Mike Konczal highlights an interesting point in the latest White House Economic Report:

The White House also looks to be on team balance sheet. See the latest Economic Report of the President(pages 110 to 114):

“The standard approach in economics has been to assume that households consume about the same fraction of the increase in their wealth each year, regardless of its source… The severity of losses experienced during the recession that began in December of 2007 in both national output and in labor markets makes these estimates appear too small…

A growing economics literature highlights the importance of household debt balances in influencing the severity of economic slumps… A series of empirical papers attempts to quantify the effect of such deleveraging on consumption (Mian and Sufi 2010; Mian, Rao, and Sufi 2011). These papers broadly suggest that the levered nature of household housing assets amplified the effect of pure wealth losses from the crash in housing prices.”

Konczal is referring to the fact that the White House is finally acknowledging the effects of the balance sheet recession.   Of course, I’ve been blathering on endlessly about the BSR for almost 4 years now.  It’s nice to see that once the patient appears to have stabilized somewhat, but substantial damage has already occurred, we’ve finally got the doctors coming in with the right diagnosis.  I think it’s rather funny that I am expecting the effects of the BSR to decline and eventually cease in the coming 18 months.   So right when I am changing my focus the powers that be are taking notice of something that should have been obvious to them a long time ago….

The problem for the US economy has been a simple one since the housing bust.  This was never the banking crisis everyone thought it was.  It was always a household crisis as I described back in 2008.   Households are the backbone of this economy and rescuing the banks while forgetting about the households was a colossal error.  One which has substantially hurt the US economy.  I guess it’s some consolation that people in power are recognizing the problem now.  Unfortunately, it’s too little too late.  The damage has been done.

Cullen Roche

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

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  • Alberto

    Why 18 months CR ? What will happen when the (unknown number of billions) of bad assets which TBTF banks keep at book value come to maturity ? Because it seems to me that too many people forgot that the accounting principles have been suspended so that what is worth 10 could be valued 100. Lot of silence on this.

  • Octavio Richetta

    A great one from ZH!


    Interesting finding: the effective yield at which sovereign bonds of “close to danger” European sovereign bonds are priced is INDEPENDENT of whether the bond is foreign law or local law! Who said markets are effcient? unless they are placing at zero the probabilitty of default.

    This is deinitely a potential money making idea for large investors. It involves going long foreign law bonds and shorting the local ones. I guess the poster, I assume a hedge fund, already took a position and wants to provide a catalyst for price alignment.

  • Octavio Richetta

    Interesting NYT article on an Amish ponzi guy who took reckless risks with money he was supposedly investing in safe government bonds! http://www.nytimes.com/2012/02/26/business/in-amish-country-accusations-of-a-ponzi-scheme.html?_r=1&ref=global

  • BT

    Another great post at Konczal’s Rortybomb site is this one:


    They take Steve Keen and the MMR analysis even further, deconstructing the rise in household debt:income ratio. They find that increased borrowing behaviour is only recent – in the big US housing bubble of the 2000s – while relatively slow income growth and relatively high interest rates have been responsible for the gradual rise in private debt:GDP since 1950.

  • http://www.pragcap.com Cullen Roche

    It took 825 comments, but I was finally able to communicate why I believe MMT’s foundation is totally wrong. http://monetaryrealism.com/?p=192#comment-1668

  • OhMy

    Your discovery over there has been known to MMT since inception. If they weren’t aware that banks create majority of money they wouldn’t say that moeny is endogenous. Of course banks create majority of debt – they are IOUs denominated in dollars. The value of those IOUs holds as long as they are convertible to tax credits – the government created dollars. The hierarchy of money is a key concept in MMT.



  • http://www.pragcap.com Cullen Roche

    I would certainly hope they know this. It’s banking basics. The problem is, when you actually break down the hierarchy you realize the MMT position is totally misleading. Most of the money in circulation today is credit. The primary driver of economic growth in our system comes through the horizontal system. Not the vertical level. And credit creation is not reserve constrained. A more accurate description is to say that the state has a monopoly on reserves, notes, coins and govt bonds. But not credit. For all practical purposes it’s entirely wrong to claim that the state has a “monopoly on currency” because currency is the medium of exchange and the state does not have a monopoly on credit creation. To claim otherwise is sheer obfuscation and the creation of an alternate reality. It’s like claiming that the bone marrow has a monopoly on life because they supply the blood to the body. What? That term is totally misleading and tells us nothing about the reality of the system which is actually a hybrid system with many importance parts coming together to create a functioning system.

    The only way the govt has a monopoly on currency or money is if the banking system were nationalized. But it’s not. And this explains why Mitchell wants the banking system nationalized. MMT needs a fully vertical component for its base case to be valid. That’s the reality here. I am sure that MMT will try to obscure this point, but anyone out in the real world knows that credit makes the world go round. The vertical level is just a facilitator. Not a monopolist. So unless MMT has changed the definition of “currency” and “money” then the term “money as a public monopoly” is wrong.

    And btw, the idea that the “value” of dollars depends on taxation is purely ridiculous. The value of our dollars is largely contingent on the quality of our production. It is the foundation of any monetary system. Resources precede taxation. Again, a simple point of logic. But again, this is an MMT concept designed to give the reader the impression that the state makes the money system go round and round….It’s totally wrong.

  • wh10

    Cullen, a thought here. The CB controls the price of credit. Mosler has explained this as setting price and letting quantity float. Mosler has defined those actions as what a monopolist does.

