Ron Paul is one of the truly honorable and honest men in Congress.  I doubt that there are many in power who want better for this country than he does, but some of his talking points need to be re-framed and corrected in order to avoid confusion about the way our modern monetary system operates.  In an interview this morning on CNBC he made some frighteningly inaccurate points.

The most glaring mistake he makes is his comparison of Europe and the USA.  He says:

“we have a debt crisis in Europe and here. That’s why we have to cut back.”

I’ve covered this point ad nauseam, but this myth persists so it’s important to reiterate.  The EMU is made up of currency USERS.  The USA is a single currency system with a Federal Government (unlike the EMU).  This means the USA is a currency ISSUER.  If the USA wants to create money they simply spend it into existence by changing numbers in the computer system.  It might sound bizarre to the layman or even the neoclassically trained economist, but the USA no longer resides in a system in which its currency is convertible into gold.  Therefore, there is no such thing as a solvency constraint.

The only constraint the USA has is an inflation constraint.  And while this might be a form of insolvency, it is by no means similar to what the EMU nations are undergoing.  Dr. Paul is implying that the USA can spend too much and cause a “debt crisis”.  This is categorically false.  There is no such thing as the bond market funding our spending or holding us hostage as they hold Greece hostage.  The price of our debt is controlled by our central bank which sets the interest rate via open market operations.  You can call this manipulation or whatever you want, but it is an irrefutable fact that the Fed controls interest rates as the supplier of reserves to the banking system.  The point is, Dr. Paul’s comparison is based on a convertible currency system (which he is an advocate of), but it is 100% inapplicable to our non-convertible fiat monetary system.  Comparing the federal government of the USA and the nations of the EMU is like comparing apples and oranges.

Dr. Paul implies that we must cut back because we could have a debt crisis like Greece.  But nothing is further from the truth.  We could suffer an inflation crisis, but that’s a very different phenomenon than the crisis Greece is suffering from.  The distinction here is incredibly important and should not be overlooked as a semantic point.  Our government could certainly benefit from cutting back on some unproductive forms of spending so as to avoid potential decline in our standards of living, but to imply that we are somehow Greece or Spain is a gross misunderstanding of our monetary system.

He later says:

“you can’t keep dumping the debt on to people.”

This is another bizarre comment.  Have you ever heard your Grandmother say: “Gosh I wish Uncle Sam would pay off the national debt so I could get rid of my Treasury bonds!”?  Of course you haven’t.  Government bonds are the equivalent of a savings account.  So, when you hear people like Ron Paul talking about paying off the national debt while also complaining about how the Fed is “starving savers” via low rates, you can hopefully see the obvious contradiction in these two comments.

The deficit of the entire government (federal, state, and local) is always equal (by definition) to the current account deficit plus the private sector balance (excess of private saving over investment); see here for a more precise and detailed discussion on this.  The private sector in this country owns over $10 TRILLION in government bonds.  These are safe interest bearing instruments which allow the private sector to save.  “Dumping” debt on the people provides them with a savings account in place of what is essentially a checking account.  Now, this is not an excuse for the government to issue more debt or spend recklessly, but again, he’s making a basic misunderstanding of national accounting by implying that these bonds represent some outside constraint that makes us at risk of some solvency crisis.  There is simply no such thing.

Dr. Paul has been very vocal about massive spending cuts.  Joe Kernan mentions the austerity that is ravaging Europe and Dr. Paul’s response is the standard mainstream austrian econ response.  Kernan says:

“you know, you’re talking about a trillion dollars in cuts in one year. You’re going to immediately hear about, you know, they tried austerity in Greece. It made things work. They tried austerity in the UK and it made things worse. The pain that people would talk about, the american public feeling with a trillion dollars in cuts.”

The pain is relatively easy to quantify given the current economic malaise.  Unfortunately, Dr. Paul misunderstands our current economic crisis so he thinks the cuts are necessary due to the insolvency of the USA that is not going to occur.  He says we need to cut the deficit massively in order to stave off our Greek moment.  But again, this is a basic misunderstanding of irrefutable national accounting identities.  If we review the sectoral balances we can see exactly how the above mentioned accounting identity looks.  What you’ll notice is that the US government is pretty much always in deficit (and we have been since inception).  This is because, as the currency issuer, they must make the currency available to its users before they can ever use it.  So the government’s deficit is the non-government’s surplus.

So what happened when the “fiscally responsible” Bill Clinton decided to balance the budget in 1999?  We can see exactly what happened.  You’ll notice that he literally starved the private sector.  As a current account deficit nation, our budget deficit failed to offset this leakage and directly contributed to the private sector’s deficit.  This forced the private sector to tap into the banking system as their ATM in an attempt to maintain their standard of living.  What ensued was one of the great debt bubbles in modern history and one of the worst periods of economic growth in American history.

What would a $1 trillion cut do to the US economy currently?  Well, we know that the sectoral balances must add up to zero ((I – S) + (G – T) + (X – M) = 0).  And we all know the private sector is suffering extraordinary weakness on the back of this massive debt bubble as they de-leverage.  The USA runs a current account deficit so the math is very straight forward.  If all three sectors try to “tighten their belts” at the same time the economy will contract.  If we assume continued weak private sector growth, continued current account deficits and a $1 trillion cut to the budget deficit in the coming 12 months my growth model looks like this:

I hope it’s becoming clear to the reader why austerity is pulverizing many of the EMU nations.  They are suffering this same sort of rare recession where all three sectors are “tightening their belts”.  Except, as currency users, EMU countries are unable to counteract the effects of their trade imbalance and solvency constraint.  It’s a total disaster.  The EMU is an incomplete monetary system without sovereignty.  In this regard, it is similar to the gold standard and it is failing for the same exact reasons the gold standard failed (trade imbalances leading to solvency constraint).

Now, in fairness, Dr. Paul likely wants to see some retrenchment.  As an Austrian economist he thinks the market should “clear” its excesses.  But what excesses are we experiencing (aside from the obvious private sector debt excesses)?  I hope I’ve already conveyed the message that we don’t have excess debt (there is simply no such thing for a sovereign currency issuer).  So perhaps he believes we are suffering from an inflation problem (even though headline inflation is in-line with its historical average and core inflation is running well below average)?   Either way, it seems as though his message is not being portrayed in a light that accurately reflects the realities of our modern monetary system.

In fairness, I should add that Dr. Paul makes some excellent points in this interview.  Specifically, he says:

“sometimes the government spending is actually a negative.”

100% accurate.  A printing press and monetary sovereignty does not give the USA the right to print in excess of our productive capacity and effectively reduce the overall standards of living of the citizens.  But we have to understand that government spending is not always evil.  In fact, as the currency issuer, some level of deficits (I prefer tax cuts to spending) are necessary at times.  Furthermore, we must ignore these debt warnings.  They are just flat out wrong.  If you want to make the inflation or hyperinflation argument then let’s hear it.  But scaring people about debt because of your misunderstandings of the workings of the EMU or the USA is a grave injustice to your listeners.

He continues:

“certainly I do defend those who have their head turned –screwed on right and say, yes. We’re sick and tired of the bailouts. And when corporations and banks get held at the expense of the middle class.

the poor are getting more numerous and the wealthy are getting wealthier. And they have a reason to gripe about that. But it’s not because the few are productive. It’s because the system is designed to help those who made how to lobby washington and get either regulation or the tax code written in their favor.”

I agree 100%.  We should not be angry at our great innovators and wealth accumulators.  We should be mad about the 0.15% of our population who trade financial products like hot potatoes and create systemic risk leveraging government money for no public purpose.  And we should be furious that these banks have been bailed out with more government money in order to sustain this unproductive business.  I could care less if private companies want to run speculative businesses, but the banking system in this country cannot be poisoned by greedy profit motives that lead to excessive leveraging of the system and increases overall systemic risk by causing contagion in the private banking system.

Dr. Paul makes some really excellent points in his discussion this morning, but we have to better understand our modern monetary system before we can move forward with policy prescriptions that will increase our standards of living and help get this country out of its current rut.

* See the full interview here:



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.

More Posts - Website

Follow Me:

  • VolTrader

    Monster piece. The Paulites won’t understand it though. They have too much invested in their political views to be convinced that the USA isn’t bankrupt and in need of a new gold standard.

  • dimm

    I fail to grasp why you refer to him as Dr. Paul (medical degree, not relevant to the anything he talks about) and fail to mention the relevant credentials of many others.

  • F. Beard

    I could care less if private companies want to run speculative businesses, but the banking system in this country cannot be poisoned by greedy profit motives that lead to excessive leveraging of the system and increases overall systemic risk by causing contagion in the private banking system. Cullen Roche

    Please explain to me why the banks are not 100% private? What makes them special? Does government need banks? No it doesn’t. Then why the heck should some, the so-called “credit worthy” be allowed to steal purchasing power from everyone else via government privileges such as a lender of last resort (the FED), legal tender laws for private debts, government deposit insurance, etc. ?

    Why in a supposedly “free market economy” is the most important component, money, produced by a government enforced cartel?

    And if all government privileges for the banks were ended, is the free-market so incompetent that it could not create its own money solutions?

    And if we truly had a free market would we be facing another Great Depression?

  • Adam

    Speaking of Clinton, I understand his “crowing” about the surplus was stupid.

    That said, was there anything he could have done to avoid a surplus.

    He had the luxury of two bubbles (tech and housing) to make him look good and bring in revenues.

  • Different Chris

    Agree on all accounts.

    Truly epic piece. The thinking of a most Ron Paul followers is so deeply ingrained that it is difficult for anything else to get through. You can get through one day, have them understanding what you’re saying, and the next its all out the window and they are mentally re-trenched.

  • F. Beard

    And then there is the 99%. What the heck kinda of system screws 99% of the population? Fascism? What else?

  • Cullen Roche

    Whose credentials do I fail to mention?

  • Cullen Roche

    He could have understood national accounting and not allowed Congress to bull doze us into surplus. Irrefutable accounting identities are pretty easy to understand. Even for the most ideological of politicians….

  • Different Chris

    I’m definitely not in the 1%. Not by a long shot. And I don’t feel like the system screwed me.

  • F. Beard

    And I don’t feel like the system screwed me. Different Chris

    Wait a bit longer. A shrinking pie will not be pleasant for anyone.

  • dimm

    Usually the people you disagree with.
    He is a Research Professor in Economics which is relevant, vs Dr Paul which is irrelevant. Krugman is another example. There are others of course.

  • Adam1

    Great piece Cullen!

  • Ben Dover

    It is true that the US gov. has the option of a quasi-default via inflation instead of a formal default. But in either case, the people who loaned money to the government are going to be very unhappy. Perhaps most people in the US wouldn’t be too upset if the Chinese and Japanese lost a large part of the value of their Treasury investments. But there is also a lot of pension fund money tied up in Treasuries, so these people would be very unhappy.

    In addition, inflation would destroy the value of long term muni and corporate debt, so even people who never purchased a single UST would also be impacted. In that sense, quasi-default by inflation is even worse than a traditional default.

    Either form of default would be a very painful event, and the best way to avoid them would be for the US government to balance its budget. But unfortunately, the chances of this happening are probably even less than the chances of Ron Paul being elected president.

  • Pierce Inverarity

    You think he disagrees with Bill Mitchell?

  • John Wilson

    Perhaps thoughful people find that a government perpertually in deficit, would finally have to “pay the piper”, as an individual certainly would if he abused his use of debt. Realising, of course , that extrapolating personal budget beliefs to the government sector , is simplistic and wholely inappropriate, it does, however, concern me that such seemingly perpetual deficits violate, not only the Austrian idea of “clearing excesses” but also the Keynesian belief of running deficits ONLY in times of recession or depression.
    Since the value of the US dollar, in terms of a 1913 dollar, is now only a few cents, in keeping with the history of all currencies, I still believe that there will be long term negative consequences , for such irresponsible fiscal policies.
    The dilemma seems to be if austerity is not the answer, and continuation of current policies result in some different negative results, then we’re damned , no matter which discipline we believe to be correct.
    I certainly agree that the European situation is very different to the US one.
    I revert to my contention that the most massive economic bubble in history will, inevitably be followed by the greatest bust of modern times.

  • Michael Covel

    Cullen, one of the easiest to understand pieces you have put out. I think having a story, in this case Paul’s, gives you case to make your story (i.e. the contrast). Easier to absorb for laymen over pure theory.

  • quark

    A percentage of the 1% shaped the rules then all of the 1% and more took advantage of the rules. You could guess by which industries they own and how the rules were changed to benefit those individuals to get a rough guesstimate. I would speculate that it is a large percentage if not all of the 1%. I’m afraid it is in their nature.

    So now it is time for the 99% to take back control and set the rules they feel are just. I believe it is to everyones benefit that this happens while everyone is still sane.

