FINAL THOUGHTS ON THE AUSTRIAN SCHOOL

* This post was written in 2011 before Mr. Roche founded Monetary Realism, which was formed due to several disagreements Mr. Roche and many other former MMT proponents had with the school of thought.  For more info on the difference in views please see here.  For more on MR’s views please see here.

 

(If you’re interested in reading part 1 of this post please see here)

Robert Murphy of Austrian school fame has posted some final thoughts on MMT. It’s my opinion that the Austrian perspective is confused about the actual workings of a modern fiat monetary system so some clarification is necessary. In his commentary Mr. Murphy makes three final points:

POINT #1: The accounting identities don’t prove the things that the MMTers think they prove, at least not by themselves.

The goal of Mr. Murphy’s initial article was to show that a modern fiat monetary system need not involve government spending in order for the private sector to save. Mr. Murphy has created his own mythical world where there is no government sector.

In a classic case of confirmation bias, Mr. Murphy has created this mythical anarchist world that he likes to refer to as “Robinson Crusoe economics”. What he has done is created an anarchist world and then filled in the pieces to prove his point. The only problem is, we don’t live in a world that even remotely resembles the Robinson Crusoe world. We live in a world where there is a highly developed government, a foreign sector and a highly productive private sector.

Mr. Murphy “proves” his point in this example by showing that Crusoe can save in coconuts. And this is quite true. If the private sector of the United States desired to save in coconuts they most certainly could (assuming they lived on this mythical island). They don’t need any government money or government spending to save. Unfortunately for those of us that live on planet earth in the USA, we must transact in USD. Why? Because we live within the organized society that our forebearers designed for us and what we call the United States of America. When they designed this society they created a common currency. And in return for specific benefits of this society they created a tax liability that was only payable in the currency of the USA. So, while Mr. Murphy might be quite content collecting coconuts in his free time I can assure you that he saves in US dollars in order to meet his tax liabilities. How do I know this? Well, I know it because the book he so prominently pushes on his website is sold for 22 DOLLARS and not 22 COCONUTS:

You’ll notice that he is not selling his textbook for 22 coconuts. No, he is selling his book for 22 dollars. And some portion of that $22 goes to Uncle Sam. More importantly, those $22 dollars can ONLY come from one place – they must be spent into existence by the government of the USA. If they are never spent into existence then they never exist in the first place. So, you can see why Mr. Murphy is eager to collect his book payments in USD and not in coconuts. He must fulfill his tax liability in the currency of the USA.

Now, I am using this example a bit tongue-in-cheek, but it is applicable in a broader sense. In doing business in the USA we incur a tax liability and that tax liability can only be extinguished via US dollars. If you take a basket of coconuts to the IRS on April 15th they will tell you to go sell the coconuts and exchange them for USD. Payment of taxes ultimately involves savings in the currency that the USA deems as proper for extinguishing tax liabilities. And that means accumulating the same currency that only the USA can spend into existence….

POINT #2: Neither the Austrians nor the Keynesians deny that the Fed could print whatever amount of money is necessary, in order to avoid a technical default on government bonds.

We don’t agree at all according to Mr. Murphy’s own commentary. First of all, we should better understand the Fed and Treasury’s symbiotic relationship so as to avoid the myths villainizing the Fed at all times. And hyperinflation is a rejection of state money (the same state money that Mr. Murphy rejects the existence of – contradiction there – yes). But let’s not get off point here. In an interview that is prominent on his website with Fox Business Mr. Murphy compared the US government to a shopper in a grocery store who can’t pay for all of his food and asks the store for a line of credit to be extended. This proves that Mr. Murphy is being disingenuous in his comments or just flat out doesn’t understand the fiat monetary system.

A currency issuer can never become insolvent in the currency that it issues if its debt is denominated entirely in that currency. This is NOTHING like a household which is ALWAYS revenue constrained. Warren Buffett cited this point in a recent CNBC interview:

Buffett says the U.S. will not “have a debt crisis of any kind as long as we keep issuing our notes in our own currency.”

So, Mr. Murphy’s comparison to a shopper at the grocery store is entirely incorrect. It is not even remotely applicable. So his comment here is either a change in his entire position (an admission of being wrong) or he is being disingenuous in claiming that we agree. Clearly, Mr. Murphy does not recognize the fundamental difference between a currency user and a currency issuer.

POINT #3: Even in its textbook version, “crowding out” is consistent with higher private sector saving. What is being crowded out is private investment.

I covered this in the original post so I won’t belabor the point, however, Mr. Murphy attempts to prove his point by falling back on the loanable funds market. Mr. Murphy’s use of the loanable funds market proves his lack of understanding with regards to basic banking operations. As Dr. Scott Fullwiler has previously explained, the entire idea of the loanable funds market is flawed:

“This model (loanable funds market) is simply inapplicable to our current monetary system in which bank loans are created “out of thin air” without the requirement of prior reserve balances or deposits to “fund” the loan’s creation. Completely contrary to the loanable funds model, in fact, the vast majority of bank liabilities have been created by banks simply growing their balance sheets through loans and asset purchases.”

In a modern banking system banks are never reserve constrained. An Austrian colleague of Mr. Murphy’s has shown this to be true. So, the entire point on crowding out is dead in the water….

—————————————————————————

* Edit – This article is nothing personal against Mr. Murphy.  I am sure he’s a good man and a fine American.  His teachings represent a broader perspective by a wide audience.  So while some of these arguments may appear directed at him, I can assure you they are not.  They are merely meant to show how a broader school of thinking is, in my opinion, misguided and/or incomplete.

-------------------------------------------------------------------------------------------------------------------

Got a comment or question about this post? Feel free to use the Ask Cullen section or leave a comment in the forum.

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:
TwitterLinkedIn

Comments

  1. He can only save in coconuts to the extent that the coconut tree ‘deficit spends’ coconuts.

    If the tree decides not to produce any coconuts, there can be no saving.

    In the Robinson Crusoe world, the palm tree is the government.

  2. Ha! That book isn’t worth even a single coconut! :)

    One of the biggest misunderstandings is that “funding” deficits by “money printing” is completely different to “funding” by taxes or the issue of securities. In reality, the same reserve accounts at the Fed are credited and debited regardless of the “funding” method.

    Economists who refute MMT seem to think that the process of government spending is like collecting acorns from a tree (taxes) in order to be able to throw them (spending). This is just flat out wrong if when the government is the monopoly supplier.

  3. Any economist who is still trotting out the old loanable funds market has no idea what he/she is talking about. You would think that two rounds of QE and continue loan declines would change that, but apparently some people just can’t connect the dots. Murphy is an embarrassment to all economists.

  4. Mr. Roche,
    I am in the process of understanding MMT. Most of the so called “inflation” have shown up in commodities that are traded in the futures market. This seems to suggest that this increase in price is due to speculation and QE1/QE2, etc. has given an excuse for bank’s investment divisions to speculate in these markets. In order to turn this speculation into huge profits these banks now have to find a greater fool to offload these futures positions at high prices. In this case the greater fool is the small-investor or retail investor. I think Bernanke and his buddies are in the process of creating an environment and they won’t stop until every man on main-street believes Gold and other commodities are going to the moon. It is clear Mr. Bernanke is taking care of elite bankers.

    I wonder in the future if workers-wages can also be traded in the futures markets (btw Yale Economist Shiller have suggested that and called it employment-insurance in his book ‘The New Financial Order’) then FED and the bankers at their will can create wage-inflation as well. What do you think about such a change from MMT’s perceptive?

  5. >(the same state money that Mr. Murphy rejects the existence of – contradiction there – yes)

    Cullen this is silly. Mr Murphy does not deny the existence of the government money monopolly.

    What would you say such a thing?

  6. Cullen,

    I have to say I am disgusted by the way you wage your arguments here and in the previous post about Austrians. You are using a long list of “uncivilized” ways to carry an argument:

    – ad hominem attacks
    – interpreting the words of people your way
    – dodging questions, often by repeating meaningless facts that are not to the point
    – saying something is so, if you do not like it, leave (What about your belief in American democracy – am I not allowed if I do not like it to vote to change it? Am I not allowed to think of better ways to do things?)
    – stating things as fact, which are by no means so

    This shows only one thing – you are dogmatic about MMT. I am really sorry to see it. I would embrace Ed Harrison’s approach, as Austrians and MMTers have a lot in common.

    InvestorX

  7. Not only do Austrians not understand fiat money: they don’t even seem to understand a lot of basic economics. For example, take those simple supply / demand graphs that appear in every basic economics text book.

    An article published by von Mises entitled “What is Austrian Economics” thinks those graphs are invalid because “It is not possible to collapse tastes or time schedules onto one curve and call it consumer preference. Why? Because economic value is subjective to the individual.” Well, amazing as it may seem, about 99% of those who adhere to conventional economics (and who accept the above sort of graphs) have tumbled to the fact that everyone’s tastes and preferences are different. Doh!

    The article also makes the absurd claim that “The concepts of scarcity and choice lie at the heart of Austrian economics”. No they don’t: the allocation of scarce resources is what economics is all about, as it explains in Chapter 1 of every basic text book. It’s not just Austrian economics that is all about scarcity and choice.

    The above Austrian article is here:

    http://mises.org/etexts/austrian.asp

  8. “More importantly, those $22 dollars can ONLY come from one place – they must be spent into existence by the government of the USA … Payment of taxes ultimately involves savings in the currency that the USA deems as proper for extinguishing tax liabilities. And that means accumulating the same currency that only the USA can spend into existence…. ”

    No. The endogenous banking system can lend it into existence, without the government running a prior deficit. And if the government is not running a deficit, it’s not spending anything into existence.

  9. Also, the banking system doesn’t require reserves to pay taxes, either on behalf of customers or for its own account. It only requires the difference between tax or borrowing inflows and government expenditure outflows – i.e. the amount of any net increase in its operating account at the Fed. The amount of that change, and even the total level of the account, are always negligible in context, and bear no relationship to gross tax inflows.

  10. “The Fed doesn’t print money”

    It’s a wonder that while MMT insists on its own contrived construction of “operational realities” on the one hand, it has the gall to put foward this flimsy detail as any kind of argument about anything.

  11. The point on taxes is that the construction of the MMT argument is biased toward the pre-existence of deficits rather than surpluses. There may be good arguments for this, but the preconditions for paying taxes is not one of them.

  12. Your point on taxes can only be satisfied with US dollars is not exactly correct. The IRS routinely seizes property (coconuts perhaps) of many types to satisfy tax liens.

    Jim

  13. This quote is not to be found on the link you provided. And probably it comes from a branch of AE called Exreme Subjective Theory or so. So the name of the branch says it is extreme, and it is not a common Austrian belief.

    InvestorX

  14. TPC – nice responses to Mr. Murphy. For what it’s worth, Mr. Murphy seems like a pretty stand up guy. I have never met him, but he has engaged me on his blog a number of times very respectfully and was willing to give me a chance on his turf. He is, of course, like most Austrians (and Keynsians), blinded by ideology, but I’ll give him some credit for taking a stab at this, even if it was with a butter knife

    Again, nice comments. Appreciate the time.

  15. The way discussions are carried out here, shows nothing different – ideological blindness and dogmatism.

    I am searching for the truth about the economy’ workinga and am willing to synthesize all schools of thought. This is not possible here though, which is really sad. So this site is not “pragmatic”, when it comes to economic theory, only when it comes to trading markets.

    InvestorX

  16. I disagree that Cullen has been “uncivilized”. Look at yesterday’s thread. Cullen posted an unbelievable amount of detailed responses to all comers (he must have been at it all day!). I’d say he has been remarkably patient.

  17. no confusion at all

    non-bank taxpayer pays taxes with horizontal money
    taxpayer’s bank pays with reserve debit
    government spends or central bank buys a non-government asset, crediting reserves

  18. Sly Stone sang, “Different stokes for differt folks”. Agree to disagree. You say tomayto, I say tomahto. Unfortunately, we can’t call the whole thing off.
    But this much is true. If a growing society has a propensity to save, money needs to be created from somewhere. My mother told me money doesn’t grow on trees (like coconuts). Our government does not drop money out of helicopters either. We are no longer on a gold standard or any kind of fixed exchange rate. We issue our own currency and all of our debts are paid in that currency. We have lot’s of resources, both natural and physical. All sorts of other countries also desire to save in our currency. In all these last few decades since 1971, we have yet to run out of currency.
    I don’t think any of those statements are wrong. I am not an economist and have never played one on TV, but from my perspective, the MMT “operational realities” make perfect sense. Just my humble opinion.

  19. Mr Roche-

    My perspective is one that comes from understanding Austrian thought first, and finding your website and other MMT materials later. I have found both to be illuminating and a worthwhile lens analyze problems.

    With that disclosure and caveat up front, I believe you are missing the bridge that could connnect your two viewpoints: the Austrian definition of savings is different but not imcompatible with yours/MMTs. I think a honest openminded Austrian would not argue with the math that Govt deficeit or net exports are required for the private sector to accumulate FINANCIAL assets. But the austrian view focuses on productive capital assets more so than financial assets. So, to close the loop by borrowing a favorite Austrian metaphor – If you burn the furniture, sure it will keep you warm in the winter, but then question then becomes, do the financial assets you accumulated in that time buy you new furniture of the same quality?

    The way things are going now, and I have bought furniture lately, I say no.

  20. The biggest practical issue with MMT is behavior. In the real world and not one filled with coconuts, if every politician believed MMT as Cullen does do you truly think we would not end with hyper inflation? Cullen always says MMT is not about spending money with abandon (since the govt can spend at will UP TO a point of caustic inflation) but it does not take into account our (or most countries) political system.

    Look at the level of spending we do even when 98% of the politicians truly believe they are driving the coun try into a wall long term. They wont cut anything of substance in that world. Do you really want to test them in a world where you say to them…you are allowed and indeed encouraged to spend and tax cut to your hearts content up to the point it becomes severely inflationary. A point Cullen cannot identify nor anyone can beforehand.

    In what fantasy will these same politicians then go to their constituents and then RAISE taxes AND CUT BACK spending when the time is necessary and inflation begins to ramp severely due to their previous decision.

    That is the missing part of all these theoretical discussions. And the only retort you ever hear is we need to put the right type of responsible leadership in govt so that does not happen. That answer is as fanciful as coconut island. The minute every politician changes to MMT theory is the day the path to hyperinflation is set in stone in. REALITY rather than in the economic textbook where you have rational thoughtful leaders rather than a bunch of skunks who care only about a reelection cycle.

    And I have not even touched on the american people,95% of which will cry afoul if anyone raises their taxes or cuts a progra, they benefit from because some economic theory calls for it.

  21. While I appreciate the impassioned defense of MMT and against the conventional wisdom, I wish that someone would make a similar plea against the faulty economic paradigm of the Federal Reserve. I have seen it some on this site, but it needs to be done more broadly. The fact that a Board of unelected officials has such power of the US economy, while executing an incorrect and misguided view of economics is frightening.

    Where is the empirical evidence to suggest that zero interest rates promote lower unemployment? Without this facet of the Fed’s mission (i.e., full employment), their current monetary stance is indefensible. Yet during his press conference, Bernanke said in as many words that the Fed has limited ability to effect long-term unemployment. By extension, rates are low because unemployment remains high, yet rates have little effect on unemployment. Thus we are eroding savers and thereby damaging our nation’s ability to prepare for the coming Baby Boomer retirement, promoting speculation over investment, and lowering real wages.

    The same people who (rightly) complain about stagnating income for the middle class and the bifurcation in real wages growth over time for some reason also support ZIRP and QE2 based upon the premise that as long as there is no wage inflation that the Fed may as well be as aggressive as possible monetarily. But flat wages combined with higher commodity prices means lower real wages by definition. Why exactly is this good?

    Lastly, where is the empirical evidence that an activist Fed and unnaturally low interest rates promote economic strength? It certainly hasn’t in Japan and evidence in the US suggests that the move to monetary Keynesianism has coincided with a loss of jobs and a decrease in capital investment in the US. Yet the response of Bernanke and his ilk is that the problem here (post-1929) and in Japan more recently is that we did not do enough and that it did not occur fast enough. This is an unprovable counterfactual and a built-in retort to any complaints that their failed policies are not working. If the Fed fails, then people like Krugman will simply state that the problem was that QE2 wasn’t big enough. It won’t be because the policies are intrinsically wrong and completely lack empirical evidence for ever having succeeded.

    I have no issue with QE, given the prevailing circumstances at the time. But now we have moved from “crisis” mode to ongoing policy. Yet, if anything, the commitment to even more radical policy has only increased. Given this failed Fed paradigm and the fact that it will be defended ideologically by its purveyors as successful in theory with the only failure being that it wasn’t done aggressively enough, how do we break the cycle and move onto a more prudent policy that actually has the possibility of success?

    There needs to be a real debate about Fed’s paradigm, yet most of the economic/financial profession seem to be in support of it–some for largely selfish reasons (e.g., Wall St who loves the effect of said policy on their bonus pool). It has become accepted wisdom that much of the fight for political ideology has had to be done through the courts by appointing like-minded judges. Perhaps we need a similar fight through appointees on the Fed Board of Governors.

  22. keynesian economics is like socialism. its a great system, it just has never been implemented in the right way.

    lol.

  23. It seems several people on this blog believe that Govt Spending is generating inflation but I think the current rise in commodity prices are due to govt spending but due to banks speculating in the futures markets.

  24. “Unfortunately for those of us that live on planet earth in the USA, we must transact in USD. Why? Because we live within the organized society that our forebearers designed for us and what we call the United States of America. When they designed this society they created a common currency. And in return for specific benefits of this society they created a tax liability that was only payable in the currency of the USA.”

    That is wrong and misleading.

    In the field of taxation the idea of America started to be lost in the late 19th century. A temporary federal income tax was first created only in 1862 to finance the Civil War and extended twice, it died in 1872 but was re-adopted by congress in 1894, only to be ruled “unconstitutional” by the Supreme court in 1896. In 1913 the sixteenth Amendment legalized it. Financing wars was the original and only reason for taxation.

    Originally when one starts thinking about America’s real government origins one is immediately confronted with the most beneficial paradox in history which was a respected state trusted to protect the right of individuals to distrust it.

    The coconuts are only used a analogy just like you use your little isle where some produce goods wile a few print a fiat currency and conveniently live at there expense.

  25. Sancho Panza goes to the heart of the matter: the Austrian theorem is that currency serves no other purpose than to reduce the friction costs of barter exchange. Excessive governments intervention in markets – credit markets, goods, services, you name it – can only come at the expense of ‘real’ savings because by definition, governments cannot create wealth. Real savings are the pool of productive assets – the furniture – that governments nowadays seem hell-bent on destroying by, for example, bailing out any banker, broker or even country that squeals because of its own recklessness, but there is a legion of further examples. MMT appears rather vague when it comes to addressing these fundamentals.

  26. Don’t get mad. Get even. I disagree that I have been uncivilized. I think I have merely squashed his argument and you are upset by it. So, instead of respond to the meat of the argument you have decided that I am waging an unfair war. That’s fine, but you’d further your cause better by proving me wrong rather than claiming that my tactics are dirty…..

    If you’ve got an argument then make it. I am perfectly happy to hear what you’ve got to say.