  • http://www.pragcap.com Cullen Roche

    The central bank controls the “target rate”. The Fed does not set the price of all credit. They provide a target rate which the rest of the market sets rates off of. Details matter. Only in a vertical system would the govt set the price of all credit. We don’t live in that world.

  • Obsvr-1

    wow — the thread reference above was one of those Loooong reads, very good discussion though.

    Think of the monopoly not in terms of the currency supplier, but a monopoly is in terms of control of the monetary (vertical) and credit (horizontal) system. The ‘private’ banks do not operate in a free market as they are regulated by the ‘monopoly supplier’ of reserves. Our problems lie in the mis-behavior of all the entities involved in the vertical and horizontal foundation. The collusion and corruption endemic within the FED/Gov’t/TBTF banks “troika” perpetuates the perception of monopoly currency supplier. Seems the reason these discussions continue to wrap around the axel, are in the terminology, semantics and complexity of all the intertwining and interconnected topics. Given the combined intelligence of all those contributing to these blog threads can’t get a firm grasp, how could the mere mortal (avg. person) ever get to a point of even a remedial understanding. These are the fundamental goals of the cartel that created the system and why it is so hard to effect a change.

    The good news from my perspective is these blogs, FOX shows like “Freedom Watch”, Ron Paul are illuminating the issues and infusing the conversation more broadly to the public. Repetition is the key to learning, more education will be the key to change.

  • wh10

    Okay. But this should be obvious to anyone that understands anything about finance. That’s why I haven’t taken this specific point as being misleading. It’s also always seemed obvious to me that MMTers understand endogenous money.

    That being said, perhaps for some it may still be misleading and is on the whole not a useful analogy.

    BTW interesting thread here that seems to be on these exact points b/w Mosler and (seemingly) other economists


  • wh10

    And I want to be clear, when I used the word ‘credit,’ in my mind, I never believed the CB exactly sets the price of loans in the private sector (duh). But the FFR does serve as the base risk free rate, which drives the price of credit (which doesn’t mean associated risk/liquidity/duration/etc premia will not dominate the size of the risk free rate).

    But like I said, for tautological purposes, perhaps some don’t find this analogy as useful.

  • http://www.pragcap.com Cullen Roche

    Miss your next 5 credit card payments and let me know if you still think the Fed controls the price of credit. Or whether you think that 25% rate you’re now paying is due to pvt control of the cost of money.

  • http://www.pragcap.com Cullen Roche

    Miss your next 5 credit card payments and let me know who you think sets the price of your money? It’s obviously not the Fed setting your 25% rate. I don’t deny that the govt has HUGE influence over the credit markets, but to say they are the monopolist is just flat out wrong. It seems like Warren certainly understands these points, but misconstrues them to push the monopolist myth. I am not sure why.

  • Obsvr-1

    way too much a nano-level than the broader and longer term scope of control that I am referencing.

  • http://www.pragcap.com Cullen Roche

    Lotta credit out there….It’s not that “nano” when taken in aggregate.

  • Obsvr-1

    Circles back to the topic of this thread; Balance Sheet Recession and how the banking sector is still teetering on the edge of solvency even with the unprecedented support from the Central Banks.

    strategic defaults, short sales, foreclosures resulting from the busted housing bubble – caused and magnified by the vertical/horizontal “monopolists”.
    de-leveraging of debt and defaults, following the debt which can not be paid will not be paid axiom. Adding usury interest rates in many cases is an accelerant to the default. Those that think or use strategic default will undoubtedly default on the unsecured cc debt too.

    More cleanly separating the private (horizontal) banking system from the FED, allowing for bankruptcy process to be the sacred foundation without gov’t or FED intervention would certainly allow for more competitive free market in the banking sector. The FED should only support the reserve system, clearing system and have a single mandate of a stable dollar; better would be to eliminate the FED and fold in the responsibility to the US Treasury under tight congressional oversight and open transparent audit/accountability.

  • wh10

    Cullen – none of the following is to say that obfuscation is justified. Scholars should always strive to be forthright within reasonable means. And I can see where specific MMTers in specific cases might be obfuscating issues, though perhaps unintentionally.

    I think I am better understanding why so much confused conflict has arisen between MMT and MMR. MMR really wants to focus on the specifics of current institutional reality. MMTers, as academics, have an eye towards developing a more general theory of economics, including institutional reality as a specific case. But I think we should be careful to not, at least sometimes, interpret MMT’s descriptions or language of general theory as exactly current reality or what MMT believes to be the best thing for society. That said, the JG seems to be a concept that MMT would imply is probably the best thing to do; however, I still lean towards the Mosler description that you can choose any buffer you want. But take for example govt spending. There are various different arrangements one could envision for this, and I don’t think MMT implies one is necessarily better than the other. Fullwiler has said if the interest rate is the same on the debt, it doesn’t really matter ‘how you got there.’

    In fact, what we are currently debating seems very similar to the critique of how MMT describes govt spending. Take Lavoie’s critique for example. I am curious why you or MMR hasn’t yet taken issue with how MMT often describes govt spending. This has always been one of my issues with MMT. I think Scott’s strong, semi-strong, weak clarifications, or the general vs specific cases, are immensely important for understanding reality, which MMR is focused on. MMTers, however, most often don’t describe it this way, and neither do you. I know you also didn’t see Lavoie’s critique as much of anything meaningful. But it seems MMR’s criticisms, such as the one we are currently discussing, are the same kind of ‘clarification’ issue as per govt deficit spending. MMR is trying to get to a faithful, detailed account of reality.