    If those weatlhy individuals who will be affected by this change resist for too long I feel the change will be more adverse to their wealth than if they were to accept the fact that they must give back influence and weatlh for the advancement of our society.

    I don’t hold out much hope.

  • dimm

    Ooh yeah. E.g. ELR

  • Jan

    Fractional-reserve banking is one of the flaws of the actual banking and monetary system. It allows private and/or public bankers to leverage without risking a penny. I’m surprised MMT hasn’t targeted this issue yet.

  • dimm

    It is frustrating when reality refuses to subscribe to theory(in this case the Austrian school of thought). Of course reality is wrong as we all know. /s
    Keynesian policies were not followed, so no violation there. In fact China shows they do work.

  • jswede

    >>So what happened when the “fiscally responsible” Bill Clinton decided to balance the budget in 1999? We can see exactly what happened. You’ll notice that he literally starved the private sector. As a current account deficit nation, our budget deficit failed to offset this leakage and directly contributed to the private sector’s deficit. This forced the private sector to tap into the banking system as their ATM in an attempt to maintain their standard of living. What ensued was one of the great debt bubbles in modern history and one of the worst periods of economic growth in American history.<<

    so if I'm understanding MMT 101 correctly, this would be viewed as a contraction in vertical money, and a horizontal expansion?

  • Delta Financials

    To be fair, a big part of what Ron Paul wants to do is overhaul the monetary system. I haven’t read the details of this proposal – but from what I understand part of the proposal includes legalizing gold and silver as legal tender to create a competing currency. IF that were to happen, it would essentially change the basis of money itself and MMT would lose its descriptive ability.

    I agree that Ron Paul often criticizes the system from an Austrian understanding which says nothing about timing. On much broader philosophy, though – he is right and his political message is to my mind a very, very strong one. Expanding the money supply works on aggregates but it works against the basis that free markets use in determining ‘reward’ and it skews it in a direction that the rich get richer and the poor get poorer.

    I like Ron Paul’s message. I’d rather have capitalism than corporatism and that’s essentially the message behind End the Fed. There is a danger in applying Austrian school principles to a world that doesn’t shift towards a different monetary system, however. But hey = 15% corporate tax rates + repatriation will be very, very significant. I think the plan is actually a lot less ‘dangerous’ than I expected it to be.

  • Options Trader

    Very aptly put, Cullen.

  • Colin, S.Toe

    During the Clinton era, I did not understand the role of federal ‘deficits’ as elucidated by MMT. I still felt he did this mainly on the backs of working people – which then set the stage for Bush’s tax cuts for the wealthy. Ir seems like the political forces behind these trends went beyond the narrow financial sector.

  • F. Beard

    but from what I understand part of the proposal includes legalizing gold and silver as legal tender to create a competing currency. Delta Financials

    That’s pure fascism. There should be no legal tender laws for private debts and as for government debts, only inexpensive fiat should be used.

    We need separate government and private money supplies is the bottom line per Matthew 22:16-22 (“Render to Caesar …”).

  • Different Chris

    I’ve been waiting 3 years, Beard.

    And the only thing that makes me feel screwed is my generation (26 yo).

  • Cullen Roche

    Oh please. I am not onboard with a full blown ELR to the extent that Bill likely wants, but I have repeatedly said I am in favor of some form of ELR (albeit in some smaller form than Bill wants). To imply that I broadly disagree with Bill is utterly absurd. Sure, we might not be kindred spirits, but your comments are just absurd. I am sorry that you think I have disrespected your high priest of finance, Paul Krugman, by calling out his numerous mistakes. Get over it.

  • Neil Wilson

    The easiest way to deal with this is to point out that the US has hardly any public debt.

    That’s debt that has to be repaid in terms of future work an energies, ie liabilities denominated in a liability it doesn’t control.

    Everything else is a mere liability. An accounting construct that can be eliminated with a mere accounting journal. Yes a few electrons will be momentarily inconvenienced, but that’s hardly a reason to destroy the livelihoods of millions of people.

    Reframe the debate. Point out the mere liabilities. And then concentrate on the real problem facing the US – the colossal amount of private debt in the system that needs to be brought under control.

  • Sig

    “Mentally re-trenched” because they want change. Touting economic theory that no one but a few Mensa candidates understand is about as useful as pissin’ in the wind. Talk about mentally re-trenched.

  • Cullen Roche

    Talking about reform is very different from the way he mischaracterizes the current system to try to scare people into believing the system needs to be reformed into what HE BELIEVES it needs to be reformed into…..

  • G H

    In your videos, you claim that for banks “loans create deposits, not the other way around.” Could you please explain this? How can a currency user (the bank) give a loan unless they have capital in their accounts to do so?

  • F. Beard

    I’ve been waiting 3 years, Beard. Different Chris

    1941 – 1929 = 12 years. And aren’t we in danger of a “lost decade”?

    And the only thing that makes me feel screwed is my generation (26 yo). Different Chris

    Yes, that is sad. Particularly since GD II and maybe WW III could probably be prevented with a bailout of the entire population and fundamental monetary reform. Or maybe we’ll muddle through anyway.

  • F. Beard

    I wonder how much banks could leverage their capital without the FED and other government privileges? I recall reading that it would be about 2-1. And the larger the bank, the more it could leverage since there would be less probability of its liabilities being redeemed by competing banks.

  • G H

    I still don’t understand. When you say “the loans literally creates a new deposit in the banking system,” are you meaning that when they buy things with that loaned cash, the cash eventually flows back into the banking system? Thereby creating a deposit in some other bank?

    A loan is a bank asset and customer liability and a deposit is a bank liability and a customer asset. So the reason the loan is made first is because if the deposit existed first, the bank’s equity would be negative?

  • Different Chris

    If we enter a lost decade or decade + I still do not blame the 1% or the system and claim they are screwing ‘me’ (the other 99%). Don’t mean to go super political here (I’m a registered independent) but the Occupy protests mostly sicken me as I personally know many people attending and supporting them. My FB and twitter streams are awash with the entitlement my peers feel. Sure, they mask their entitlement with disgust for Wall Street which is in and of itself not missplaced. But the fact is they could be occupying homesless shelters, food kitchens, after school programs and the like with the same message. They could create a positive result and keep the screw the evil 1% mentality. Instead they continue to sit sitll for their support hoping to get a free Radiohead concert out of it. Ok, rant over, sorry for that.

    “Yes, that is sad. Particularly since GD II and maybe WW III could probably be prevented with a bailout of the entire population and fundamental monetary reform. Or maybe we’ll muddle through anyway.”

    Don’t know about you but I’d prefer the muddle through.

  • F. Beard

    It’s this simple and this outrageous: In exchange for your promise to repay (if you are “credit-worthy”) the bank goes to a keyboard and adds money to your account balance. “The loan has created a deposit.”

    Slick, eh? But where does the purchasing power for the new deposit come from? Ans: From every other money holder including and especially the poor who are usually not considered “credit-worthy”.

    Banking is socialism for the rich, otherwise known as fascism.

  • Cullen Roche

    Reserve balances don’t finance lending.

  • Pierce Inverarity

    Beard, you’re clouding an operational, and educational discussion here with your politics. Can you please pipe down for a minute while Cullen helps G H out? The actual mechanics of bank operations are tricky and important for full understanding of MMT. Thanks.

  • dimm

    I know you like him. That is why I mentioned him.
    Dr. Paul is just Paul as far as economic policy is concerned. Bill Mitchell is Dr Mitchell, whether you have a personal friendship with him or not.
    Of course this is your blog, so you can choose to be respectful to whoever you want. I’m sorry if pointing that out is silly and irrelevant.
    Again, if you’d like me to stop posting I’ll respect that.

  • F. Beard

    Don’t know about you but I’d prefer the muddle through. Different Chris

    Rather than justice and reform?

    It should be obvious that if the banking system doesn’t kill a lot of us this time that it eventually will.

  • Pierce Inverarity

    Here’s Mosler’s definition, from Cullen’s piece on horizontal/vertical money: “When banks create money by extending credit (loans create deposits), this occurs completely within the banking system and results in a liability for the bank (the deposit) and a corresponding asset (the loan). The customer has an asset (the deposit) and a corresponding liability (the loan). This nets to zero.”

  • Different Chris


    By mentally re-trenched I mean that they have done a reversal. I have had multiple conversations with ardent Ron Paul supporters and I can get them to agree on basic ideas in MMT. The next day, THE VERY NEXT DAY, everything has gone out the window and it back to the rhetoric for them. That doesn’t sound like change.

    Also, any and all Mensa International members would probably be insulted by your comment based solely on the fact that I can wrap my rudimentary mind around the basic levels of MMT.

  • Cullen Roche

    Oh stop it. No one is asking you to stop posting. And no one means any disrespect by forgetting to mention titles. You’re wasting our time with this nonsense.

  • F. Beard

    and educational discussion here with your politics. Pierce Inverarity

    So a concern for ethics is “politics”?

    But sure I’ll pipe down. I’d really like to know myself how the banks get away with 20-1 leverage.

  • Different Chris

    “Rather than justice and reform?”

    No, rather than GD II and/or WWIII, the options you mentioned in the post I was responding to.

    We have had chances for justice and reform and we probably will again in the future. With or without them we should have the ability to muddle through which shows some inherent strengths.

    I want the Just and Reform. I don’t want them via GD II or WWIII.

  • Delta Financials

    He’s perhaps guilty of exaggerating the problem – but he is right on what accumulation of debt does to the system. In fact, he approaches it exactly the right way because he talks about it as a currency and monetary SYSTEM issue. You can criticize the Austrians for not appreciating how this system works (which makes their timing laughable) but you can’t criticize them for not understanding how economics works.

    I understand how and why QE does not create inflation now. But, that’s a transmission mechanism issue. There is no sustainable path out of this – it’s a choice between a prolonged malaise and stagflation. Or if they really lose their heads, hyperinflation. So, to say that the currency is what’s flawed – is, to my mind, accurate. MMT is descriptive, not prescriptive.

    His description of the current system isn’t through MMT and there’s no reason for it to be – because he’s making a broader philosophical point about the monetary system, economic well being and the role of government. It isn’t the role of politics to present intellectual descriptive arguments on how the system works, – it’s the role of politics to present philosophical arguments for how the system can be improved/reformed to enhance the general welfare. Which is what he’s doing. So I have no beef whatsoever with Ron Paul or anyone who chooses not to use MMT to tell us how they want to create a new society.

    Re: gold and silver. I don’t much care for the gold standard, but competing currencies is an intellectual tickle. Any thoughts on that, Cullen? Ron Paul’s understanding is that a currency that does a better job of preserving value will attract people and that’s the instrument you use to phase out the Fed. I think the argument is flawed, but the notion of competing currencies itself is an interesting one. Thoughts?

  • Different Chris

    G H,

    When the bank loans me money to buy a car. I take the money and buy the car. The person/entity I bought the car from DEPOSITs that money in their bank (might be the same bank, might be a different bank- doesn’t matter, we are talking about the private banks as one large balance sheet here).

  • G H

    Ok that makes sense from an idealistic point of view, but how does that reconcile with a bank’s balance sheet?

    WFC’s 10-K is here:

    They have just over $800bn of loans and $850bn of deposits. Based on your statement, this mean that they may or MAY NOT have $800bn of their customer’s cash in their “vaults” to match the $800bn of loans. They could, for example, have only $100bn of their customer’s cash and the remaining $700bn be just accounting tricks?

  • Different Chris

    G H,

    The way that accounting is being displayed does not show the liabilities created that correspond to those $700bn.

  • Cullen Roche

    But his description is inaccurate and it leads him to say things like “we need to cut the govt debt or we’ll suffer a debt crisis”. That’s just flat out wrong. His misunderstanding leads to bad policy conclusions.

    You can’t have a sovereign currency with competing currencies. In other words, if you can pay your taxes with gold then why would anyone accept USDs? If the US govt wants hyperinflation in the USD and to crash the savings of their citizens then they should make gold a competing currency. If they want to restrict growth and cause currency imbalances via foreign trade then they should reinstate the gold standard. Both are bad ideas in my opinion….

  • Pierce Inverarity

    They say they have $850 in deposits, I’ll take them at their word for the purposes of this discussion and the fact that they’re audited regularly by the FDIC and SEC.

    How those deposits are composed, you’d have to dig down further, but generally on the 10-k you’ll find them broken out into demand deposits, savings accounts, certificates of deposit and hard currency holdings. There could be more, but regardless, I’d say 95% of any bank’s balance sheet is comprised of digital deposits, not hard cash in vaults–but it’s the same to the balance sheet either way.

  • F. Beard

    You can’t have a sovereign currency with competing currencies. In other words, if you can pay your taxes with gold then why would anyone accept USDs? Cullen Roche

    Yes, government money should only be issued by the government. Nor should it be made of expensive materials. However, it should and need be only legal tender for government debts, not private ones.