  27. MMT is the correct school for describing the functioning of the modern monetary system. Kudos to TPC for schooling all of us in the particulars which many times are anything but straightforward.

    However, this also needs to be tempered in that the comparison to a monetary alchemist is not exactly on point. An alchemist actually creates a good that everyone universally values.

    For now, the dollar is similarly valued. When we start seeing a rejection or unilateral repricing in goods with our trading partners, that is when the jig is up. And I would humbly suggest that we are seeing moves in that direction right now.

    Deficits and debts matter. And anyone who espouses a MMT position and yet does not recognize that fiscal insanity will eventually destroy us (and I mean in the next decade) has no idea what they are talking about.

  28. You might want to review the history of US taxation. The states have always had the power to tax property. So your focus on the income tax is missing the forest for the trees.

  29. of course the government is fiscal

    the MMT complaint relates to recognizing crediting of bank accounts as opposed to printing; rather a lame distinction

  30. No, it’s a rather important one because once you understand the real operations of a fiat monetary system you recognize that the Fed is not entirely necessary as is. You guys all want to abolish the Fed yet you’re making this claim that it performs this necessary function. Again, the austrian argument is filled with many contradictions….

  31. You picked too easy of a target. The Austrians pilfered all of the money definitions from the Chicago School.

  32. When you fall in love with the yellow metal, it is easy to confuse the nominal with real.

  33. not clear because its wrong

    banks don’t “leverage” HPM; Canada has a zero HPM requirement

    the banking system is not short HPM when it makes a loan – which is why Canada can run a zero requirement system

    HPM is for clearing and settlement, not for making loans

    nothing special about loans and HPM

  34. You’ve gotta love how all these gold bugs tell everyone to buy gold and yet, in their personal lives, they do nothing but transact in dollars. You can only buy Murhpy’s book in dollars. So, while he hates the system and wants it torn down, he has no problem benefiting from it and selling millions of books in the process.

    How do these guys even have an audience? It’s a bunch of old rich guys complaining about how the greatest economic engine in the history of man has suddenly failed them (as they collect dollars in exchange for fear).

  35. you frequently miss the very point of a response

    the MMT distinction is not what you say it is

    its between crediting accounts and printing; not between fiscal and monetary

    the former is lame; the latter is worthy of debate

  36. Of course the govt has to have created the currency in order for a banking system denominated in that currency to exist.

    That doesn’t mean banks are reserve constrained. You’re missing the whole point in your semantic argument.

  37. So, if the Fed is this vital entity with the unlimited almighty power of printing money then surely it must exist. So why do the Austrians want to abolish it? Who would “print the money” then? Or is this the point where we all go live in the anarchy world with no govt spending???

  38. Additionally, this debate is easily squashed. If the US govt decided to eliminate its currency overnight then the banks would be without “money”. It’s that simple. So his argument is totally nonsensical. They can’t transact in USD if the USD doesn’t first exist.

    A bit of common sense goes a long way…..

  39. I think the best way for the average person to think of MMT is as a flows model, where the Austrian concepts are normally interested in the stocks model (resource allocation). MMT accounts for financial transactions, whereas Austrians account for the follow-on effects of those transactions.

    Now, Wynne Godley and others developed what they term a stock-flow consistent model. But i still contend once the flows are accounted for, the long-term effects are going to be determined by how well an economy allocates its resources according to its desired goals. And this is why the Ausrians always have a good point. The economy-wide market system is constantly assimilating information based on micro-oriented choices, so that in the aggregate prices are a better signal for allocating resources than 10 guys sitting in a room who have no way of knowing what the economy demands and needs to supply at given intervals.

    So it gets back to the age old debate about who best allocates resources — the economy itself or 10 guys sitting in a room. That is, the market or the government. And I suspect the Austrians have an allergy to government intervention because they understand the historical pattern of government tyranny and misallocating resources. At the same time, it may prevent them from having an open mind for learning new things about how the modern monetary system actually functions. Policy choices are separate from the system.

  40. This is what the Austrians like to do. They like to create these unrealistic scenarios without actually thinking them thru. In this case, anon has created this mythical world where USD’s exist without the government having first created them. As if USD’s are a construct of the US banking system and not the US government.

    Uh sorry buddy, but banks didn’t create the US Dollar. The US Dollar was created by our government and can only be created by our government.

  41. Yeah, they completely reject the idea that a sovereign currency is a construct of the state. In doing so, they totally miss the point. They ignore the fact that savings denominated in USD has to come from somewhere and that the banking system didn’t just magically create all these dollars on their own. No, they were created by the USD govt. The daily operations of the US banks aren’t constrained by the amount of reserves in the system. But taken to its logical extreme, they are constrained in their ability to transact in US to the extent that USD must actually exist! It doesn’t take much common sense to get past this point and quite frankly, I am surprised that some sharp people can just unwittingly overlook such an obvious point….

    Bill and anon believe they have some “gotcha” moment when the reality is that he is proving my very point. The fact that the banks even have USD in the first place is a construct of the states creation of this currency….This is beyond common sense and should be very easy to understand. A currency which doesn’t exist cannot have a banking system denominated in that currency….

  42. Cullen, these are not rational people. There is a group of austrians who honestly believe the world could exist without any form of government. I can kill that argument in a paragraph.

    If we have no taxes and hence no formal government we would have to rely on private militias for protection. Now, Robert Murphy says we can all be protected by these private armies for hire. It would work by paying into an insurance fund. Of course, when seen logically it’s easy to see the flaw in this. No one would want to pay for the military insurance in peace time. So, in peace time the army would have no funding and would be small by necessity. But as soon as a nuke lands in NYC everyone would get scared and buy army insurance. Then we’d have a surge in military. The only problem is that they’d be entirely untrained and unprepared for battle because they’d be mostly new hires. The only way to have a well prepared and stable military is by having consistent funding for an army. In a free market system that is just no realistic. Free markets work in ebbs and flows and the funding into a private army would collapse during peace time. That’s how free markets work. And in doing so, it would make us most vulnerable most of the time.

    As you said, a little common sense goes a long way.

  43. A better example of how ridiculous the anarchy argument is is the police. Who would police everyone? Private security forces, right? So, if your neighbor decides to have a party at 3AM and you call your security force, what would happen? They go over and knock on the drunk neighbors door and the neighbor goes:

    “Dude, who the f$ck are you. Get off my private property. I didn’t hire you to police my house. You have no authority to infringe on my civil liberties!” (door slams in face of security officer).

    Some higher entity has to give these people the authority to do these sorts of things. A private security force will never be seen as having this authority because 95% of the citizens won’t be under contract with them.

    An even scarier thought is with the private armies and advanced weaponry. Who controls all the US nukes? Who controls the nuclear subs? Do you really want your crazy ass neighbor, who owns a private military force, with his finger over the button? Uh, no.

    None of it makes sense at all.

  44. I have no problem with a smaller govt. It’s not at all incompatible with MMT. I have a serious problem with Mr. Murphy’s unrealistic belief that we could have zero govt.

    I do have a problem with smaller government because most of the arguments made against it are fraudulent lies.

    Really what these people want is the ability to extort one sector of the economy at the expense of others. Or create a tribal system (Afghanistan) where THEY are the ones in power.

    The world is complex the US in complex deal with it. Government needs to be large enough to be effective and to be effective it requires some size in some cases.

  45. You’re misinterpreting the word “leverage” here, just as horizontalist critics of Wray used to do. Leverage is used by MMT’ers to essentially mean “short position.” “Leverage” is used this way all the time in finance. So, banks in Canada, when they lend, create a short position for themselves in reserve balances; that is, they need to get reserve balances if they ultimately have to settle the payments made by the recipient of the loan. This is true even though there are no reserve balances held overnight. The point has nothing to do with being reserve constrained or the money multiplier. Given the confusion the word “leverage” caused years ago (i.e., “leverage” has multiple meanings), though, I stopped using it and replaced it with “short position” or something equivalent.

  46. The Austrians seem to think that money grows on trees like coconuts. In addition, they make up their own definitions and accounting rules. They are in a non-parallel universe. There is no sense arguing if you don’t agree on what economist generally accept. Maybe they can create a country somewhere to see if their ideas actually work.

  47. He’s making an even more extreme error. He’s actually claiming that a banking system denominated in USD could exist without the govt having first created the USD. Common sense is very uncommon.

  48. “The economy-wide market system is constantly assimilating information based on micro-oriented choices”

    Except from those with choices but no money to generate the necessary market information, ie those in poverty.

    Which causes the system to under-produce ‘needs’ and over-produce ‘wants’.

    The current system has faulty signalling which means that it is driving along with the brake permanently on. Yet that wasted effort is sorted very quickly once you realise that the currency issuer has to balance everybody else’s budget, not just their own.

  49. True. Either a deficit or a loan from the govt/cb (i.e., surplus position) will create reserve balances for the non-govt sector to use to settle a tax liability. My MMT colleagues usually leave out the latter, for some reason. The case would seem to be stronger if both were included.

  50. Their ideas are in full force in many African countries. Perhaps Bob Murphy would like to forego his comfy home, modern computer system, etc and run around the African desert for a few months? It’s like all these people who claim that austerity is so great. Oh yeah, quit your job and move to Greece, try to get a job and report back in 6 months. Tell us how you feel after you can’t feed your family.

    I don’t think America is perfect. There are lots of problems right now and there are lots of things that need fixing, but in less than 300 years we have created the most advanced and prosperous nation that man has ever seen. And there is an entire segment of the population who wants us all to believe that the world is this horrible place that needs to be drastically reformed. Meanwhile, Bob Murphy is sipping a chi latte somewhere reviewing the comments on his new computer with the AC blasting on his face. What a life these guys all have ! They make millions scaring people into buying their books!

  51. > by definition, governments cannot create wealth

    whomever wrote that never heard of “auto-catalysis,” “social species”, tribes, nations, corporations, thermodynamics, return-on-coordination or even reverse-entropy;

    How silly of the rest of the world not to recognize that they’re all wrong & that the Austrian logical “meanderthals” are right.

    Also, the author must not have heard that the government is us? Guess it’s not in Austrian land?

  52. Yes, I remember asking Warren how the govt could tax more than the total of cumulative deficits and he replied “by loaning the funds to be taxed to the non-govt sector”. So, yes, the govt can be in “surplus” and still tax, but this is a very funny case. Which is why most MMT blogs ignore it, I guess.

  53. Cullen, since USD is dominant world reserve currency and since World Trade (and thus dealings in dollars) has exploded over past decade, the question is “How do all those dollars get created for other countries to use”. How does this aspect impact MMT?

  54. For me though, I am not really talking about decrying the Fed per se. I am wondering why there are so few voices challenging the very premises upon which they make their decisions–essentially their fundamental paradigm. There are people like Ron Paul who want to outlaw the Fed. There have been some murmurs on the Right about trying to eliminate the dual mandate. But I see very few people challenging the economic principles upon which they operate. The only one that really comes to mind is Doug Noland. There are others, but most of those have a selfish ideological angle they are pursuing, as opposed to a true intellectual disagreement. And as long as the opposition in ideological, its hard to see change occurring until the current methodology fails spectacularly.

    The reason I brought this into an MMT thread is because I respect Cullen’s attempt to win people over to his viewpoint through constant debate and discussion done so in a constructive way. While I do not agree with all of MMT, there is much of it that I am willing to accept as true following lots of reading and debate.

    On the other hand, I see almost no debate or constructive discussion about the Fed’s belief system and the principles that they hold to be true which underpin all of their actions. Ideological discussions sometimes, but really very few questioning the empirical evidence supporting or disputing the efficacy of their actions. How can we have a Board of Governors at the Fed, in which even the so-called hawks are unwilling to vote for any rate normalization? There is such broad consensus that even the dissenters are not really dissenters–they simply believe in lower degrees of the same ideology of interventionism and easy money.

    How do we productively move forward from here when that is the case?

  55. And of course the loan from the govt will have to be repaid and for this to be able to happen the govt will either have to deficit-spend in the future or to forgive the loan, which is functionally the same as deficit spending.
    Scott, am I missing something?

  56. Thanks Cullen….so presumably the risk once again reverts to “value-integrity” of USD….depreciation of USD and inflation.

    I invariably appreciate your writings and insights.

  57. I’ve done a huge amount of work on this within my QE work. And the foundation of that is a belief that the Fed’s existence and involvement in the market is an extension of flawed monetary theory and policy.

  58. There is a frighteningly high level of common sense in everything you write Cullen. Thanks for seeing the world so clearly and passing that vision on to the rest of world – much of which appears to be blind.

  59. TPC, … reading Krugman’s book on a real world example of monetary policy in a micro-economy (the Whitehouse babysitting pool), it’s clear you don’t need spending. At the minimum you need a credible authority that will create and lend babysitting chits. Perhaps the disagreement between you and Mr. Murphy, is simply, he is saying you don’t **in principle** need to spend, whereas you are saying “that’s the way we do it in practice” (in practice means, the gov spending [like gov debt] is the price setter or reference).

  60. TPC, … BTW you should put a “no coconuts” logo (i.e. red-slahed coconut) on your site. Sweeeeet …

  61. i think it is very hard for either side to win this argument (even though I realize that this site is mostly MMT followers). My understanding is that for Austrians money is a medium of exchange whose value is the productive capacity of the nation. In this language deficit spending and fractional reserve banking system (while credit is expanded) is inflationary. Please don’t show me a chart of CPI because in Austrian definition there is more money in circulation per same output is the definition of inflation, not a weighted index constructed by a bunch of reasonably smart people. I understand that MMT does not view it as inflationaery because all these changes are assumed to be reversed at some point through taxation, credit contruction etc. Austians do not argue with that they just see that construction as the reason for the bust part of the boom bust cycle. To me MMT’ers and Austrians are speaking different languages. Where it gets confusing is, they use the same words (inflation, credit, money creation) but assign different meanings to them. So they think they are arguing (because the words sound the same) but they are not, because they do not understand statements made using the same econ lingo made by the other side. I am not an economist but that’s my understanging of the problem. Please do not throuw coconuts or gold bars (per gold standard everyone here hates) at me. I think Austrian understanding to misallocations of resources and profits and its effect on a business cycle under fiat currency or a fractional credit system makes perfect sence. Accounting identities are nice but they do not get out out of gross misalocations and destructive bubbles followed but spectacular busts. I am not even talking about moral hazard arising from the easy money policies (yes, of course they can be reversedover a full cycle, but only if it is run by a folmula, not a charizmatic Princeton professor playing God).

  62. My goodness, you’re missing the point here. I have nothing to do with the Austrians, or defending them. I’m interested in your interpretation of MMT. That is all.

  63. At the minimum you need a credible authority that will create and lend babysitting chits.

    And when it injects those chits into the economy, what do you think it is called? It is called deficit-spending.

  64. To be clear: when you say “lend” you presume it will later collect on the loan. But if your credible authority is the only source of chits in the economy, then it can collect only on the things that it itself creates prior to that. So, on the whole, the only way the chits can be repaid is by deficit spending of the authority. It is really simple.

  65. No, Austrians are speaking politics. It is a school of thought intended to always push govt away. There is nothing rational about it. For instance, they claim that inflation is always a rise in the amount of money over some output. And they go into these elaborate arguments about how this is always bad and its an extension of big govt largesse and they show us charts that claim the dollar has fallen 90% over the last 100 years. Well, that’s just flat out dead wrong. The US money supply has increased enormously since 1913. If you’d told an Austrian that the money supply would explode the way it has over the next 100 years they would have told you the world was totally screwed and that govt was about to ruin everything. Instead, the 1900’s were characterized by the single greatest period of wealth creation and prosperity that any society in the history of man has ever undergone. And the USA and its big govt led that charge. Now, the austrians would claim that it could have been even better. Well yeah, that’s like marrying Heidi Klum and then complaining about her not being more beautiful.

    The very existence of this school of thought seeks to destroy or minimize the greatest construct of the last 300 years. They want us all to believe that the USA is this horrible place where everyone is getting screwed over. Well news flash. We are the richest most prosperous nation in the world. Are there big problems? Yes. And I discuss them routinely. But we don’t need to destroy the govt to achieve prosperity.

    And while their rhetoric might sound great in theory it is nonsense in reality. So, while the public eats up this nonsense, people like Peter Schiff and Jim Rogers and Bob Murphy are selling you products, sailing around the world, paying their taxes in USD and generally benefiting from this great system that they love to hate. And you’re worse off for it….

    Please. It’s a political school of thought cloaked as a economic theory.

  66. Trading with the U.S. doesn’t preclude China from getting rid of Tsy’s, right? It’s just that they are earning interest with Tsy’s as opposed to holding USD. But if they did want to get rid of Tsy’s, what would happen? I don’t see why that would “close trade” with the U.S.

  67. “i think it is very hard for either side to win this argument (even though I realize that this site is mostly MMT followers).”

    This does not even qualify as an argument. Please don’t give the Austrians that much credit.

  68. Well, let’s see about those words you put in my mouth:

    I said:

    “Also, the banking system doesn’t require reserves to pay taxes, either on behalf of customers or for its own account. It only requires the difference between tax or borrowing inflows and government expenditure outflows – i.e. the amount of any net increase in its operating account at the Fed. The amount of that change, and even the total level of the account, are always negligible in context, and bear no relationship to gross tax inflows.”

    So obviously, I didn’t say the currency doesn’t exist, because I said the Fed provides that relatively small operating balance in that currency – to the government.

  69. Think about it logically. If they are going to continue to accumulate USD via foreign trade then their only real option is to buy USTs. They can try to buy Chevron again if they’d like, but we all know how that ended. So, if they really want to eliminate their UST holdings they need to eliminate all future foreign trade with the USA. Not gonna happen.

  70. So I’ll just repeat here from the thread above:

    I said:

    “Also, the banking system doesn’t require reserves to pay taxes, either on behalf of customers or for its own account. It only requires the difference between tax or borrowing inflows and government expenditure outflows – i.e. the amount of any net increase in its operating account at the Fed. The amount of that change, and even the total level of the account, are always negligible in context, and bear no relationship to gross tax inflows.”

    So obviously, I didn’t say the currency doesn’t exist, because I said the Fed provides that relatively small operating balance in that currency – to the government.

  71. It’s the same argument. Where does the money come from? It comes from somewhere. It didn’t just magically appear in the banking system. And of course, the US govt created it and spent it into existence. Go back to the initial existence of the banking system. It didn’t just magically appear with USDs. It was deposited there by someone in the govt who deemed it legal tender. Only then could the banks begin all their other shenanigans.

    Clear?

  72. TPC, is it not strange to credit a monetary system with the boom USA experienced over 1900’s? and I mean ANY monetary system. I think property rights and a legal system that defends them and hence supports innovation and business gets the credit. Any monetry sustem would be a source of friction or lubrication on top of that.

  73. Also, it is clear that the currency must exist in order for the government to impose tax liabilities in that currency. Since I stated early on above that the currency exists, obviously, I’m stating also that there is a reference object for the tax liability.

    What I have questioned is not that the currency must exist, but that it must be provided by the government or Fed throught deficits or lending, in the amounts that reflect a requirement for payments of gross tax flows or gross borrowing -which is what MMT says in the way it describes gross reserve requirements for those payments. That is not how the reserve system works.

