head… thus the equations! Beautiful beautiful equations… if only we could actually use them for this stuff ;)

  68. What’s important is that this process is extremely unlikely to be abrupt. All the savers at once deciding to cash in and to spend? Not going to happen. If on the other hand it is gradual and you begin seeing demand pull inflation – great! it means that the govt can now reduce its deficit because it no longer needs to be filling a hole in demand with it. It is all Functional Finance.

  69. … actually, yes you may have a good point. On-selling, sure that’s true. No hard upper bound on inside money, also true, … well it could be that even though many of these variables are growing “without bound,” however, in relation to one another, they still make an economy work… over the time frame of someones life say. I’m getting an image of balance sheets growing approximately exponentially by all players… sometime one outpaces the other, but the “coupling” between players tends to bring it back in line in a relative sense in the long run. Pretty fuzzy thought, but I’m gonna go w/ that for now.

  70. People freak out when they see 16T in debt. They envision a massive moment of debt redemption and govt not having the money to pay “them all”. This is the level of economic understanding out there. If instead the debt is understood to be a demand-driven service from the govt to the private sector, everything changes!
    Cullen, you wouldn’t be working your a$* off running this site if you thought that understanding the system did not change anything!

  71. Maybe you’re just more of an optimist than I am. Personally, I dont think things will change much. Conservatives will just blame govt spending for sluggish growth and misallocations and Libs will say they’re wrong. No different than today really…

  72. Peter, I really believe in the message and I agree that we’re making a difference. But the inflation constraint is only the tip of the iceberg….

  73. For anyone actually paying attention to my math, you probably noticed an unnecessary complication:

    x’ = A(x,t) is good enough. For the non-linear case, “A” can be a vector, and you don’t need the “*x” on the end. It’s only when you attempt to linearize it around a nominal state (to make the math easier), then you take partial derivatives (to approximate A) and A blows up into a matrix and you get x’ = A~*x, where “A~” is the square matrix of partials of A wrt the elements of x. OK, I’ll stop the dork fest now.

  74. Also very plausible sounding. I haven’t been following your long series of debates w/ Cullen too closely here, so this is new territory for me… is this some of what you’ve been over with him?

  75. that’s some “coupling” between states that I didn’t take into account.

  76. Peter, agreed that the so-called govt debt “crisis” has caused a huge amount of unnecessary fear out there. The fact that there is no govt debt crisis is a good reason to be optimistic, in my opinion. But it is interesting that many MMTers appear to still be very pessimistic. They seem to be worried for the opposite reason. They think the govt debt (or at least the deficit) is too SMALL. This is understandable if you believe that the govt is in control, and that NFA’s are the key driver of the economy. However, if you believe instead that money is created mainly by the banks in an endogenous way, then there is more reason to be optimistic. Once the private sector kicks in (and it appears that this process has already begun if the recent sector balance chart is any indication) then we could be in for a nice little boom time. The bottom line is that I think the MR approach gives one much more reason to be optimistic than does the MMT approach.

  77. We’re more balanced. We focus on private investment mostly while MMT focuses on govt NFA. Historically, Investment is the key driver. Hence our use of S=I +(S-I) & not (S-I). The brilliance of that equation still bliws my mind. It’s so simple yet so illustrative.

  78. again a NON-ANSWER.

    money isn’t just a tool. money has a creation point. who it was created by and what it was created for MATTERS.

    Money replaced barter.

    Barter didn’t do social justice.

    Money did not replace barter to do social justice.

    It replaces barter because the haves had too much of one thing, and money made it easier for them to store value between trades, it was a unit of value between the things they used to barter.


    So, now you stand before strike number three…

    It isn’t about how the Fed works, or how you think money works pretending we don’t care about how it started.

    This is about a REAL ARGUMENT you have no apparent response to – it is a total over-arching critique of your work…

    The people who made “the tool” are the people who “the tool” is for.

    We don’t make a hammer and hand it to a poet, and act as though it is for poetry.

    LOOK, I GET IT: you all don’t like the current state of things, you all want to have more power and other to have less than is the current status quo.

    But gents, you have to do the hard work.

    You are trying to bank on riled the masses of incompetents who don’t have a pot to piss in toppling the system, and letting the govt. do that kind of things that you think it should do.

    INSTEAD, judo is required.

    There will be no govt. guaranteed job – the govt. and the people don’t get to determine what is best for the unemployed to do.

    INSTEAD, we give the unemployed a guaranteed income BUT only if they are AUCTION week after week to private citizens starting at $1 per hour.

    This gives us the deflationary forces we want WHILE shrinking the size of the state and achieving FULL EMPLOYMENT.

    Without needing to print a single new dollar.

    It weakens Wall Street. It weakens govt. and it solves for illegal immigration.

    There is no reason to pretend money is magic, or to act as if the real producers of the things worth bartering wont always and forever be IN CHARGE while everyone else is not in charge.

    We can fix the system with one policy change.


    I have solved the problem, you are welcome to try and poke holes in it, but there hasn’t been a single econ blogger on either side who has actually even come out against it from rortybomb to sumner – and all in between.

    The simplest solution is the right one.

    Yours will never be simple until you explain why the top half the private sector half will willingly support more power int he hand of govt. in the hands of people like you.

    until then… you are just playing around.

  79. Great, you’ve got it all figured out! Time for the implementation phase. I’m sure your realistic, practical solution, when presented by a winning personality such as yourself, will gain acceptance quickly (amongst those who matter anyway, who cares what the beggars and dirty hippies think!). Congratulations! Probably what then… a matter of weeks? Months at most before it starts?

  80. You sound like you’re confusing me with other people. Maybe you think I’m MMT or something? I don’t argue for govt policies and job guarantees or income guarantees or whatever you’re here screaming about. I started Monetary Realism to describe how the system works. That’s all. I’ll let you and MMT try to save the world with your policy ideas.

    Btw, money is a tool created mainly for private purpose, but govt also harnesses it for public purpose. In large part to protect the “haves”. But we’re not really talking about the same things…

    So go ahead and fire best pitch in there. I’m a mirage who isn’t swinging because I’m not involved in the at-bat you think I’m involved in….

  81. Cullen Roche,
    You know that Warren is closing his shop for the comments what is sad. Hence my visit here.

    Tom Brown,
    The representation x’ = A(x,t) (first-order ordinary differential equations) where x is a vector is correct however you may not be able to get A(x,t) in an explicit form. Yet evaluating A(x,t) is a precondition of integrating the equations. This oversimplification (the dependency on stocks only) is exactly the mistake Steve Keen (and the people in the shadow who feed him with new ideas) have made. (I am assuming you are familiar with his modelling approach and the “Minsky” program).

    The reason why you cannot say that flows at time=t are only a non-linear explicit function of stocks at time=t is that in economics flows at any given point of time x'(t) depend also on other flows at time equal or less that t. An example would be the investment flow depending on lagged consumption – the key element of Michal Kalecki’s original dynamic model.

    Please take one of more sophisticated dynamic models from Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth [Marc Lavoie, Wynne Godley] and try converting them into x’ = A(x,t)

    It won’t work. What Wynne Godley was doing was a bit more tricky. He used a computer program to evaluate the flows at discrete points of time by solving a non-linear set of equations at that point and then integrated the 1st order set of ordinary difference equations. (It all started from “Theory of Economic Dynamics [Michal Kalecki]” – think about his short-run and long-run analysis).