    The only place for competing currencies is the private sector. There various private currencies could compete with fiat for the paying of private debts.

  • Greg

    I dont feel the system screwed me totally either, I am in a very enviable position, but your comment reeks of “I got mine,
    f–k you!”

    The fact that the average working stiff, which I am not, has gotten screwed the last few decades should make us all mad. We supposedly are a country that rewards hard work, not just good fortune with speculative bets. I am in a field, health care, that pretty much rewards you for more and better quality work, but too many do not.

    I like my community better when there arent restaurants and bookstores closing because of lack of customers. I like it better when people are employed and working towards a future. I have a son and soon to be grandchild and I want him to have a community that is much like the one he grew up in, vibrant and active. It is deteriorating at a steady pace and our idiot Tea bag politicians of this state want to inflict more pain simply because they can (Under the guise of “we have to”) Firing teachers hurts students and hurst businesses that those teachers frequented. Its idiotic. Not that a constant look at how we do things in EVERY field isnt warranted, but this all out assault on middle class is criminal.

    Go OWS! Go OWS! Go OWS!

    Until Dylan Ratigan gets his way and until bankers are placed in their proper role in society (NOT as the arbiters of everyones welfare) we are screwed!

  • beowulf

    Just like the Navy has two kinds of captains, the rank equivalent to an Army Colonel and the courtesy title for the commander of a vessel, doctor has two different meanings. In the German sense (the PhD degree originated in Germany), it means a scholar who has completed his apprenticeship, and completed the requirements necessary to be recognized into the ranks of the scholarly guild. In the British sense, doctor has the courtesy title long before MD degrees even existed (to this day, British doctors receive a bachelor degree, not an MD).

    Physicians use the courtesy title Doctor professionally and socially (excepting those women doctors who prefer to go by “Mrs” socially). Scholars with the academic rank of Doctor use their title professionally but not socially (that is, outside their profession). I believe most newspaper style books follow this practice.

  • jswede

    @Pierce: I think Beard’s statement is the most helpful/clear part of the discussion.

    >>It’s this simple and this outrageous: In exchange for your promise to repay (if you are “credit-worthy”) the bank goes to a keyboard and adds money to your account balance. “The loan has created a deposit.”<< – F. Beard

    this gets to the crux: the bank can 'create' these deposits by issuing loans, their only limit being the ratio of capital to balance sheet. that is, they are capital, not reserve (deposit), constrained.

    it also happens to jibe with your Mosler quote.

  • Greg

    I agree that 99% of the people havent been screwed, but there is no doubt that the will of less than 1% carries more weight than the remaining 99+% and THAT has to change. I’m sure most OWS protesters would willingly admit that they are better off here than a lot of people world wide, but they also know that the last few decades have NOT been positive for most people. We are being pushed into wasteful senseless wars by our leaders while ignoring true human rights issues on many continents, we continue to chase scarce energy resources, enriching a few while ignoring the unlimited potential of many renewable energy sources.

    Something has to push this system over the edge to major reforms. The Tea Party is a sham republican power base front group ( ala Denninger, a leader in that movement early on) so our next hope is OWS.

    Go OWS! Go OWS! Go OWS!

  • Rick

    (1) Banking system: The bank can make a loan and refinance it by borrowing from other banks. No need for a deposit. But there is a limit to this. If the bank has a big gap, other banks will ask higher interest rate. At some point if the bank continuous doing this without getting enough deposits to lower its leverage, the bank fails because it cannot refinance its gap (assets – liabilities).

    (2) About the debt crisis. I am not sure Mr. Roche (who I admire for his boldness and knowledge) told the whole story. As debt increases it puts an upward pressure on interest rates and the currency is devalued. This is why Ron Paul is talking about cuts. This is not an issue of default here. default and solvency is a red herring I am afraid. When the currency is devalued, purchasing power goes down and imported inflation rises. In addition, if the currency is a reserve and many commodities are priced based on it, commodity and energy prices rise and this can lead to a consumer debt problem because of inability to repay loans.

    Thus, debt of a currency issuer is of course no problem for solvency but solvency is a red herring. The real issue has to do with the imbalances created by excessive debt that can lead to situations that are worse than insolvency.

  • Cullen Roche

    I don’t deny that there’s an imbalance, but I think this message has to be very precise in its delivery. We should celebrate our great innovators and producers who amass great wealth. And we should tear down those who accumulate great wealth, take golden parachutes and rape the system before their failed firms are bailed out…..

  • Cullen Roche

    Deficits actually put DOWNWARD pressure on interest rates. When the govt spends it results in reserves in the banking system. If the govt does not remove these via open market ops or tsy sales then the reserves will be traded amongst the banks in the overnight market as they try to rid themselves of them. This puts downward pressure on the rate. The Fed has to manipulate rates higher in order to achieve a positive FFR. Hence, the natural rate of interest is actually ZERO. Just look at our current situation. If the Fed wasn’t paying IOR and allowed all those reserves to drive rates down the overnight rate would be 0%…..

    This is the same thing Bruce Krasting said the other day. It’s a common misunderstanding of modern banking and it feeds the “crowding out” myth. Japans put the kabosh on that one decades ago….

  • beowulf

    “Dr. Paul makes some really excellent points in his discussion this morning, but we have to better understand our modern monetary system before we can move forward with policy prescriptions that will increase our standards of living and help get this country out of its current rut.”

    There’s no shifting Ron Paul on monetary issues, which is too bad, I’ve always liked the guy. The way I figure, his reputation for honesty and integrity is a product of zealous strength of his goldbug beliefs. A less crazy politician would have been corrupted years ago. If you’ve read the Robert Harris’s latest novel about ancient Rome, Conspirata (what, you haven’t? Go read Imperium then Conspirata), the fearless, stubborn old senator Cato really does come across as the Ron Paul of his day.

  • Adam

    “But in either case, the people who loaned money to the government…”

    Please familiarize yourself with how the monetary system ACTUALLY works. It is operationally impossible for the monopoly supplier of the currency to borrow money if the Central Bank is doing its job of being protecting the payment system that underpins the banking system.

    As a general start try…

    “Either form of default would be a very painful event, and the best way to avoid them would be for the US government to balance its budget.”

    Again, please familiarize yourself with how the system REALLY works. Trying to balance the budget is more likely to bankrupt the private sector which can go broke than it is to actually balance the budget.

  • beowulf

    Speaking of Robert Harris novels, his next book takes place in the financial world, and it involves an unusual trading system that some hedge fund or another will be inspired to reverse engineer.
    The Fear Index, based in the brutal world of high finance, is described as a chilling contemporary thriller and involves a scientist who invents a super computer to trade on world financial markets and which feeds on fear.

  • Adam

    “… not only the Austrian idea of “clearing excesses””

    You’ll find most MMT’ers have no problem with “clearing the excesses” and actually would like to see the TBTF institutions put out to their insolvent pastures. What MMT says is that you can do it without putting 16%+ of your working population out to the unemployment pasture. There was ZERO reason to allow the banking crisis to disrupt overall aggregate demand and plunge the economy into such a deep recession. The government of a fully sovereign fiat currency is never without fiscal resource to ensure full employment.

    “Keynesian belief of running deficits ONLY in times of recession or depression.”

    That is a gold standard relic that does not apply. A fully sovereign fiat currency issuer has no fiscal constraint which needs to be balanced over the cycle.

  • Cullen Roche

    I was a vocal critic of the bank bailouts. I view debt as having a strong moral code that requires strict adherence. When we allow those around us to defraud us we are diminishing that moral code. This is why we don’t put up with fraud, theft, scams or bailouts. Allowing people to get away with these actions is one of the worst crimes you can commit in our monetary system. The fact that our govt has embraced this is shameful and we should have voted out every single last member of Congress who voted for the bank bailouts.

    I should add that the great bubble was in private sector debt and it was largely due to govt ignorance in running budget surpluses.

    In addition, don’t fall for the whole “the dollar has lost 95% of its value” trick. This is used by people who want to scare you into believing that your life is being ruined by fiat money. But ask yourself if the American std of living has fallen 95% since 1913? Or has it exploded to gross excesses where everyone owns an iphone, a McMansion and two cars? Inflation is misunderstood by the people who propagate this myth.

  • Douglas B

    Spending twice what you earn is long term a train wreck and a major adjustment is sadly needed to regain control of your country. The difference between what you think you do and what you are actually doing at home and overseas is very wide. Wide enough that if the people really understood it , there would be an uprising. The president has little if any power, the internationally controlled banks are manipulating the puppet strings and that explains why they are taking crazy high risks with people’s money and getting bailouts when they fail. I have no problem with venture capital firms taking risks, just don’t pretend to be a safe Bank to park your money in. Cutting spending by half would be a start to the shrinking of Government, but any plan will probably be hijacked by the lobbyists who run rings around your grossly over sized government.
    If a major depression arrives, that farmer in the woods will be one of the best off.
    Interesting times with new horizons arriving .

  • Marc

    so you think that indeed the USA is not issuing YOUs continuously and therefore is not ( and will never be) subject to the market “forces” .

    In other words, the FED controls the markets. Is that so? The FED, just because is a currency issuer, can issue YOUs at will, with no other consequence rather than inflation.

    How simple. Let´s just wait and see if indeed there is a free lunch. At least one. These myth that the FED is in control will burn the investors.

    As soon as the credit denominated in dollars starts to default, the only thing the almighthy FED will have just 2 options: continue to issue CREDIT (NOT CURRENCY, AS YOU THINK) OR DEFEND THE CURRENCY.

    There is a huge difference between the current amount of paper notes (or currency) and the dollar denominated credits or YOUs.

    Your lesson is far from true

  • Rick

    “Deficits actually put DOWNWARD pressure on interest rates.”

    I talked about debt, not deficits. This is another red herring. Debt levels affacts bond yields and future inflation expectations. No way to affact that by deficit spending. The FED had to actually buy bonds to relieve that pressure. This debases the currency with all the negative side effects. Deficit spending lowers short-term rates but causes debt to accumulate and puts upward pressure on longer-term rates and the ability of consumers to replay variable rate loans, credit cards, etc.

  • Adam1

    Most people don’t REALLY understand how fractional reserve banking works and so called monetary experts (economists) perpetuate the misunderstanding.

    Banks do accept deposits and they do make loans, but that does not mean a bank loans out “money”!!!

    At the core of any bank is a payment system. There is a very special “money” or deposit that a bank holds called a “reserve”. All reserves come from the Central Bank (FED). They were either lent into existence by the FED or spent into existence by the Treasury (with help from the FED). There are MORE deposits in the banking system than reserves… hence the name FRACTIONAL reserve banking.

    Reserves are used to clear payments. When you write a check it causes changes in your account and the banks balance sheet. At the end of the day when all checks are cleared final settlements between banks need to take place, these are done with reserves.

    When you ask the bank for a loan, the bank is not loaning you money. The bank is going to hand you a check which it will promise to clear. In reality, you are asking the bank to make a large payment (or series of payments) that you do not have sufficient funds to pay in exchange for a series of smaller return payments (plus interest). The bank agrees and hands you a loan check. It then leverages its payment system to “clear” that loan check. In the process a deposit is made somewhere in the banking system (99% of the time).

    How you ask? When you took that check to say the car dealer he deposited it at his bank. If you and the car dealer have the same bank its just an accounting entry for the bank. They wrote the check, they know the check is good; they wrote it… they increase the deposits to the care dealer by the amount of the check (deposit out of thin air).

    Now had the car dealer deposited the check with another bank, the other bank would accept the deposit on its books the moment the teller hit enter on the system (deposit out of thin air). The other bank now needs to clear the check still. The check will go through clearing and settlement process. The originating bank will uses its reserves to clear the payment. Should it not have sufficient reserves it can find excess reserves on the overnight inter-bank lending market (Federal Funds Market in the US) – and don’t forget the deposit receiving bank now has excess deposits from accepting the check which they can lend. And if all else fails (that 1% of the time from above) they can use existing loans/treasuries as collateral and get loaned reserves from the FED.

  • F. Beard

    The way I figure, his reputation for honesty and integrity is a product of zealous strength of his goldbug beliefs. beowulf

    Yes, but Dr. Paul claims to be a libertarian. What is libertarian about forcing us all to use gold as money?

  • Cullen Roche

    Spending twice what you earn might cause inflation. But it won’t be a long-term train wreck in the manner that Paul implies here…..Important difference.

  • Al Swearengen

    Many people in OWS want some accountability. Financial “professionals*” that profited obscenely doing things they knew were completely unethical, if not borderline criminal, have kept their jobs, their bonuses, their ill-gotten fortunes. Our co-opted 2-tier justice system has just shrugged its shoulders and turned its back.