  74. CR. I think you didn’t get the thing with the coconuts. You shouldn’t take everything literally.
    The government could have made coconuts as legal tender. In fact the constitution stipulates a silver standard. Neither a paper currency nor coconuts. But today paper money is legal tender despite what’s written in the constitution. So coconuts could be very well legal tender – if just the government wanted. Some societies used shells as ‘legal tender’.
    Wheter people save paper money, gold coins or coconuts (or whatever the government made legal tender) is not of importance – it’s just a metaphorical help to get the point.
    In fact if the world would have a gold standard you could pay your taxes in CAD, RAD, USD, EUR, RUB, YEN… or any other currency you would like because at the end you pay taxes in gold to a given weight and purity no matter of coinage.

    Sure Buffet is right. But what is the easiest way for government to monetize debt? Inflation. And how implies a government inflation? By printing paper money. So if government doesn’t print money today it may very well tomorrow, next week or in ten years.

    But in fact I do not know why CR tries to prove Mr. Murphy’s not correct. He has no voice in mainstream media. We should focus on what mainstream economists (like Krugman) says because they certainly have a voice in media and therefore more influence on policies and opinions.

  75. Of course. I am not giving the monetary system “credit”. I am merely showing that the monetary system is an extension of our representative republic. There’s a lot of pieces that go into the success of an economy. All I am pointing out is that austrian econ focuses entirely on the size of govt and ignores that fact that govt is a construct of the public for the public. We didn’t create this govt and pour money into its coffers because we like to piss money away. We chose this govt and size because it works really well. And the last 100 years prove that. Are there issues now? Yes. I talk about them all the time….But we don’t need to reset the American system….It’s got a few kinks. So let’s actually focus on reality and the way things ACTUALLY work and get to fixing them. The train isn’t broken. It just fell off the tracks.

  76. Go back to my first comment:

    “More importantly, those $22 dollars can ONLY come from one place – they must be spent into existence by the government of the USA … Payment of taxes ultimately involves savings in the currency that the USA deems as proper for extinguishing tax liabilities. And that means accumulating the same currency that only the USA can spend into existence…. ”

    No. The endogenous banking system can lend it into existence, without the government running a prior deficit. And if the government is not running a deficit, it’s not spending anything into existence.

    __________________

    You said $ 22 can only come from one place.

    I said no, and why.

    I didn’t say the dollar didn’t exist as a reference currency, obviously.

    The point as you articulated it was about $ 22 – not about one dollar.

    I’ve been consistent all the way through.

  77. Think of it a different way. If the Tsy issues bonds to drain all reserves, and the cb doesn’t engage in open market operations to manage the target rate, then to pay taxes the cb must lend the reserve balances.

    This is actually a very common arrangement in non-Anglo-Saxon monetary systems. Marc Lavoie has written about this extensively, and refers to it as an “overdraft” system, in contrast to the “asset-based” system of the Anglo-Saxon nations.

    This is why, if we are going to be precise about how the monetary system works–and that’s one of the competitive advantages MMT’ers claim for themselves–then we should say that there are 2 sources of reserve balances: previous govt deficits and loans from the govt/cb. Even more precise is to point out that aggregate reserve balances change (only) via a change to the cb’s balance sheet.

  78. Quote:”For instance, they claim that inflation is always a rise in the amount of money over some output.”
    CR, they do not claim. This is how inflation is defined by Austrians. It’s like one cent is defined to be one hundreth of a dollar.
    And therefore Austrians distinguish between a change in prices caused by the change of supply and demand, or by the change of the monetary base. This is not the same!

  79. Treasury actively uses TTL accounts at auctions when it wants to – to avoid net reserve drains.

  80. Okay, so let’s just make the bankers rich by having them be the ones that extend all the credit to everyone. All vertical transactions net to zero! That’s been happening for 20 years and look where it got us….

  81. BTW: If Peter Schiff and Jim Rogers were as wrong as some try to make us believe they most likely could not sail the world. So their economic view might not be as bad as you think.

  82. I agree that we could make coconuts our currency. And we would be constrained by the amount of coconuts in the world. But that’s not the world we live in. We live in a fiat system. So, building these mythical worlds is useless. Besides, we tried the gold standard. It failed miserable for reasons that are clear to anyone with a sound understanding of international finance. Study Europe if you’re interested in what a single currency system does. It’s a mess. The GS was a disaster. If it comes back I am sailing to coconut island forever…..

  83. OK, lets nationalize and have a single bank – the central bank.

    That’ll sure confuse the MMT point on reserves – there won’t be any.

  84. Yes, let’s create all sorts of mythical worlds that aren’t applicable. If the oxygen leaves the air tomorrow you will die. Did I just prove that you are going to die tomorrow? Or did I create a totally unrealistic scenario to confirm my bias?

  85. good precision

    but why are reserves needed any more than the net change in the government’s balance at the Fed – which is usually negligble through netting, including TTL transfer and expenditure outflow effects? The netting, which is the purpose of cash management in any operation, mitigates the net requirement for reserves to back inside/outside money transactions.

  86. Jim Rogers is rich and famous because he partnered up with Soros (the antithesis of austrian econ). Schiff is rich because he’s a marketing machine. I highly doubt he’s compounded at 25% since inception…..So let’s not confuse rich with investing genius….

  87. Scott, thanks, no problem with that. But, again, loans from the CB have to be repaid, aren’t they. And these on aggregate can be done either with reserves resulting from deficit spending or with additional loans from the CB (a roll over.) So, if we don’t allow roll overs, then you still get deficit spending as the only source of reserves in the system. Correct?

  88. Anon, hopefully Scott will reply. He is the banking genius and I am clearly not conveying my point very well. My apologies.

    Thanks for keeping it civil.

    Cullen

  89. Are you actually asserting that money would come from private banks, or from banks with a charter from the government. The first basically legalizes counterfeiting, the second is just a delegation of state power to a private entity. The state still creates the money, just via delegation of authority.

  90. Dave, in the world where coconuts are currency, the coconut trees are deficit-spending those coconuts. So far so good and who cares, you say? But then why do you care about govt deficit spending?

  91. Quote:”In fact, they’re dependent on us for growth via trade so we actually have them over a barrel.” Hahaha, this is very funny :-) I guess you’ll still find economists from the british emire out there arguing like that.

    Sorry. I do realy not hope that the US is declining like the empire. But one has to be careful.

    If the example of the coconuts learns us something, then it’s the fact that you need savings (or higher productivity – which is at the end the same) to progress. If the Chinese have huge amounts of savings they can progress. It doesn’t necessarily mean that the US is declining, but it might be that the US stands still – which is in the long run the same.

    I can’t see any one ‘over a barrel’ here. And certainly not the biggest creditor in the world. Remember, only 40 years ago the US was the worlds biggest creditor. It replaced the british empire.

  92. This argument I do not understand. I could turn it around and say: Why did G. F. Knapp develop MMT? He lived in a world of gold standard and by using your argument his theory would have been useless because he lived with a gold standard. Why thinking of paper money (or coconuts) if the world has a gold standard? He could have used coconuts to visualize MMT.
    And whats the problem with that???

  93. People thought Knapp was crazy. That’s why his thinking didn’t catch on until government’s actually became the creators of their currency with no outside constraint.

  94. Mr. Panza:

    I think you raise a fundamental point. The Austrians are essentially supply-side economists. This is where you get coconut economies, etc. It also leads to confusing nominal and real, in fact inverting the relationship at times.

  95. Britain collapsed because their economy started to stink it up. The declined because they stopped competing at a level with other countries. Do you really think the USA is declining or do we still have all the best companies, etc?

  96. The problem is that in a fiat currency system the money object must have no intrinsic value. I assume coconuts have a
    some kind of material value. It is a fundamental difference. Also it is a consumable object. At least the gold standard folks realize that a consumable commodity cant be used as a monetary standard – what is the value of our money supply on any given day. Well how many coconuts did Hurley eat?

    The analogy is actually a very poor one, it confuses a number of issues and rather than simplifying, the explanation is more obscure.

  97. Also, it’s not always the same banks in the overdraft position. The cb just needs to have enough loans outstanding at any point in time to meet the banking system’s reserve requirement (where applicable) and payment settlement needs.

  98. It’s as if the Money Supply and government expansion was good and the only reason for the economic prosperity of the last century. High level of production compensated inflation it was not help by it.

    A public corporation does not need to issue more share as it grows and a Government does not need to issue more paper currency then to service the growth of it’s underlying economy. As a general rule an economy does not need government as a participant but the Government does absolutely needs the production of the economy to maintain it’s power and paper printing. Rationalizing dilution is not a economic theory.

  99. CR until 1909 most countries in the world had a gold standard based on the one from the british empire. Every nation with foreign trade had a gold, or at least (like India) a silver standard. It didn’t fail at all. I’m not talking about the dollar backed by gold like we had after WWI to 1971. Countries without a gold standard had still to pay foreign trades in gold (like Uruguay) and not with their paper money.
    Paper money was throughout history established on rare occasions (war, huge governement debt, revolutions…) and were always a system of transition and never long term. Of course for a human live 100 years may be very long term but I’m looking at the whole history of currencies and money.
    The fact is under a gold standard (with circulating bills, cleared by the banks in London) you had full employment without any inflation or deflation. The gold standard is the most mature monetary system the world has ever known. Again, I’m talking about the period before 1909. And still you had a credit system and could have created debt and go bankrupt.
    As I mentioned, there is not one single system without any flaws and therefore we must not think if a theory is right or wrong, we must think if a theory is useful and appropriate.

    BUT I do not think that a 100% backed currency by gold (like American Austians like Mr. Murphy advocates) will work today. The knowlege about the monetary system before 1909 is unfortunately vanished and not of a single economists interest – as mainstream economist would argue it is old fashioned and therefore not adequate.
    I think a new monetary system would be some sort of a mix of MMT and a gold standard…

  100. Cullen has discussed this on many occasions. Single currency systems result in trade imbalances. The Euro is a perfect example. This forces some nations into debt to offset the trade imbalance. If you can’t print money then you’re totally screwed when it comes to defending this. The result is depression.

    We do not want to go back to that world.

  101. Real GDP per capita has expanded 100X since 1913. So, any inflation has been far outpaced by real growth. We have not gone backwards. We have made enormous progress.

  102. Yes you are correct but you can also place a three hundred pound load in the trunk of you car and it will still be much better than a 1920 cars but is this a positive factor?

  103. Cullen,

    I know you have addressed the Fed in many of your discussions on QE2. In your opinion, how can this debate be advanced to a point at which it becomes something more than a fringe belief. You have done great work advancing you MMT ideas through discussion and debate. And there seem to be others on other blogs advancing MMT to others.

    How can we do the same with the debate over the Fed? not just its actions, but the flawed nature of its underlying ideology and belief system. When people criticize the Fed’s action, its just written off as arm chair quarterbacking. What I want to see is a debate over the the Fed’s failed view of economic and monetary policy.

    Bernanke has almost single-handedly re-written the history of the depression such that it is widely held that it was caused by central bank mistakes and inactivity. And then he uses this view to justify all that he does to day. It is misconception built upon misconception. Yet economists, academics, and financiers of all political stripes seem to have bought into the Greenspan/Bernanke view of the central bank. And as long as this is prevailing thought, we will just get more Governors with the same belief system.

    In my opinion, this is the single most important economic issue facing our country today.

  104. I’m an economics neophyte, so forgive me if the answer to this is obvious: while I appreciate and largely agree with Ryan’s comments above about the current monetary policy of the Fed, is it not true that the Fed does serve some very useful purposes in terms of heading off financial panics right and left every few years? I mean, it was created largely for that reason, if I’m not mistaken.

    Also, while the Fed’s current monetary policy (dubbed “Keynesianism” by Ryan above) may be flawed (it’s essentially “pushing on a string” wrt to reducing unemployment), how does that discredit the Keynesian notion of supporting effective aggregate demand with direct government spending on whatever (preferably infrastructure, physical and human, for the long term, of course) to take up the demand-side slack in the private sector?

  105. Britain collapsed because their economy started to stink it up. The declined because they stopped competing at a level with other countries. Do you really think the USA is declining or do we still have all the best companies, etc?

    Well I do not think and hope that the USA is declining but it might stand still and therefore other countries (most likely China, Brasil… probably India one day) will move closer or overtake the USA in some sort (for now I think only economically but not military power). Unfortunately many goods today are made in China (whereas 40 years ago most was made in USA) and the US can not compete with industrial goods either (like Britain) today.
    The US went from the biggest creditor to the biggest debtor. But as I mentioned you need savings (or rise in productivity) to invest and therefore to progress. The declining savings moved industry out of the US to cheap countries like China and India. The US is only the biggest economy because it is the biggest consumer – not producer any more.
    But I really believe in innovation in the US and that these processes (decline of industry) can be turned around.

  106. Well I do not think and hope that the USA is declining but it might stand still and therefore other countries (most likely China, Brasil… probably India one day) will move closer or overtake the USA in some sort (for now I think only economically but not military power). Unfortunately many goods today are made in China (whereas 40 years ago most was made in USA) and the US can not compete with industrial goods either (like Britain) today.
    The US went from the biggest creditor to the biggest debtor. But as I mentioned you need savings (or rise in productivity) to invest and therefore to progress. The declining savings moved industry out of the US to cheap countries like China and India. The US is only the biggest economy because it is the biggest consumer – not producer any more.
    But I really believe in innovation in the US and that these processes (decline of industry) can be turned around.

  107. But Scott, while it looks like this is different from deficit spending, in fact this is just deficit spending in disguise of constant lending. The non-govt sector is always indebted to the govt in this setting via loans from the CB. Why is it materially different from the govt “giving away” funds tot he non-govt sector?

  108. This is an enlightening point. So, while banks aren’t reserve constrained they are constrained by their dependence on the US governement’s willingness to create new dollars, right?

    As Peter said, the creation of new vertical money is deficit spending and only vertical money can be used to create horizontal money. So, in a way, the banks are constrained by the deficit. Is that right?

  109. Can banks make money out of thin air? If not, where do they get the money that they lend?

  110. My point was the same as Anon’s point–not all reserve balances in circulation that banks use to settle payments with the govt sector come from previous deficits. In fact, even in the US, since most daily settlements with the govt will probably result in daylight overdrafts at the Fed, it’s more often the case that reserve balances to settle payments with the govt sector come from a Fed loan. I wasn’t trying to say that could only happen in a surplus, but (as I said above) clearly if there were surpluses, that could be the case, too.

  111. nottpc:

    Your argument has some merit,(venal politicans, self-interested voters, and I would add, a very complicated monetary system to understand) but I would counter with:

    Is it better to operate a nation’s economic system on a false belief, trusting that ignorance will result in better outcomes, or;

    It is better to to operate a nation’s economic system on an actual description of the operation of that system, and hope that the democratic system selects reasonable policies most of the time.

    A bedrock belief of the America system says that it is better to have an educated population, entrusted with universal voting rights, to arrive at an optimal system of living.

    Nobody expects perfection.

  112. Doesn’t Treasury also transfer balances to TTL accounts on the same day it receives payment at auction settlements? Isn’t that part of its cash flow planning?

    That would avoid the requirement for Fed intervention other than unexpected dislocation.

  113. i.e. with TTL transfer, the reserves aren’t drained from the system, and banks can still square their reserve positions interbank

  114. The TTL account isn’t perpetually replenishing so there are instances when banks need to find reserves at the CB.

  115. Wealth is created by rising productivity, investment, savings. Therefore you need free markets and private property. Wealth is neither created by MMT nor by a gold standard, nor a government.

    But I think a gold standard is in favour of rising productivity, investments, savings (private sector) whereas MMT is in favour of government and its allies.

  116. That is not what MMT states. You need to read the section on sectoral balances in Cullen’s article on MMT. He says:

    “This accounting identity does not merely mean the government can spend money and make the population wealthy. Money is not wealth. Money is the medium of exchange that allows citizens to exchange and transact in the underlying goods and services.”

    “While money is a creature of the state (that is, it can only be created and destroyed by the state) this money is not necessarily valuable only because the state says it is valuable. The “value” of the currency involves other linkages. Keynes once compared money to a theatre ticket:

    “money is the measure of value, but to regard it as having value itself is a relic of the view that the value of money is regulated by the value of the substance of which it is made, and is like confusing a theatre ticket with the performance”.

    This is an accurate portrayal of currency in a modern fiat monetary system. Money in and of itself has no intrinsic value. The theatre ticket has no value aside from the paper it is printed on, however, given the value of the performance citizens will be eager to attribute a certain value to these tickets because they are deemed by the theatre as being the tool of entry into the show. If the theatre mismanages the number of tickets in circulation they will devalue the tickets. ”

    http://pragcap.com/resources/understanding-modern-monetary-system

  117. I ment it doesn’t care what the government makes legal tender. If its shells, coconuts, gold coins or even paper. Government can theoretically make every thing it likes legal tender. So therefore I do not understand whats the matter with coconuts. Just print a $-sign on it and call the coconut dollar. It’s just a play of words.

  118. Scott, my point is that a loan of $1 from the Fed is functionally identical to $1 deficit-spent, if it is constantly rolled over (in aggregate) Both are vertical money injected into the economy. Both serve to satisfy non-govt sector’s demand for NFAs. A rolled-over loan from the Fed is an NFA of the non-govt sector just as G-T is.

  119. Yea, would be better if the electorate were educated enough to know when the govt is heading towards inflation, and why, so that we are the leash on them. I’ve heard too many times the complaint against MMT b/c people would abuse it. I’m sorry, how does that affect whether it works or not?

  120. Here is another take on the US Govt paying it’s bills:

    YOU HAVE REQUESTED OUR VIEWS ON WHETHER THE SECRETARY OF THE TREASURY HAS AUTHORITY TO DETERMINE THE ORDER IN WHICH OBLIGATIONS ARE TO BE PAID SHOULD THE CONGRESS FAIL TO RAISE THE STATUTORY LIMIT ON THE PUBLIC DEBT OR WHETHER TREASURY WOULD BE FORCED TO OPERATE ON A FIRST IN-FIRST-OUT BASIS. BECAUSE OF YOUR NEED FOR AN IMMEDIATE ANSWER, OUR CONCLUSIONS MUST, OF NECESSITY, BE TENTATIVE, BEING BASED ON THE LIMITED RESEARCH WE HAVE BEEN ABLE TO DO. IT IS OUR CONCLUSION THAT THE SECRETARY OF THE TREASURY DOES HAVE THE AUTHORITY TO CHOOSE THE ORDER IN WHICH TO PAY OBLIGATIONS OF THE UNITED STATES.

    ON A DAILY BASIS THE TREASURY DEPARTMENT RECEIVES A NORMAL FLOW OF REVENUES FROM TAXES AND OTHER SOURCES. AS THEY BECOME AVAILABLE IN THE OPERATING CASH BALANCE, TREASURY MAY USE THESE FUNDS TO PAY OBLIGATIONS OF THE GOVERNMENT AND TO REISSUE EXISTING DEBT AS IT MATURES. SEE GENERALLY H.R. REPT. NO. 31, 96TH CONG., 1ST SESS. 9-10 (1979).

    WE ARE AWARE OF NO STATUTE OR ANY OTHER BASIS FOR CONCLUDING THAT TREASURY IS REQUIRED TO PAY OUTSTANDING OBLIGATIONS IN THE ORDER IN WHICH THEY ARE PRESENTED FOR PAYMENT UNLESS IT CHOOSES TO DO SO. TREASURY IS FREE TO LIQUIDATE OBLIGATIONS IN ANY ORDER IT FINDS WILL BEST SERVE THE INTERESTS OF THE UNITED STATES.