    You can also check out the work of Gennaro Zezza who uses “Eviews”.

    There is more into it but I am curious whether I’ll “get any traction”.

  82. Cullen, why do you say of Wray’s desire to shrink the banking system (as you describe it, I’ll take your word for it) that `it will NEVER happen’???

    That seems to me way off, though I might be misunderstanding what you meant by it.

    It’s unarguably true that in the last couple of decades, the financial sector in the U.S. and other economies, notably the U.K. but also some non-Anglo Saxon ones, expanded enormously in terms of its share of the economy (ie as measured by profit as a share of GDP). It’s also clear that that model in some sense crashed in 2008.

    In the countries that allowed their finance sectors to get that big and central to the economy, there’s a growing sense among the population that it was a mistake. Since most of those countries are democracies, that will eventually translate into policy (it may take a while, given the political power of bank lobbies, but it will happen and is probably already starting to happen).

    In that sense (I don’t know if that’s the one you had in mind) some kind of shrinking of the banking system will occur. You don’t need to be a political rocket scientist to see that.

  83. You seem to know a LOT more about it than me! I have never tried to model the economy with differential equations… I was really just talking out loud thinking how it could be done. I’ve modeled physical systems, … for basic engineering feedback control type operations, and I’ve built tracking and prediction filters. Also, I’m aware of Keen’s work, and have looked at his balance sheet style differential equations… and some of his results, but that’s about it. I’ve never dug into it to any depth (although I’d like to). Thanks for the references! I’m not sure I understand everything you’re talking about, but I’ll take another look through you post and think about it some more… perhaps look at some of your refs.

    Really my goal, I guess, is to perhaps add some dynamics, simple dynamics, to a tool like what already exists at econviz, … to put to rest, anyway, some of the simpler ideas about “what would happen if…” It’s easy to talk yourself into a “plausible” answer with words, but I think its always a valuable exercise to plug some numbers in some concrete mathematical relationships, and fire up the simulation (knowing FULL well what its limitations and assumptions are) and see what happens. If it goes like it normally does with those things, you’ll spend 99% of your time fixing bugs and futzing with aspects of the simulation that cause results to wander off into areas that don’t make sense (using a gut check really). I guess that’s where the real learning comes into play… not so much with the “completed” tool. If you get something that makes sense, and that you can demonstrate has *some* limited predictive powers (even in contrived laboratory economic “experiment” type situations), then that’s about all you could hope for… that and the insights it provided you in making it (since it’d force you to be precise in your definitions, etc.)

  84. Cullen,

    If the central bank pays interests on excess reserves to retain the capacity to set overnight interest rates (the point made by Scott), the private banking sector is actually still supplied with the riskless financial assets earning interests (which are deposits at the central bank) in the same quantity as before – in the volume determined pretty much by the volume of deficit spending – but these assets have no time structure defined – there are zero-term, there are “cash”.

    If I understood you correctly you want to underline the difference between the zero-term riskless assets provided to the banking sector when spending is financed by currency emission and long-term bonds used currently to offset (“finance”) spending.

    In the currency emission financed world there is no yield curve defined on the existing riskless assets (government liabilities) and therefore hedging and speculation on changes in interest rates (and implicitly the inflation rate) in time in the future are impossible.

    Is this what you are saying? That the moguls from the finance industry would never accept the idea of a “platinum coin” precisely because it depletes them from a valuable tool (government bonds) which can be used for hedging/speculation?

  85. BTW, I spend almost all my time here trying to figure out what those “mathematical relationships” are at the lowest level… trying to understand the rules of the game that’s being played out all around us.

  86. Oh, and BTW, x’ = A(x,t) is a first-order ordinary differential equations… but since x is a vector, it can be higher orders too, i.e. if x is an N-vector, it can be describing up to Nth order dynamics.

  87. You write “The reason why you cannot say that flows at time=t are only a non-linear explicit function of stocks at time=t is that in economics flows at any given point of time x’(t) depend also on other flows at time equal or less that t. An example would be the investment flow depending on lagged consumption – the key element of Michal Kalecki’s original dynamic model.”

    But you can use a Pade’ approximation with continuous time DEs to model a lag:

    Also, you can always resort to discrete time difference equations (what the computer will essentially do anyway for a numerical simulation), but you can be explicit about it and model it that way up front. After all, we do spend at discrete times (and in discrete amounts, but that’s another issue). Converting from cont. time to discrete time is a well known process. As long as the sample rate is high enough for the bandwidth of the system, you can make it arbitrarily accurate.

    OK, I’ll look up Godley.

  88. By now the comments have drifted so far off the topic of the article (which as usual is very good) that it makes it pointless to comment, but let me try. You think PK is not asking the right question. Are you? Sticking with the theme of Inception, perhaps you need to go even further into the dream and then you may find that the more proper question to ask is, “Why do we save?”, or rather “Do we need to save now?” Saving money is necessary in the age of sarcity simply because we cannot “save” resources as they are perishable. Money is not, in fact, on the contrary, it increases if interest rates are positive. But if Kaminska et all are right and resources are actually not that scarce in the future but rather humankind will be living in the Age of Plenty because of the advance of technology, then saving money so that you can buy resources becomes obsolete. If you eliminate scarcity or the ideology of scarcity on which all the teachings of (neo)classical economics are based upon, the monetary system , as we know it and have it, ceases to have the same purpose as now. Interest rates at 0% could already be saying that this paradigm shift is here. The market is telling us that there is no need to save anymore. Perhaps the age of abundance is already here but we still need to battle the ideology of scarcity. Perhaps money has lived up to the end of its social purpose. As “interloping” said it in a recent post, Twitter is the new money supply. So, no, we will not need “safety” assets if we do not need to save, and then,yes, if there is still any doubt to what money is and what it does, then the government will have no ideological or practical reason to “self-finance” itself.

  89. No, my point is that this will be insufficient as the non-bank and bank public will still desire assets that support a real return portfolio. Either the govt can supply these via long-term bonds OR the banking sector will supply them. IOER is not enough, particularly considering the non-bank public can’t use reserves. So you end up at the same point either way. Either the banking sector will supply them or the govt will. IOER will not be enough. So you end up either supporting the capital structure of banking indirectly or directly. Same govt run rentier capitalist system either way….

  90. Morgan, what is your question? If you don’t pose a question how can you expect an answer? This blog is not about social justice, it is about understanding finance as it really exists. So what are you shouting that adds to our understanding of how our money works? We all know poor people are at a disadvantage, did you just discover that?

  91. And in China with all banks a tool of the Government, you still do have a stock market for investment at your own risk.

  92. Of course they did monetary transactions at their holy places (temples) in the hope they would be honest in the presence of their God(s).

  93. I’ve finally got it…the government can pass a new law in line with my retirement plan…’Make as much money as you can now, spend it while you got it and kill yourself when the money runs out!’ :-)

  94. No Johnny, you’ve got it all wrong! Didn’t you read Morgan’s posts above? You need to embrace the “hegemony.” Oh, excuse me, HEGEMONY!! That’s right, what’s Mr. “Boo-hoo, I lost my job, and now they’re gonna take my house too?” ever going to amount to? Nothing!! No sense in wringing your hands about “social justice” or spilling any tears over that loser. He’s just another chump, circling the drain. Best to get on board with Morgan, and his genius plan based on the cold hard facts of the REAL WORLD… regarding “barter” and those who have vs those that beg (hippies and slackers that don’t matter).