    Our justice system is 2-tiered because if I sell my house to 30 different people, will the authorities just shrug and let me get away with my illicit gains? No. But that’s exactly what the banksters did with bundling the same subprime mortgage in up in 30+ CDOs in some cases. Then secretly betting against them while touting them, like Magnetar. It was fraud and they would not get away with in a country with one system of justice for all.

    * I use quotes out of respect for the many finance people who act ethically.

  • Cullen Roche

    The fed absolutely can control the rate on bonds. They have infinite reserve balances at their disposal. Being a US govt bond trader, I’ve learned this lesson the hard way at times. The Fed smashed my face into the pavement one too many times and then I learned how the game works. They control the bond market. We just play in their sand box with the sand they allocate to us. If you don’t trust me, try buying govt bonds when they begin to hint at rate hikes and let me know how it turns out for you after they smash your savings to bits and pieces.

    No one said there is a “free lunch”. In fact, I was very clear that there isn’t. Our constraint is always inflation. If you’re hinting at hyperinflation then you might want to read my paper on it. It will change your traditional perspective on the causes of hyperinflation.

  • rhp

    you got it

  • Cullen Roche

    Debt is the accumulation of deficits. Long rates are an extension of short rates. Although, if the Fed wanted to, they could pin the long bond at whatever they wanted to. Then again, the US Tsy could also stop issuing long bonds altogether. It would make no difference.

    If govt debt puts upward rates on bonds (and you think the Fed is monetizing the debt or keeping rates artificially low – both myths) then perhaps you can explain why Japan has 200% debt/GDP and the Japanese govt 10 year is at 1.5%?

    There are some obvious holes in your story which should be making you question whether your analysis is all accurate…..

  • Cullen Roche

    Just wanted to say thanks to everyone for keeping this convo civil and on the right track. I know it’s tempting to get political and derail the topics, but it’s awesome to have such a brilliant group of readers who are not only inquisitive, but informative. Thanks.

  • Pierce Inverarity

    Adam1, this is a great synopsis. Can you, or anyone, opine on whether MMT thinks we should have legal capital ratios caps for banks? Or do we? Would it rein in the financialization of the U.S.? Thanks.

  • Pandora

    RON PAUL 2012!

  • F. Beard

    And if all else fails (that 1% of the time from above) they can use existing loans Adam1

    Potentially crappy assets? Since this is true then the FED is potentially just giving money to the banks, disguised as loans.

    /treasuries as collateral Adam1

    Since the US Government should not borrow in the first place, this should be impossible.

    and get loaned reserves from the FED. Adam1

    So the FED is eliminated on ethical grounds as a source of reserves.

  • F. Beard

    Yes. Nice synopsis. Thanks. So via the inter-bank lending system the individual banks split the interest for the loans they make with each other?

  • F. Beard

    There is a very special “money” or deposit that a bank holds called a “reserve”. Adam1

    Actually, it seems to me that reserves are the genuine money. They can be converted to actual currency (coins and notes) and they are accepted by the US Government for taxes.

    The question is: Why are the banks able to force us into a rat-race with their form of money – so-called “credit”?

  • Pierce Inverarity

    You don’t have to go to a bank for a loan. Banks aren’t the only issuers of credit out there. You can go to your family, friends, or if you’re large enough, you can go to the private marketplace and issue bonds. You can even use a credit card not affiliated with a bank.

  • Chuck Hussel

    It’s important to understand that our views regarding personal control over financial outcomes are largely a product of our environment. See this study:

  • Greg

    Agree Cullen, but something has to drive the conversation to the right starting point. Tea Party aint going to do it, they just want govt “out of the way” and for everyone to just stand on their own. They are also driving the totally destructive deficit/debt mania. The democratic party aint gonna do it. They are just trying to avoid pissing off too many of their donors and get reelected. I think OWS has a chance to make us look in the right place. Is everyone in Wall St/Banking part of the problem? NO of course not, but is banking and Wall St/Banking the right place to look for the problems…… yes indeed.

    As most of us know here its our monetary system that is totally screwed up. Simply because the people in charge of it are operating out of a flawed paradigm. The responsibility for the state of our monetary system starts with banking, next is Wall St and investment firms and lastly (But only slightly less culpable) our govt. Now it could be argued that gove has put itself in third spot by selling out to the other two and therefore it is most culpable because they sold out the people….. I give that argument a lot of credence but the first two to reform NOW are banking and Wall St.

  • F. Beard

    You can go to your family, friends, or if you’re large enough, you can go to the private marketplace and issue bonds. Pierce Inverarity

    Yes, people can borrow EXISTING money outside the banking system but what the banks do is CREATE money (so-called “credit”) as they lend it. That is altogether different. How is what the banks do any different than a counterfeiter who lends rather than spends his “product” into circulation?

    Further, if I borrow $20 from you and pay it back that $20 remains in existence but if I borrow $20 from a bank and repay it, the $20 ceases to exist!

  • pat

    Hi Cullen,

    Great fodder for the mind… I get the macro picture of MMT, but drilling it down into specific details, gets quite overwhelming.
    I went to amazon for books by Wynne Godley. “Monetary Economics” is about the only one to choose from.
    Any recommendations
    I have to say many intelligent, and widely know people have stated their concerns of our debt problem, and the future fallout thereof. So far their fears have cost them time and money in investments.
    Getting it right is essential for me.

  • Jo

    Uk AAA, Germany AAA, France AAA USSA? Not so much.

    Case closed.

    Oh, sorry, my bad, they don’t understand either.

  • Greg

    “In addition, don’t fall for the whole “the dollar has lost 95% of its value” trick. This is used by people who want to scare you into believing that your life is being ruined by fiat money. But ask yourself if the American std of living has fallen 95% since 1913? Or has it exploded to gross excesses where everyone owns an iphone, a McMansion and two cars? Inflation is misunderstood by the people who propagate this myth.”

    Thank you for saying this Cullen. I agree totally.

  • Cullen Roche

    Hi Pat,

    Have you read my primer? Seen the videos? Warren Mosler’s book is free online. There are many links at the bottom of my primer page. Let me know how I can help. I’m sincerely here to help so I am happy to do so. Especially for people willing to put in the effort on their own.

  • Ben Dover

    I am quite familiar with how the system works. After my great-grandfather died in the 1960’s, my great-grandmother sold their house, “invested” the proceeds mostly in US Treasuries, and moved into a small apartment, planning to live off the interest. It worked fine until the inflation of the 70’s caused food, rents, clothing, electricity, telephone bill, and pretty much everything else to increase in price by several times. Her small fixed income pension and interest payments were no longer enough to pay for food and rent and I don’t know what she would have done if my parents and grandparents hadn’t stepped in to help her.

    And my great-grandmother was not an isolated case. Several of her friends ended up in a similar situation. Being old and poor with your money running out is a terrible situation. Inflating away the debt would create massive pain for retirees, just as it did in the 70s.

  • Different Chris

    I have the same problems with Wall Street they do.

    I don’t have any idea what they hope to accomplish by literally doing nothing.

  • Different Chris


    I make $42K a year in the NYC area. I work in an industry that is neither my passion not my education.

    I do not eve remotely feel like “I got mine”

    I work hard everyday to try to get mine, and to try to get a job I would care to do and generally be passionate about.

    Every year I give a considerable amount of the small amount I have saved to organizations that benefit the homeless.

    I am more than vaguely insulted by your “read” of me.

  • Somnolento

    I wish you weren’t such a coward on this site.

  • Marko

    “What would a $1 trillion cut do to the US economy currently? Well, we know that the sectoral balances must add up to zero ((I – S) + (G – T) + (X – M) = 0). And we all know the private sector is suffering extraordinary weakness on the back of this massive debt bubble as they de-leverage. The USA runs a current account deficit so the math is very straight forward. If all three sectors try to “tighten their belts” at the same time the economy will contract.”

    I think it would be very useful to illustrate the math that leads to economic contraction in the case described here. Too often , MMT proponents rather breezily claim that the private sector and the public sector can’t deleverage at the same time. That strikes perfectly sane and rational people as illogical , because any sector can simply refuse to spend , if they so choose. Showing the detailed math of how it CAN happen , but with the result being shrinking GDP , would go a long way toward making MMT more understandable and less counter-intuitive , IMO.

  • Dan G

    Your statements imply that some of the other canidates and their followers understand mmt bette?. Regardless Paul’s understanding of the economy, and the changes that need to occur are still far superior than any other canidate. Does not mmt “theory” draw a connection between creating inflation, enriching bankers, and degrading the standard of living for the middle class; Or do most mmt proponents think that the inflation numbers put out by the goverment are really accurate.
    The whole system needs to be revamped. The federal reserve should be ended. It is a massive conflict of interst that a private bank has been given this much power.

  • Ben Dover

    This equation is a truism which always holds. There have been times when (G-T) was near zero, yet at the same time employment was low and business was booming. So to trot out this equation and say: “See, this proves the economy will collapse if government spending is cut!” is not at all convincing. These terms (I,S,G,T,X, and M) all depend on each other and on other factors, so the equation doesn’t really make any detailed predictions.

    Suppose we balance the budget and (G-T) goes to zero. How can you prove that (X-M) would not increase to compensate, creating jobs in the export industry? In fact, Japan and China seem to be purchasing Treasuries for the explicit purpose of boosting their exports to the US. If the US government didn’t sell Treasuries to them, it might very well boost our own export industries.

  • Different Chris

    Didn’t mean to imply that other candidate (or ANY OTHER CURRENTLY SITTING POLITICIAN) does understand or care to understand MMT better. But the topic at hand is Mr. Paul, isn’t it?

  • Different Chris

    If he’s a coward on this site he is most likely a coward in all other mediums of his life.

    I’ve grown to like him. I find him entertaining. Like a small child that runs around a family gathering passionately telling people the world is flat.

  • Different Chris

    Who are you and what have you done with Trixie…..

  • exley

    I totally agree…been ‘discussing’ these very points with a few mensa libertarian folks on various sites…it is like banging your head on a wall…and they get so mensa snooty about it too…gaa

  • hamish

    Also with that “dollar having lost 95% of it’s value” meme, it doesn’t matter if you’ve got 120% more of them now. Only caveat on this is that interest rates should be high enough on your savings to maintain their real value. The value of money is what it can do for you, not the number of digits printed onto it. It makes me think of my visit to Japan, a subway ticket costs say 200yen, which sounds a lot till you notice you have pocket full of 50 & 100 yen coins which you got from changing a few dollars at the exchange window.

  • F. Beard

    It’s the deposit insurance. Without the FDIC and if the government as the monopoly issuer provided a risk-free storage service for its fiat then most people would not use the banks. Hence banks would have tiny reserves. And without a lender of last resort, the banks would not dare extend much credit.

    There it is. The banks screw us because they are privileged by government to do so. Our money system is fascist.

    Well, at least we know the free-market did not fail. It was just a failure of fascism.

  • Cullen Roche

    Yes, the real price of everything is the toil and trouble of obtaining it. Today, I can put my laundry in the wash, load the dishwasher, order dinner and do an hours work all at the same time. Try doing all that back in 1913, let me know how awful your day was and then tell me our std of living isn’t ASTRONOMICALLY higher than it was back then…..

  • Dan G

    Ok, maybe I can sway your vote then. Most of the other canidates flip flop their views unlike Paul. I would rather have an economic savy canidate with integrity like Paul that doesn’t understand mmt than a canidate that does understand mmt, but would like to continue abusing the system by keeping the status quo monetary policy.
    People should keep in mind that mmt is just monetary theory, and no one knows for sure the impact that creating excess credit will have over long periods of time. It is a “modern” theory, and this implies there could be some more unforeseen consequences from credit creation down the road. After all, economics is not really a science.

  • F. Beard

    It is a “modern” theory, and this implies there could be some more unforeseen consequences from credit creation down the road. Dan G

    The solution, as I endlessly repeat, is separate government and private money supplies per Matthew 22:16-22 (“Render to Caesar …”).

    That way, government money mismanagement would not typically hurt the private sector and vice-versa.

  • Pandora

    I’m just amazed I was the first to say it. What’s wrong with you people?

    Truth be told though, it’s because I was hanging out on other posts (THAT SHALL NOT BE MENTIONED) helping to destroy the conversation with talks of islands, trees, pig farms, and countering good old-fashioned “I’m TELLING on you!”…when, just then, I saw a comment on my feed come through from CR thanking his “brilliant” readers for “civil conversation” and not “derailing topics” on THIS post. Being pressed for time, I had to do a quick hit-and-run to buck THAT trend. Perhaps, then, he’ll stop gerrymandering his posts with “Hey, HALF of you, LOOK over there!”

    But? I am moderately confident his OTHER readers were having more fun.

    (Stomps away).

  • hangemhi

    Cullen – you should put this post in your “must read” category…. for the comments. Just when I think I understand MMT I’m having to re-read a number of the comments and research. F. Beard – I don’t understand you half the time, but every now and then you crystalize something for me.