    Saw it at BI earlier
    http://www.businessinsider.com/debt-ceiling-gao-rule-on-prioritizing-payments-2011-5

  121. Cullen,

    I have enormous respect for your beliefs, and MMT. However, this comment is very disappointing:

    It’s a political school of thought cloaked as a economic theory.

    While Austrians in general are small government types, they are not in any way to all be considered anarchists like the Rothbard wing and thus the description of them as a whole I have read the past two days is extremely misleading and unfair. Hayek supported guaranteed incomes, social insurance including in health care, supporting education and much else. Obviously Hayek didn’t want to eliminate government.

    The mischaracterizations of their approach to the scientific method when it comes to economics is not only not accurate when it comes to many Austrians, their objections are misunderstood and misapplied.

    I admit, the loudest faction is definitely those from the Rothbard wing, especially at LewRockwell.com and Mises.org, but amongst Austrian influenced people I read those sites are considered a bit flaky and out there. Some have torn into them for connections to rather statist, authoritarian, racist figures. Ron Paul was closely alighned with both sites for example, and we all know the kind of weird stuff that has come out of that relationship. Bizarrely even a good bit of authoritarian thug worship (including Putin and the Serb’s in the 1990’s.)

    In fact, I would say that the characterizations (not necessarily by you Cullen, but at times) remind me a lot of the kind of rhetoric that is used against MMT adherents. Including the claim that MMT is really just a economic theory to be used to justify bigger government, the exact claim you throw at the Austrians in the quote above.

  122. The transfers to Tsy by banks and from Tsy to TTL’s aren’t netted, though. The first requires previous reserve balances or an overdraft to the reserve account. Fedwire is an RTGS, so each transaction has to occur separately.

  123. Dave, there is a difference between monetary and non-monetary economies and these affect human behavior. If you eat your “money” (like Robinson eating his coconuts) then it is very different from a system where money itself has no intrinsic value excepts as a medium or exchange and settling of tax liabilities. In a barter economy one does not need a govt to inject anything into the system. In a monetary economy this is no longer true.
    Murphy used coconuts to prove that non-govt sector can save without govt spending. Yes, it could save in coconuts. Just as you could go did some soil and save in soil particles. This is not how people think of savings in a monetary economy. We work for money – for those 1’s and 0’s in our bank accounts. Our desire to spend depends on how much 1’s and 0’s we have there. And those 1’s and 0’s come for the non-govt sector as a whole form the govt, which is why MMTers keep hammering that the govt deficit MUST accommodate non-govt desire to save.
    P.S. Even in a coconut economy somebody is deficit spending – it is just that this somebody is the coconut tree.

  124. Why, then, do the banks need reserves at all? If they can create money (provided sufficient capital backing) to fund loans, what’s the point of bank reserves?

  125. The Euro is clearly a fiat currency and therefore it must obeys the laws of MMT (according to CR). What happens within Europe is of a different problem. Sure, one could argue that Greece just would have monetized its debt… over and over again because it ‘doesn’t want’ to be competitive. But what kind of world is that who favours the debtor! Shouldn’t the creditor be favoured in a world of fair trade and fair economics????

    BTW: The Yen decreased more than threefold in the last 20 years to 80 yen a dollar whereas the US trade imbalances with Japan increased tenfold! So CR is wrong.

  126. I do not asume that anyone clear in mind woud eat his coconut if its legal tender. He would try to change the coconut to other goods before its rotten. Most likely people would pay taxes with rotten coconuts.

    On the other hand people would issue ‘bank notes’ (is like credit) and instead trade with them, because its difficult to put coconuts in your wallet. But when you go to the bank and change your coco-dollar the bank will change it to a real coconut and your starvation is over. The other coconuts the bank can lend to others starving until they find work and can pay back the coco-dollars.
    But what will happen if the government descides to remove the redeemability of coco-dollars? People would start again collecting coconuts. Therefore the government will force you to pay taxes in ‘worthless’ coco-dollars. This system works as long as people trust in the system and will get enough coconuts to eat.
    But doomsday may occur one day. It’s just a matter of time. Probably on the island it takes 1 year, but it could also take 100 years or 1000 years… I don’t know.

  127. …or probably you hit the reset button and the government introduces the pineapple-dollar to start the system over again. Everyone collecting coco-dollars will be the looser…

    But what economy is that where the debtor is in favour and the hard working and saving creditor the cheatee?

  128. CR you refere again to a gold standard from WWI to 1971. A currency does not have to be pegged on a certain gold price. In fact before 1909 currencies where not pegged by a certain exchange rate of gold.

    The Euro is a fiat currency. Periphere countries can not monetize debt because its a political descision. But as I wrote – if the could monetize debt it wouldn’t make them more competitive or productive. in the short term it would encourage speculation and arbitrage activity in these countries and penalize creditors. How many times can you penalize creditors before the lose confidence?

    But more important the example with Japan shows that trade imbalances occure with floating currencies and therefore you are wrong.

  129. … in fact the Euro does not prove that MMT is either wrong or right. It just shows how dependent on policy makers MMT is.
    GS is different… And thats what I mean when I write we do not have to look if a theory is right or wrong. We have to ask how appropriate and how useful a monetary system is.

  130. It’s funny how I get a advertising to sign a petition for Rand Paul for your web site for this topic. For the record, I’m a long time reader and a MMTers…. just thought it was funny.

  131. “I know of no Austrian who wants bigger government. Ever.”

    Maybe yes, maybe not, but that is not the anarchist view that has been presented here. The Somalia case was brought up as being an experimental case for their views. Funy, something along those lines was said by an Austrian, and Austrians from around the world ridiculed it. I borught up Hayek, who may want a fairly small government, but certainly didn’t want no government. You may not know him personally, as he is dead, but he and Schumpeter were the two most influential Austrians, and they were not anarchists. As I said, it may be true they are small government types in general, but they are not uniform nor fit the stereotype I keep seeing in the comments. Oh, and how does Rob Parenteau fit into that “ever” claim? Or me.

    “If the US govt had not spent any money in 2008/2009 we would be deep in a hole. This is the same sort of policy that has been promoted in Ireland, Greece and Portugal. It is ravaging these nations and the people who wanted austerity are now being proven fantastically wrong. An expansion in govt spending has proven to bolster the private sector in times of a balance sheet recession. And any reasonable person who understand the sectoral balances can clearly see why this is the case. So, yes, I am very disappointed when I see people with this dogmatic small govt view.”

    I wouldn’t pick on Austrians for this in particular. In addition, couldn’t an uninformed free market oriented economist of any school make a similar complaint about MMT because its most famous proponents are so outspokenly statist? Do I ignore Minsky because he is too statist in my opinion?

    Also, I think your complaint is a bit off. Dealing with those sectoral balance issues does not require government spending (though well thought out public works and other options could be considered) but also through tax cuts. It isn’t small government issues that MMT’s insights run up against, it is balancing budgets. If you increase the size of government in Europe, and then tax it the sectoral balance issue still remains. So, once again your complaint in the quoted paragraph should be about their budget balancing tendencies, not their small government views (which you are free to disagree with on other grounds.)

    “So no, anyone who characterizes me as using MMT to push is a big govt agenda is just flat out wrong.”

    True, and characterizing Austrian economics as some unified set of beliefs that are anarcho-capitalist, anti scientific and many of the other epithets I have seen slung around in these comment sections (though mostly not by you) is wrong as well. The core tenets tend to attract small government types of various flavors just as the core insights of MMT tends to attract more statist types, though what constitutes Austrian economics is far broader and more diverse than a narrow descriptivist approach such as MMT. In fact, I see no reason that MMT cannot exist easily within Austrian Theory as it does not violate any central aspects of Austrian Economics. Rob Parenteau I assume would agree. Confusing the insights of any theory (or general collection of theories) with the poltical beliefs of the loudest expositors of such theories is not something I suggest we do.

    “The world isn’t black and white. And Austrian economics is….” Hayek was one the least black and white thinkers I ever read.

    For example:

    “But there are two kinds of security: the certainty of a given minimum of sustenance for all and the security of a given standard of life, of the relative position which one person or group enjoys compared with others. There is no reason why, in a society which has reached the general level of wealth ours has, the first kind of security should not be guaranteed to all without endangering general freedom; that is: some minimum of food, shelter and clothing, sufficient to preserve health. Nor is there any reason why the state should not help to organize a comprehensive system of social insurance in providing for those common hazards of life against which few can make adequate provision. It is planning for security of the second kind which has such an insidious effect on liberty. It is planning designed to protect individuals or groups against diminutions of their incomes.” (From here he goes on to discuss price supports/subsidies that maintain income for certain groups to the cost of other’s interests.)

    He also was not opposed on principal to increased government spending and deficts during crisis. In fact, his main criticism of Keynes was that the “General Theory” was in reality a special theory to a balance sheet recession, not that government had to sit on its hands. In fact, he believed that Keynes felt that way as well and lamented his death under the rationale that once the crisis was past he would have published brilliant arguments as to why deficits needed to be restrained to avoid inflation and other ills and that his work was being misinterpreted. I think Hayek may have been right, but obviously we will never know.

    I understand you have an issue with anyone who doesn’t hold to MMT, and Hayek might not have done so had he been alive today, though I don’t know he would not have been convinced by Rob or some other MMT adherent. However, we shouldn’t describe Hayek, as important a figure as Austrian Economics has ever produced, as believing in a black and white world at all.

  132. Things are now really mixed up. And as I said there is no monetary system without flaws and even under a gold standard you can have recessions. Its about usefulness and appropriability.

    Everyone could be self supporter. Therefore everyone of us would spend the whole day farming to provide food for himself. But this would mean that there can be no progress. Only if someone can produce as much food to feed an extra person will be progress. This extra person can build homes, invent machines and much more and gets payed with the extra food (not with a backscratch).
    Or if you produce more food than you can eat in a day you can spend another day to invent, craft and so forth… for yourself. And if another person does the same you can exchange his inventions, crafts with yours and vice versa.

    So a backscratch economy could be regarded as an economy of self supporters who produce only food for one person per day. But that will mean that there is no progress and also no need for any exchange or trade at all. So every monetary system (fiat currency or gold standard) is redundant in a backscratch economy!

  133. “The profligacy of the periphery has come back to haunt them as asset prices fall and economies contract. With no floating exchange rate there is no way for these nations to combat this problem.”

    Exactly. Exchange imbalances had to be coordinated so that countries inflated/deflated to maintain the “correct” exchange rate. International coordination is required for this, but as you mentioned, most countries are not willing to alter their domestic economies for a more stable exchange rate. When push come to shove, domestic concerns outweigh international concerns. That is another reason why the gold standard failed, outside of the pro-cyclical argument.

    When taking that into account, its slightly humorous that politically-idealistic economic viewpoints hold the gold standard in such high regard. Minimal domestic government that cannot print money? How about that widely-feared “new world order” via a global central bank and fiscal institution to determine which economies inflate and which deflate (and when)? Because that is the only way a gold standard, which needs international coordination, to exist… Enforcement is required for the gold standard, which is one of the reasons for the Bretton Woods failure, outside of its fundamental deficiency of allowing “permanent impairment” declarations by deficit countries, an escape route that always kept surplus countries from doing their part… not that they would have anyway, for reasons cited above.

  134. Also, you’re taking my comments a bit out of context. I never wrote this piece with the intention targeting anarchists. They are entirely unrealistic in my opinion. As I clearly stated in the original piece, I was focusing on the small govt austrians.

    “Austrian economics is based on a laissez faire approach to the economy. In general, they prefer as little government intervention as possible. This is not an irrational perspective of the world. After all, the United States was founded in large part thanks to government’s that overstepped their boundaries and forced the citizens to form a government that was run by the people and for the people. Freedom of government tyranny is the cornerstone of the United States so it’s not surprising that our population is particularly sensitive to “big government”. In this regard, Austrian economics makes an important contribution to the field of economics. Unfortunately, Austrian economics is dominated by political rhetoric and scare tactics that are utilized to push a political agenda and not a rational view of the world in which we live.”

    My problem with austrians in general is that they use an economic theory to push a political agenda of small govt. I don’t find that to be consistent with a flexible economic approach so I reject it. If there are austrians out there who are not so extreme I would be interested in reading their work. I haven’t encountered any….

  135. The MMT is either applicable to all fiat currencies or you just simply proved that MMT is wrong.

    This defines a theory: A theory is correct under any circumstances. If not it is simply wrong. Laws of nature are applicable everywhere on earth. If not – then the theory must be wrong. Of course you can ‘cheat’ by intervene and manipulate the outcome of the result (which in fact does the government with our monetary system), but you only cheat yourself.

    But as I said. The EU shows how vulnerable the MMT is in terms of policy makers. This currency has a structural problem, not a theoretical.
    And because of this vulnerability aganst government intervention i think some sort of GS is more useful and appropriate as monetary system and therefore to prefere.

  136. “is it not true that the Fed does serve some very useful purposes in terms of heading off financial panics right and left every few years?”

    Absolutely. Outside of the Rothschild and Illuminati conspirators (give me control of the money supply and I don’t care who is in power), the Fed was created to create a more elastic monetary system/ pooling of gold supply because of frequency panics and seasonal fluctuations due to harvest, both resulting in scarcity of financing and sometimes 100% interest rates. between 1895 and 1921, there were 113 months of recession (fifty-five percent of the time). Stability was key…J.P morgan was the only “central authority” to stem panics in 1893 and 1907, which, coupled with the Great Earthquake in San Fran, led to congressional studies and National Monetary Commission recommendation of the need for a central bank. And this is ignoring the dominance of the British banking system, which financed the vast majority of U.S. exports of the time, so the U.S. was very concerned about developing its own functional payments system, patterned after the bill broker and ECB system in the England.

    Sadly, counter-cyclical CB actions have been taken to an extreme in order to prevent any economic cycle/pain.

  137. Economic schools of thought and political bents are intertwined and have evolved with//influenced by one another over time. Keynes became popular during the Great Depression, and Hayek was concerned about philosophically combating socialism and communism. Kennedy used New-Keynesian for his purposes, as did many in the 1970s. Hence the Keynesian/Democrat assumed relationship. And “free market fundamentalism” and Reaganism spawned from the cold war era, so politics always used economics for its purposes (and vice-versa). That is the one thing that is attractive about MMT- its descriptive in terms of flows, but it will always be accused of socialistic/free-spending b/c/o the tendency to associate economics and politics. I tend to think that MMT policy prescriptions do have behavioral concerns that are associated with politicians unproductive spending, but that is beside the point. It still describes the monetary system well.

  138. lets also remember that Keynes is not associated with the Keynesian economics that we tend to associate with him. Politically speaking, Keynes agreed wholeheartedly with Hayek. Just not his economics.

  139. This is an excellent illustration of how semantics is the crux of the debate above. Your position is perfectly correct, but it doesn’t make mine incorrect.

    I would characterize the chits as the government’s collective reflection of society to formalize what we would do one-on-one. For example, if I babysit your kids this Fri, you’ll sit mine on Sat. We both go out and have a good time. I would not call this deficit spending, it’s a barter.

    You would say, the government creates a social program called USBabeSit and issues BabeStamps which are paid for by taxes paid with BabeStamps. It enforces one to do their share of babysitting because we need to pay those stupid taxes.
    This program is funded by “deficit spending”.

    I think MMTs can also sound a bit too arrogant by saying “it is really simple”. If it is so simple why can’t thousands of PhDs agree? The answer: academic bickering on semantics, and arrogance. But, I guess I don’t have that privelege as a non-econ-PhD.

  140. Cullen,

    I don’t know if it is a minority or not. I have never seen a census of those who claim to be Austrian. Also, I know of no Austrian who could be considered big government, but then I don’t consider you a big government type so I do not see that as an obstacle. At their core the Austrian arguments against large scale government involvement, as the quote above demonstrates, is really less about size than purpose. Of course, once you eliminate the purpose of deciding how people are compensated and the difference between them etc., size becomes much smaller. Taking care of the poor and providing basic necessities such as health care may not be done well by the government, but they don’t really require a big government. It is the shuffling around of the rest of our incomes in all kinds of distortive ways (such as to make everyone a homeowner and increase housing prices) that requires a big government. While some Austrians do oppose supporting the poor (as do others) that is a not a central tenet of Austrian economics. Avoiding distorting price signals is. So Hayek and others (such as Chicagoan Milton Friedman who favored a negative income tax to support the poor) support programs that directly support the poor and needy rather than programs that are trying to social engineer which distorts price sgnals and leads to mal investment. That may be a poor choice (as Bill Clinton and Conservatives argues in the 1990’s for welfare) but it is not a knee jerk antipathy for the poor or anarcho-capitalism.

    Hayek considered Keynes a friend, and since I wrote the comments above I found a video on youtube, which shows Hayek relating the story of Keynes claiming that if inflation became a problem he would get out there and change public opinion in the other direction.

    I believe Hayek. Not just because he was a man who showed no shyness about telling what he saw as the truth during his career, but because it sounds like Keynes! The video also speaks about his disagreeing with the attempt to restore the pound to its old gold price. He thought the devaluation should stand. What do you think his advice on Europe would be now? I suggest he would favor the PIIGS leavng the Euro and devaluing.

    He also says (and he acknowledges Keynes may have been correct) that he believes Keynes advocated a gradual inflationary policy because Keynes believed the trade unions had achieved such prominence that full employment and growth could not be achieved at a stable price level. Now, Hayek is famous for having advocated for policies that increased wage and employment flexibility to defeat the crisis, and in this interview is admitting that at least in that case, his opponent may have been right! Not exactyly dogmatic. Of course, I also agree with him that Keynes was building a theory to combat that specific situation and calling it a general theory merely to give it intellectual cover, but others can disagree.

    Hayek believed in a spontaneous order because his belief was that we couldn’t know the right answer for all time on anything and needed a society that could adapt in a myriad of ways. Maybe that was wrong, but it is not dogmatic or close minded. I’ll send you some of his stuff if I can find electronic versions. You may not agree with them, but any fair minded person would not view him as the kind of caricature that some commenters here have claimed all Austrians are. I would start with the essay mentioned in O’Roarke’s piece on why he is not a conservative. I wish I could get every conservative in America to read it.

    Anyway, I think the interview is pretty fascinating.

    http://www.youtube.com/watch?v=VqU-AZh-wqU

  141. A government constrained in size and power by limiting its spending capacity is not a democracy.

  142. nottpc,

    The problem you describe is a political accountability problem. It isn’t going to be fixed by any view of economics and money. You expect too much.

  143. “My problem with austrians in general is that they use an economic theory to push a political agenda of small govt. I don’t find that to be consistent with a flexible economic approach so I reject it. If there are austrians out there who are not so extreme I would be interested in reading their work. I haven’t encountered any….”

    Once again, Rob Parenteau? Also, while you may have not targeted the anarcho-capitalists, you use Murphy as your foil, and he is a pretty heavy into Rothbard. So, if you think he is representative, then I suggest you need to read a bunch of others.