    Mr. HEGEMONY sees reality so clearly, and his genius is so evident that he’ll soon have a seat at the table with “those that matter” …anti-social personality disorder or not… he’ll probably be the featured speaker at the next tri-lateral commission meeting…. taking an honored seat at the table with his new puppet master friends. You’d better get on board now! Your looney lefty sounding whining will get you NOWHERE!!

    I sure hope Mr. Cold Hard Facts of Reality takes a few moments from his busy day, once he’s hobnobbing with the elite (can’t be more that a week or two now can it?… now that he’s revealed the full extent of his genius?)… to come back here and tell us all where we went wrong. To laugh in our faces and roll his eyes at our pathetic level of loserdom and self-delusion…. and tell us how it *could* have been for us if we’d only listened.

  95. It’d be a better use of your time to converse with a stop sign. Morgan isn’t here to “consider your ideas.” He’s here because he knows what he is, and he’s in the punchbowl, and he likes it that way!

  96. “…a total over-arching critique of your work” – LOL, as if he’s spent even 10 seconds trying to understand the body of your work!! Don’t waste your time with this one.

  97. We could also consider a scenario of extreme QE by the NCB.

    The Fed going to the private markets to buy back all those trillions in outstanding T bonds.

    After that, there would be no more risk free financial assets in the hands of the private sector. Japan has already gone half way around this road, btw.

    The NCB can always “monetize” ex post. Strangely, however, that possibility doesn’t seem to worry too much those among us who are always in a state of terror, screaming against the dire threat of monetization.

    Maybe it’s the case that deficit spending via monetization seems more threatening if practiced by a democratically elected government – compared to when it results from the obscure operations of a technocratic central bank.

  98. Cullen, I don’t think the UK has made any choice. It has been forced into a quasi-public utility setup which neither the banks nor the government want and which actually doesn’t work very well. The whole direction of government policy is to reduce public support of banks and return the nationalized ones to the private sector.

  99. Hi Cullen.

    Brilliant summary of the whole “debt as safe assets” argument. I wish I could put it that succinctly.

    All roads seem inexorably to lead to the end of private banking as we know it. However, as a Brit I am all too familiar with the problems regulating privatized utilities – the opportunities for rent-seeking, regulatory capture and the confused messages given by governments of different colours. I’m no fan of Soviet Union-style banking systems (which is what full nationalization would be, as Alea pointed out about the IMF’s full reserve banking paper). But private/public partnerships are no easy solution either, even when explicitly defined.

  100. ” I’m no fan of Soviet Union-style banking systems (which is what full nationalization would be, as Alea pointed out about the IMF’s full reserve banking paper)”.

    Why is China scarcely or never mentioned in discussions over “nationalized banking”? There the financial sector is publicly-owned and yet the economy’s performance has been superb. Perhaps it’s about time to stop obsessing about the long buried Soviet past and start looking at present day examples of state-owned commercial banking instead.

  101. The most pragmatic, sustainable capitalism might turn out to be the growth of LOCAL CURRENCIES. I live in Bristol and the Bristol Pound is starting to take off here, as other local currencies in Brazil and other places. Take a look

  102. “But if we stopped issuing t-bonds completely I would be willing to guarantee that the banking sector would become more and more unstable”.

    You may be “willing” to guarantee it but you cannot really “guarantee” said outcome because the experiment has never been tried.

    Your argument seems to be an instance of claiming there is never an alternative to the status quo because changing the way things work entails risks (including the risk of unintended and/or unforeseen consequences) so it’s preferable to just let it be as it is and has ever been. An extreme, Edmund Burke like form of conservatism, so to speak.

    And yet the banking system is already quite unstable and able to disseminate that instability to the full economy, thank you. It’s hard to imagine a banking sector more unstable – and more dependent on life support from the state sector – than the present one.

    Change is urgently needed and mere whining about the inconvenience of stopping the issuance of T bonds won’t do the trick. I suggest this site start discussing proposals for reform along the lines presented by the likes of R. Werner – e.g., introduction of limits on the amount of credit creation allowed by regulators, etc. This may well be prove to be more productive line of debate for the future.

  103. A nationalized banking system would be one in which the government issued $1 trillion in interest-bearing cash every year, backstopped the home mortgage system, provided easy loans for industry favored by party contributors, placed Goldman alum in charge of the system and bought the bad debt of big financial houses when their levered bets went sour.
    Um, wait.

  104. RM Mitchell is MS, not MMT.

    And MS was developed independently of MMT and likely before it.

    Just like Kalecki invented the notion of effective demand before Keynes.

  105. What people like Krugman still donot get is that it is a Catch 22 discussion.
    You donot want to tell the majority of the people how the system really works and how unproven several of the measures presently taken are and what possibly the risks thereof are.
    If you do you open several other cans of worms.

    All is basically totally counter-intuitive and most likely too complicated for the large majority to understand. If political decisons on voter level are going to be taken on this issue the outcome is highly uncertain. And when the system drops, nothing is going to stop that as it is backed up by nothing real (except what might by empty promises by governments).

    Eg a platinum coin just shows in an extreme form how weird the system is in most people’s eyes. Which is not a good thing for a system mainly built on credibilty and not much else.

  106. “Monetary Sovereignty”.

    It does have some differences with MMT. For instance, it believes raising interest rates is very effective at fighting inflation, as evidenced in the Volcker episode of the early 80s.

    But, perhaps more importantly, MS is an ally of TPC and many other selfless warriors in the holy battle against that particular threat to human freedom and civilization: the Job Guarantee. :)

  107. No, MS is in favor of bank nationalization. And I was never against the JG. In fact, the whole debate started raging because I proposed replacing unemployment benefits with a “small JG” and the MMTers went all bat shit crazy because I didn’t support a “full JG”. I said start it small.

    You can understand MR and support whatever you want. That’s the difference between MR and MMT and MS. I don’t really give a damn how people use MR to support their own political agendas. I just want people to get the understandings of the system right.

    No offense, but you don’t seem to be up to snuff on all of this stuff….

  108. Thanks Frances. I’ve enjoyed your recent posts.

    It’s rather simple really. We either choose a system that supports market based money issuance where the govt implicitly supports the capital structure of banks. Or we don’t. There’s no other option.

  109. RMM is personally in favor of bank nationalization but that position is just a preference. It does not derive from the economic and monetary analysis and theory that is at the core of MS.

    Whereas the belief in the capacity of monetary policy as a tool against inflation does derive from MS analysis and is a (extremely important and scarcely analyzed in heterodox blogs, btw) point not shared with MMT.

    And the fact that most followers of MR usually have a more conservative political leaning when compared to the relatively left of center MMTers doesn’t mean that MR positions itself on the right, or center or left of the political spectrum – presumably. A descriptive theory should be as free from value judgments as possible.

    Of course, sometimes it’s difficult to remain objective and neutral when the discussion touches more emotionally charged issues. For example, here at TPC in the middle of conversations and disagreements over apparently technical-only points one can often read rants including unscientific claims on the alleged “superiority of our free market system” and other quasi-religious notions.

    But then again maybe this is just normal and to be expected as part of the human condition.

    I just hope it will remain explicitly outside the bounds of MR :)

  110. Geoff

    I can only speak for myself and no other MRist/MMTist but my pessimism lies not solely in the notion that govt deficits will be shrinking ( I do think that is counterproductive) but that we are still operating under notions that rising wages are to be fought as harbingers of inflation.