    I asked this on another thread – last I looked it wasn’t answered…. doesn’t the massive Gov “debt” mean there is a massive amount of money in the system? But we’re in muddle through with high unemployment because corporations and the wealthy are sitting on record amounts of cash, so this is just a huge imbalance. Not a lack of spending – just a lack of productive use and distribution to those that would actually spend it. Maybe I’m describing the liquidity trap – no?

    If the above is true (and please correct me if it isn’t) then isn’t it true that there are one of two solutions – 1) re-distribute the money in the system (via taxes or spending incentives to those sitting on piles of cash), or 2) the Gov to spend even more money into the system but in a way that it gets into the hands of those who would actually spend it (and deleverage).

    Obviously you could do some of both.


  • F. Beard

    Anyone? hangemhi

    The entire population, including savers, could be bailed out equally without changing the size of the total money supply (reserves + credit) IF

    1) The banks were forbidden from any further credit creation.
    2) Monthly and equal bailout checks were sent to the entire adult population equal in total to the amount of credit debt paid off the previous month. The checks would continue till all private credit debt was paid off.

    The above would merely replace credit with reserves so it would not change the size of the total money supply.

    So everyone can be bailed out, including the banks, from the bottom up with no serious risk of price inflation.

  • F. Beard

    I should add that since savers would receive equal bailout checks that only a (large?) fraction of people’s mortgage payments would be covered. I have not run the numbers though. Must I do all the work? :)

  • LifelongLib

    I understand it like you do, hangemhi, but like you I’d welcome comments from people who know more than I do.

    One thing about MMT is that it’s very high-level. It looks at things like the amount of money in the private sector, but it seems to me (and I think to you) that who in the private sector has the money, how they got it, and what they do with it are enormously important also. To address those issues it appears you have to go beyond MMT though.

  • Adam1

    Inflation can come from any component of aggregate demand, not just the government. And bad policy is just bad policy no monetary system can prevent that. Under the gold standard during the banking crises of the great depression depositors on average lost 40% or more of their money.

    Inflation is a risk. A fully sovereign free floating fiat currency actually provides the most robust policy options of any currency system known. Its just a matter of implementing good policy and understanding how it works.

  • Dan G

    Its just tht often times I here mmt discussed on your blog, which I have enjoyed for a couple of years, as though it offers predictive outcomes of credit creation today in a positve light for tomorrow without repurcussions. As you imply, it is a description of the monetary system; however the fact that the word theory is in its own description seems to give some contributors the idea that creasting credit is not as bad for the future as some doomsdayers imply. My point: no one knows.

  • Dan G

    The train wreck could and has happened because the assets (RE) backed by reserves were/are overvalued in relation to private median income hat supports the debt.

  • PedroCPAGuy

    “Ben Dover”

    Ben … after all these years … good to see you again.


  • Different Chris


    The problem is that the nature of the recession, being a balance sheet recession. The private sector is overly debt heavy due to a bursting of an asset bubble (housing), leaving balance sheets out of wack. So the problem is that private income previously spent on other things has been diverted to deleveraging. If the private sector were ‘fully’ deleveraged then the ammount of money in the system would be fine. But we need more money in the system now to help speed along the deleveraging process and get to a higher level of aggregate demand.

    Private sector starts spending more, companies receiving that spent money see the increase in demand and higher people to process the additional demand….. its so much simpler than most politicans would make it seen.

  • Colin, S.Toe

    It was easier when she was just being tough and funny.

    Revealing vulnerabilities changes things.

  • Adam1

    Typically in-house deposits pay the least interest (cheapest source of funds for the bank) followed by interbank loans and still higher would be discount window borrowing. Depending on the make-up of the overall sources of funding will determine the banks cost of funds. The difference between that and its lending rates will be approximately the net interest margin income the bank earns.

  • krb

    Great job Cullen! I’ve complained in the past about political commentary within your economic analysis, so when you do a perfect job of apolitically addressing the economic facts in a politicians message you deserve a big pat on the back. Who cares after all, if your solutions are embraced by a republican, democrat or independent, so long as they get embraced by SOMEONE who can make a difference. Again, great job! krb

    PS HW, if you’re out there, this is how I’d prefer it. What do you think? Thx, krb

  • hangemhi

    Thanks guys. I guess what I’m working towards with my question is – does the Federal debt matter or not? Haven’t we already spent too much money – but it’s all locked up in all the wrong places? Or, is there so much household debt that still needs to be destroyed that there really isn’t as much money in the system as we think?

    Additionally, if there is “too much money in the system” or “too much debt” – but it isn’t being put to use – what happens if the Gov spends our way out of this mess so that the average household can de-lever and spend again, and the economy takes off – could the past “debt”, which is cash sitting idly now in the private sector, hit the economy and we have excessively high inflation?

    Down this rabbit hole we go – if that happens, then don’t we need to tax that money out of the system to slow things down?

    This end result of this train of thought is that we have to tax those who have too much money eventually. Either now to redistribute where it will actually be put to use. Or later because we have to slow an economy with too much money.

    Or is this not a problem, the Federal debt really does not matter, and we can allow the super-rich to stay that way and just focus on the average American household?

  • krb


    Careful when going down this road. I can agree that arguing that the dollar has been devalued 95% suggests hardship may be an oversimplification or misleading, but so is the claim that because we have more gadgets and easier lives is also an oversimplification. An honest discussion of the devalued dollar and whether or not our standard living is better or worse needs to take into account many more factors that play a role. Two simple ones, my grandma and mom never had to work out of the home to sustain that era’s standard of living…..and the cost of raising that era’s 5-9 kids is unthinkable in today’s era of 0-3 kids. I’m sure there are other factors that play a role, but I hope you see my point. Thanks though for an excellent piece! krb

  • plain jane

    That part seriously freaks me out, that money repaid to the bank just goes *poof!* I always thought of the debt as being the not-really-money-yet part of the deal, and the payments as being the “real” part.

    I’m trying to explain MMT as I understand it to my husband so he will know that I am not having an internet affair.

    (I think he is starting to wish I was having an affair instead.)

  • F. Beard

    Thanks. So a way to drastically lower the banks’ ability to leverage would be to:

    1) abolish government deposit insurance and provide a risk-free storage service for government fiat. That would take away much of the deposits. Btw, the US Post Office should promote this as a way to save office closings.

    2) abolish the Fed. That closes the discount window.

    That would leave inter-bank lending as a means to distribute reserves. I see no ethical means to eliminate that.

    That would leave banking as it truly is anyway, an inherently risky business for depositors and the banks.

  • Different Chris

    You and I have similar backgrounds in this respect. I know how entrenched they can be partially because I know many of them and have these conversations with them, but also because I used to think many of the same things they do.

  • Winston

    From the article.

    “The only constraint the USA has is an inflation constraint.”

    “If you want to make the inflation or hyperinflation argument then let’s hear it.”

    Given the following, could someone explain if and how this data comports with MMT theory, principles or thinking, if it does?

    The US had double digit inflation in 1979, 1980 and 1981, and yet the Federal Debt as a percentage of GDP in those years was at the lowest in the century at 30%.

    Since then public debt has been on a steady march higher and higher to where it is today at 100%. Private debt has escalated as well during this period to unprecedented levels and basically equals the public debt today.

    Meanwhile, inflation has averaged only 3% during these same years from 1981 to 2011.

  • Peter D

    Winston, high deficit/debt are neither necessary nor sufficient condition for high inflation. That’s all. there are reasons why inflation may arise even when govt spending is very low (cost-push inflation/credit expansion) and at times it would exactly because private sector is short of required savings (due to low deficits) that it would turn to credit bubbles and cause inflation.
    Here is a great read on what does and does not cause inflation:

  • F. Beard

    there are reasons why inflation may arise even when govt spending is very low (cost-push inflation/credit expansion) Peter D [bold added]

    So if the banks were unable to extend much “credit” that would eliminate one price inflation mechanism?

  • F. Beard

    and we can allow the super-rich to stay that way and just focus on the average American household? hangemhi

    That’s the way I would do it. Increasing taxes during a depression is not wise.

  • Huckleberry

    Two simple questions:

    Paul says he wants to eliminate the Department of Interior. The Department of Interior, among other things, manages the National Park System, and provides firefighting services on over 200 million acres of land.

    If Paul is elected, and does what he claims he wants to do, what will become of, say, Yellowstone National Park? And who will fight wildland fires on those 200 million acres?

  • Different Chris

    “Additionally, if there is “too much money in the system” or “too much debt” – but it isn’t being put to use – what happens if the Gov spends our way out of this mess so that the average household can de-lever and spend again, and the economy takes off – could the past “debt”, which is cash sitting idly now in the private sector, hit the economy and we have excessively high inflation?

    Down this rabbit hole we go – if that happens, then don’t we need to tax that money out of the system to slow things down?”

    That’s pretty much it. To the final part- Warren Mosler sometimes refers to it as the economy running ‘too hot’ so it needs to be ‘cooled’ by higher taxes. Same idea.

    “This end result of this train of thought is that we have to tax those who have too much money eventually. Either now to redistribute where it will actually be put to use. Or later because we have to slow an economy with too much money.”

    I personally don’t agree with any kind of redistribution and can also tell you that MMT does not perscribe policy of any nature. Instead it would call for a reduction in spending or increase in taxes or combination of both. I would imagine the best answer depends on the situation at hand.

    I can say for sure that there are plenty of people who may not deserve all the money they have. BUT as long was the acquired it legally I will never be for taking it from them. To me, this is not in line with the good nature of capitalism. If you advocate for regulatory change that would… say.. shrink the financial sector so that it is not unproductively acquiring money (of course this is incredibly difficult) I would not be opposed to that. But redistribution is a slippery slope, in my opinion.

  • F. Beard

    If Paul is elected, and does what he claims he wants to do, what will become of, say, Yellowstone National Park? Huckleberry

    Presumably it would be sold off to the private sector with loans from the counterfeiting cartel to finance the purchase.

    Dr. Paul needs to realize that much of the wealth disparity in the US needs to be reversed before ANY thought of selling off the public commons is considered.

  • Peter D

    “So if the banks were unable to extend much “credit” that would eliminate one price inflation mechanism?”

    Yes, the question is whether it would not cause other problems. I know your stance but I don’t have the answer as to what the perfect banking system would look like.

  • Ben Dover

    Inflation is a virtual certainty when a government chooses to monetize it debts.

    Also, the US effectively left the gold standard in the 20’s when the federal government started issuing gold certificates without having enough gold to back them up. It was this practice which lead to the bank runs in the first place.

  • F. Beard

    Yes, the question is whether it would not cause other problems. Peter D

    Yes, it would be massively deflationary by itself if further credit creation was banned. That’s why I also advocate at the same time an equal (and metered) bailout of the entire population to replace all existing credit as it is paid off with reserves to prevent the total money supply (reserves + credit) from changing.

    I know your stance but I don’t have the answer as to what the perfect banking system would look like. Peter D

    Banking should be no different than any other risk-taking business.

  • Gary_UK

    My quick input to a very interesting article and thread.

    The problem the US will have to face, and pretty soon I believe, is that a country cannot run a perpetual trade deficit without hitting a wall. The US has used its ‘exorbitant privilege’ of having the world’s reserve currency for nearly 100 years.

    The US policy of overspending and printing caused it to devalue against gold several times (as sensible overseas entities chose to take gold rather than US Treasuries). Eventually the tie with gold was broken, the dollar floated, and the US retained its exorbitant privilege til now.

    But even though MMT does describe the system pretty well, in a global context it seems to ignore the thoughts and actions and desires of all of America’s trading partners, who have basically been funding a lifestyle that cannot be afforded for the past 40 years plus.

    Eventually the world will choose not to transact in dollars, and from that moment the US will be forced into austerity. In a global marketplace eventually one has to pay one’s dues. Anyone that believes differently is not living in the real world.

    How will it end? My belief is still that the US will keep socialising the banking losses, turning fake money (i.e. money that was part of the housing bubble, equity that really was never there and has long since disappeared) back into real dollars by saving banks/pension funds asses. The impact on confidence in the dollar will be massive.

    Eventually I believe confidence in the dollar will disappear, and real assets will be sought as a store of wealth, evetually causing a shortage of dollars, and the printing presses to run on overtime, and hey presto that’s your hyperinflation.

    America’s saving grace will be the simultaneous destruction of the paper gold markets, and a global desire to revalue gold against all currencies to rid us of the debt overhang. So, America will settle up with China with some of its gold, but at around $50,000 per ounce (in today’s money).

    We’ll probably have 5 more years of these debates before the final day of reckoning arrives, let’s all hope it ends as I describe, without a shot (nuke) being fired. Somehow I suspect the US will get antse and attack Iran and others, just to prolong matters and distract attention. We will see.