    Anyway, I think you may have that backwards on the poltical vs. economics. I agree that the Schiff, Pento, etc., crowd falls under that. I also admit that people who want that are obviously attracted to a set of theories which gives strong reasons to be wary of government. However, that is not a flaw of the movement intellectually. I think most of the major theorists at least, and most people I know, actually started out as leftists of at least a mild sort. They changed due to what they believed from studying the world and finding the Austrian path made more sense to them. Hayek certainly did not start out with a small government agenda, he came to one (though a lot larger than some here have claimed.) They may be mistaken, but the typical austrian (or for that matter great classical liberal economists in general) started out as socialists. Including Milton Friedman by the way.

    Anyway, I give you Hayek as an example. He may be wrong, but he is not extreme, close minded nor a believer in a Black and White world unless by the very act of coming to different conclusion than you that qualifies. I am not sayiing you would feel that way, but if you did, then it is not Hayek or Austrians who are close minded or see things (or more accurately some things)in Black and White.

    In general you are obviously not close minded, which is why the particular vitriol against such a broad swath of people with varying beliefs about a number of subjects (for example, they are not all big fans of gold as a currency) that I saw you not challenge in your comments seems surprising.

    I know I, Rob, Steve Horowitz, Tyler Cowen (fan of Sweden as close minded right wing ideologue, really?) Alex Taborrak, Kling, Megan McCardle and on and on would find it hard to recognize ourselves in the comments I was reading. I am sure you would disagree with them on many things (as do they amongst themselves) and none are MMT adherents outside of Rob, but dogmatic? Close minded? Megan who loves transit? Kling who wants to regulate securitized mortgages out of existence, Tyler who has defended Sweden’s welfare state and quality of life, Horowitz who has staked out a battle against “me” libertarianism that refuses to acknowledge that for the country as a whole we are freer than before the New Deal regardless of his small government instincts?

    We should not let our disagreements about MMT color our ability to generously understand others views. Hayek and Keynes should be role models for us. Despite their disagreements they remained friends and admirers. They actually agreed on far more than is generally realized with an admirable ability to acknowledge their weaknesses. Their disagreements were often different than they are commonly described as others turned their intellectual arguments into vast gulfs, battlefields where difference meant moral and intellectual flaw rather than genuinely beleived error.

  144. I think that I am with Murphy on this issue. Eventually the shopper (the US) will have to come up with money that it can’t create out of thin air to pay for goods it now imports from abroad because individuals and companies will refuse to accept and hold it. To think otherwise is to pretend that a perpetual free lunch is possible. The fact that the MMT proponents do not seem to understand the lessons of history and seem to have ignored the huge loss of purchasing power makes me wonder about their critical thinking skills and their intellectual integrity.

  145. Au contraire! You make an egregious error when you claim that we have not studied history. What you are saying is that currency collapse could occur. That is hyperinflation. I have studied and written thoroughly on the history of hyperinflation and the current state of the USA has NOTHING in common with past hyperinflations. You might be interested in the following paper:

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1799102

  146. @ anon:

    “creating money out of thin air” is a myth!
    If banks could, we would not have any debt crisis! People who claim this have not understood anything! And even if they could, why would anybody be so dumb and take debts from banks that dont even have money, and even put a liability at risk, for nothing real in eschange? I mean think it all through and you will become aware that it is a paradogm.

    Its not money what is being created in the banking system, its only claims on THE money, that has been spend into existence by the state, there is only FED money and the rest is only claims on money= debts.

    If i were to have a saussage, and two people had a paper that claims that saussage, do all we three have a saussage?

    All that “…out of thin air” bla bla is a complete myth, its that myth that keep the current system going, but noone wnat to touch that, Carl Walker had proven this already in the 50th, that claims on money are not money (in his book “Das Buchgeld” book money/ fiat money)

  147. @ anon:

    “creating money out of thin air” is a myth!
    If banks could, we would not have any debt crisis! People who claim this have not understood anything! And even if they could, why would anybody be so dumb and take debts from banks that dont even have money, and even put a liability at risk, for nothing real in eschange? I mean think it all through and you will become aware that it is a paradogm.

    Its not money what is being created in the banking system, its only claims on THE money, that has been spend into existence by the state, there is only FED money and the rest is only claims on money= debts.

    If i were to have a saussage, and two people had a paper that claims that saussage, do all we three have a saussage?

    All that “…out of thin air” bla bla is a complete myth, its that myth that keep the current system going, but noone wnat to touch that, Carl Walker had proven this already in the 50th, that claims on money are not money (in his book “Das Buchgeld” book money/ fiat money)

  148. “austrians reject the fact that fiat money is state money”

    That is actually a discussion you should have with Rob who probably knows more than I do on that score. However, that doesn’t seem to be a core belief of Austrians in my experience. The classic Austrians were theorizing during the gold standard era. Such a distinction seems a bit anachronistic in referring to any core belief in that respect.

    However, the debt dynamics issues are very similar. Which makes the Schiff inflationistas crowd seem a bit silly. Many austrian influenced economists are very worried about deflation for the same reasons that Mises and others were before 1929. In fact, I think I first started sticking around here because you sounded so Austrian when it came to the effects of a debt-deleveraging cycle.

    I am Austrian by roots, but I admit to being heterodox. I have long been a reader of Minsky for example, even though I did not know about MMT or his association with it for a while. Also, isn’t there a Mises Minsky connection? I think Minsky was taught by Mises. Anyway, while Minsky was obviously different, I always found a stronger affinity with him and Austrian strains of thought than Samuelson and the neo classical synthesis crowd. They also both reject efficient markets theory as it is currently conceived.

    Most of the most interesting Austrians, Keynesian’s and others are heterodox as well. Which means all the schools have a lot to teach. They all have issues with semantic walls, assumptions unquestioned, etc. However, most Austrians are no more dogmatic than mainstream economists of all schools on the whole. In fact, most are so open and fair minded that when people think of Austrians they hardly mention them and notice the loud mouths. Who is more well thought of, Peter Schiff and Michael pento or Tyler Cowen? Tyler, but when people think of an Austrian they think of Schiff and Pento. Yet, amongst most economists who are Austrian influenced Schiff is a joke, Tyler is considered a fascinating part of the economic conversation.

    Certainly most Austrians are no more dogmatic than James Galbraith, Paul Krugman, or Brad Delong. I would suggest less so. Who would you rather have a deep discussion intended to be pleasant with on economics on things you don’t necessarily agree on? Tyler Cowen or Paul Krugman? Don Boudreaux or Brad Delong? Lawrence H White or James Galbraith? Would Tyler just sit there arguing about fiat money being state money getting red in the face and saying disparaging things about MMT like some of the Austrians who have dive bombed your site? I don’t think so.

    Ever disagrred with Galbraith, DeLong or Krugman? Not fun at all if you like good natured conversation. All three of the men I mentioned are fantastically wonderful in conversation, even when they disagree strongly and are far more influential in Austrian circles than the cartoonish characters who by their very outlandishness get attention. The real figures of influence people know, but don’t even think about it seems when the term Austrian is mentioned. So you may not be able to win any of them over, but they will not get caught up in some refusal to acknowledge fiat money is state money as an apriori fact.

    Oh, what about Winterspeak? I think his roots are Austrian, and he has become an MMT’er. I think he might be a person to pose that question to as well. Of course, Austrianism is not a set school, but a broad tradition. So few can say they are “austrian” really. It is a tradition, not a biblical canon.

  149. …a great piece on the importance of market confidence (and respect) for currency and governmental authorities in general…

  150. How about some of the states that have passed or are passing laws that give gold and silver the status of meeting the requirement of paying debts and taxes?…quite a transmision device..currencies will be backed by confidence or somenthing shinier
    Rancher from South Dakota

  151. Dave, don’t miss the forest for the trees. Backsratch economy is just a stylized example that helps to think about real economies. The idea though is clear: with fixed money supply any hoarding of money (even totally justified, such as planning for “the rainy day”) is depriving other people of income. No way around it. If you really want to appreciate this point, read this lengthy but brilliant post:
    http://heteconomist.com/?p=658
    The heteconomist blog in general is one of the best expositions of MMT ideas, highly recommended.

  152. Sorry, jt26, where do we disagree exactly? If you babysit for your neighbors and they babysit for you then indeed no deficit spending needs to occur and this is a non-monetary setup. Impractical for large scale economies, bla-bla-bla, we all know.
    Now, you admit that an authority that established the chits needs to deficit spend them in your next paragraph. So, where is the disagreement again?

  153. Peter D,

    A loan from the Fed is absolutely not NFA for the non-govt sector. The bank has added reserve balances (asset) and short-term borrowings from the Fed (liability), so change NFA=0, unlike a deficit in which the liability remains with the govt. That’s why, when you calculate NFA, you have to subtract all central bank loans from the total qty of tsy’s plus currency plus reserves. Hope that makes sense.

  154. Go see the MMT publications at http://www.levy.org. There are literally dozens of pieces critical of the Fed there. Bill Mitchell’s academic research published on his CofFEE site does so, too.

  155. Scott, what I meant is that if this loan comes with an implicit promise of constant roll over and never needs to be paid off (by the non-govt sector as a whole, not by the specific bank) then it is functionally serves as a vertical money injection.
    If I give you money that you never have to pay back then we can call it a loan but in reality I just gave you a grant.
    If we don’t allow roll over, however, then there comes a time when the non-govt sector as a whole has to repay the loan to the CB. And it can do so only with reserves injected by govt/cb.
    Now, if CB just grants reserves to the non-govt sector, I don’t know how those are tracked. Do they appear in the govt deficit numbers? The Fed’s “deficit” (is there such a thing)? I remember ESM asked exactly this question on Warren’s site regarding the funds for QEI that Bernanke famously described as changing numbers on the accounts at the Fed, but nobody replied. Regardless, the consolidated govt sector has to vertically “spend” one way or another.

  156. Not quite. There is absolutely no need for vertical for banks to create horizontal money. As Anon pointed out, there’s no reserve balances at all held overnight in Canada. What is true, instead, is (1) the govt must “name the thing” that will settle a tax liability (Keynes referred to it as “the power to write the dictionary”), and (2) creation of horizontal money brings a short position in vertical money (even if none exists presently, as long as the “thing” has been named).

    That’s very different from the suggestion that “only vertical money can be used to create horizontal money.” When you say those sorts of things, it sounds to many people like a version of the money multiplier, which is clearly false. MMT’ers have learned the hard way to be careful how we say things in our academic research.

  157. Scott, what I meant is that if this loan comes with an implicit promise of constant roll over and never needs to be paid off (by the non-govt sector as a whole, not by the specific bank) then it is functionally serves as a vertical money injection.
    “If I give you money that you never have to pay back then we can call it a loan but in reality I just gave you a grant. If we don’t allow roll over, however, then there comes a time when the non-govt sector as a whole has to repay the loan to the CB. And it can do so only with reserves injected by govt/cb.”

    That’s like saying that household debt is a “grant” because the household sector as a whole never pays it off. I think you’re trying to draw an analogy where it ultimately becomes meaningless. Loans from the Fed, like household debt, are not NFA for the non-govt sector, by accounting identity. I don’t see any reason to go further than that.

    “Now, if CB just grants reserves to the non-govt sector, I don’t know how those are tracked.”

    It never does. It’s always an asset swap or a loan.

    “Do they appear in the govt deficit numbers? The Fed’s “deficit” (is there such a thing)? I remember ESM asked exactly this question on Warren’s site regarding the funds for QEI that Bernanke famously described as changing numbers on the accounts at the Fed, but nobody replied. Regardless, the consolidated govt sector has to vertically “spend” one way or another.”

    What it would be is a reduction in the Fed’s equity. Like when Warren suggested the ECB provide a $500B transfer on per capital basis to EMU national governments–that would have been a “grant,” and it would have been an increase in reserves on its liability/equity side and an offsetting reduction in its equity.

    Hope that helps!

  158. Peter D,

    “If I give you money that you never have to pay back then we can call it a loan but in reality I just gave you a grant. If we don’t allow roll over, however, then there comes a time when the non-govt sector as a whole has to repay the loan to the CB. And it can do so only with reserves injected by govt/cb.”

    That’s like saying that household debt is a “grant” because the household sector as a whole never pays it off. I think you’re trying to draw an analogy where it ultimately is not useful. Loans from the Fed, like household debt, are not NFA for the non-govt sector, by accounting identity. I don’t see any reason to go further than that.

    “Now, if CB just grants reserves to the non-govt sector, I don’t know how those are tracked.”

    It never does. It’s always an asset swap or a loan.

    “Do they appear in the govt deficit numbers? The Fed’s “deficit” (is there such a thing)? I remember ESM asked exactly this question on Warren’s site regarding the funds for QEI that Bernanke famously described as changing numbers on the accounts at the Fed, but nobody replied. Regardless, the consolidated govt sector has to vertically “spend” one way or another.”

    What it would be is a reduction in the Fed’s equity. Like when Warren suggested the ECB provide a $500B transfer on per capital basis to EMU national governments–that would have been a “grant,” and it would have been an increase in reserves on its liability/equity side and an offsetting reduction in its equity.

    Hope that helps!

  159. Lance:

    That was a most welcome diversion.

    PJ’s Eat the Rich is still one of my favorite books.

    I’ve got to read him more often!!

    Thanks!

  160. Scott, sorry to be a pain, I must be really bad at communicating this stuff. Please, bear with me.

    That’s like saying that household debt is a “grant” because the household sector as a whole never pays it off.

    Not exactly. First, household debt as a whole can be totally paid off, however unlikely this may be. But the real difference is that here we’re talking inter-sectoral debt – namely, b/w the govt and non-govt sector, while household debt is inter-sectoral.

    I think you’re trying to draw an analogy where it ultimately is not useful. Loans from the Fed, like household debt, are not NFA for the non-govt sector, by accounting identity. I don’t see any reason to go further than that.

    OK, don’t call it NFA. Anon and yourself said that deficit spending is not needed to inject money into the economy. Let’s start at point 0. You have the CB and just one bank B. Now, no deficit spending occurs. Instead the CB loans $X to B. Fast forward to time t. Time to repay the loan to CB. Where can B get $X to do so? It only has the original $X loaned, so, it can give those back but then there is again no money in the economy! So, either CB rolls over the loan or additional $X gets deficit spent. What I claim is that this functionally is exactly the same. The govt sector still has to make the money available for the non-govt sector, it is just that in one instance it is called the scary word “deficit” and in the other it is a loan from the CB. Inflationary and so forth effects for the economy are exactly the same!

    “Now, if CB just grants reserves to the non-govt sector, I don’t know how those are tracked.”
    It never does. It’s always an asset swap or a loan.

    Right, understood. But suppose that all the ABS swapped in the QEI was totally worthless – all the collateral loans defaulted etc. Then the Fed just basically lost all that money. I think you answer this point here:

    What it would be is a reduction in the Fed’s equity. Like when Warren suggested the ECB provide a $500B transfer on per capital basis to EMU national governments–that would have been a “grant,” and it would have been an increase in reserves on its liability/equity side and an offsetting reduction in its equity.

    OK, does this reduction in equity have any real life consequences? Can the Fed go bankrupt? No, the Fed, as the issuer of currency can no more go bankrupt than the Tsy – actually, even less so, since it is actually the Fed that issues the currency in the current institutional arrangement. So, this reduction in equity per se is totally meaningless just as the deficit numbers per se are totally meaningless – the only real life consequences are inflationary in both cases.
    In fact, reduction in equity for the CB is completely analogous to the deficit of the FA – if the CB and the FA were operationally consolidated then the two would totally conflate.

  161. Hmm. It’s possible I’m reading Anon incorrectly.. but it seems he’s saying that things *could* work another way, in another monetary system, while you’re saying that they *do* work this way, in this one.

    Which is the whole point of MMT, I think. It’s applicable to the system we have today, not the system in Europe or the system we had in 1970.

  162. ” The goal of Mr. Murphy’s initial article was to show that a modern fiat monetary system need not involve government spending in order for the private sector to save. This is nonsensical for reasons that are apparent to MMTers. But Mr. Murphy has created his own mythical world where there is no government sector.”

    As i have said many times before, please make some sense, because the 1st sentence does NOT infer the last and you are commiting errors of logic and that ruins your whole argument. Besides that, for you savings could only be in paper money which grossly contradicts reality.

  163. MMT talks about savings of financial assets, yes. We’ve been there with you. There is a reason why this is important. In micro-land, I really want to see a person who is satisfied entirely with his savings of coconuts and such. And macro, non-govt sector as a whole still needs to pay taxes and transact with “paper” money (not really paper, but whatever), so, there is a very good reason why in aggregate it wants to save in “paper” money.

  164. You have squashed nothing, elementary logic has squashed your argument and made you look silly. If i have to best pick a word for you, it would be dogmatic. You are no better than krugman, he just as well twist things and infers to others things never said or meant.

    For your reference and the coconut deficit spend supporter, people can save in both money and property.If money supply growth is constrained only to the level of GDP growth, one can save still if the central bank increases the money in circulation. Government deficit spending does not necessarily have to be the first ‘spender’. Then the CB can increase reserve requirements to choke off inflation. In effect a central bank can do the job you infer ONLY the government can and should be doing in order to enable savings. Your MMT argument has been put on false premises foundations and by the rules of logic therefore you cannot have a true deduction/induction.

  165. So the fed is not necessary? Aren’t you denying thus its existence and influence on the economy? Surely you are not describing the real world we are living in. Arent you committing the errors you wrongfully attribute to others? You cannot build a solid theory on weak foundations.

  166. Cullenito,
    Money is a legal tender for all debts, public and private and a medium of exchange. This is by definition. It has NOT been conceived to be a store of wealth, but a store of value, therefore money is a derivative of economic activity, not engine of. MMT is bunk, you are a dogmatic just as much as an incuisition priest ever was :)

  167. Peter, the example with Crusoe is exactly the same, a stylized example. So tell me why people do not get it if Mr. Murphy uses a stylized example and always try to proof that coconuts are not a realistic example because we use dollars?
    Anyway I proofed that a backscratch economy has no need for any sort of money.

    But unfortunately people do not get the point of a gold standard were you draw bills and have bank notes.
    A bank note is like a credit (its backed by gold and therefore is like credit). So the bank will still provid credit to does who need it. But the money supply under a real GS is entirely guided by supply and demand and not artificially by the government or the FED.

    If gold price rises, people will tend to change their bills and notes to hoard gold. But if you change your bill the bank gives you gold and automatically the gold supply increases and the agio disappears – vice versa. There is no inflation or deflation (or just for very short time).

    There is no depriving of other people. Thats the biggest myth about the GS. Anyway the currency does not need to be backed 100%. In reality it was backed by around 30 – 50%. So there is room to ‘create money’ and giving credit to those request.