    As for the 25% interest rate, I already said that point was obvious to me, and even made the point that loan premia will likely often exceed the risk free rate. Obviously the difference between the risk free rate and the total interest rate on a loan will depend on the specific loan.

    Fair question about Mosler’s motivation in using the analogy. I’d be interested in his response. Perhaps it’s in some articles or the link I posted. My sense is that he thinks it’s useful as a general analogy and does not intend to be political. Like you said, he would obviously agree with the clarification that under current institutional arrangements the private sector has vast influence on the price of credit. After all, the man has been involved in banking for much of his life, owns a commercial bank, and literally made loans in his early professional years.

    I am definitely for nuance, clarity, and accuracy, but we have to draw the line at some reasonable level of nuance, because we could be here for days if we wanted to. Seems Mosler’s level isn’t sufficient for you. This might be due to approach of MMR vs MMT I described above. I am not saying anyone here is necessarily wrong.

    BTW I don’t think Mosler, the ‘king’ of MMT, supports nationalizing the banking system, so obviously he sees value in letting the private sector have vast influence on the price of credit. So I do find it problematic to identify Mitchell’s political beliefs as the true, underlying message of MMT as an independent theory.

    On the point of general theory vs specific reality – just because MMT can help one understand how a banking system can become nationalized, that doesn’t mean that MMT means that this is definitively what should be done. Obviously this is a policy choice. In fact, we could use many economic theories to understand how the banking system could be nationalized.

    In summary, I think that in these MMT/MMR debates, and in the spirit of not ‘obfuscating,’ the participants should be careful to separate

    1) Accusations of obfuscation of reality or criticisms of the specific political beliefs of specific MMTers/MMRers, which may be valid


    2) What MMT or MMR truly intends to teach. In the MMT case, sometimes what it may teach may not be current institutional reality, but that doesn’t mean MMT doesn’t realize this OR that MMT envisions a certain description as they best way to run a society

  • LRM

    Let us know when the “Idiots Guide to MMR ” is ready. I like reading econ stuff but would prefer not to wade through THE 825. I trust CR’s insights and am happy to sense his success in coming to a confort zone in monetary theory.

  • Octavio Richetta

    So CR, what do u think now about Paul Kasriel’s analysis such as his latest forecast which focuses on the recent increase in bank credit as a central piece for the fragile but ongoing recovery?

  • Andrew P

    Sovereigns can always change the rules ex-post facto, as they have with Greece. It does not matter what law the bond was issued under. The EU will always change the laws to suit its purposes no matter what, and sovereigns have absolute sovereign immunity so they can’t be sued except in their own courts. In fact, the 11th amendment makes this clear with regard to State debt here in the US. If (for example) Illinois says we are not paying and you all get a big haircut on our bonds, you can only sue them in Illinois courts. Good luck.

  • Andrew P

    We don’t live in a country where the Government sets the price of all credit, but the Chinese do. Virtually all banks in China belong to the Government. I guess China follows MMT as was originally intended.

  • http://www.pragcap.com Cullen Roche

    Bill Mitchell’s headline on this site says “macroeconomic reality”. So if he’s not reaching economic reality and he’s just teaching a theory then maybe MMTers should make that contradiction a bit clearer. Because right now it’s pretty clear that they’re trying to have it both ways. They’re just teaching a macro theory, but then it’s framed as a macroeconomic reality. Sorry, but that’s blatant obfuscation. Is it a theory or is it a reality? If it’s both then they should clarify.

    Personally, I am beginning to think much of it is just a myth based on the error of the monopolist myth. There are so many contradictions in the monopolist commentary that it wouldn’t take much to shred it apart, quote by quote and connect the dots on everything from the monopolist to the vertical to the job guarantee to the politics.

  • Andrew P

    What about China, where all the official banks are Government owned, and the only truly private credit is through “shadow banks” that must use Mafia methods (like leg-breaking thugs) to collect debts. Isn’t China following MMT more closely than the USA ever has?

  • http://www.pragcap.com Cullen Roche

    I honestly don’t know enough about China to talk. But sure, if MMTers want to say “China is the MMT model” then go for it. At this point, I don’t really give a damn what MMTers do. One thing’s for certain. They seem to be pretty good at making enemies out of allies and a mountain out of a mole hill.

  • Octavio Richetta

    I understood that foreign law bonds which come in several favors, offer more protection to creditors than local law. This has a value when there ability of default is not zero.

  • Octavio Richetta

    Probanality not ability! Blame e iPad

  • Don Levit

    I agree with Cullen that the household debt is the major problem we have to deal with.
    There is one item on the federal government’s balance sheet that disturbs and confuses me.
    That is the liability listed for federal employees’ retirement plans.
    It is listed in the latest President’s budget at $5.8 trillion.
    What does that number mean?
    Is it saying we need an extra $5.8 trillion today, to fully fund the federal employees’ retirement into perpetuity?
    Don Levit

  • jt26

    State theory and MMT … the evidence …

    The government put makes private credit a much greater part of the state: re: the implicit liabilities that are excercised from time to time: Fannie/Freddie, money market funds in 2008, PBGC, deposit insurance (BTW this counts, because if you don’t act like an insurance fiduciary, then it isn’t insurance!), partial nationalization of banks, Maiden Lane etc.

    The government has intervened directly in the economy, even under non-war circumstances: remember wage and price controls? And can so again.