    As I always say, good luck America, the world needs you, but with allof your current problems behind you. The market always forces the issue, resolution cannot be avoided, and the price has to be paid for 40+ years of living beyond your productive means.

  • Cullen Roche

    No such thing as monetizing the debt. You’ve been reading Austrian mythology.

  • Cullen Roche

    Japan puts a mighty big wrinkle in your whole reserve currency theory…..You’ve been claiming that this creates artificial demand for the USD for years now. And your persistently inaccurate (Aurtian) hyperinflation predictions have been largely based on this thinking. But the truth is that there is enormous demand for our currency because we are 25% of total world output. It’s not a whole lot more complex than that. You don’t have to find some reserve currency boogeyman to blame it on.

  • VolTrader

    Cullen, any thoughts on this piece?

    “This gentleman’s premise is incorrect. The US is not a currency issuer; it is a currency user, just like Greece. The poorly named Federal Reserve is the currency issuer. “

  • Different Chris

    During an interview I recently had for a management consulting position, I was speaking with a Director who had done some work with Treasury and Fed. She said that the Fed actually performs the auctions of Tsys. (I’m assuming that she’s right, I am a true layman in this area although I’d rather not be…) That doesn’t exactly sound independent to me.

  • Gary_UK

    Cullen, sorry, but you cannot argue the US is on an even keel in terms of trade. And you cannot argue that the reserve status doesn’t create huge artificial demand for the dollar. If you really honestly believe that is the case you will have gone down in my estimation greatly.

    Your point re Japan is a little obtuse, however perhaps you are hinting that they are in the same boat as the US (minus a reserve currency) but have yet to experience a currency collapse.

    Simple reason…have a look at this link, and as I’m sure you are aware, Japan runs a trade surplus, so they’re ok at the moment. Check out the US’s figures, scary eh? Those big debit figures have to be ‘paid up’ eventually. I don’t know where you get your 25% figure from, but if you’re consuming more than you can pay for in a global context, it’ll bite you eventually.

    Do you realise why the Fed just arranged some pretty big swaps with Europe? Solely because of the reserve status privilege, and a real shortage of dollars in Europe due to a credit crunch. So, yes, that is why there is currently still demand for the dollar.

    And as for my hyperinflation prediction, generally predictions aren’t proven inaccurate at the time they are made. I give the dollar-based system 5-7 years before it is replaced, and that is the timeframe for hyperinflation. I’ll be here when it does!!

  • Cullen Roche

    The current account deficit is roughly 3.5% of GDP. The Fed swaps represent 0.003% of GDP. Do you think you’re greatly exaggerating the impact of these “problems” you discuss? In my opinion, you are.

  • Ben Dover

    Your link merely points to an article that says that the Fed isn’t monetizing debt now. I never claimed that it was.

    By “monetizing the debt”, I mean a case where government spending exceeds the money it takes in from taxes and borrowing. And this is happened many times throughout history.

    What’s next Cullen? Will you deny the existence of Florida?

  • Captain Obvious

    HW here, masquerading as Captain Obvious these days. And yeah, the more I read Cullen’s work, he’s a good egg. I’m glad he was hatched. But don’t expect me to display the same level of maturity until politicians stop looking for jobs in my uterus.

    See? I am natural. :)

  • Gary_UK

    I’d just have a look at the long-term dollar chart on this webpage. It doesn’t really matter whether I’m overstating matters does it.

    The market has hacked 50% off the dollar’s value versus its trading partners since 1985. And yes, I am fully expecting a counter-trend rally back up to 100 or so next year, but the trend is firmly down. It looks even worse over the last 80 years. The bottom will be reached eventually.

    All good things (empires) come to an end.

  • Malmo

    Denninger is a lunatic:

    I wouldn’t waste one second of my time on this obtuse creep.

  • Cullen Roche

    So that’s all there is to it? You cherry pick a range and point out a trade weighted decline in the USD? The one thing we agree on is that the bottom will be reached eventually. We all reach the bottom at some point. The bottom of a coffin. But you’d be a fool to expect the USA to hit “bottom” during our lifetimes. One day perhaps, but you don’t go from being the greatest growth story in the history of man with the greatest innovators and corporations of all-time, to “the bottom” overnight.

    I see great people in this country doing great things every day. The American dream isn’t dead. It’s just on pause. Bet against that at your own peril.

  • VolTrader

    Denninger wrote about you. He didn’t really refute anything you said, but he wrote a lot of words.

  • Gary_UK

    Hardly overnight, it’s going to have taken over 100 years. Feel free to post any dollar chart that shows a strong dollar over any decent period or range you like, if you can find one.

    Britain, my home country, was for many years the biggest player in the world. Look at us now. Same with Rome, Prussia, Italy, Greece. History, it unfolds. Empires end.

    America will sadly reap the rewards of its economic demise, and we will both see it happen. It won’t be the end, as there is no ‘end’, but America will become like Britain. Maybe one day it will be back, who knows. But in its current form it will face its day of reckoning.

  • Dexter

    It’s mostly rambling…but he does say this…

    Nice try Cullen; your explanation is (Bulls**t)

  • Malmo

    Denninger has absolutely no expertise on the subject. He doesn’t even have a college degree. Period. He is rude, crude and vile when he argues. No matter what subject comes up, Fukishima, politics, monetary theory, BP oil spill, etc ad nauseum, Denninger claims to knows more about it that anyone alive. He is a charlatan (and I’m being kind). Don’t waste a minute on him.

  • Cullen Roche

    I’ll take that bet. I am not a little bit bullish on America over the next 50 years. I am rabidly and wildly bullish about America. Come talk to me in 20 years. :-)

  • krb

    Ha! Good one, made my afternoon! Have a good day HW….uuhh….CO! krb

  • Malmo


    Be careful if you link to him from your site. He’s been know to redirect to porn sites if he dislikes your views. Folks should copy and paste just to be safe.

  • Obatalasacrificedmychicken

    The website is just crazy…is that a real fansite or a parody?

    did he really say that if you “poop out a kid” you have to pay for it’s education, or be made to break rocks? Yet he sends his own kid to a public school? WTF?

  • Malmo

    It’s a parody of what he’s actually said at his website. The folks that set the place up were banned at Denninger’s site for merely disagreeing with him. Many of those banned were out $150 that bought greater access to his site. There were no refunds either. There is no one falsehood at The man is nuts.

  • DanH

    He’s hoping you’ll respond and link to his site. This is how he generates traffic by attacking popular authors. His tactics are dirty and he will essentially smear you rather than attack you points.

    I would not engage him if I were you. The only people who read him are the ones who are also crazy.

  • SS

    I like how he says deficits don’t matter and then goes into an unreadable and insane rant about the quantity theory. MMTers reject the quantity theory you idiot!

    “If ignorant both of your enemy and yourself, you are certain to be in peril.” – Sun Tzu

  • Cluster

    Karl Deninnger just PWN’D You.

  • Bubba

    >>(even though headline inflation is in-line with its historical average and core >> inflation is running well below average)

    I guess you don’t buy gasoline, bread, milk, motor oil?

  • Cullen Roche

    4% is the historical average. We’re supposed to believe that this is high just because you cherry pick the non-core items?

  • Obatalasacrificedmychicken

    I think PWN’s Karl Denninger ha ha ha

  • BB

    Below is a quote from Karl Deninnger’s above mentioned article.

    “This time, I’m not going to be particularly nice as I’ve about had it with the “MMT” look-alikes running around peddling trivially-provable false impressions through the use of half-statements and arm-waving.

    So I’m going to do exactly that (prove the impression he wants to leave you with false) and in doing so issue a well-deserved smackdown to this author.”

    I would be very interesting to see cullen respond to all of Karl’s points.

  • Cullen Roche

    See here. Denninger is making a number of egregious errors in his understanding of non-convertible fiat currency systems. He even goes so far as to compare us to Greece, which by now, should be clear to everyone, is an absurd comparison. He thinks the USA can run out of money and that bond yields could cause us to suffer the same fate as Greece. He’s just regurgitating a bunch of political points based on his misunderstanding that we reside in a convertible currency system. His comments are so easily refuted that they’re not even worthy of a full post. Honestly, I am shocked he has such a large audience. I guess screaming the loudest is one good way to achieve a following though.

  • Malmo

    Denninger is both a deflationist and inflationist. He’ll go from one to the other whenever it serves his purpose. He is the cherry pickers cherry picker. What few followers he has left at his forum are no better. That place is a mere shadow of its former self. All the independent thinkers have left in a mass exodus. No one with any self respect participates there. He even threatened to sue people who copied and linked news articles there, even though he encouraged that behavior for years. Heck there was a person who pasted full Barron’s articles there for eons yet Denninger did nothing about it until he caught wind of the Righthaven lawsuits. The man is truly disturbed.

  • Jabari

    No, he’s “cherry-picking” the stuff that people need to live. We don’t need “core” things such as iWhatevers, but bread, milk, and gas are kinda necessary.

    (BTW – 4% yearly inflation is a RIDICULOUS number – leave it to the american skool system to not teach anyone anything about an “exponent”, or what it can do to you…)

    (BTWx2: Once J6Ps get priced out of that “non-important non-core cherry picked stuff”, we’ll be way, way worse off than Greece. Hungry people aren’t happy people)

  • Jabari


    Have you LOOKED at the results of our skool system, compared to China (and others in the Far East)??

    And you think we’ll be BETTER in 50 years?

  • Cullen Roche

    If you’re going to cherry pick items then maybe I’ll do the same thing. How about the 4% deflation YoY in housing? That’s an important item, right? The roof over your head? The BLS doesn’t even account for housing prices. They just track everything to owners equivalent rent. If you just used the BLS data you wouldn’t even think the largest monthly expense for homeowners has taken a 30%+ plus tumble in the last few years. They peg the housing component at 42% of CPI. And still we’re at a historically average level. If you’re going to cherry pick items then at least be fair about it and account for the facts…..

  • F. Beard

    I personally don’t agree with any kind of redistribution … Different Chris

    There is no need for redistribution, not even in real terms. The entire population, including savers, can be bailed out of ALL private credit debt without debasing the dollar IF the bailout is combined with a ban on further credit creation and IF the bailout checks are metered to just replace existing credit as it is paid off.

    We have a one-time opportunity to bailout the entire population without debasing the dollar. What are we waiting for?

  • Cullen Roche

    Last time I checked, our top 10 corporations earned more revenue in a year than the entire GDP of Russia or India. 10 corporations. TEN of them. You’re trying to downplay American innovation, entrepreneurship and productivity. It’s not going to work.

  • DenningerIsMyChild
  • Obatalasacrificedmychicken

    Thanks that site is to funny.

    What’s with Lenovo? Another company Denninger has been trying to short?

  • KeepDenningerSafe


    Please stop visiting the internet! I want to help you.

    These evil people know you are mentally behind, and preying on your mental state every single day for LULZ.

    People, please be more passionate to a mentally challenged person such as Karl, he is not to be toyed with, like Igor Frankenstein.

    Please Karl, hide under your mattress and play with your batgirl toys.

  • VII

    I read this but can’t figure it out.

    Karl insults someone then apologizes. This post shows how much of a D$$$ he is?

    Am I right?

    Anyway…I just went to his site…Cullen what are you doing with this guy?
    I havn’t seen a site like his since I stumbled into my computer lab at university back in 1994. I think he’s using the first porn portal. I mean did anyone see his typewriter on side with a light flasingh behind it.

    At least smack down some equals Cullen…to that…I offer your next opponent…Ben Bernanke. you should take him in the first minute of round one.

  • Cullen Roche

    I’ve seen the way Karl likes to kick sand in people’s eyes and attack them personally. I thought about writing a post on this, but we’ve gotten a taste of what that would turn into. It’s not a productive endeavor. If people want to believe Karl’s analysis then short some govt bonds and USA CDS and pray to yourself that we turn out like Greece. But this comment is the last time you’ll hear me mention the man…..It’s not conducive to educational or productive debate.

    Sorry I even entertained it for 1 second….

  • VII

    Ok..I think your view is clear on this guy.

    I know nothing of him…just felt dirty when I went to his site. It’ so old the virus that would have attacked me from the computer no longer lives.

  • Bubba

    >> 4% is the historical average. We’re supposed to believe that this is high just because you cherry pick the non-core items?

    If you’ll sell me food and fuel at 4% over last year’s prices, I’ll take all you can deliver. Tell me where to send the check.