    Its really quite unbelievable to have a system that runs on private credit, requires steady incomes AND rising incomes for credit to safely rise and yet we work diligently to cut incomes. Its like building an engine that produces more and more horsepower and then cutting the flow capacity of the fuel lines in half.

    Its like everyone else is overpaid according to all of us. We all joyfully celebrate when some company downsizes and preserves our stock price, yet fight tooth and nail when our boss wants to cut our package or raise our share of health insurance contribution (which is rational BTW…. fighting for your income share that is)

    “This is understandable if you believe that the govt is in control, and that NFA’s are the key driver of the economy. However, if you believe instead that money is created mainly by the banks in an endogenous way, then there is more reason to be optimistic”

    Banks are extractors just like the govt is. They dont create productive people they profit off them. Banks dont go to where are no assets and bring them there. They go where there are assets and use them for profit, which is fine but if you want credit levels to expand, your customer base better be getting richer not poorer.

    Most Americans are getting poorer. Yes some are getting richer and maybe they will drive a whole new credit boom. Id like to see it but dont anyone expect me to take on more debt for the team. Most consumers are tapped out still and those not tapped out have a little more uncertainty about where their incomes will be in 5-10 years.

    “The bottom line is that I think the MR approach gives one much more reason to be optimistic than does the MMT approach.”

    I dont know about that. I think Cullen does solid analysis and I understand well the nature of our balance sheet recession because of him. But any boom we experience will not be broad based in terms of numbers of participants at first. A few will have to lead the way if it is to happen. There just arent nearly as many working Americans capable of taking on the debt there was in the 90’s and early 2000s. Its just fact. Young kids are working for less now and are trying to stay mobile. My son and daughter in law might not buy a house for a decade. Many in their generation are moving to the cities to avoid the need for suburban driving.

    And unless you see incomes broadly rising their wont be any support for our credit structure to grow far and wide like it once did.

  111. lluvatar, you and I speak the same language! I too am a Kalman filter guy, although particle filters (rightly so) are starting to cut in on my game. Unfortunately I’m still in economics elementary school :(

    What do you think of my response to Adam K above, with his objections regarding time delays (in a continuous time system)? Pure time delays can be dealt w/ via Pade’… and Matlab does handle continuous time systems (by internally using various forms of “quadrature” to approximate a solution using discrete samples), or, like you and I (and Adam, I think) say, the whole system can be explicitly discretized. Then time delays are just a matter of adding more states… perhaps a prohibitive number of states, I’m not sure!

    Also, he says there’s a dependency on times not just at t, but delayed from t and ahead of t. Well, Pade’ could be used to introduce various lags… so that the sim could be based around a middle one, so that we can look ahead too… but more importantly, I’d think those future and past times might be represented by a linear filter’s (Kalman) ESTIMATE of the states at those times, and that’s a well known problem (smoothing and predictive Kalman filters)… plus these filters can help deal with noise, which we haven’t talked about, but is certainly an element of the system.

    Also I don’t really get his objection to “a dependency on stocks only.” I mentioned balance sheet entries, not stocks. I guess there’s a connection (assets on a BS are stock prices). OK, true, then why not add in more states? I have no idea what those are, but I explicitly left the door open for that.

    Also, I really don’t understand his 3rd to last paragraph about Godley and Kalechi… so perhaps a bit of reading is in order. However, what he describes smells a lot like what you and I both describe in our description of taking the Jacobian (I called it “partials”), etc., to linearize a non-linear system. It just doesn’t sound that mysterious. There’s a bit more there with his “solve a system of non-linear equations” but I’m not sure what he’s getting at.

    Plus he mentions Steve Keen and his Minsky program… which I think is online now for people to use, but I haven’t tried it yet. I don’t know…. Keen’s approach seems intriguing to me.

    But still, I’m sticking to my 1st impression: The really really hard part of this is going to get economists to agree to precisely define terms, states, and relationships between states. Like I say, I’m still in econ elementary, but once in a while I poke my head in over at Nick Rowe’s site, or Sumner, or David Glasner… guys w/ a strong neo-classical inclination, which I highly suspect of being dead wrong… still there’s a lot of Math behind it… or probably more accurately “built up on top of it” however shaky the foundation… but to hear those guys argue with each other is nuts! They seem to perpetually argue about defining basic terms… “NO, your dead wrong! THAT’s not what ‘aggregate demand’ is!” … how the hell do you make any progress when you’re still fighting over stuff like that? Can you imagine engineers fighting over what “voltage” means?

    OK, if I learn anything I’ll let you know! I myself feel like I should take a detour at some point and learn about the neo-classical models. I’ve read part of Keen’s book, but that is pure debunking… I’d actually like to hear the whole neo-classical story, warts and all, so I can at least understand their objections to this heterodox stuff. So much to learn!

    Also, your idea of using a Kalman estimators… I’m absolutely positive that must be going on right now. That’s must have occurred to people with money in the game decades ago…. because obviously if you can predict the future… even a little ways ahead, then you can make money off that! The thing is, I think you have to fold into the dough the idea that those estimates themselves are fed back into the system. The only way they wouldn’t be is if the people running the estimators didn’t do ANYTHING with the information. So building the estimator adds another feedback loop, thus changing the system, and throwing off the estimate. That’s why I think the real value is in gaining insight… and perhaps showing that the filter works for predicting limited situations… like some sort of economic laboratory set up… with people in a room, or an online gaming situation or something. To predict what the real economy is going to do with any precision, I think requires that you explicitly fold in the feedback loops that will surely result… but I’m not sure how that works…it seems like an ever retreating thing you’re estimating… or perhaps keeping the info secret, until you can show your results. Once the cat’s out of the bag, you’ve changed the plant you’re estimating.

    In any case, I expect the problem might be a lot MORE difficult that predicting the weather… because the weather systems themselves DON’T CARE what our estimates are! We don’t create an additional feedback loop when we make a storm prediction. The economy is a very different creature!

  112. I too took a double-take when I saw that… but I think you’re taking Cullen out of context, in what he writes here anyway. I accepted his explanation he gives here of “limited JG.” I’m not aware of the whole history though!

  113. Can someone tell me if the money for IOR is printed or if it comes out of Fed profits? I can’t find an answer to this, and it’s a vital part of Krugman’s argument that IOR is functionally equivalent to debt because IOR still involves interest payments.

  114. Up front, I don’t know the answer. However, IOR is certainly not physically “printed” (on paper bills)… but you already knew that I think. My two cents: I would highly suspect that it has absolutely NOTHING to do with Fed profits, since I have the impression that the Fed is absolutely free to independently expand their balance sheet without bound, the only restriction being their charter/mandate to continue to support the private banking payment system, the public’s demand for physical cash (bills & coins), and to implement monetary policy, ostensibly for the good of the nation (i.e. target an inflation rate, or employment rate, or whatever).

    Hope you find someone who actually knows!