    Correlation of credit ….
    i) Tys yield curve: high short-term correlation; lower long-term correlation (business cycle)
    ii) HY bonds: low correlation
    iii) IG: similar to Tys yield curve

    When you look at “pure” long term investments in knowledge-based economies: non-defense federal R&D vs. private: ~15%; total federal ~35%

    I think one could argue that the state is important, but it is debatable whether that “influence” is 10 or 40%.

  • jt26

    What are the policy implications when the private BSR is recognized by the gov and the Fed?

    Barring organic growth, the only options are:
    - higher inflation
    - currency devaluation
    - debt forgiveness (DF) & DF>creditor losses

  • http://www.pragcap.com Cullen Roche

    I think the state plays a massively influential role. I just don’t agree with the use of the term monopolist. The state does not have a monopoly on the issuance of credit and I find it kind of amazing that MMTers try to claim otherwise….They are trying to have it both ways by saying banks aren’t reserve constrained, but that the state has a monopoly on credit because payments settle in reserves.

  • jt26

    I agree with you for the US; just wanted to add some data points for reference.
    The monopolist argument may apply during certain times/countries where that influence on credit is >>50% (e.g. China now, Japan on and off). Maybe what the MMTers are arguing is that the monopoly is required. But, I think like the JG argument, it is not required, and is more a matter of choice. The historic evidence is a greater degree of state control of private lives is reflected in private credit.

  • http://www.pragcap.com Cullen Roche

    Well, what they’re saying is that because the state sits atop the hierarchy that it means the banks are basically an extension of the state. I think the details are important and it’s useful to understand that the Fed is the monopolist of reserves and that the Tsy is the monopolist on bonds, but those are very specific things. The state does not control the amount of credit in the system so to claim that the state has a monopoly on money is absurdly wrong….MMT uses this terminology to give the appearance that the state steers the whole ship. But the truth is that the banks steer the ship. Without one fully vertical nationalized banking system there’s no monopoly on credit and therefore no monopoly on money.

  • John

    If the gov runs a surplus, won’t that ultimately dry up credit? ESP with CAD to boot. So then the q, who’s your daddy?

  • http://www.pragcap.com Cullen Roche

    It would actually drive the pvt sector INTO credit as they would go into debt to obtain money that the govt isn’t making available through NFA creation.

  • jonf

    A surplus?? Imagine the accounting for that to happen. But Clinton had a surplus and the economy was doing well – - the so called goldilocks years. In fact those geniuses were planning perpetual budget surpluses. But then George ended up with a recession, followed by a couple of tax cuts, wars and lots of deficits until around 2007 all that credit came tumbling down. That’s where we are today and with deficits of well over a trillion. But not to worry we can keep on bailing out the TBTF banks, to the tune of, o take your pick, $16 trillion or $29 trillion. Guess they needed a little help along the way,from that monopolist yet.

  • kmurphy629

    Cullen, you have really got me thinking but I don’t know if I am approaching it the right way…I always assumed that MMT could claim that govt created all NFA’s because total credit would stay more or less the same because of capital requirements constraining bank lending…but thinking about our current mess, did banks create LOTS of NFA’s themselves by skirting capital requirement rules through financial innovation? Those NFA’s were assets on their books but unfortunately liabilities on homeowners books…and when the market has a slight downturn and combined with the new mark-to-market rule…the assets deflated, but the liabilities remained…Anyway, if that is somewhat correct, I then wonder can banks create NFA’s under “normal” circumstances? If you are saying “yes” it is with credit…then how much would/could it vary with the same amount of govt’ provided NFA’s?

  • http://www.pragcap.com Cullen Roche

    Obviously, no one is denying that the USA can bailout who ever they want by printing money. The fact that the credit crisis even occurred was the result of the banks being their own suppliers of credit. But hey, it’s easier to justify job guarantees and certain political programs if you can first convince everyone that money is a state monopoly. Never mind that it’s not. Why should we let reality get in the way of a purely good ideology?

  • http://www.pragcap.com Cullen Roche

    Banks don’t create NFAs. But that kind of misses the point. In this system the banks are unconstrained in their ability to create credit. That’s why I keep saying it’s incorrect to say the state has a monopoly on money. Credit is money. And the state does not control the issuance of credit. The crisis makes that clear.

  • wildebeest

    So does this mean you are on board with Steve Keen now? Hasn’t he been making this point for years?

  • wildebeest

    As above, does this mean you are now aligned with Steve Keen who has been making these sorts of arguments now for years:


  • http://www.pragcap.com Cullen Roche

    No. Keen is a horizontalist. They don’t fully appreciate the powers of the vertical component. And I think MMT takes the vertical component to an extreme (though they’re more balanced then horizontalists). MMR is somewhere inbetween them. We’re not state theorists, but we’re not pure circuit theorists either.

  • http://www.pragcap.com Cullen Roche

    Nope. Keen’s a pure horizontalist. There’s a better balance between MMTers and horizontalists. The bank money doesn’t rule the system. But neither does the state money. They are part of a bigger more complex system. A focus too much on either one leads to a misguided understanding. I disagree with Keen’s pure credit money focus and I also disagree with MMT’s monopolist focus. The reality is that it’s a hybrid system and we need to better understand both without losing sight that neither one takes “center stage”.

  • Obsvr-1

    yes, indeed the horizontal and vertical are intertwined into a complex and dynamic dance of the wealth encumbancy; they collaborate (conspire) to drive the boom/bust/bailout cycles to perpetuate the doctrine of ‘privatized gain, socialized loss’ with wealth capture from the masses to the few. The cozy relationship between the TBTF, FED and Gov’t actors, between the vertical and horizontal money changers, concentrating the control and power to the few driving the crony-capitalist behaviors. In combination the monopoly supplier of NFA, monopoly supplier of Trsys and the oligarchy supplier of credit creates the crony-capitalist oligarchy and corporatist gov’t. Label it any way you want, we have problems of too much power and control over the “money” supply by too few.