  • Karl Donglicker

    excellent fan site for the “tech guru turned amateur econotard”

  • Rob T


    First time poster and (now) student of MMT, just wanted to say thank you for taking the time to produce the massive body of material comprising PragCap. I’ve been reading through your articles and papers for the last 24 hours and am admittedly embarrassed for having embraced so many Austrian theories as gospel for as long as I did. That’s not to say that I came to your site as an Austrian; rather, I began migrating away from the school as its anachronistic characteristics became apparent to me mid last year. I knew that I was missing something in my understanding of the conundrum that is our modern economy, and the content found here is the missing piece of this fantastic puzzle. I hope to post in the future as I continue to enhance my understanding of MMT and its contemporary implications. All the best, and thank you,

    – Rob T

    P.S. – Despite gold not having a role in our monetary system, and given the fact that hyperinflation in the U.S. is beyond a remote likelihood, how do you explain the rise over the last decade? Gold bugs were omnipresent from 1980-2000, so that can’t be the primary driver; gold’s been around for forever, as have the hyperinflationist fear mongers and clever marketeers, so it can’t be another bogus promotion. As for foreign demand, and this is what I’m trying to get at, wouldn’t the fear of Chinese inflation coupled with the country’s growing middle class consumption prompt massive gold accumulation? Obviously the greatest driver behind its appreciation is central bank accumulation as opposed to divestiture, but I have to wonder why this is the case. Even though the risks of hyperinflation or public debt crises in the U.S. are either remote or impossible, the fact that such outcomes are possibilities (and potentially probabilities) in so many other countries seems – to me at least – to be the principle driver behind gold’s price appreciation. It may be a relic in our great nation, but developing nations flush with dollars furnished by our trade deficit seem to be treating it as an asset worthy of portfolio allocation as do numerous other mature nations. Your thoughts would be appreciated, and I apologize if I’m asking you to repeat yourself. Thanks in advance.

  • Cullen Roche

    Only under one condition. I get to pick a location in San Diego where you’ll agree to purchase and then sell me a home for last year’s prices. Deal?

  • Cullen Roche

    Gold is a commodity with a currency component. So the laws of supply and demand still apply to it. I’ve actually been quite bullish about gold for the last several years, but my take is slightly different from a mainstream bullish story on the metal. My thinking has been simple. Demand from Asia combined with a misunderstanding of the Eurozone crisis would generate enormous demand for gold as investors misinterpret the Euro crisis as a failing in fiat money. There’s much more to my thinking on gold. You might review the following pieces:

    And welcome to the site. Feel free to ask questions any time. There are tons of smart people here and we’re all pretty much on the same page about trying to help people better understand the monetary system. The state of the world is too crappy for people not to better understand all of this….

  • Bubba

    So it doesn’t matter that diesel is up 17% year over year nationwide, because there is one neighborhood in San Diego where housing prices are up 71% yoy?

  • Rob T

    Thanks! I’ve been bullish on gold based on the CB demand and developing nation retail demand alone; I am happy to say that I no longer embrace the relic as any sort of insurance against a (un)likely hyperinflation.

  • Cullen Roche

    The average national house price is down 4% vs last year according to Case Shiller. Housing is 40% of monthly costs according to the BLS while Gasoline is 5%. That means the deflation in housing has been TWICE as impactful to the household balance sheet as the inflation in gasoline…..My point is that you need to represent the full picture in a broader manner rather than just cherry picking the non-core items that people like to focus on just because we see them every day…..

  • Jabari

    “How about the 4% deflation YoY in housing? That’s an important item, right?”

    Huh? I must have missed the part where EVERYBODY IN THE US sold and then re-bought a house in the last year, and do that every year.

    The only people I can think of that would catch that benefit are those who jingle-mailed and re-bought, or maybe those who were renting through the bubble and bought after, but that group can’t be a very large percentage of the nation. It’s certainly substantially less than the percentage that buys bread, milk, and gas.

  • Jabari

    Yeah, we do REALLY well at innovating things like Credit Default Swaps, don’t we?

    The other thing we do REALLY WELL is to use foreign slave-labor to make huge profits for American CEOs.

    I guess you’re right! :)

  • F. Beard

    Speaking of gold, Mish Shedlock is running on about a gold standard. I like Mish but the Austrians have led him astray.

    How about debunking him, Cullen?

  • Cullen Roche

    Okay. I get it. You think 4% inflation is high even though it’s the historical average over the last 70 years.

  • Cullen Roche

    I know. America sucks. It’s an awful place. Our standard of living is horrible and we produce nothing. Does that pretty much sum up your position?

  • MJJP

    Another fallacy that needs to be exposed is that there isn’t enough gold on the planet to back the US dollar and its debt let alone every other nations currency.

  • Jabari

    Hmm – what part of “stable prices” (i.e., in the Fed’s charter) is congruent with “4% inflation”?

    I don’t care what the average is – the target should be 0% (or less), with the penalty clause of the Coinage Act of 1834 re-established.

    (Search for the word “penalty”, and notice the word “debased” in that description. 4% inflation certainly counts as debasement…)

  • Cullen Roche

    Ah, you’re a fan of the 1800’s. Yes, what a glorious century. We only had SIX depressions in that century. I am sure it was fun to live back then. Meanwhile, since the dreaded Fed was created in 1913 we’ve experienced the greatest explosion in household wealth and standards of living that man kind has ever witnessed. All while people like you quote facts about the dollar losing 95% of its value while your fluffy golden retriever sticks his head outside of your 4 door SUV while you drive back from your vacation home to your McMansion in your quaint Arizona town. What an awful country. I can’t believe our govt has played a role in subjecting you to the greatest wealth gains in human history! Oh the injustice.

    10 years of “tough” times and Americans act as though they’ve been forced to resort to living in caves. I fully understand that things aren’t great, but you’re just slightly exaggerating how tough Americans have it in general….

  • Greg


    Your comment denigrating the 99% where you said “Im not in the 1% and I didnt get screwed” came across as “Well they aint screwing me so shut up”. If thats now how you meant it…. fine, but I still think its wrong to criticize this movement responding to the erosion of our economic conditions over the last couple decades for sure but the last 3-4 years especially. I happen to think they are screwing you……. and me and Cullen too. Screwing us by arguing about meaningless crap like public debt ceilings, putting teachers and other public employees out of work simply because they can and failing as a govt to do their job and letting the private money interests take charge of the public welfare.

    Yes a lot of the OWS people are simple opportunists and out of work losers who are seeing this as a big party but there is a truthful element at the core and already we are seeing the discussion changing as a result of this occupation. I for one welcome a change in the discussion. Hopefully it leads to real societal shifts in priorities.

  • Ron Paul

    You can disagree with Ron Paul and still donate to his moneybomb

    Black This Out Moneybomb is now a 3 day event.

    October 19 – 21 , 2011

  • Jabari


    Where did THAT come from? *shakes head*


    Look, all I said was to bring back the death penalty for money-forgers. Nothing more, nothing less. Not sure where you got ANY of the rest of that from.

    The great leaps in standard of living have been due to the individual brilliance and efforts of people like Nikola Tesla, Henry Ford, and Dennis Ritchie, not due to the Federal Reserve, JP Morgan, or Goldman Sachs.

  • F. Beard

    Meanwhile, since the dreaded Fed was created in 1913 we’ve experienced the greatest explosion in household wealth and standards of living that man kind has ever witnessed. Cullen Roche

    To be fair, the Fed funded US involvement in WWI and caused the Great Depression, both of which led to WWII and 50-86 million dead. And now we may be in GD II to be followed by who knows what.

    Plus, please explain why banking should not be a purely private business instead of a government backed cartel?

  • Cullen Roche


    I doubt we’re as far apart as you believe. I know the last 10 years have not been great. And I know that the financial industry has raped and pillaged this economy. I have done an enormous amount of work on this. But I also don’t think it’s the end of the world. We’ll get through this and when the country realizes that it can’t rely on the banks to leverage themselves up then this economy will get back to some semblance of normalcy. I am not saying we’re there yet, but we’re also not on the fast track to becoming third world…..

    I hope you didn’t take anything I said personally. I am just trying to offer a broader perspective (even if you don’t fully agree with it).



  • Cullen Roche

    oye. Blaming all the deaths from the world wars on the Fed is hardly a fair position…..

  • F. Beard

    The main causes of World War II were nationalistic tensions, unresolved issues, and resentments resulting from the World War I and the interwar period in Europe, plus the effects of the Great Depression in the 1930s. from [bold added]

    Plus you have not explained why so-called “free market capitalism” requires government privileges for the banking system. Is the free market incompetent to create good money solutions?

  • Peter D

    Another little-known fact is that American students have never performed well on international tests. When the first such tests were given in the mid-1960s, our students usually scored at or below the median, and sometimes at the bottom of the pack. This mediocre performance is nothing to boast about, but it is not an indicator of future economic decline. Despite our students’ mediocre test scores, the nation’s economy has been robust for most of the past half-century. And the news is not all terrible. On the latest international test, the Program for International Student Assessment, American schools in which fewer than 10 percent of the students were poor outperformed the schools of Finland, Japan, and Korea. Even when as many as 25 percent of the students were poor, American schools performed as well as the top-scoring nations. As the proportion of poor students rises, the scores of US schools drop.
    To put the current “crisis” into perspective, it is well to recall that American education was in crisis a century ago, when urban schools were overcrowded, swamped with students from Eastern and Southern Europe who didn’t speak English. The popular press at that time warned that the nation was being overrun by a human tide from inferior cultures, and the very survival of our nation was supposedly at risk.

  • Greg


    Thinking about this deficits dont matter claim that gets hung on MMT. Do you think it might be more effective to instead say that in fact deficits dont matter…… in and of themselves. They are just a number representing one side of an accounting identity. Knowing the nominal value of the deficit alone is completely worthless. It has to be evaluated in relation to real economic variables like unemployment rate and output gap. Saying deficits alone dont matter as a way of evaluating the economys health is equivalent to saying that temperature alone doesnt matter as way of judging human health. Unlike a human temperature which is known to have a normal level there is no normal level of deficit.

  • Jabari

    In the last few years, basically (but not absolutely).

    In the past century or further, when .gov wasn’t nanny-state-ing everything, no.

  • JWG

    The 8000 tons of gold in Fort Knox is tail event insurance against that day sometime in the hazy future when a big reset becomes necessary; fiat currencies are faith based systems at their core. The US holds that gold in its portfolio for the same reason private investors in the West hold it in their portfolios–tail insurance.

  • F. Beard

    fiat currencies are faith based systems at their core. JWG

    The only “faith” needed with fiat is that taxes will continue to be collected in it. I recall a saying about “death and taxes”.

    Gold is the true “faith-based money”. And unless it is remonetized by government fiat (intentional irony) then why should not its value eventually fall to its mere commodity value adjusted for inflation?

  • JWG

    Karl Denninger’s site is entertaining in the same manner as a demolition derby is entertaining, but you wouldn’t go to a demolition derby for driving lessons. His economic school of thought is best described as synthesis of Austrian and Martian, and he repeats the same canards about MMT as all of the other yahoos. However, his mathematical concerns about compounding of debt burdens, long term trends and unsustainability are well founded. If he would only stop yelling.

    The long term average of 4% inflation in the US that TPC finds acceptable results in a doubling of price levels every 18 years; incomes are not keeping pace in the US and the result will be declining living standards for a majority of Americans and the death of the American dream. The Fed must rethink its belief that inflation is a socioeconomic positive if it is going to allow 4% inflation per year. 2% inflation per year results in a doubling of price levels every 36 years; American society can handle that, but that is NOT what the Fed has actually been delivering over the long term.

    Let’s not confuse correlation (the Fed’s reign since 1913 has coincided with long term growth in the US economy) with causation. It is quite possible that if the Fed had kept prices truly stable since 1913 as our economy grew, our economy would have grown far more in real terms and we would all be better off today. That is the counterfactual that should be considered. If inflation is MMT’s recognized constraint on money creation via deficit spending, then what is the long term record on inflation telling us? It is telling us that the Fed and the Treasury have been facilitating excessive money creation since 1913. Score one for Ron Paul on the MMT scoreboard.

  • Ben Dover

    During the 70’s, economists were constantly explaining that OPEC oil price increases were responsible for the high inflation rates of period. They would go into long explanations of how oil was a raw material for plastic, and was needed to run tractors and create fertilizer, and to transport everything. So, it was claimed, if oil became more expensive, this would ripple through the economy and cause everything else to increase in price as well.

    But when oil prices collapsed in the 1980’s, the price of gasoline went down, but that was about it. The price of oil in 1998 was around $12, which was actually a bit lower than in 1975. But general price levels in 1998 were many times higher than in 1975. And since 1998, oil has gone back up into the $80 range. But we haven’t seen anything like the inflation of the 70’s.

    My conclusion is that the economists of the 70’s (or at least the ones that the news media chose to interview) didn’t know what they were talking about. Why should today be any different?

  • Ben Dover

    Who fought fires in Yellowstone in the millions of years before Europeans arrived on the scene? The place seemed to be in pretty good shape when the US Forest Service was first created.