  168. Read my treatise. I never said that money has any intrinsic value.

    There’s more to fiat “value” than just productivity. I particularly like Keynes’s theatre ticket analogy. The ticket itself has no value. It is the show itself that is valuable. And the ticket is attributed value by its users because the theatre deems it as the only form of entry to the show. A fiat currency works the EXACT same way. There are multiple linkages in a fiat currency. A good show isn’t enough to meet them all…..

    http://pragcap.com/resources/understanding-modern-monetary-system

  169. CB = Coconut Bank
    Robinson Crusoe’s coconut surplus equals CB coconut deficit, by definition. :o)

  170. As i said, money is a medium of exchange, not the cingular store of wealth. For your information, the mankind has saved multiles of all goverment debt in the form of property: real estate, factories, intellectual property, art, durable goods, etc. despite many destructive wars. Reality proves that the private sector has saved multiples of gov’t deficit spending therefore you have empirical evidence MMT is bunk.
    if you want to make a clown of yourself saying that the private sector can save only as much as gov’t deficit spends, be my guest :)

  171. I value most the debate here, but I openly admit that MMT does not pass the sniff test of either common sense or the rules of elementary logic.
    Where dogmatic followers of a theory (like you or Krugman) discredit yourselves most easlily is applying the theory in different environment, you have simply forgotten that these theories are not universal, but apply to a vacuum environment and that is explicitly said with ‘all other things being equal’.
    Let me just be specific, I would be glad if you really put some thought into this.
    Money creation (and deficit spending as a form of it) as you say has no intrinsic value, it is the value of what you acq

  172. Sorry, pressing a tab+enter by mistake submitted my post.

    Money creation (and deficit spending as a form of it) as you say has no intrinsic value, it is the value of what you acquire with it. Therefore by increasing the supply of it, you can influence the behavior of speculative holders of money, not of investors in productive assets, who by definition seek to optimize the return of their assets and hold as little cash as possible and if they have unused for production purposes ‘wealth’ it is already in another form. For that reason money printing cannot influence their economic behavior. The speculators with the ability to borrow from the Fed are most priviledged by money printing: they can frontrun (and they do) everyone else. This is how the Fed recapitalizes otherwise insolvent banks.

    Back to our economic setup: the gov’t prints, hands it to Joe, who buys the goods produced by Xing in China. There is no way that tweaking of the money supply or deficit spending can incentivise Joe to work for the goods he acquires through gov’t transfers. Until gov’t is not allowing real wages to drop, employment will not pick up in the US, but will continue to increase in China where the deficit spent money gets accumulated. Keynesian theory was not conceived for an open economy with such a setup and judging by his famous ‘when facts change, I change my mind’ I believe he would have been keen to admit that his theory does not work in Americhina.
    Basically all this happens because money is not the engine of economic activity, it is not even the fuel, it is the roar that gets produced when the engine works, the higher the rotational speed the greater the noise and the impression of wealth creation, the lower the speed the more gloom and pessimism you get. For this purpose, a legit economic theory must aim at increasing the velocity of circulation of money, not increasing the amount of money because if it does not move, it is dead.
    Go revise you MMT stance if you wish.

  173. Cullen,
    I am catching you all too often in inconsistent statements. The Fed by charter is NOT the gov’t, the Fed cannot BE and BE NOT the gov’t as a matter of convenience for you.
    Banks do create money, because credit is money. In fact they first loan, then they borrow from either the Fed, private citizens or other banks to provision for reserves. Are you saying credit is not money? There are roughly $2.4 trillion of consumer loans outstanding, that was booked as economic activity when produced, what have these producers registered as receivables? The banks register the interest as it arrives or as they have scheduled as well as profits regardless the fact that the money has not been earned yet.
    You just can’t have it be both black and white on every subject all the time.

  174. Andrew,

    The function of reserves are to meet any reserve requirements (which works differently to the textbook model) and as a means of clearing within the banking system, as each bank is required to maintain a non-negative balance at the central bank.

    Banks don’t need reserves to make a loan, and banks are not constrained by the amount of reserves they have. But they are constrained by lack of credit worthy customers and by their capital (in the short-run).

    Reserve requirements simply lower the profitability of banks, and the difference between a bank that has sufficient loans and a bank that doesn’t are the costs, a bank with insufficient reserves, and an end of day balance which needs to be settled with need to obtain those reserves at the overnight rate.

    If you’re interested in learning more I’d suggest looking for Scott Fullwiler’s posts both here and on the other Austrian related thread. There are some great ones in the previous thread on capital and reserves.

  175. You are not completing the linkages I described and in doing so you are misinterpeting me. If you’re going to so ardently hate something you should at least try to understand it. You clearly do not.

  176. As defined, none of terms in the sectoral balance equation include coconuts. This is by design; it does not intend to say anything about coconuts.

    If you believe the sectoral balance is correlated to the distribution of coconuts, you’ll need to explain why and write a new sectoral balance equation that includes the relationship of coconuts to the other sectoral balance terms. I’m fairly certain it would be uninteresting as the sectoral balance equation represents flows and you don’t see many transactions denominated in coconuts.

    No one is saying an individual can’t save coconuts. I’ve got part of one saved in my cupboard.

    Savings as defined in the sectoral balance equation does not include coconuts.

    What use is the equation if it doesn’t tell us anything about real stuff? It tells you when the flow of money from the govt sector (reserves, FRNs) is inappropriate to the preferences of the non-government sectors. Too much or too little can negatively affect the production of real stuff. It logically follows that if there can be situations where too much money is flowing (a concept that everyone easily accepts) there can be situations where too little money is flowing.

  177. Apart from phony valuations that could easily overstate the value of assets 2-3 times, the US household wealth is estimate at 55 trillion or so, total government deficit spending is about 13 trillion, private corporate wealth by book value is as well about 40 trillion (not quite sure about the exact number). So, how does the MMT theory explain the emirical evidence that 13 trillion of gov’t debt has created something like 55 trillion (or 95 trillion if you take at face value) wealth? Were not private savings equal gov’t spending?

    Please explain the empirical discrepancies between MMT theory and reality. You are saying that someone’s spending is another’s savings, so for everything spent there must be savings and some of it must have been destroyed through depreciation and wars, yet we have cumulative spending times less than the valuation of assets.

  178. Please don’t show me a chart of CPI because in Austrian definition there is more money in circulation per same output is the definition of inflation, not a weighted index constructed by a bunch of reasonably smart people… To me MMT’ers and Austrians are speaking different languages. Where it gets confusing is, they use the same words (inflation, credit, money creation) but assign different meanings to them…

    Let’s distinguish between beliefs and facts. “Jesus Christ was born on December 25″ is a belief; “Christmas Day is December 25″ is a legislative fact, enacted by the Senate and House of Representatives of the United States of America in Congress assembled. The following are legal public holidays… Christmas Day, December 25 5 USC 6103

    For precisely the same reason, the definition of inflation used by MMT and Keynesians is indisputable because it exists in the realm of fact and not belief.
    the terms “inflation”, “prices” and “reasonable price stability” refer to the rate of change or level of the consumer price index as set forth by the Bureau of Labor Statistics, United States Department of Labor. 15 USC 1022
    Congress also defines credit, “credit” means the right granted by a creditor to a debtor to defer payment of debt or to incur debt and defer its payment. 15 USC 1622. And as you know, the Constitution grants Congress the money creation power in Article, Section 8. Congress can define these terms however it wants. Our beliefs are irrelevant since we don’t get a vote (except on the Tuesday next after the 1st Monday in November, in every even numbered year).

    OT, but reading comments at Austrian blogs calling MMT “creationism” reminds me that “Intelligent Design” may be the most awesome rebranding ever. Apparently there are no supporters of socialism or central planning in this country, otherwise they surely would have borrowed the Intelligent Design label years ago. :o)

  179. I don’t believe the capital assets you describe are considered savings in governmental accounting.

  180. Isn’t gov’t accouting just that: putting lipstick on a pig?

    When gov’t spends (deficit or not) on a road, that creates economic activity and if it requires 2 new trucks to haul the asphalt, concrete, etc. it gets funded exactly by that spending along with the value of commodies and the profits that later on get saved and consumed. Therefore gov’t spending must always be greater than private savings, not vice versa. Add interantional trade for flavor and you make the discrepancy even more striking.

  181. Dear Baychev,

    It seems you have not understood the very first fact–not theory–of the US currency system, in effect since the US went off the gold standard. Every single dollar in existence was “born” because the government “created” it ex nihilo, and it then entered the system (to simplify a little) either via direct government spending (that is, gov’t buying of private sector goods and services, by creating credits in their bank accounts) or via the banking system, which creates credits for the private sector. There is a difference however: gov’t spending literally creates an asset in the private sector, whereas bank credit obviously creates a debt, since it is merely a transfer of an existing asset from one account to another, so that the transaction nets to zero; that original existing asset also first came into being through gov’t issuing of credit, like all our dollars. All dollars are originally created ex nihilo by the government.

    You may not like this fact, or you may not understand it, but it is a simple, incontrovertible fact. All fiat money is created by government fiat. If you do not understand or want to understand this rock-bottom fundamental fact, it is a complete waste of time conversing with you. It would be like like trying to argue with a person who stoutly believes that the earth is flat and does not want to believe or want to study the evidence that the earth is roughly spherical because it goes against his wishes and interests.

    Read Cullen’s simple and graphic example in his “Understanding MMT” about the fictional island economy; and also read Mosler’s “7 Deadly Innocent Frauds.” No one should even bother to enter into dialogue about MMT until having read these.

  182. Cullen,

    You are twisting my words again. I am not mad, I am disgusted by your way of arguing and disappointed from you. I do not think you have crushed his argument, because you have not used logic or anything else (e.g. empirics) to do it, but I do not care if you have or not. Actually I am sad that you have not – I hoped you could do it

    MY point is about your method of waging a debate. Your excursions to the coconut island are too freqent, your twisting words and statement is too often, your dodging answers is too frequent, your arguing about semantics never stops etc.

    So you are dogmatic and there is no point of arguing with you, it is like arguing with the gramophone.

    InvestorX

  183. Private Sector Surplus or Net Savings = Government Deficit + Current Account Balance. This is Accounting 101, as I studied in university in 1980, Toronto, Canada.

    No trucks or coconuts.

  184. And who said the system should remain so? Who said there is no better system? Who said there SHOULD be no discussions of a different system?

    Oh wait, the current system is a chartalist’s dream, so yeah – protect the status quo and dodge any notions of a discussion of a different system! Very progressive, Cullen, very democratic!

    InvestorX

  185. Absolutely correct Dave. US went from a net wealth crator to a net consumer and is declining relative to many other coutries. Trade with China is not only a positive, as it allows for the gutting of American industry and middle classes, as describe by you.

    And what is MMT’s take on that – oh we have a C/A deficit, so we should increase the budget deficit. This is a pure accomodation of the foreign deficit, allowing America to overconsume and feel ok for a while at the same time. The problem will not come from the Chinese dumping of UST, the problem will come from a weaker and weaker US REAL economy. Accounting identities are just that – they do not show you the correct policy with regard to the variables.

    InvestorX

  186. if you read closely, i am talking about private banking. My last sentence was that banks can only work with “FED” money….
    Imo you just take over blindly dogmatics from other economic models!

  187. baychev,

    MMTers are talking saving in paper, not real wealth. A problem with that is though that accounting identities do not point to you what the correct policy is.

    InvestorX

  188. First let’s set facts straight: the USD is in existence long before 1971 when the last gold standard was abolished. However, this is irrelevant to the other error you made: private debt is reshuffling of assets and gov’t debt is money. As you create debt, you increa se the money supply. Example: a loan for a GM car adds X amount to the company’s account through the sale. That money has not existed before andwill not exist physically in the system until earned and the debt is repaid. This is not a transfer of someone’s savings to another person’s account, gor reference see the share of deposits to loans. FRB is actuallya legalised counterfeiting. Hopefully you understand this :)

  189. We don’t disagree in the mechanics; it’s semantics. I would not call this microeconomy necessarily deficit spending.

    If USBabeSit gave everyone one voucher at the start of every month, then required a tax of one voucher at the end of the month, then there is no deficit spending … I would call that 1 month of “working capital”, but again that is a question of semantics.

    BTW I didn’t make any comment about the practicality in large systems.

  190. This is interesting, lets do a thought experiment. What if the treasury didn’t deficit spend? Could banks still make loans? Could government still collect taxes with bank loan money?

    The answer to all these questions would seem to be yes IF the Fed is accommodating of the need for reserves. It wouldn’t have any treasuries to buy, but it could buy or lend against the financial assets of banks.

  191. Dave, it is well known that all models are wrong but some models are useful. Murphy’s coconut model and backscratches model are both stylized examples that leave a lot out but one is useful and one is not. The reason Bob Murphy’s model is not useful is that it was supposed to prove that people can save without govt deficit, but did so in a non-monetary setup. MMT talks about saving of net financial assets for a reason: people CAN save in real assets, but the medium of exchange is the currency and the taxes that create the demand for currency are paid in this currency. Do you know anybody who has savings entirely in stuff as opposed to financial assets? Even if there were such a person, non-govt sector in aggregate still cannot save only in real assets. For example, if you own real estate, you owe taxes that you have to pay in USD. Thus the non-govt sector has to come up with at least some USD and those can come only from the govt. Thus Murphy’s example was simply inapplicable (or it could somewhat be, but only if you realized that the deficit-spending authority in his example was the coconut tree.)
    The backsratch example, on the other hand, was to expose the essential dynamic of fixed money regimes. If there is only so much money to go around, then if one agent saves it, then another agent is deprived of income in this period. This example does expose the essential feature and therefore useful. A much more detail, closer to real life example is in the post that I still really, strongly suggest you read
    http://heteconomist.com/?p=658
    because it shows extremely well why gold standard and similar systems are problematic for growing economies. The GS was abandoned for a good reason. While is true that money could still grow as a certain multiple of gold reserves, the convertibility constraint still put shackles on the system. Mosler explains how it worked here:
    http://moslereconomics.com/mandatory-readings/soft-currency-economics/
    (search for “Appendix”)

  192. Dave

    I must disagree. You claim that under a gold standard the money supply is entirely guided by supply and demand. Thats is false, the supply is fixed to the amount of gold one has. A fiat/credit system is demand driven, determined by a borrowers prospects for further income streams (at least in the horizontal component of money creation)

    A gold standard is a zero sum game, which means one persons nominal gain is anothers nominal loss. Not conducive to overall system wide growth.

  193. jt26, how does actual deficit spending differ from your USBabySit example that warrants a different name?

  194. InvestorX, that’s like saying “the problem with a hammer is that you cannot use it to saw”. MMT uses sectoral balances identity to expose a certain essential fact, not to solve all the world problems. Savings in financial assets are essential for the economy and affect human behavior. That is not saying that savings in real stuff can be ignored, but this is a separate issue that baychev, for one, has hard time to wrap his head around.
    I would add that if we were only concerned about savings of real stuff, then why the hell all the hysteria about govt deficits, which are after all only numbers…

  195. “Scott, sorry to be a pain, I must be really bad at communicating this stuff. Please, bear with me.”

    No worries. Could also be that I’m just bad at interpreting.

    “Not exactly. First, household debt as a whole can be totally paid off, however unlikely this may be.”

    Assuming the household sector always pays cash to buy houses and cars seems like a huge stretch to me, at least in a capitalist system.

    “But the real difference is that here we’re talking inter-sectoral debt – namely, b/w the govt and non-govt sector, while household debt is intRA-sectoral.”

    No. I’m talking about the household SECTOR, whose debt would be held by the financial, non-financial business, and international sectors.

    “OK, don’t call it NFA. Anon and yourself said that deficit spending is not needed to inject money into the economy.”

    Just being picky, but better never to use the word “money” when you’re trying to be precise. It’s one of the most imprecise words there is. Along with “liquidity” and “liquidity trap.”

    “Let’s start at point 0. You have the CB and just one bank B. Now, no deficit spending occurs. Instead the CB loans $X to B. Fast forward to time t. Time to repay the loan to CB. Where can B get $X to do so? It only has the original $X loaned, so, it can give those back but then there is again no money in the economy! So, either CB rolls over the loan or additional $X gets deficit spent. What I claim is that this functionally is exactly the same. The govt sector still has to make the money available for the non-govt sector, it is just that in one instance it is called the scary word “deficit” and in the other it is a loan from the CB.”

    I generally agree with this. That’s why I always say (as above) “either a govt deficit or a Fed loan are necessary for the non-govt sector to pay taxes or buy Tsy’s.” I’m trying to equate the two, at least in some ways.

    “Inflationary and so forth effects for the economy are exactly the same!”

    I agree and disagree here, though the disagreement part could be the result of a miscommunication somewhere.

    Disagree: This would seem to assume that a govt deficit and a govt surplus have the same effect on desired spending of the non-govt sector at all times. I don’t think there’s any chance that is true. Perhaps that’s not what you were intending to say, but your use of words makes it sound that way.

    Agree: the loan is only to the banking sector to settle its payments and meet reserve requirements where applicable. It has no additional effect on the banking sector’s ability to do anything. And the qty of reserve balances provided would be the same with a govt deficit or surplus. The only slight difference would be the debt service paid by banks in the case of the Fed loan. Further, the CB’s that have used the “overdraft” approach weren’t somehow providing less stimulus compared to those using the “asset-based” procedure. Still further, my contention in principle 9 of my paper on the the general principles of modern central bank operations is that all of the systems are actually “overdraft” systems, for the most part, since even the Fed uses repo’s with primary dealers to add/subtract reserve balances on a day-to-day basis at the dealers’ banks (which would then be circulated to banks needing them via the fed funds market). Repo’s are a CB loan to the non-govt sector, which means that there isn’t even a debt service difference between the two approaches. Prior to Lehman, repo’s outstanding were greater than the qty of reserves in the US, so the US was clearly an “overdraft” system for the most part.

    “Right, understood. But suppose that all the ABS swapped in the QEI was totally worthless – all the collateral loans defaulted etc. Then the Fed just basically lost all that money.”

    That would be an increase in NFA of the non-govt sector, yes.

    “OK, does this reduction in equity have any real life consequences? Can the Fed go bankrupt? No, the Fed, as the issuer of currency can no more go bankrupt than the Tsy – actually, even less so, since it is actually the Fed that issues the currency in the current institutional arrangement. So, this reduction in equity per se is totally meaningless just as the deficit numbers per se are totally meaningless – the only real life consequences are inflationary in both cases.”

    Completely agree, obviously.

    “In fact, reduction in equity for the CB is completely analogous to the deficit of the FA – if the CB and the FA were operationally consolidated then the two would totally conflate.”

    Completely agree. I said exactly this in “Helicopter Drops are Fiscal Operations” 1.5 years ago.

  196. So, Peter D, it sounds like we are pretty much in agreement. I think the disagreement was more a miscommunication, as I was interpreting your point as suggesting that a Fed loan in the case of a govt surplus was just as stimulative to the economy as a govt deficit. I don’t anymore believe that was the point you were trying to make.

  197. I would respectfully suggest to some commentators of this thread :)

    1. To take a look at David Bohm’s distinction of conversation as dia-log (towards knowledge) and dis-cussion (disarrayed percussions). A beginning point being

    http://en.wikipedia.org/wiki/Bohm_Dialogue

    2. To clearly separate and state scientific issues (of HOW things happen) from ethical issues (of OUGHT to be done).

    Science or any scientific theory cannot found ethical choices or values, because it cannot answer “ought” questions. It can only answers of “how to do”, GIVEN that ethical choices or goals have been specified in advance.

    Ethical choices are irreducibly subjective and no one can arrive to a meaningful conversation if arguments about objective facts (supposedly scientific) are used to state, explain or trying to convince others to assume one’s own ethical choices.

    3. In arguing about the meaning of equations, it must be kept in mind (as physicists do) that the “dimensions” of symbols matter. It is one thing to interpret:

    Y=G-T+S-I

    as relating quantities of money.