    They got caught with pants down in 2007/2008 with the black swan event that busted their sector, end result the same, socialized loss – this time to the tune of $T’s and with an ugly by-product of even Bigger TBTF institutions.

  • Dan M.


    I’d like to add that if the lack of enough NFA’s in an economy to total investment usually leads to a depression (1929 (yes, I know these weren’t technically NFA’s at the time, but even in a gold standard base money and credit function much the same), or 2008) only when “bad investments” manifest themselves, and a small rush towards NFA’s turns self-replicates into a large rush.

    Since these “bad investments” are usually produced by bubble-esque horizontal activity, and only after their bust is when the base NFA’s come back into the limelight, then it’s obvious that the stability and risk-management of the horizontal sector greatly affects the demand for assets of the verticle sector vs horizontal. In a perfectly managed banking system & economy, NFA’s would probably be a moderately thin coat of “lubrication” on everyone’s balance sheet. However, the types of investments (what you (and now myself) would describe as the driver of money) that underly the financial assets and liabiliities of the economy are what drive the stability of the horizontal sector, and therefore the safety/liquidity preference towards the vertical sector.

    So the horizontal sector obviously has huge influence over the public’s demand for the vertical, because even though its financial assets net to zero, its REAL WEALTH does not, and that wealth is what drives the demand for an efficient, growing, stable medium of exchange in the first place.

    If the purpose of medium of exchange is that investment that will lead to prosperity, and if where that transaction takes place a credit asset and credit liability are formed, it would appear quite wise to pay attention to that aspect of money creation AT LEAST as much as the NFA’s that tend to lubricate all the real difficult activity.

    I think I could tell you relatively quickly whether a domestic economy has enough base-currency to function in a healthy manner in the short-to-medium term, but if the banking system is built on improper regulations, run solely by government, or has other more complicated problems, this is the true source of the problem in the monetary system. No amount of NFA’s will help if your horizontal sector is not properly-enough pricing risk… it is KEY that the man directing the fire hose of credit know what he’s doing and that he remains reasonable accountable. If you have glorified used-car salesmen handing out loans and then selling them to other glorified used-car salesmen managing 401(k) plans, who then sells them to unwitting savers, you probably have just as big of a problem as letting an economy run dry of enough NFA’s in the first place.

  • http://www.pragcap.com Cullen Roche

    Nice thoughts Dan. This is also the crucial insight from S = I + (S-I). When you understand the driver of the economy you understand that horizontal money drives demand for vertical facilitation. MMTers tend to think that we need vertical to “leverage” horizontal when the reality is that horizontal creates growing need for vertical. We leverage horizontal to meet vertical! They get the whole causation backwards.

    But that doesn’t mean horizontal money should be unleashed. In a sense, the desire for MMT to give control back to the vertical is rational. Tighter regulations are a public good….

  • jonf

    So you think the banks were able to perpetuate that fraud without the deficits and the feds accommodation for all those years?

  • http://www.pragcap.com Cullen Roche

    It’s all one complex system. Of course no one acts in isolation.

  • AK


    This discussion is very interesting as always, and I am glad to be a part of it. But I am still confused as to how you seem to have gained such a different impression of MMT than I. Just a few thoughts after reading many of your comments:

    1) In most serious MMT literature I have read, the correct way of describing the states role is that it is a “monopoly ISSUER of currency/money”, rather than having “a monopoly on money”. If we feel that semantics/definitions are that important, then the difference between those two statements is a crucial one.

    The first statement accurately points out that a state is the only singular actor entirely unconstrained in issuing money, unlike the horizontal, which is constrained at ALL times in issuing new deposit-money by (i) capital requirements (typically set by the state) (ii) the ability to find credit-worthy borrowers (typically regulated by the state) (iii) the requirement to create a corresponding liability to the deposit-money created (accounting fact of the loan-writing process). The state therefore exercises direct control over the issuance of NFAs (as we all know), but also strong control over the issuance of new deposit-money. I feel that these facts clearly warrant use of the term “monopoly” as an accurate term to describe this arrangement. The fact that, at times, the state may CHOOSE not to exercise control over the credit creation process (i.e. lack of oversight pre-GFC) does not mean that it does not have the ability to do so at any point that it chooses. Nor does it cancel the fact that the credit creation process would be impossible (or at least, entirely different) without the issuance of bank reserves in the first place by the vertical. It is much like the debt ceiling debates in the U.S; the fact that Congress chooses to place a limit on itself does not change the fact that it has the capacity to meet all its debt obligations as it sees fit.

    Now, I do not discount the probability that some MMT commentators may have been sloppy in his/her usage of the above phrases at times. But I don’t think that’s enough to write off an entire theory as “obfuscation”. In any case, you haven’t pointed out how (even in the event that MMT DOES have this “monopoly” definition wrong) that necessarily renders any of MMT’s subsequent observations invalid (and if so, which ones specifically?).

    2) Following on from my first point above – when a banking system is issuing credit at a low/stable/sustainable rate (which I think most agree is in the public interest) then the horizontal’s power over money creation on the macro scale is muted, at best. This is because as new loans create new deposit-money, the repayment of old loans extinguishes old deposit money. If you view the horizontal sector over the long-term, then this dynamic actually always must hold true. Therefore, on the macro-scale, “money” issuance can only be affected by the horizontal during the “special case” of short-to-medium-term credit booms; and over the long-term, not at all.