  115. Of course, everything I “know” about it I’ve probably gleaned from reading these very pages. Master Roche has occasionally bestowed upon me the accolade “in paradigm” and has kindly allowed me to jump in and answer questions on occasion. … Don’t let me frighten you!… MR is not some kind of creepy cult! BTW, are you new here? Have you been issued a purple robe yet?… come right in and take and seat, grab a cup of cool-aid and relax… I’m sure the Master will be with you shortly…. But the man’s a…He reads poetry out loud, all right. And a voice…he likes you because you’re still alive. He’s got plans for you. No, I’m not gonna help you. You’re gonna help him, man. You’re gonna help him. I mean, what are they gonna say when he’s gone? ‘Cause he dies when it dies, when it dies, he dies! What are they gonna say about him? He was a kind man? He was a wise man? He had plans? He had wisdom? Bullshit, man! And am I gonna be the one that’s gonna set them straight? Look at me! Look at me! Wrong! …. Ahhh, The heads. You’re looking at the heads. I, uh – sometimes he goes too far, you know – he’s the first one to admit it! Hahahahaha!

  116. It seems to me that eliminating the private banking system entirely would be overkill. I believe there are benefits to having decentralized, competitive banking as a way of allocating capital.

    Most of the small, medium, and large commercial banks and CUs do a decent job of allocating capital, are reasonably well-regulated, and when they get in trouble, can be resolved without shaking the economy to its foundations, ISTM.

    The megabanks, as they currently operate, are the problem. The benefits they provide (other than to insiders and the connected) are greatly outweighed by the costs.

  117. lluvatar, forgive me if this message is repeated. Everytime my message seems to have gone into the ether… it eventually comes back. But if that’s the case here, it will have been about six hours… a new record!

    Anyway, the gist of my disappeared message was regarding a post I’d made to Cullen… but he didn’t take the bait:

    But now that I know you’re a Kalman estimator and state space dynamic systems guy, I can fill you in on what I was really getting at with Cullen:

    It seems to me that the economy, the BLS, and the Fed constitute a plant, an observer (estimator), and a controller, resp, in one big feedback control system. In other words the Fed set’s as its goal a target rate of inflation, say. It collects data from the BLS (the CPI, for example), and then it uses a control law of some sort to move the levers (FOMO and overnight target Federal funds rate) to achieve this target inflation. At least during more normal times, when we’re not at the ZLB (like during Greenspan’s “Great Moderation”).

    What I was really getting at in my question to Cullen, is what happens to MR’s theory of banking if this feedback loop were made into an explicitly continuous time (or at least high sample rate discrete time) signal. Does that change anything?

    One of my favorite descriptions of how the fundamentals of the system works is contained in Scott Fullwiler’s article “Krugman’s Flashing Neon Sign.” In that piece, Fullwiler uses the phrase, over and over again “…and this happens as a consequence of the Fed defending it’s overnight target rate.” His whole argument seems to be, in some sense, predicated on this fixed target overnight rate, and his argument makes a lot of sense!

    Krugman, in his response to Scott, reluctantly concedes (between the lines anyway) that Scott is perhaps *technically* right, but only in a short term sense. He then brings in some neo-classical theory I don’t understand, to essentially state that, “Well, yes Mr. smartypants, that’s how you could describe the system over a short time frame… like between Fed meetings [every 6 weeks?], but in the BIG picture, over LONG time frames, the Fed is setting an INFLATION rate target, not an overnight interest rate, … and thus in the BIG picture, given these obvious neo-classical relationships [I think Krugman calls it a "teachable moment"], you are wrong, and I am right!!”

    So what I was essentially getting to with Cullen, is “Does Krugman have a point here?” We can make that explicit by making the CPI a continuous signal, subtracting it from the target inflation rate (to create a continuous error signal), and feed that through the Fed’s control law, to produce a continuously changing target federal funds rate. How does that affect Fullwiler’s description, and MR?

    See the thing is, that I’m sure that a continuous CPI will be very noisy, and it will need to be low-pass filtered, thus introducing a phase lag into the system (perhaps six weeks?), and thus the end result may not be much different than what we have now.

    Stated another way, what if we were to make the Fed funds target rate explicitly a DEPENDENT variable (dependent on the target CPI, the estimated CPI, and the Fed control law). Does that change Fullwiler’s and Cullen’s story about how the system works? Does it lend credence to Krugman’s argument?

  118. lluvatar, I have a question for you that doesn’t fit on this page (comments have now spilled onto a 2nd page for this article), thus I’ll place it there. I tried twice to post here with no luck.

  119. ***** CAUTION: HIGH DORKAGE AREA *****

    This make sense to you?: x’ = A(x,t)
    Then this is for you:

    Please forgive me if this message is repeated. Every time my message seems to have gone into the ether it eventually comes back. But if that’s the case here, it will have been more than six hours… a new record! I think perhaps it was just too long for the 1st page of comments.

    Anyway, the gist of my disappeared message was regarding a post I’d made to Cullen… but he didn’t take the bait:

    But now that I know you’re a Kalman estimator, state space, and dynamic systems guy, I can fill you in on what I was really getting at with Cullen:

    It seems to me that the economy, the BLS, and the Fed constitute a plant, an observer (estimator), and a controller, resp, in one big feedback control system. In other words the Fed sets as its goal a target rate of inflation, say. It collects data from the BLS (the CPI, for example), and then it uses a control law (“Taylor Rule?”) of some sort to move the levers (OMO and overnight target Federal funds rate) to achieve this target inflation. At least during more normal times, when we’re not at the ZLB (like during Greenspan’s “Great Moderation”).

    What I was really getting at in my question to Cullen, is what happens to MR’s theory of banking if this feedback loop were made into an explicitly continuous time (or at least high sample rate discrete time) signal? Does that change anything?

    One of my favorite descriptions of how the fundamentals of the system works is contained in Scott Fullwiler’s article “Krugman’s Flashing Neon Sign.”:

    In that piece, Fullwiler uses the phrase, (over and over again) “…and this happens as a consequence of the Fed defending it’s overnight target rate.” His whole argument seems to be, in some sense, predicated on this fixed target overnight rate, and his argument makes a lot of sense!

    Krugman, in his response to Scott, reluctantly concedes (between the lines anyway) that Scott is perhaps *technically* right, but only in a short term sense. He then brings in some neo-classical theory I don’t understand, to essentially state that, “Well, yes Mr. smartypants, that’s how you could describe the system over a short time frame… like between Fed meetings [every 6 weeks?], but in the BIG picture, over LONG time frames, the Fed is setting a different target, not an overnight interest rate, … and thus in the BIG picture, given these obvious neo-classical relationships [I think Krugman calls it a "teachable moment"], you are wrong, and I am right!!”

    Here’s the 1st of two of Krugman’s responses:

    Here’s the 2nd:

    So what I was essentially getting to with Cullen, is “Does Krugman have a point here?” We can make that explicit by making the CPI a continuous signal, subtracting it from the target inflation rate (to create a continuous error signal), and feed that through the Fed’s control law, to produce a continuously changing target federal funds rate. How does that affect Fullwiler’s description? And MR?

    See the thing is, that I’m sure that a continuous CPI will be very noisy, and it will need to be low-pass filtered, thus introducing a phase lag into the system (perhaps six weeks?), and thus the end result may not be much different than what we have now. It wouldn’t have a zero-order hold though (like we do now).

    Stated another way, what if we were to make the Fed funds target rate explicitly a DEPENDENT variable (dependent on the target CPI, the estimated CPI, and the Fed control law). Does that change Fullwiler’s and Cullen’s story about how the system works? Does it lend credence to Krugman’s argument?