    It is another thing to interpret it as relating quantities of goods/services.

    And it is not a good idea to interpret it as relating simultaneously quantities of money and quantities of goods/services. (This is called dimensional inconsistency among physicists, something that in economics does not get much attention.)

  198. Scott, thanks for much for your reply.

    I think the disagreement was more a miscommunication, as I was interpreting your point as suggesting that a Fed loan in the case of a govt surplus was just as stimulative to the economy as a govt deficit. I don’t anymore believe that was the point you were trying to make.

    I actually was making this point, but now after reading your reply, I realize I was probably wrong and need to think about it some more :)

  199. Interesting. I think the way to think about it is to separate the point you were making into to separate points, as I did above in my “disagree/agree” reply. You kind of (accidentally?) found your way into a rather specialized discussion on cb operations (“asset-based” vs. “overdraft”), and your insight was correct (or, at least, it’s the same conclusion I’ve reached, which I happen to think is correct, anyway).

  200. “The goal of Mr. Murphy’s initial article was to show that a modern fiat monetary system need not involve government spending in order for the private sector to save. This is nonsensical for reasons that are apparent to MMTers.”

    How do you justify this statement?

    I am confused.

  201. To clarify, the implication of the quote is that the private sector requires government spending in order to save–this proposition is what I’m intersted in seeing you (anyone) justify.

  202. What answers do you want? You are slinging mud and not debating….The only thing disappointing here is your attempt to make an argument….

  203. What? I complain about the system every day. No one ever said it was perfect. Are you here to have a real discussion or are you just becoming a nuisance?

  204. No, we’re talking about the legally mandated currency in use today in the USA. Not coconuts. You seem to be forgetting the fact that you can’t pay your taxes in coconuts.

  205. I was interpreting your point as suggesting that a Fed loan in the case of a govt surplus was just as stimulative to the economy as a govt deficit.

    Do I understand correctly that the difference in stimulatory effect is that govt deficit creates a corresponding deposit in the banking system which then can be used to buy stuff etc, while a Fed loan is only to allow inter-bank clearing (no stimulatory effect per se) and payment of taxes?
    I am trying to think of it at point 0 for the economy with no cash, deposits or reserves (trying to be precise and not use “money”!) The govt has two options to jump-start the economy
    1) Deficit spend by creating a deposit for the non-govt sector and a corresponding reserve balance at the Fed.
    2) Tell the banks “create all your horizontal money and I’ll back it up by lending you the necessary reserves to clear and pay taxes with”. This option is a bit harder to think about. Suppose for simplicity we only have one commercial bank B, so, no reserves needed for inter-bank clearing. Now this bank B gives a loan to a customer C, which creates a deposit as we all know. Now when C needs to pay taxes, the Fed loans reserve balance to B, B reduces C’s deposit by the amount of taxes and the Fed reduces B’s reserve balance by the same amount.
    Am I doing this correctly so far?

  206. The point is that the govt must name what is the currency to be saved in and it must actually create it. So, in a very strict sense a fiat currency is always created and spent into existence. If it does not then we are not existing in a fiat system. The world that Murphy describes is not a fiat system so while it might be nice to theorize about commodity based currency systems it is not the system in which we live.

  207. That’s another very strange statement.

    It could be interesting to address it, but note that I am asking why the government has to spend in order for the private sector to save.

  208. Apologies, I must have misread your post. Currency is not spent into existence. Central banks ship it directly to the banking sector. Further, currency is not needed to save–in any monetary system.

  209. How do you save in a currency that doesn’t exist? I’d like to save in Marsian Area 51 currency, but until the Marsians decide to create that currency and issue it I cannot save in it. This is a basic tenet of fiat money.

  210. Think of it like a ticket into a football game. You can’t save that ticket (currency) until the stadium (government) actually issues the ticket and allows you to save in it.

  211. I didn’t say that you can save in currencies that don’t exist (I agree that that would be logically impossible), I said that you do not need currency to save. You do not need money of any form to save–under any monetary system.

  212. Right, so two things: 1, why do need to save the ticket (currency) instead of some other asset (e.g. bank deposit, or commodity, or capital good). 2, even if you could only save in currency, why must the government spend in order for you to acquire it? In general, the government gives banks currency on demand in exchange for reserves. No spending necessary.

  213. You’re taking the point too literally. I don’t need physical cash to save. It could be in electronic form. I don’t care. But the point is that the government has to name the thing that can be saved in and paid taxes with. And that’s the key. In any government that has expenses for public benefit there will be spending. And where there is spending there must be taxes. So do the math. It’s pretty obvious that a modern fiat monetary system involves spending, taxation and savings in the unit of account named legal tender by the government.

    In theory, you can save in bank issued money. But taken to an extreme, if the government never spent (and only taxes) they would drain the private sector of the unit of account. This would force the private sector into debt. So in a strict sense, if there are taxes, there must be spending.

  214. Yes, essentially. Note that (2) is effectively austerity in the current environment, or at least waiting for the non-govt sector to sort it out. But note that (2) is also equivalent in terms of stimulative effect (i.e., none) to letting the non-govt sector sort it out while the cb uses open market operations to purchase govt debt from previous years (i.e., there’s a surplus in the current year but a positive national debt) to ensure enough reserves are circulating for the banking system’s needs.

  215. Vimothy. Do you know any person who doesn’t have at least part of savings in money? Even if you did, the non-govt sector in aggregate still needs to save in “money” since it is a medium of exchange and of payment of taxes.
    So, yes, you can save in real stuff etc, but there is still a minimum level of desired savings of NFA and this can only be accommodated by govt deficit.
    If you worry only about real stuff then why worry about govt deficit, which is nominal?

  216. I’m simply taking you at your word.

    There’s only one type of govt money I can save in, and that is cash. I can’t save in the other type, which is reserves. Imagine a situation in which there was no other asset. Would it be the case that the govt needed to spend in order to supply cash (or reserves)? No. The govt does not need to supply cash by spending. Indeed, the govt does not supply cash by spending (in general, although we could imagine some limited situations in which it did). The govt supplies cash by swapping it for reserves with banks, not spending.

    However, this hypothetical (in which there is one asset, cash or narrow money), does not bear any resemblance to reality. In fact I can save in a whole range of assets: cash, bank deposits, commodities, corporate bonds, capital goods, etc, etc, etc.

    So the proposition “a modern fiat monetary system needs government spending in order for the private sector to save” is false on two counts. 1, In that the govt does not need to spend in order for the private sector to acquire money (of any description–narrow or broad), and 2, in that the private sector does not need money (narrow or broad) in order to save.

  217. Peter, Yes, people save in money balances, amongst other things. But the statement in the OP clearly implies that the private sector cannot save unless the govt spends. This is false.

    The private sector can save regardless of govt spending patterns. The private sector can save in assets that aren’t govt money, govt liabilities in any sense, and in assets that aren’t money in any sense.

  218. Wrong. In aggregate private sector has to have a minimal level of savings in govt/CB liabilities and these by definition come from the govt/CB. I am surprised to see you making what looks to me like a basic fallacy of composition error.
    True, as discussed with Scott Fullwiler above, the CB can loan the reserves to the non-govt sector. But then these are not savings of non-govt sector (loans are not grants) unless the CB takes a loss on the loan (and in which case it is completely analogous to the deficit of the FA.)

  219. Hahaha, I’m getting schooled here!

    You are entitled to make whatever claims you like about the private sector and what it needs. All I’m doing is discussing the OP’s proposition, which is that the private sector cannot save without govt spending. This proposition is clearly false. If you agree that the private sector can save using capital, for example, then you necessarily agree with me.

    Note that I am not saying that the private sector cannot save if the govt spends, or that govt liabilities do not provide a useful function in the economy.

    If the private sector requires narrow money (cash and reserves), then the CB can supply these without any govt spending. So if your claim is that the private sector needs narrow money to save in, it can acquire this without govt spending.

    If the private sector requires broad money (deposit balances) for transactions and to guard against risk, the banking sector can supply these without any govt spending. So if your claim is that the private sector needs broad money to save in, it can acquire this without govt spending as well.

    Further, as I already mentioned, and is surely unarguable, the private sector does not *need* money of either type to save. That is, it can save without money. It can save with commodities or capital goods, for example. Do you deny that the private sector can save using capital? If you do not, then it follows logically that you agree that the private sector does not need money to save.

    Again, let me reiterate that I am not claiming that the private sector does not want to hold some portion of its wealth in the form of risk free claims against the govt. I am claiming, and this is not some subtle point if theory, that the private sector can save without the govt spending.

    Capiche?

  220. (G – T) = (S – I) – (X – M)

    stick to the sectoral balances math and it is much easier to understand.

  221. Baychev,

    You and Vimothy simply cannot get through your heads that MMT is describing a de facto state of affairs. You are both simply hopeless. Or, endless explanations in books, articles, and various blogs, on the part of highly intelligent and accomplished professionals such as Scott Fullwiler and others, are wrong, and you extraordinarily brilliant and perceptive individuals have seen through it all, and this without a fraction of the knowledge they have.

  222. The OP was that the non-govt sector cannot save NFAs without govt spending. True, it wasn’t formulated precisely in this manner, but this was the thrust. The second next paragraph to that makes this clear. The correct statement should be something like “the non-govt sector desires to save in govt liabilities which can come only from the govt”. The reason for this desire is the govt lianbilities being the prevailing medium of exchange, up there in Wray’s money pyramid, which in turn is driven by taxation.
    And at the very minimum, if such savings desires are 0, the govt still must inject enough HPM for the non-govt to pay taxes. Then you get balanced budget, naturally.

  223. Greg, how can a fiat currency be demand driven??? Neiter the supply nor the exchange rate nor the intrest rate has to do with supply and demand. Every parameter is plain (FED) politics.

    The gold standard works just like a natural cap – the gold in stock shows the maximum amout of notes or bills a bank can issue. But of course the bank can purchase more gold and thereforer increase credit.

  224. The quote was,

    “The goal of Mr. Murphy’s initial article was to show that a modern fiat monetary system need not involve government spending in order for the private sector to save. This is nonsensical for reasons that are apparent to MMTers.”

    This is rather different to,

    “The non-govt sector cannot save NFAs without govt spending”,

    Which is a tautology, and so true.

    Or,

    “The non-govt sector desires to save in govt liabilities which can come only from the govt”

    Which is a behavioural statement, and one that most people agree with–most people, but perhaps not Austrians. To demonstrate this to an Austrian, it would help to involve some theory rather than making strange and imprecise claims that you don’t actually believe in (assuming the OP agrees with you).

    “And at the very minimum, if such savings desires are 0, the govt still must inject enough HPM for the non-govt to pay taxes”

    This isn’t right. The banks need reserves for settlement, but the govt does not need to spend to provide the banks with reserves. You are confusing monetary and fiscal policy in a way that doesn’t seem particularly helpful given the context (an online debate between Austrians and MMTers).

  225. Vimothy, I saw the quote but the second next paragraph makes clear what the OP was. You want to be nitpicking about it – OK.

    This isn’t right. The banks need reserves for settlement, but the govt does not need to spend to provide the banks with reserves. You are confusing monetary and fiscal policy in a way that doesn’t seem particularly helpful given the context (an online debate between Austrians and MMTers).

    I said “inject”, not “spend”. As I indicated above, the CB/Govt can lend reserves to the banks. There is a whole discussion with Scott about it above.

  226. Peter, first of all the so called ‘good reason’ why the GS got abandoned was the financing of WWI. Well some may really think this is a good reason…

    To the backscratch economy. This is an oversimplification of anything and completely out of touch. The backscratch economy assumes that 100% supply generates 100% demand, even of a redundant good. And this is actually the key figure of this economy. If supply or demand gets out of sync the economy will be doomed. There is no space for invention, rise in productivity and so forth. There is no competiton, no specialisation… This economy is in fact really doomed because there can’t be any progress.

    The real economy works like this. If someone doesn’t want to provid a backscratch he will use the spare time to do something else to earn money (he will most likely invent the headscratch). Now the demand for backscratches decreased and economy will react to that by reducing the supply. That’s not stealling! The one who doesn’t get a backscratch will have an itchy back and scratch it on a tree :-) But most likely there is one in this economy who doesn’t want a backscratch but instead preferes the new invented headscratch. So then the economy provides 99 backscratches for the backscratchers and 1 headscratch for the headscratcher. Everyone is in work again.
    In the real economy there will be some people who provide better backscratches then others. This is called competition. So people will ‘save’ and be ready to pay more for a future backscratch but therefore getting a better one.

    You see the backscratch example is completely out of touch and not useful at all. Its just to confuse people.
    And at least we know that on this planet ‘Crusoe economies’ existed and in fact for the most part of human history.

    Do you charge me for theft on Steve Jobs because I didn’t buy an ipod?

    Backscratch economy fails and you can’t explain a thing with it. And certainly you can’t explain a complex monetary system.

  227. vimothy,

    How do the banks acquire the reserves they exchange with the CB for currency?

    Banks don’t get reserves without exchanging them for something – either outright exchange or as collateral.

  228. Peter, you wrote,

    “if such savings desires are 0, the govt still must inject enough HPM for the non-govt to pay taxes. Then you get balanced budget, naturally.”

    As with my original query, I was addressing what was actually written, not something that may have been intended, but was never expressed.

    “As I indicated above, the CB/Govt can lend reserves to the banks. There is a whole discussion with Scott about it above.”

    Yes, very good. The CB typically injects reserves into the banking system via repo during open market operations. It can also buy or sell securities outright.

    But anyway, that’s the point. The CB can supply HPM. If the private sector requires it, fine. But it does not need the govt to spend in order to provide it.

  229. jeff65, The CB wants to hold the highest grade assets on its balance sheet, because any losses on its portfolio represent a transfer of wealth, and generally we want to transfer wealth via fiscal policy. So the CB normally trades reserves in for govt securities, which are risk free.

  230. I think that most people missed the top-goal of Robert Murphy. As per his words:

    “My point is that the national-income accounting tautologies aren’t a good critique of the tea party after all.”

    By the way, I think that, correctly, he should have been written:

    “My point is that the national-income accounting *equalities* *cannot be used to found* a good critique of the tea party after all.”

  231. vimothy,

    Bank deposits cannot represent private sector savings when viewed in aggregate. They are bookkeeping entries that always net to zero within the private sector: bank deposits are your asset but the bank’s liability.

    To the extent that they don’t grow on trees, acquiring the other assets you list requires you to accumulate dollar denominated savings first. In addition, even if the assets do grow on trees like coconuts, in order to use those assets in the future economy you have to find someone who has accumulated savings in dollars and is willing to buy those assets from you.

  232. It’s not hard to see where this is going!

    Govt securities came from the, ahem, govt.

    Therefore, the private sector cannot save unless the govt spends…?

  233. It doesn’t matter whether we’re considering aggregate or individual savings. Go and ask someone whose opinions you respect if you don’t believe me. Bank deposits don’t represent what you guys call “net financial assets” or “nominal net savings” or whatever, but that should be obvious.

    A bank deposit is a liability for the bank. On the other side of its balance sheet sits an asset. The bank is an intermediary. The principle is not so different from a corporation that issues a bond to finance the purchase of a factory. The implication of your argument would seem to be that the corporate bond does not represent saving for the private sector, because it is an asset with a matching liability. But that can’t be right.

    Can it? If the govt ran a balanced budget, would the private sector be able to save, in your view?

  234. vimothy,

    “The implication of your argument would seem to be that the corporate bond does not represent saving for the private sector, because it is an asset with a matching liability. But that can’t be right.”

    This is consistent with the MMT view. Corporate bonds represent saving for the household sector which is not the same as the private sector. Households still have to accumulate dollar savings to acquire corporate bonds. After the exchange is made there is nothing new added to the private sector as a whole.

  235. It’s not false in the sense that the govt needs to name the unit of account and make it available for you to save in. This should be a rather basic concept for you to comprehend, yet you manage to reject it….

  236. No capiche. You’re misconstruing a simple fact. The unit of account that you save in is the unit of account deemed legal tender by the govt. If we are to have an organized govt with spending for public purpose then we must have taxes. And in order to tax we must first spend. It can be no other way. So, you’re making this totally illogical argument based on a false paradigm.

  237. And if you want to conclude that no govt is necessary then, well, you’re just not right….We don’t create govt’s for the hell of it. And the world without govt would be a mess. So please try to keep things framed realistically….

  238. “This is consistent with the MMT view.”

    No it is not. I have my disagreements with those guys, but most of them are very smart and this is sixth form stuff.

    The private sector can save by by producing capital. If you doubt this, just glance at the sectoral balances identity in awakened sheep’s comment. In a closed economy, the private sector cannot save net of investment unless the govt runs a deficit. Hence the phrase NFA–NET saving, as in net of investment, as in the private sector can save by investing, but in order for it to save NET of investment (so that S is greater I), the govt must borrow the funds.

  239. vimothy,

    “If the govt ran a balanced budget, would the private sector be able to save, in your view?”

    The answer depends on the definition of “save” and “private sector”.

    Let’s assume “save” is deferred consumption of dollar denominated income.

    Then:
    If by “private sector” you mean “household sector” – yes, the household sector can save.
    If by “private sector” you mean “domestic sector” – yes, the domestic sector can save.
    If by “private sector” you mean “non-govt sector” – no, the non-govt sector cannot save.

  240. Vimothy,

    My point was to show that the govt must name the unit of account and make it available to the public. In an organized society where the govt serves a public purpose we must have taxes. And in order to tax we must first spend. It’s a much broader point than the one you’re honing in on, which is really semantic in the context of the conversation I was trying to start (and clearly didn’t communicate very well).

    Now, I know Murphy has this dream where there is no organized govt and therefore no taxes, but let’s be realistic here…..That fantasy world doesn’t exist for the same reason that I don’t sleep with Heidi Klum every night (no, not because I am ugly) – because it’s a fantasy.

    I hope that clarifies the point I was trying to make. Sorry for any confusion.

  241. “It’s not false in the sense that the govt needs to name the unit of account and make it available for you to save in.”

    Is some precision to much to ask for? You do not save in “the unit of account”–the unit of account is the numeraire: assets are denominated in it, it is a unit of measurement. You save in deposit balances, commodity holding, govt bonds, cash currency, tangible assets, whatever, and their value is expressed in standard units like the dollars.

  242. Seriously? Is your entire argument semantics because if you’re just here to blow off some steam and waste people’s time then don’t bother.

    You’re not going to prove anyone wrong and if you’re not interested in being agreeable then please don’t waste other people’s time.

  243. Cullen,

    “You’re making a totally semantic point that takes my comments out of context. I should have been more clear, knowing that non-MMTers were going to read the piece.”

    Respectfully, I don’t think it is totally semantic. As this exchange demonstrates, I think it would also help MMTers if you were more clear. Why is it people in the comments section think that the govt must spend or deficit spend in order for the private sector to save? I suspect that it is at least partly because they take their cues from people they look up to, like you, and you are not always as careful as you could or should be.

  244. And sorry, but “money” is a very imprecise subject so don’t waste your time with these absurd attempts to apply precise definitions to imprecise subjects.

  245. “And if you want to conclude that no govt is necessary then, well, you’re just not right….”