    3) “MMTers tend to think that we need vertical to “leverage” horizontal when the reality is that horizontal creates growing need for vertical. We leverage horizontal to meet vertical!”

    I can’t see how you disagree with the process that (i) the vertical issues reserves (ii) the horizontal takes those reserves and expands them as far as capital constraints/creditworthiness allow.

    Unless of course you are getting at something else which I have not picked up.

  • http://www.pragcap.com Cullen Roche

    1) “Entirely unconstrained” is a semantic point and misleading. The state is not the monopoly “issuer” of money. The banks issue most of the money in our system. They are obviously constrained in some sense, but that doesn’t mean the state directly controls the price or quantity of their credit issuance. The state controls credit issuance only in a very loose sense. This is a pretty irrefutable point, but MMTers obscure it in their hierarchy argument. The monopolist argument is totally separate from the hierarchy and is not a valid point in ascribing monopolist powers across the entire spectrum of money. The state is only the monopolist of very specific forms of money, of which credit is not included.

    2) The horizontal level is just about always expanding loan issuance and has averaged a very high % rate of change historically. I don’t know how anyone could downplay the expansion of credit in the economy as being a “muted” effect. It is, by far, the primary driver of growth throughout the economy. If you don’t know, then run a business without credit. You’ll find it’s close to impossible. http://research.stlouisfed.org/fred2/series/LOANS

    3) Banks don’t “take reserves and expand” them. MMT teaches us constantly that banks are never reserve constrained. But they’re trying to have it both ways here by saying the hierarchy based on reserves and payments settlements means the monopolist has power over the banks, but then they claim banks aren’t reserve constrained in their lending operations. It’s an obvious contradiction.

    I don’t think you’re seeing the points the same way I am….Can I clarify any of this further for you?

  • AK

    1) I wouldn’t say “entirely unconstrained” is misleading. I’d say it’s a statement of fact.

    For example, let’s consider the role of price/quantity setting: the state simply CHOOSES to directly control only the overnight rate. It could (and during has) intervened to control the price of credit at other terms.

    In my opinion, that adequately describes a monopoly – a person who has the power to set price/quantity of a good which only they provide.

    As for the rest of your point (1) – I can see that you are viewing it from a perspective of the vertical/horizontal being “individual parts of a whole” whereas I am viewing it from the “issuer/user” perspective. Perhaps that is where our disagreement stems from. I think both are useful ways of viewing it depending on what aspect you want to discuss.

    But I still think this is, more than anything, a semantic argument, and more importantly, I cannot see why this definitional/semantic issue negates any other part of MMT.

    2) It is still entirely within the powers of the state to control this process as much/little as it sees fit.

    3) Perhaps a poor choice of words on my part, I accept.

    My point is this: even though reserves do not constrain banks in their credit issuance, reserves are essential PRIOR to the credit-issuing process because

    (i)transactions between horizontal actors require transactions of bank reserves (unless both actors use the same bank)

    (ii) the deposit-money that banks issue during the credit creation process is denominated in the same currency as their reserves.

  • AK

    I had replied but I’m not sure where it went. In any case I noticed you made some extra points in the meantime so I’ll reply again:

    MMT recognises that banks issue most of the “deposit-money” in our system. MMT recognises that the state does not exercise control over the price or quantity of money. However, MMT also recognises that the state easily could (without any changes to the current institutional structure) exercise as much/little control over these areas as it chooses. That is why, even within the current system, MMT chooses to recognise the state as the monopoly issuer of money; the current structure of the state gives it the POWER to exercise control over virtually all aspects of money (even if it chooses not to). I think this is in line with the traditional definition of a monopolist.

    2) Agreed that credit is crucial. But, as per my above point, the state can exercise any level of control over this that it wishes.

    3) Poorly worded on my behalf. My point is this: although banks aren’t reserve constrained, that does not mean that reserves are irrelevant to the horizontal process. Every private horizontal transaction will result in a reserve transaction (unless both actors use the same bank). That is one of the crucial insights of MMT: regardless of how much deposit-money the horizontal chooses to issue, transactions in this deposit-money will require a corresponding transaction between banks in state-issued reserves (unless of course the actors use the same bank). Therefore, the use of horizontally-created deposit-money DEPENDS on the issuance of state money in the first place.

    Also: the insolvency events of 2008-onwards show that the monopolist does indeed have ultimate power over the banks, because the banks are still a currency user.

    The issue admittedly becomes rather complicated when the vertical starts taking instructions from the horizontal though! If that is the “power” you are describing, then I think you’ll find I agree wholeheartedly.

  • AK

    oops, I thought my earlier reply got deleted so I replied again with some added points… apologies.

  • http://www.pragcap.com Cullen Roche

    1) So, maybe MMT should say “the state could be the monopoly issuer of currency”.

    2) Yes, could, but doesn’t. You’re creating a Robinson Crusoe myth….

    3) There are plenty of banking systems without reserve requirements that marginalize this point. I am not denying that the state has to name the thing which can be used as currency, but that’s different from claiming that the state has a monopoly on it. We know from MMT that loans create deposits so unless you think the state controls the loan process then there’s no such thing as the state being the loan monopolist. If you believe this then you can’t believe the state monopolist myth.