    Oh, I guess I should point out somewhere that Fullwiler also got back to Krugman: (it’s actually an update at the top of the “Krugman’s Flashing…” article above).

    Here’s a good summary and set of links to pretty much the full debate (you can find other sets with a few different people, but the core articles seem to be the same):

  120. I am sorry if I don’t address the main points directly – I started writing the comment earlier before I saw yours. I am also sorry to Cullen because I start off-topic but I would like to raise an important, in my opinion, point. I am going to put the debate(s) with Paul Krugman in a wider context.

    “I spend almost all my time here trying to figure out what those “mathematical relationships” are at the lowest level… trying to understand the rules of the game that’s being played out all around us.”

    – this is what I am doing, too, but I have very little time.

    “The really really hard part of this is going to get economists to agree to precisely define terms, states, and relationships between states.”

    In my opinion it is even worse.The intuitive models related to money taught at Econ 101 used as a closure to all other models are fundamentally incorrect.

    Here comes the core mistake made by the neoclassical economists and so-called “New Keynesians” (Krugman) – the loanable funds model does not describe the current economy. In all “official” textbooks banks are considered to merely re-lend deposits or even worse, reserves. Only recently has Paul Krugman started admitting that the money multiplier is misinterpreted but he still probably has no clue what’s wrong – despite scathing critique written by Scott Fullwiler at the time of the debate with Steve Keen. The “canonical model” of banking and how the finance sector is plugged to the wider economy are factually incorrect. Banks create debt and deposits at the same time (as atomic transactions in the database sense) and in a modern reserve banking system this process draws reserves, supplied by the central bank. Looking at the balance sheet of a bank we can see that a new loan creates a new deposit (liability for the bank, asset for the borrower) and new debt (asset for the bank, liability for the borrower). The bank liability – the deposit – is new “broad money” created ex nihilo and corresponding to new spending power often (but unfortunately not always) related to goods and services which are yet to be produced – in the best case to “productive investment”. I am not saying that lending process is not constrained by bank capital and other factors. The key point is that all the models based on re-lending money saved by “patient” agents to “impatient” agents are fundamentally incorrect and useless. Paul Krugman’s IS-LM (actually later disowned by its creator, John R. Hicks) uses a “loanable funds” market as a closure. This is wrong. All the DSGE models use “loanable funds” as a closure. This is wrong. It is not true that spending power of the borrowers comes from the savers and the market equalises supply and demand of funds at a certain interest rate. This is how it worked in the coins-based economy without lending institutions. According to D. Graeber (Debt: The First 5,000 Years) similar systems were rather uncommon. The spending power of borrowers comes from the banks and saving in financial assets is a result of injecting new money to the system by borrowing. (Strictly speaking the quantity of financial savings – including the stock of deposits – increases at exactly the same time the loan is extended.) This is the Kaleckian “investment” flow driving the whole economy. But if some agents start borrowing for speculation to buy non-productive assets (Minsky, Keen) or for consumption they would never be able to afford financing – we are in a deep trouble.

    We should consider the whole banking system (and more – the financial sector) as a distributed database consisting of linked balance sheets. This is the environment where all the financial stocks and flows exist. Accounting rules define what is an equivalent of Kirchhoff’s current law. Ever wondered where sectoral balances come from? They are the result of aggregation of individual transactions occurring in the system between groups of agents which have to conform to double-entry accounting rules..

    On top of that we have real economy with physical means of production, commodities and services – and physical assets. We have to analyse the interaction between both.

    The trouble is that you have students who in the age of 18 (without any prior life experience and not having studied electronic circuit theory) have to cram in order to pass Econ 101. In order to pass the exam they have to internalise the loanable funds model. They have to build intuitive models in their minds, to start thinking in terms of supply-and-demand curves – also for tokens called “money”. Now we have undoubtedly very intelligent and well intentioned people (like Paul Krugman) who nevertheless can only intuitively think in terms of loanable funds. Paul Krugman will keep repeating his “in liquidity trap” without being able to even imagine the essence of the debt-deflation process – that some agents intend to repay their debt what leads to destruction of spending power, while others refuse to spend out of stock of their savings. Who gives? In the absence of adequate budget deficit spending (MMT , Monetary Realism) and/ or current account surplus the system settles at the lower level of economic activity. Let’s look at the obscene housing bubbles which burst recently – first in Japan, then in the US, UK, Ireland, Spain. So back to the topic of the main post – in my opinion we won’t get Paul Krugman to agree on the mechanics of functioning of the banking system because this would endanger his mental models of the economy at the macro level, based on IS-LM. Paul Krugman needs to believe that outside of liquidity trap the increase of quantity of money (“dead presidents”) will lead to increase in investment and possibly inflation. We have to look at the flows as the state variables describing the system (deficit spending, private investment – contributing to aggregate demand now and investment decisions realised in the future) not the stocks (which are also relevant, especially real stocks such as real capital but at the different time scale).

    Do we have an alternative theory? I think so. I strongly believe that the alternative school of thought I keep in mind has a very strong influence in China – not on universities which largely follow the mainstream Western macroeconomics but among central planners, people who have “Red Phones” on their desks. We have to keep in mind that the Chinese call their economic system a “socialism with the Chinese characteristics” which is basically a cross between laissez-faire at the micro level and central planning / strict state control at the macro level. The reforms bearing fruits in 2010s were seeded in the late 1970s and germinated in the 1980s. The Western socialist reformers who contributed at the early stages were Wlodzimierz Brus and Kazimierz Laski. Both of them belonged to economic school of Michal Kalecki. It was not “orthodox Soviet Bloc Marxism” any more. The Kaleckian reformist school could be considered more “post-Keynesian” than Marxist. Kalecki was not initially trained as an economist, he studied engineering. He was able to build correct mental models of macroeconomic reality precisely because his mind had not been already possessed by the classical marginalist thinking and supply-and-demand curves explaining everything.

    Please do not assume that I am a socialist, I lived in the Soviet Bloc and I consider that system utopian. Stalinist communism was even worse – it was evil. I am merely trying to investigate which approach in macroeconomics is working better – looking at the West stuck in the ruts of never-ending recession and China powering ahead. If you are able to look past left-wing sympathies of the author there is one book I can recommend. It is in my opinion not obsolete at all, despite belonging the the era of “slipstick” rather than modern computers and Internet. (It was written in 1952).

    It is “Theory of Economic Dynamics” by Michal Kalecki – available from Amazon for $15. It is not the Bible but you may even find answers to your questions related to mathematical modelling of macroeconomic processes in that book.

    NB the Fed cannot spend. Its presence in the feedback loop changes very little regardless what signal is considered to be the error signal to be minimised. It is only capable of inducing a recession by jacking up interest rates to halt accelerating inflation. Not so good in stimulating the economy even outside the deleveraging (liquidity) trap – private debt-financed expansion actually leads to financial instability. It is the government which can and should spend.

    Financialisation and encouraging “saving” or rather mega-hoarding and debt expansion is not good, we have to get back to Keynes and Lerner.

  121. Well, who knows. perhaps it’s just one more instance of Eurasia always having been at war (or peace, depending on the circumstances) with Eastasia. :)

    Anyway, for the sake of sanity one should not waste too much time following all the details of never ending, hair-splitting debates among rival creeds.

  122. Adman, wow,.. a lot there. Very nice. You are well ahead of me on working this stuff out. OK, so Kalecki.. I’ll put him on my reading list.