    Actually there is lots of evidence that lightning fires played a critical role in the ecology of many areas of the Southwest. In the old days, lightning fires would burn through many areas every few years without killing the trees. But if you suppress the fires, plant litter collects on the ground over the decades and eventually sets the stage for a huge unstoppable fire which kills everything.

  • DanH

    I’m pretty sure Cullen doesn’t think 4% inflation is ok. But it’s not something to panic over.

  • F. Beard

    If inflation is MMT’s recognized constraint on money creation via deficit spending, then what is the long term record on inflation telling us? It is telling us that the Fed and the Treasury have been facilitating excessive money creation since 1913. Score one for Ron Paul on the MMT scoreboard. JWG

    Your logic appears irrefutable.

  • first

    There will be a time to short treasuries.
    It has happened in the past and it will happen again.
    It is correct to say that its not possible to go against the fed but that is only until consumers price inflation shows up. We ain’t there yet but it will be a hell of a trade even if Bernanke says he wont take rate higher any time soon.
    He was wrong on rates in 2008 will be wrong again.

  • F. Beard

    There will be a time to short treasuries. first

    Why? The US Gov has no need to borrow in the first place. And if price inflation becomes a problem, can’t the government reign in the banks without having to drain reserves by say raising capital requirements? In fact, couldn’t the US Gov greatly increase its ability to spend without price inflation if it just banned credit creation by the banks altogether?

    Not that I propose a permanent ban on credit creation. That would not be ethical. But a temporary one is justified till say the entire population is bailed out of all debt to the counterfeiting cartel.

  • johnny rotten

    could you please explain again why it is that you dont want to
    address the points made by mr denninger- please tell me it isnt that you dont
    want sand kicked in your face- maybe its simply this you cant refute his
    points- anyone who defends the fed in my humble opinion has no credibility
    the fed under alan greenspan was one of the primary causes of the housing bubble
    alan greenspan ignored brooksley bornes warnings on derivatives and leverage
    and the result was a financial meltdown- ben bernanke has been proven to
    be an incompetant buffon who didnt see the housing bubble or the results
    of its exploding- yet he is going to determine what interest rates should be
    REALLY? thats who you have your trust in? REALLY I suggest you watch
    the academy award winning documentary INSIDE JOB then tell us again why
    we should listen to ECONOMISTS who also didnt see the housing bubble
    until it had exploded that is- funny that the great depression occured about 10 years after the creation of the federal reserve- I guess that was just a coincidence – dude get a friggin clue

  • F. Beard

    funny that the great depression occured about 10 years after the creation of the federal reserve- I guess that was just a coincidence – johnny rotten

    Actually, it was about 15 years and Ben Bernanke admitted it was the Fed’s fault.

    Btw, Greenspan said that the boom-bust cycle was necessary for progress. I guess he had the reciprocating engine in mind? Too bad he didn’t think of turbines, eh?

  • Captain Obvious

    Nice blog, Neil. I just subscribed, looking to get a better understanding of what’s going on in the UK. And I am not sure if this is a compliment or a warning. Sadly.

  • Captain Obvious

    I am all of the above. But mostly, I am as real as a rock in your shoe. Why does this always circle back to YOUR toe? You know, it’s not always about you.

  • Captain Obvious

    Ok, time for a bit of comic relief (shocking, I know). I’ve read probably a dozen or so of your comments, likely even responded to a couple. And this WHOLE time I’ve been reading your moniker as some sort of fancy East Indian name. Just wanted to throw that out there.

  • Cullen Roche

    Right. I have never said 4% inflation in the current environment is good. But as you said, it’s also not catastrophic or even remotely close to the hyperinflation that austrians have long predicted.

  • The Dork of Cork

    25 % of world consumption – there is a difference.
    Much of the productivity growth in America comes from imported goods
    We give you goods , yee gives us paper.
    You consume.

  • Adam1

    Actually the US government is in a catch 22 with gold. Gold is a real asset with real resource value. In our highly monetized world why would they “sell” gold they’d just end up with dollars that they can already infinately produce. If the US government wanted to unload its gold it should only do it as a real trade for a real asset. Maybe we can buy Canada or something (kidding my Canadian friends)?

  • F. Beard

    In our highly monetized world why would they “sell” gold they’d just end up with dollars that they can already infinately produce. Adam1

    In order to drain reserves out of the economy to protect the value of the dollar. It would be a joke on the gold-bugs too since their so-called “real money” would drop in price while the price of the dollar would rise.

  • The Dork of Cork

    As far as I am aware Karl accepts insurance of FDIC deposits – but these are credit deposits – they are a product of leverage & would not exist without credit.

    Yet he refuses to decrease the leverage without dramatically cutting the money supply which as seen in Ireland & Greece cuts production & not just consumption & in reality actualy increases leverage (private sector debt in Ireland relative to GDP is only decreasing marginally despite all the cuts and I beleive household debt is rising relative to wealth)…/oleary-and-walshe-on-debt-deleveraging-an...

    IF they issue a dollar of Goverment money you can only lose a max of dollar 1 dollar in the system if malinvested.
    However commercial banks can lose many multiples through leverage.

    His stance only makes sense if he wants to go to a full money system Tommorow without any credit in the system which he has advocated before.

  • The Dork of Cork

    Sorry about the link – just google Irish economy blog and continue down a few recent posts until you get to debt deleverging by oleary & walshe.
    A interesting PDF document awaits.

  • first

    “then why should not its value eventually fall to its mere commodity value adjusted for inflation?”

    That is where it should rationally trade Bear but since when did Gold trade rationally.

    Gold is trading A) Based on fear
    B) Like a stock moving up on anticipated earnings it is moving up on the anticipation of a fast devaluation of the Dollar and most currency for that matter. If and when inflation hits the fan there would very likely be a major run out of fiat currencies and in to gold. You could always convert your Gold in to paper to pay your taxes but in a devaluation you could not do the opposite with out suffering a loss of your purchasing power.

    This is the so called rational of Gold holding and purchases.
    Whether it is justified or not that answer will be known in the not so distant future.

    One thing is certain ether way if any one is long or short it will soon make there heart beat faster.

    Buy Gold with a long Put or sell Gold with a long call.

  • Winston

    Outstanding explanation. Thank you.

    It sounds like banks can always get the reserves they need at the right interest rate price, and will therefore continue to make loans as long as they can get a higher rate on the loan than what they are paying for the reserves.

    If so, doesn’t this mean banks are not really creating deposits out of thin air, but rather they just have unlimited access to reserves at the right price which they convert into deposits?

  • first


    I agree with you on many things but I don’t invest on what should happen but on what it is they do. I have learn a long time ago that what they do is not in my best interest so I act accordingly. We are not sacrificial animals It’s our duty to protect our hard earned assets.

  • F. Beard

    OK, I did some math. Just taking into account the average monthly mortgage payment in the US ($1,686) then the entire US adult population (244 million?) could be sent about $306 per month (initially) till all mortgages in the US are paid off with NO price inflation risk IF the banks were forbidden to issue any more credit during the bailout period.

  • Winston

    Peter D

    Thanks, I will read the articles suggested.

    What I’m driving at is the relationship between levels of government debt and inflation per MMT. The people I talk to about the ability of the government to print unlimited amounts of money to help drive down unemployment, always come back with the “I” word, inflation.

    And of course in their minds, greater government debt is synonymous with the government printing money, although I know MMT makes a huge distinction here.

    But even so I was trying to show them that when the federal debt was the lowest in the entire century, at 30% of GDP, the CPI measured inflation rate was the highest in the century, and therefore if we were to drive the current debt down from 100% of GDP to as low as 30%, we could still have dangerous double digit inflation. In short, austerity is a false hope against future inflation.

  • first

    Ron Paul may not understand MMT but….
    Whether its the treasury that issue the currency, the US being the reserve currency printings there own accepted paper and that it can’t default does not really matter.

    Is basic objection are still very valid and that is that in a free market economy money valuation and rates are a function of markets and not a Central Planing System. Central Planing worked well for the elites in the USSR and its appears to be working well for the Banksters Elite in the US and Europe.

    How is hell can Ben Bernanke talk of money trading freely when rates are control ? That like saying the price of candies fluctuates freely according to demand but we control the price of sugar.

    As for is position on Gold I think he is mistaken.

  • Different Chris

    I do believe you are misinterpreting me. You seem to have the idea that I feel like I dodged a bullet that the 99% didn’t so I say “screw em!” This could not be any further from the truth. I am in the same situation they are, and think they are acting in a totally ridiculous fashion.

    My comment did not denigrate the 99%, its pretty clear that I qualify myself as part of the 99% as I am not apart of the 1%, so I’m not really following you there. Obviously economic conditions could be better. I want them to be better too and I have a problem with why they aren’t better.

    I have the same problems with Wall Street that OWSers do. If it weren’t for the financial crisis I most likely have a better job doing something I care about (and less important to me- be getting paid more). These people sit still in protest; I look into jobs I’m overqualified for because that’s all that’s out there right now.

    I denigrate the movement (not the 99%) because as I walked passed some of them yesterday after an interview and I realized something. They are literally doing nothing. That is there statement. They’re going to sit there and do nothing to show the world they’re upset. Its ridiculous and its childish. They could be volunteering to help people who really REALLY need help under the same banner with the same message. Instead they chose to sit still in one of the nicer (in terms of cleanliness and crime) parts of New York city.

    As I said, I have the same problems with Wall Street that they do, and I still have no idea what they hope to accomplish by camping. I understand the sentiment of the protests. I in fact agree with it. But the protests themselves are a colossal waste of time that could be spent proactively DOING something positive with the same message. As I said, I personally know people who haven’t left the financial district for weeks now. I understand them and what they’re upset about. WHAT they’re doing to convey their message makes no sense to me and strikes me as childish. If I had that much free time I’d be doing something to help the homeless (personal passion of mine) or trying to volunteer to help the WWP.

    Again, I walked passed some of them yesterday. Two blocks south of the group of OWSers I walked passed were two homeless people begging. The juxtaposition was sickening.

  • Different Chris

    Hahaha. I had similar confusion at one point and I’m a Clint Eastwood fan.

    Stupidity is properly humbling. Hence my picture.

  • Dismayed

    Wray’s book, “Understanding Modern Money:The Key to Full Employment and Price Stability”, is a good read.

  • Dismayed

    “But redistribution is a slippery slope, in my opinion.”

    We’ve already gone down the path of redistribution. We’ve channeled massive sums of money from the middle class to the wealthiest 1%.

  • Nick

    Hi Adam, or Cullen, could you explain what happened with say Northern Rock or Lehmans with this sort of banking system. Maybe better with NR as it was a commercial bank. thanks

  • JWG

    Johnny Rotten–gone but not forgotten.

    Denninger is right on some things and wrong on others. There are plenty of conservatives–and liberals–on this site. If you want to understand how the world of money and banking actually works so that you can think for yourself and cut through all of the BS and nonsense, take the time to grasp MMT.

  • Rick

    Your responses to Ron Paul are full of straw man arguments I am afraid to say.

    Demminger shows a graph that explains what caused the financial crisis:

    The root of the problem was IMO the trade deficit. The rest and in particularly MMT are red herrings. You don’t have to be an economist or even educated at all to understand that when money continuously flows out of a country due to excessive trade deficit and these monies come back as credit to finance further consumption with the party you run trade deficits with then eventually the system will break down and an infusion of cash or more credit will be needed (QE).

    The secondary effects are a decrease in purchasing power due to a falling currency and the resulting re-pricing of commodities against it.

    Thus, the real issue, not the red herrings, is the running of deficits on top of trade deficits. Because trade deficits by themselves mean little and government deficits by themselves mean little but when combines they mean disaster.

    Why don’t you address the real issue then? I apologize in advance if you have already done so.

    P.S. I hope you understand that expansion through credit leads to leverage and excessive leverage eventually leads to collapse. This is what Ron Paul worries about. Your counterarguments using theory are a straw man.

  • The Missing Link

    Not to belabor the point, dimm, but I tend to think the exact opposite. Of course, I am still relatively new to this site, but in general, I find Cullen goes all “credential” on someone when he is about to kick them to the curb. Otherwise, he is much more informal.

    Similarly, if I begin a comment with “Dear Mr. Roche”, I can assure you he is going to get slapped into next Tuesday.

  • The Missing Link (literally)

    CR, one of you papers links to which doesn’t exist. Returns a 404 Error.

    I don’t know what paper or how I got there since I have 4k windows open right now.

  • steve hernon

    Boring. You simply create a false conclusion i.e entrenched views, to diminish the opposition while throwing a few meaningless bones of agreement on minor points.
    Your so-called rational analysis does the same old boring thing.You use your parameters to define the problem. Minimal consideration is given to the human factor that actually directs the life of the society and emphasis is on the abstract perceptions that never move anything but only react and analyze after the fact (like a monday morning quartergback).
    The tenacious fact of individualism will continue to ignore and dismiss you and your government is OK philosophy