  • AK

    1) MMT looks at the state and observes that it has a number of unique powers over currency that no other actor has; it then chooses to label that as a ‘monopoly’. MMT thinks the term ‘monopoly’ is good enough. You don’t. Either way, MMT nonetheless correctly and accurately describes those ‘unique powers’. Therefore MMT remains valid as an economic framework.

    It’s ultimately a semantic issue. If you describe a ‘monopolist’ as being unconstrained, and then define the word ‘constrained’ broadly enough, then no-one will be a monopolist.

    2) No, I don’t think its an Austrian-style Robinson Crusoe myth, because the Austrians pretend that Robinson Crusoe is the only possible reality.

    I think MMT literature clearly delineates what COULD happen and what DOES happen (as well as what DID happen in the past gold standard days). There’s plenty of MMT literature (i.e. Mitchell) which describes both the current commercial banking arrangement in (excruciating) detail, as well as how a nationalised banking system would work.

    The context is clear: private commercial banking with an interbank market and market-set longer term rates is CURRENTLY how it works; nationalised banking with no long-term government debt instruments is how it COULD work. Unemployment benefits is how the labour buffer stock CURRENTLY works; the JG is how it COULD work. MMT predicts that both of those ideas would work better than the current ones in place, based on MMT’s understanding of CURRENT institutional structure. But in all cases, MMT’s operational observations remain valid and consistent. As Mosler repeats: ‘pick your size of government and adjust accordingly’.

    3) See point (1).

  • http://www.pragcap.com Cullen Roche

    1. I don’t deny that MMT does a superb job of explaining the operational realities of the system. MMR isn’t much different on the ops. But they take it to an extreme using the monopolist terminology. And it’s done to rationalize their policy proposals. They see the state as the monopolist whose role it is to be price setter and employer of last resort. But the whole premise is flawed because the state is not the monopolist. This is most certainly NOT a semantic issue. And constraint does not describe a monopolist. A monopolist has complete control of a means of production. The state, undeniably, does not control the creation of credit. So the entire monopolist argument is bunk. This is an irrefutable point and anyone who denies it is guilty of blatant obfuscation.

    2. If MMT describes a world that COULD be then fine.

  • AK

    You imply that MMT’s policy prescriptions are based on an inherent desire by MMT to create a powerful state. You imply that MMT spends its time describing this imaginary powerful state, instead of describing reality, and that is why its prescriptions are destined to be wrong.

    And it seems to me you hang this all off the use/misuse of the word “monopolist”.

    That is a semantic argument, precisely for the following reason: the validity of MMT’s policy proposals is entirely unaffected by whether or not the current state can be defined as a “monopoly issuer”. MMT’s policy proposals rely purely on whether or not the current state possesses certain important powers over money. MMT accurately points out that the state does indeed have those powers.

    The whole ‘monopolist’ issue is, therefore, a purely semantic issue since it is of no pragmatic consequence. Put simply: if MMT conceded the point, none of its proposals would need to change.

    As an example: I support the job guarantee based on the following:

    (i) lack of a labour buffer stock can cause inflation via a wage-price spiral
    (ii) inflation is a bad thing to be avoided
    (iii) therefore we need a buffer stock of labour to function as a price anchor/inflation regulator
    (iv) the current buffer stock arrangement guarantees a payment to individuals in the buffer stock based purely on their ability to stay alive
    (v) this hurts current productivity as these individuals are a net resource drain. It also hurts future productivity via a less-skilled workforce.
    (vi) a preferable system would be one where the buffer stock is offered any task with a non-zero value-add to society

    Notice that whether the state can be described as a true “monopolist over money” is utterly irrelevant to the aforementioned reasons for a JG. The only thing that is important is that the vertical has the ability to meet the payments. MMT accurately describes the fact that the vertical does indeed have that ability.

    Ultimately, MMT policy prescriptions are broad. Within this broadness lie the ‘grey areas’, which is where genuine debate should occur. For example: (a) MMT says the budget deficit needs to be expanded at the moment in order to boost aggregate demand. Do we do this via a tax cut? Or do we do this via government spending? For whom do we cut taxes? Where do we spend? What gives us the best results? (b) MMT also says we need to make the labour buffer stock more productive. Which job will make them most productive? How do we go about offering it? What resources should we expend in doing so?

    These questions are the ones that require careful consideration of both facts and values – as Mosler often asks, what size government do you want? That’s a value based question; MMT can not, and does not, seek to answer value-based questions. That is the realm of politics.

    So again I return to my central point – MMT describes the best way of achieving certain aims, given current economic reality. Despite all the debate, I still have not heard any economist from any school of thought (including MMR) provide better specific suggestions of achieving those same aims, whilst still remaining consistent with operational reality.

  • Dan M.

    AK & Cullen,

    Maybe I’m misinterpreting MMT here, but I’ve read certain MMT assertions in the past that entirely DO seem to be insisting that the vertical portion is what drives our economy’s ability to grow, and constantly try to toss the horizontal portion way to the back of the bus. I THINK I’ve even read an MMT’er article writer or blogger assert that it’s the government that creates wealth because of its ability to issue NFA’s, and the private sector doesn’t really because the financial assets of the private sector net to zero. It ignored the real wealth of the private sector, but probably would have attributed that to the vertical portion.