    BTW, any thoughts on lluvatar’s ideas on addressing the time delays you wrote of as difficulties in using x’ = A(x,t) earlier?

  123. Shoot, that Anonymous above is me. Also, what of Keen’s debunking of neo-classical theory in his book? Have you read that? Good? Bad?

  124. Also, if I wanted to familiarize myself with the neo-classical basics, do you know of a good concise text? Wrong or not, I guess I’d just like to know where they’re coming from with more clarity.

  125. I went back and read your original post again. I think I didn’t understand some basics there, like what you meant by “flows” exactly, so before I embarrass myself too much I need to look up those refs!

    Also, I like your Kirchoff’s law analogy! That’s the kind of very basic “law” we all need to be able to agree on before we can get anywhere… an it sounds like you’re saying that Krugman and the neoclassicals are NOT on board with that!

  126. Adam, lluvatar, … one other think, just briefly. Regarding testing economic theories or policies out. I’m sure economists somewhere must have established “laboratory” like conditions to check at least SOME of their ideas in a more or less controlled environment. Something more akin to a psychological experiment than anything else I’d guess.

    What if we were to try to use online gaming to do something similar? You might have to offer real cash prizes to participants to get them to do it. But imagine setting up some kind of synthesized “economy” online, and then trying out different policy ideas (or perhaps checking out theories). Have several game “rooms” that each player is randomly assigned to. Each room has identical initial conditions, except that each will implement a different government/Fed policy, for example. These could be multi-day type games. A pretty fuzzy thought I know… but I’m always wondering, “How do you know if this model is really correct?” Is there such a thing as an “experimental economist?”

  127. I have explicitly said “Accounting rules define what is an equivalent of Kirchhoff’s current law.” I have never had KVL in my mind. As to other points I will respond in the evening (it is early morning in Australia).

  128. Adam, regarding economy + BLS + Fed as a feedback control loop, one thing I didn’t touch on here but is pretty obvious: the issue of controllability and the more fundamental issue of observability. We probably strike out on both! I think your statements implied as much when you asserted that the Fed can’t do much except screw everything up. I guess we’re closer on the observability front (i.e. closer to having an observable system), but the idea that the Fed, through it’s limited set of inputs to the plant, can actually control much is probably overly optimistic to say the least!… again, those terms (obs/cont) only apply to the “linearized” system (pretty much a prerequisite for me, since I don’t know much about non-linear controls except to try to linearize about the current nonminal!). When I was in grad school (early 90s), “robust controls” were big… basically it was a way (maybe you already know) to incorporate plant uncertainty into a linear plant. At least that’s how the CalTech guys approached it (I didn’t go there, but my prof did — he was brand new). Then you build a linear controller that does the best possible job (by some measure) on all the plants in the set. It was a clever way to keep everything linear so you could use a vast array of mathematical tools on it…. not that it didn’t get complicated with having to solve non-linear equations (coupled Riccati eqs mostly, I think)… but the theory was fairly elegant. I remember the Matlab toolbox our prof had made was called “mu tools” … I think “mu” (Greek letter) was a measure — like an upper bound, for example, on how bad you were doing. Memory’s a little foggy here! Of course at a minimum you hope to stabilize them all (all possible plants in the set you’ve described). Never used it in the real world though!… and never kept up too much w/ the literature, since I soon went down the signal processing and tracking path… and now FPGA implementation path in my career. Never had need of building anything more than a SISO (single input / single output) controller in my career.

    Another prof took a different approach.. don’t recall much except the words “H-infinity” and “H1″ control, and how they were duals of each other and how you could use the simplex method (operational research) to solve the H1 problem, and thus solve the other. Or something along those lines!

  129. Wow, I had no idea how many dorks, uh, I mean folks have been drawn into this debate:

    Sumner, Beckworth, Rowe, Krugman, Fullwiler, Roche… you don’t see actual back and forths between ALL of those names that often… not that it’s happening here either I guess, but this Waldman fellow seems to be a clearinghouse of all the names involved.. including Coppola (commenting here on Cullen’s site right now).

    BTW, Nick Rowe was lamenting in his most recent post on this that “MMT types” weren’t criticizing him more. Well perhaps he’d be OK with some MR criticism. Here’s what he said:

    “I’m a bit surprised I haven’t got more pushback on this post, from the MMT guys for example. Not that they are the only ones who make what I think is the big mistake of saying that the real world is like the red/green world, in which the stock of government money is demand-determined, because a lot of very orthodox central bankers and New Keynesians say the same thing.”

  130. … and here’s a previous post Rowe had on the “stock of money is demand-determined” subject (the part he expected some friction about):

    I like how he states that the sentence

    “The supply of money is demand-determined.”

    is “not even not even wrong; it’s just gibberish.” He has three levels of wrongness… and he ranks that as the lowest… one below “not even wrong.” Ha!

  131. I am not convinced that we can consider the economy at the macro level as a system which can be linearised and we just want to put it in a negative feedback loop so that the external noise is eliminated. Steve Keen tried to model the economy using predator-prey-type equations (Lotka–Volterra) but I think that the system is even more non-linear. Stock market indices charts suggests that. I agree that the monetary policy of the 1990s-2000s targetting inflation rate was an attempt to implement a negative feedback loop. Yet the “Great Moderation” did not last forever. The component which is higly non-linear is related to investment and speculation – the more something grows the more people throw money into it, until it breaks down and collapses (George Soros – theory of reflexivity in economics). Even worse, agents often throw borrowed money into the bubble (Ponzi) what leads to saturating the economy with private debt in the long run. Because of the non-linearity I am not convinced whether Kalman filters can be used to estimate the “deep” parameters of the model. The macroeconomic reality is also quite non-stationary (evolving in time). Obviously I might be wrong – until someone gives it a go we don’t know for sure.

    NB my background is (also) electronic engineering but I mostly have been doing embedded programming since I graduated over 20 years ago so while I do understand what you are writing about this is not something I would be able to follow without looking up various things on the Net.

    The process of “financialisation” as described by Michael Hudson leads to growing instability and in the long run damages the productive economy. It is very easy to say “let’s get rid of the Wall Street”. Chanting slogans won’t change anything. Everyone knows that the political system is dysfunctional and has been subverted by various interest groups. What may make a difference is replacing the old paradigm in thinking about the economy by the new one. The mistakes made by the followers of the neoclassical economics often seem to be trivial to someone who has not been brainwashed (or “educated at leading Western universities”). A person who has read and understood books written by Dan Ariely would wonder how even moderately educated people might ever consider making assumptions about “rational agents optimising their utility function in time”.

    Anyway let’s see how the current situation evolves in time.

  132. Cullen I think you are wrong and Krugman is right. If government could finance its spending only by printing it would imply inflation in some situations: increase in government spending financed by printing would cause that too much money would chase too little goods. But if government could finance its increased spending by borrowing on the market it would imply that private sector would spend less so there would be no inflation.
    So thanks to monetary policy government can spend more if it wishes to than if it would have only rely on fiscal policy (condition on being credible for the markets in its borrowing capabilities).