    That was probably one skewed, extreme take, but I’m quite sure it was written by a reputable MMT’er. I’ve seen time after time the MMT literature downplay the private sector horizontal level because the value nets to zero. I don’t want to misstate anything from MMT, but I think Cullen is trying to make a point that MMT, through their language, is trying to get people to view things in such a way that over-emphasizes the state and under-emphasizes the private sector’s ability to build productive, wealth-building contracts around the base currency. In fact, private currency that is simply denominated in US dollars is not unlike currencies of centuries past…. most debts and equity are “secured” by real assets. In fact, that’s exactly what a balance sheet shows… the assets, and the claims thereon. So these forms of currency may be serviced in US dollars, but they’re secured by productive assets (or the promise/plan for productive assets to be built), and those productive assets are what drives the value of “private currency (loans, equity contracts, etc,” as much as the dollars they’re serviced with.

    Visualization and semantics are everything when you are trying to get the public to understand an economic theory or monetary process. I feel, now, that while my eyes were being opened (and believe me, MMT has made a great many things much more clear), I was being slightly purposely lead by MMT into over-focusing on the vertical component and wild assumptions about what the state could reasonably get away with in a democracy.

  • http://www.pragcap.com Cullen Roche

    They want the vertical level “center stage”. They say it in their literature. It’s plain as day….

  • Obsvr-1

    The argument & debate is interesting, if one can leave their vertical and horizontal polarized len on and then read or re-read “The Creature from Jekyll Island” you will see the repeated pattern of the boom/bust/bailout orchestrated by the ‘money’ power elite – comprised of the FED/Gov’t-trsy/TBTF Bankers. So instead of using the term ‘monopoly’ it would be better to use ‘cartel’ – as the vertical and horizontal are two arms of the beast, with the gov’t/politicians enabling the process. Unfortunately the regulators are embedded in the belly of the beast, instead of maintaining stability, they are fronting a false sense of security. Allowing regulatory arbitrage and control fraud undermine the system allowing the bubbles to form in the boom/bust/bailout process.

    The pattern that repeats throughout the history of the FED is: Get them in debt, keep them in debt, when they get in trouble give them more debt, until they are insolvent to the inability of paying the interest on the debt. Once the cash flow stops or is in jeopardy of stopping, run to the Gov’t/FED for a bailout. A continuous process of privatized gain and socialized loss. When this process back fired and the BUST was in the financial sector (FIRE) the entire system was destabilized to the brink of destruction. And now the members of the cartel are even stronger (or To Bigger to Fail).

  • AK

    Dan M & Cullen

    Before I make my point, let me make a few things clear:

    I agree that production by the “horizontal” precedes everything. (That includes NFA’s, government action, vertical transactions, and even the existence of government itself.)

    I also agree that investment primarily drives increasing standards of living.
    I also agree that productivity is the ultimate aim with full employment, price stability etc. being important ancillary goals in achieving that aim.

    I don’t agree that MMT ignores, or, is incompatible with any of that. I would say all of the above are cornerstones of MMT, and that is evident in its literature. If someone argues that the horizontal sector has no real wealth, or is not the primary driver of real wealth, then they are fundamentally misrepresenting MMT.

    Now I will be the first to say (and have said many times before) that MMT authors could make more of an effort to make its language clearer. Because MMT has been “at it alone” for so long, and is a complex subject, the language it uses is often esoteric and not meaningful to a wider audience, unless they spend a large amount of time reading volumes of MMT’s literature. This is certainly a valid criticism and is an impediment to MMT’s success. But it is also an unavoidable product of its complexity.

    Ultimately, it is certainly a criticism of style, but not a criticism of substance. You have both criticised MMT only for ascribing incorrect meaning to words. That is, by definition, semantics. Now, labelling something as “semantics” does not mean it’s unimportant; but it can mean it is of no practical consequence.

    That is the exact situation we find ourselves in here: I still have not read any good reasons as to why the specific, pragmatic, consequences of MMT change if you define the vertical as a “true monopolist” or not. With respect, simply saying “because it overemphasises vertical power” it not really saying much at all, and is more of an ideological statement.

    I want to hear why MMT is practically wrong.

  • http://www.pragcap.com Cullen Roche

    What MMTers do is build up the monopolist argument in an effort to support the claim that the govt should be the price setter and employer of last resort. So, if you don’t have the monopolist you’ve kicked the legs out from under the job guarantee and the price setter argument. Since credit is money, and the govt doesn’t have a monopoly on credit, then there’s no monopoly on money. Which means the basis for the JG and govt as price setter is based on a flawed premise. The theory is wrong not only from its foundation, but all the way to its policy conclusions. The only way you could deny this is to claim that the state has a money monopoly despite not having a credit monopoly. In which case you’d be creating an alternate reality…..

  • AK

    “What MMTers do is build up the monopolist argument in an effort to support the claim that the govt should be the price setter and employer of last resort.”

    MMT does not argue that the govt should be the price setter and employer of last resort. MMT argues that the govt is already the price setter and employer of last resort. The monopolist definition is not needed at all to support either conclusion:
    - The government already is a price setter in the labour market, because it sets the price floor of the labour market via the minimum wage. (I am assuming you might argue that setting the price of minimum-wage earners is not equivalent to setting the price of all labour, and hence cannot be labelled as a “price setter”. Again – a semantic issue. Perhaps it would be more accurate to say that the state is the only coercive price setter in the labour market – private actors can only respond to the minimum wage by setting their prices at minimum wage, or, higher than minimum wage if they need to attract scarcer labour. If you offer a worker less than minimum wage, you will likely attract punishment from the state. Therefore: the state is the only coercive price setter within the labour market.)

    - The government already is the only employer of last resort – if the private sector won’t give you a job, the government will currently employ you to stay alive.

    So I repeat my previous contention: I still have not read any good reasons why MMT’s practical foundations, its descriptions, and its prescriptions, are incorrect.