  133. Non-linear aspects: I completely agree!! I don’t think it’s clear at all that linearization or EKF’s are going to be useful (as you point out). I guess I was wondering, that if you could linearize (at each time-step, in the EKF manner)… I’m wondering if even THAT overly simplified system would pass the controllability/observability tests (even during the “Great Moderation”) given the system in place. I think not! For example, the “Great Moderation” might be interpreted as “unobserved states” (really just ignored stated, i.e. the private debt/GDP ratio) growing w/o bound. And perhaps even if they were observed, those states were “uncontrollable” given our current system. Perhaps a “debt Jubilee” function is required to reach those types of states (for example, I’m not saying I’m sold on the debt jubilee idea).

  134. Since the obs/contr tests are straightforward, it’d be interesting to try that if someone had an accurate non-linear model for the middle of the “Great Moderation” years. You might argue it puts an upper bound on how well we could have done if we’d taken another path: for example, if looking back we decide that what we REALLY should have done was targeted a modest financialization level (perhaps 10% of economy in finance) and minimized ponzi lending… given the controls in place at the time, could we have even done that with the overly-simplified linearized system! If the answer was “no” then there’s no use in asking the question w/ the non-linear system because that system will just be that much tougher.

  135. Dan Ariely is doing this at the micro level (he is a psychologist working on behavioural economics).

    I am not sure whether such an experiment would work at the macro level because people may not behave in the same way as in the real life (please read Ariely to see how tricky is to make people behave in a “natural” way in a controlled environment). Also – do we really need to do it?

    We do have theories which describe the macroeconomic reality quite well. How did the American or British governments finance winning the WW2? What was the unemployment rate in 1950 in the US or in Australia?

    The trouble is that these theories have been rejected are erased from the academic teaching and later from the social conscioussness (via the mass media) – initially for political reasons. They remain largely unknown to the people living in the West.

    The “platinum coin” debate is an attempt to inject these ideas back into the mainstream and you can see people like Krugman or Rowe wriggling desperately, trying to defend incorrect models and put the genie back into the bottle.

    A few months ago I asked a co-worker who had grown up in Mainland China about whether governments have to borrow pre-existing money in order to spend (or the sky will fall over) – or whether the governments are not fiscally constrained. He gave the correct answer without any hesitation. That’s why the Chinese are powering ahead with their “state capitalism” model – and we are stuck in a persistent stagnation and recession until the “financial capitalism” is dismantled – because financing expansion by the rising level of the private debt is no longer a viable option and the defence spending in the US is not high enough to finance all the R&D needed to maintain the overall technological supremacy of the West. This is the “experimental economics” at the 1:1 scale – and the experiment is open-ended.

  136. Never heard of Dan Ariely. Thanks for the reference. I’m sure my “online gaming” exercise would fail the test in several important ways… but still, if you could… and this is a BIG BIG if… get some buy-in on that from some of the various schools of thought, I wonder how it would turn out. In other words, Market Monetarists get to make the rules for their world, Austrians for theirs, MMTers for theirs, neo-classicals for their, etc. Then it’s like a contest to see who does best. You’d have to agree ahead of time on how to measure “best” though.

    Yeah, I know, a lot of problems with that! Perhaps the biggest problem… aside from designing the game and making sure you had real motivated participants, and that their behavior would in some way approximate real-world behavior and getting buy-in on the set up and the rules and the measures of outcome would be…

    … the LAST thing economists want to do (I’m guessing) is put their ideas to some kind of test!! They’ve enjoyed a comfy armchair world of philosophizing about this one little aspect of reality (while the rest of reality-studying academics is regularly subjected to some sort of experimental verification, or at lest some kind of check against reality), with really NO consequences if they’re wrong, … and it’s doubtful they’d want to give that up by risking losing face in some sort of competition. I think the Austrians actually built that right into their theories, didn’t they?: that the truths they describe are “self-evident” and cannot be subjected to verification!… hahaha!

    This test I describe would attract a lot of interest from all of us amateurs though! Ron Paul people would be cheering the Austrians on, and … …uh… well, actually, that might be the bulk of the spectators! I’m not sure MMT or “free banking” advocates would be able to draw very big crowds!

  137. BTW, when I say the various schools could “make the rules” for their world, I just mean they could act as dictators regarding economic policies… not that they could alter the rules of how the world operated outside that.

  138. Adam K, Nick Rowe makes a similar argument to Krugman re: the “feedback loop” here:

    basically saying, like Krugman, that “in the short term, Keen is correct, but that’s of no significance because the CB targets inflation, and thus in the mid and long term Krugman and I are correct.”

    The actual words he uses are: “…the supply of reserves is perfectly elastic at 2% *inflation*. It is perfectly *in*elastic with respect to the rate of interest (except at very short horizons).”

    Again, there’s that question of the “error signal” the CB uses. You’re saying that the error signal doesn’t really matter here, correct? Inflation or interest rate… won’t make a difference. Fullwiler says the same.

    Rowe seems fixated on what he calls the “hot potato” effect (of outside money?), but not all neo-classicals agree with him about that:

    Fullwiler, in the intro here:

    responds to Rowe and Krugman, saying essentially, “fine, use the Taylor rule all you want for monetary strategy, but because on an operational day to day basis the Fed must target an overnight interest rate — a rate it could change anytime — it doesn’t affect what I’ve said. The Fed has no control over reserve levels, base money, etc, just the rate.”

    Later he takes a crack at the “hot potato” idea:

    stating flatly “There is no hot potato effect for currency in the real world.”

    BTW, just recently Sumner makes a plea to please “Keep banks out of macro” in response to an Economist article:

    … I’m assuming so he won’t have to learn anything about banks and banking!

  139. Cullen, in Scott Fullwiler’s article that you link to here, they talk quite a bit in the comments section about “elastic” and “inelastic.” Also, Nick Rowe makes uses those terms in this article here:

    “In Canada, over a longer horizon, the supply of reserves is perfectly elastic at 2% *inflation*. It is perfectly *in*elastic with respect to the rate of interest (except at very short horizons).”

    I’m going to guess you don’t agree with Nick, but what does he mean “(in)elastic with respect to…” In what sense is elasticity/inelasticity with respect to something?

    So two questions: What’s elasticity/inelasticity and in what sense is it defined with respect to something else?

    I could guess, but it’s easier to hear the straight story.

  140. Tom, I think (I could be wrong) tha Cullen would agree with Nick:
    “central banks target interest rates, and they achieve this by having a perfectly elastic supply of reserves at their target rate every day. “

  141. Hi Cowpoke, … I looked for that quote you give… I think that was one of the commenters that was disagreeing with Nick that wrote that, “Tschaff,” wasn’t it? What Tschaff says seems to be a direct contradiction of what Rowe says.

  142. BTW, the “Ask Cullen” page still seems to be broken. Do you agree? New comments do not go at the bottom.

  143. Tom, it was that one, can you post The Rowe comment for please sir? I am Bizzy up and down the stairs here But am interested.
    If ya got time.

  144. Cowpoke, not sure what you’re after. The Rowe comment was from the article. I posted it in my original comment:

    “In Canada, over a longer horizon, the supply of reserves is perfectly elastic at 2% *inflation*. It is perfectly *in*elastic with respect to the rate of interest (except at very short horizons).”

    Do you mean something else?

  145. Blame ultimately rests w/ the SW guys that made a buggy blog. There shouldn’t be anything that we can post that screws it up!

  146. Thanks Tom, I have a better picture of it now., Thanks, I am going to Research this Elastic a bit more tomorrow

    Thanks Again Tom..

  147. Are traveler’s checks money or is that double counting? If you tear up the traveler’s checks what happens? Answer – you get IOeR (idle or unused money).