    That isn’t what I want to conclude. I’m not an Austrian. I don’t believe in “limited govt”. I am all for full employment and the usual bog standard centrist stuff (FWIW). What I was trying to do was explain that the govt does not need to spend for the private sector to save. It’s not a political point. At least, it should not be. Why make it so?

    The private sector needs risk free assets and it needs base money. But that can be true AND it can also be the case that the private or non-govt sector can save even if the govt runs a balanced budget or a surplus.

  246. vimothy,

    The term “I” in the sectoral balance equation doesn’t mean whatever you want it to mean. It certainly doesn’t mean productive capital that may or may not be converted to financial assets in the future.

    You were asking for precision above – for an equation to work it must have units. ‘$’ and ‘$ worth of stuff’ are two different units. If this distinction is unimportant there would have been no GFC.

  247. I never said the govt had to run perpetual deficits….I have never said such a thing. You’re just putting words in my mouth. I’ll agree that I wasn’t precise enough, but I never said a govt had to run perpetual deficits…..

  248. Oh, Vim ,come on! If the injection of money is via deficit spending and is just enough to cover taxes, then the govt runs a balanced budget. If it is via CB loans, then the govt runs a surplus (a pointless one, but nevermind). You are nitpicking now :)
    Regardless, the non-govt sector won’t be able to accum NFAs without govt deficits (or forgiven loans from the CB, which is the same thing.) With outstanding CB loans the private sector is actually short NFAs.
    So, the sectoral balances identity stands, since it talks about NFAs, not those other savings you refer to.

  249. “Are you claiming that a govt can tax without ever spending? Sustainably?”

    What does “sustainably” mean? If the govt cut spending to zero and left taxes as is, I would expect that to be very bad. Equally, if the govt cut spending to zero and cut taxes to zero, I would expect that to be very bad as well.

    I am saying that you do not need the govt to spend in order for private saving to be positive. Further, you do not need the govt to spend in order to supply the private sector with a positive quantity of base money. The CB can supply the private sector. (Scanning the thread, I notice this: “Either a deficit or a loan from the govt/cb (i.e., surplus position) will create reserve balances for the non-govt sector to use to settle a tax liability. My MMT colleagues usually leave out the latter, for some reason. The case would seem to be stronger if both were included.” I fully agree with that).

    Now, you do need govt bonds to provide a risk free asset for the private sector. And you do need govt bonds to provide a risk free asset for the CB. So clearly, you need some positive level of govt debt. But this is a different (related, but different) argument.

  250. vimothy,

    Additionally “capital” is a stock. The sectoral balance equation is about flows. Investment may produce productive capital, but the term “I” is the flow of dollar denominated corporate income directed into producing capital. It is not the capital itself.

  251. I should rephrase to say the term ‘I’ INCLUDES dollar denominated corporate income SPENT to produce capital.

  252. Are you claiming that the CB should provide reserves to the pvt sector so we can all pay our taxes?

    I like that you’re being thorough, but I mean, come on, let’s try to keep the conversation at least a little bit realistic. I love to think about coconut islands and whatnot, but at some point this conversation has to remain realistic.

  253. “you’re just putting words in my mouth.”

    That certainly wasn’t my intention and I apologise if I did. I’m was trying to quote you pretty directly. The reason I brought it up is because I have a fair amount of debates with MMTers, and I read a lot of debates involving MMTers and there does seem to be a certain amount of confusion over this.

    Here is SRW making exactly the same point in one of his posts on MMT:

    “Household savings is mostly a proxy for real investment, while “private sector net financial assets” refers to a mutual insurance program arranged by the state. It is a category error to confuse the two. Yet in online debates, the confusion is frequent. Saving backed by new investment requires no accommodation by the state. It discredits MMT when enthusiasts claim otherwise, sometimes quite aggressively and inevitably punctuated by the phrase “to the penny”.”

    interfluidity.com/v2/1357.html

  254. I agree. A common problem seems to be that people debate the validity of the equation without agreeing to the definition of the terms.

    Why do people think they call them “terms”?

    They are called terms because you must accept them in order to talk about the equation! If you want to assign new meanings to the terms you need to write a new equation.

  255. I get your point. And I am saying it’s semantics only because it is not realistic or complete. The reason we have a govt and a common currency is because we decided that we wanted this govt to provide a public purpose. That involves vertical money. And in order for this entity to exist there will inevitably be vertical transactions which result in taxes and spending. That’s just our reality. Does it mean that the pvt sector cannot save in USD? Not necessarily. Yes, if you eliminate the vertical transactions then there is not necessarily any savings due to govt spending. But the vertical and horizontal transactions are inextricably linked. The US banking system exists only because the US govt exists. So, to pull one out in solitude and create an example where the govt need not spend, is totally unrealistic. Murphy’s foundation for thinking though is based on this unrealistic reality where govt doesn’t exist. So naturally, it just doesn’t work. It might work on coconut island, but that’s just a fantasy. A world without govts is not realistic.

    Does that clarify?

  256. “Are you claiming that the CB should provide reserves to the pvt sector so we can all pay our taxes?”

    That’s basically the current institutional arrangement. The CB ensures that the level of reserves held by the banks is such that it hits its target rate (I’m ignoring the case of IOR for simplicity). This means defensive OMOs when taxes or govt spending drain or inject reserves. But its the CB what does it–reserves are a CB liability.

  257. Vimothy, from my experience MMTers usually say Govt Deficit = Non-Govt Surplus or something like this. Now this is a precise statement, deficit and surplus referring to differences between financial assets spent and financial assets earned.

  258. You’re missing my point. See my other comment. I’ve gotta run to dinner. I presume you’ll agree with my last statement though.

    Thanks for stopping in. I always appreciate it when someone points out an error in my line of thought. It adds to future clarity.

    Best,

    Cullen

  259. “The reason we have a govt and a common currency is because we decided that we wanted this govt to provide a public purpose. That involves vertical money. And in order for this entity to exist there will inevitably be vertical transactions which result in taxes and spending.”

    I agree with all of this.

    “Does it mean that the pvt sector cannot save in USD? Not necessarily. Yes, if you eliminate the vertical transactions then there is not necessarily any savings due to govt spending. But the vertical and horizontal transactions are inextricably linked. The US banking system exists only because the US govt exists.”

    A situation in which there was no USG but a banking system would certainly be very strange, and I agree that we are basically in the realm of sci-fi here.

    “So, to pull one out in solitude and create an example where the govt need not spend, is unrealistic. Murphy’s foundation for thinking though is based on this unrealistic reality.”

    IMO these thought experiments have value because they help us to think about mechanisms and relationships that are inherently very complicated in simple ways. If you ever study economics at uni you will probably come across the Robinson Crusoe economy. It is a starting point for building up much more complicated models. If you are familiar with Godley and Lavoie’s SFC models, in their textbook they start with a very unrealistic and simplified model and gradually make it more and more complicated. What else can ya do? I don’t feel smart enough to do much other than start small and try to understand simple things, and then hopefully use that understanding and apply it to marginally more complicated stuff.

  260. “I said “inject”, not “spend”. As I indicated above, the CB/Govt can lend reserves to the banks. There is a whole discussion with Scott about it above.”

    LOL–Just took your advice and read this. I see Anon and Scott made most of the points I’ve been trying to make, only about 500 comments earlier.

  261. “MMTers usually say Govt Deficit = Non-Govt Surplus or something like this. Now this is a precise statement”

    Agreed–an identity

  262. “Thanks for stopping in.”

    Thanks for having me. Bed time in this part of the world!

    Regards,

    V

  263. Nice link, Jeff. I am yet to read the comments, but this is a very good exposition. Puts some meat on the bones of G-T=S-I+M-X…

  264. Sorry to say so but you guys are dead wrong (incl. Mr. Murphy). A true GS has nothing to do with a gold backed currency. In fact a gold backed currency is more like fiat currency then anything else.

    To Peter D: The guy who wrote about a GS on http://heteconomist.com/?p=658 is dead wrong too. He has no clue what a ture GS is and thinks as well its a gold backed currency. To stylze the GS he uses a ‘car standard’ instead and shows where most people fail when thinking of a gold standard. Here are the stylized assumptions from ‘heteconomist':
    Quote:”The total wage bill per day under full employment is 6 so the parents realise 6 business cards will be required. Since they happen to own 2 cars, they set the Car Standard at 3 business cards per car owned. This ensures that they are entitled to issue 3 business cards for each car, giving a total of 6.”
    Here is to add that the kids can earn with ONE card ONE hours of outdoor playing and it is equal to ONE hour of work in the household. So the total of six cards are backed with two cars.

    First of all the ‘car standard’ works like fiat currency, because the ‘government’ sets the price of ‘cars’ by random just like the government tells you what value the dollar has. Under a true GS the price of gold (or a car) is set by the market.

    We have a problem of valuation here. Think backwards. It would mean that the kids (he uses two in his example) could buy both cars from the parants after 6 hours of household work. This example has to fail. And even more, the cars are not liquid at all as gold is in a true GS.

  265. Minsky was taught by Schumpeter, not Mises. Still interesting, but not the same at all.

  266. Also, I know Jamie and he’s absolutely not in the same category as Krugman and DeLong in terms of having a disagreement. You’re totally right about the latter two, though.

    You’re also right about Winterspeak, at least I think so. And don’t forget Ed Harrison, mostly Austrian, originally Austrian, and one of the nicest and most open-minded guys around.

  267. My point was about this statement:

    “Why did G. F. Knapp develop MMT? He lived in a world of gold standard and by using your argument his theory would have been useless because he lived with a gold standard.”

    You always tell people to leave, if they do not like the status quo. If they had adhered to it, chartalism would not even exist. This is only one example of my complaining about your argument techniques. You become illogical when it comes to discussing crucial assumptions of MMT.

    InvestorX

  268. Scott,

    Thanks for reminding me about Schumpeter. I knew I remembered him being taught by someone in the Austrian tradition.

    On Rob’s Minskyianism, that may be true, but doesn’t that make the point that you can take an Austrian and add Minsky and others into the mix? That the Austrian tradition is not necessarily closed, even if some treat Human Action as a Bible rather than one book in an intellectual journey? That the pugnacious attitude of the Rothbardians shouldn’t blind us to the wide swath of people who are deep within, or heavily influenced, by that tradition but do not share the inability to adapt their views to the findings of others?

    I would say you are right about James in terms of civility, but my impression when he discusses people who really disagree with his views on the role of the state he is pretty contemptuous. However, my impressions may be wrong or at least an invalid general observation.

  269. Dave, you are getting hung up on inessential details again. This is how the GS – the actual one – worked. Yes, the market could buy all of gold, if the market coordinated its effort. This model has two kids to make it simple to think about – yes, it will be unrealistic about some issues like this one, but this is how all models work.

  270. InvestorX, this is not precise. As Dave quite correctly pointed, even under Gold Standard we had a fiat currency but shackled by convertibility to gold. So, the essential features of tax-driven money were still of interest, if only to show that it can be unshackled.

  271. Jeff65,

    I thought I might try to pick up some of the stuff you were saying last night that I didn’t get a chance to respond to, because I think there is a general point worth making here.

    “A common problem seems to be that people debate the validity of the [sectoral balances] equation without agreeing to the definition of the terms.”

    I’m not sure if this is right. I think that everyone, including Bob Murphy, agrees that the identity is true by definition. Who would dispute this? Only someone who doesn’t understand what an identity is.

    Murphy’s argument is that you cannot use an identity alone to prove anything. For instance, the fact that we can express the balances as G – T = S – I just as easily shows that an increased deficit (that is, increased NFA) can come at the expense of reduced business investment—which is, of course, true.

    From your link, SRW again:

    “Growth in the “net private sector financial position” could come from an increase in household income (yay!) or a decrease in the value of real business assets (yuk!).”

    Thus, he advises,

    “We certainly shouldn’t make policy decisions based on promoting or accommodating such an ambiguous outcome. Instead, we should craft our policies to be consistent with what we actually want, which is household financial income.”

    Ambiguity: bad—and that’s the reason we need identities, incidentally.

    If you think that net financial assets have some positive value for the economy, it would help to make the case if you were explicit about what that actually is, which means bringing in theory (and maybe talking about risk aversion, insurance, liquidity, etc), rather than just saying NFA = GFL, QED, and leaving it at that. They don’t understand why the private sector needs a steady supply of govt liabilities, so merely pointing out that it acquires them via deficit spending doesn’t help them to understand anything they don’t already know.

    For Austrians, saving is about productive assets, tangible capital. If you try to tell them that the govt needs to net spend in order to supply savings to the private sector, it isn’t going to make much sense to them. There is quite a sophisticated argument in favour of MMT, but it remains to be made in this debate (at least, as far as I’ve seen—there are too many comments to say for sure!), which seems to have got stuck on the most uninteresting part of the record. That’s a shame—not least because there is also a lot of stuff that you guys could learn from them, if you were so inclined.

  272. V,

    Sorry about that. I am not sure why you got caught in spam. I always review comments in the spam so don’t worry about it in the future. Comments always get there at some point!

  273. The inessential, as you call it, is very much essential. You talk about a ‘static’ GS where the government sets the price for gold, forces you to use their currency and therefore issuing money is monopolized and redeemability is abolished by law.
    But I’m talking about a dynamic system where the market sets the price by supply and demand, bank notes and bills circulate, free coinage, a free banking system without monopoly, a system by the markte for the market. This is a huge difference and non of that is inessential. You even can’t disregard the functions of gold and what money is or whats the difference to a currency and what purposes all these different things serve.

    BTW I need to repeat that I’m not claiming that MMT is wrong. I just want to show that there are and were other alternatives and most likely they are more useful and more applicable for free markets.

    But nobody can deny that in the long run under a fiat currency the debtor is privileged and therefore the creditor underprivileged. What person clear in mind (exept of central bankers and wall street bankers) would prefere such an immoral system? Every honest businessman on this planet should fight against such a system where you face governments arbitrariness and fraud is supported.

  274. With regards to my last comment I should add something. It’s not that I think these thought experiments are useless. It’s that this one has been covered previously. So, we’re not really thinking outside the box here. We’re just cutting an old box in half and pretending that it’s still a box. That’s what Murphy is attempting to do. I just don’t see the value in it.

    Sorry it took me 344 comments to get that point across…..

  275. How would you go about eliminating the trade imbalances that a single currency system like this would produce? Because that would be your biggest hurdle….An insurmountable one in my opinion.

  276. Dave, the gold standard we had prior to 1933 worked essentially like the system described in the heteconomist link. The fact that there is some other system that you have in mind – some Platonic ideal of a gold based system – is a separate issue. You want to post a toy model of that one for us to ponder – OK.

  277. Please… You talk about trade imbalances… Open your eyes… The US trade imbalance with Japan increased tenfold whereas in the same period the yen decreased against the dollar more then threefold. What trade balances under fiat currency are you talking about???? There is no ‘natural’ trade equilibrium under free foating currencies.

  278. I never said floating exchange fixed the problems, but it’s certainly an improvement over the GS. Just look at the damage caused in Europe by the single currency system. If a govt cannot protect its people from an exogenous threat then it should not exist. That, after all, should be the minimum purpose of govt – to protect its citizens. A single currency system makes that impossible. And that’s why they have always failed.

    It’s not that a floating exchange system is perfect. It’s just that it’s an improvement over depression prone GS….

  279. What argument is this??? You blame the GS that its biggest issure is not to work appropriate to equate trade imbalances and on the other hand you try to tell me that floating currencies are not perfect to avoid trade imbalances?????? Stop it….

  280. BTW: every govt will fail to proctect its citizens. On the long run the only thing that matters for the govt is the govt itself. So you as a citizen will always be the cheatee.
    Or you realy think that the politicians will favour you?

  281. Peter, this is realy funny. I rarely met a person who could admit that its believes were wrong or its stylized views were wrong. So you are not an exeption.
    When I read your comments I see that you can’t admit to be wrong. You are in constant denial. The simple fact that you can’t admit that the backscratch economy is completely wrong and the heteconomist example too, prove that. You don’t give any argument, but instead you insist that your view on a GS is the only right one. You don’t even want to try to think about another alternative… You live in this world and thats how the world has to be….

  282. To make it clear: I really think that your thoughts on MMT are valuable… but you have not the slightes knowlege about a true GS. But you claim to be wise…

  283. The stylized example of heteconomist seems to me like that: If I want to stylize a Harry Potter book in your (or heteconomist’s) way I could say that it is a 700 sheets paper thick thing with letters from A to Z.

    And what tells us this stylized example from Harry Potter?

    You would argue that it is not important in which order the pages are set together and certainly it is not important in what order the letters are put together.. Its just a stylized example from a Harry Potter and therefore it must be true…

  284. vimothy,

    I said: “A common problem seems to be that people debate the validity of the [sectoral balances] equation without agreeing to the definition of the terms.”

    You said: “I’m not sure if this is right.”

    Really? How did a stock (productive capital) enter our conversation yesterday?

    I agree with your sentiment that precision in language is required. I’d add though that clarity is not served by playing dumb or being coy in response to imprecision. If you’ve got enough time to engage in a lengthy exchange of playing dumb, you’ve got time to engage constructively from the start.

    You said: “Murphy’s argument is that you cannot use an identity alone to prove anything.”

    You can certainly use it to discredit reasoning that requires the sectoral balances equation to be false. There is a lot of that kind of reasoning making the rounds.

  285. OK, Dave, we’ll agree to disagree… But I would still like to hear the details of your Platonic ideal of a GS system.

  286. Jeff65

    Yes, I saw your comments upthread—I meant to get round to them, but didn’t get the chance. You are misunderstanding the identities slightly.

    The stock of capital entered into the conversation because you brought it in. GDP is a measure of productive activity—the flow of production over time. The I in your sectoral balances identity represents the flow of new capital produced in the current period, a flow that adds to the stock of existing capital. This flow corresponds to a flow of expenditure—a monetary flow—which gives us one way of measuring the flow of output produced: sum of final sales (for the investment component of GDP, this will obviously mean summing the final sales of capital goods). There are other common methods of measuring GDP, however; for example, one method is to take the sum of factor incomes, and another is to take the sum of value added.

    The monetary flow will correspond exactly in value to the flow of output for any of the individual components (such as investment) and for the total flow of output, or GDP. This is because we’re measuring those flows by measuring the amount of money spent by demanders of output or earned by suppliers of output. And the amount of money spent on capital goods is naturally the same as the monetary value of the capital goods sold.

    “There is a lot of that kind of reasoning making the rounds.”

    I really don’t think there is. The identities are true in every state of the world and under every theoretical description of the world. Remember, they are identities. An identity is just a tautology, a definition. It’s like saying that X = X. No one, Austrian or otherwise, is making the argument that, just because X = X, doesn’t mean that X = X.

  287. vimothy,

    “The stock of capital entered into the conversation because you brought it in.”

    No, I did not. You did – or at least you didn’t clarify what you meant when you said “productive capital.” You were criticizing others for being imprecise…

    Capital IS a stock, the money spent on it over a period of time is a flow, but again this is not what you said.

  288. “the Fed doesn’t print money.”

    A little late to the discussion .. but what ??

    Of course the Fed prints money! I mean where do the $1 currency notes come from ?

    I know whats being said here … but it can be said that the Fed printing notes is demand-determined. However “the Fed doesn’t print money” is wrong to the core since the Fed does print money.

  289. Anon,

    “OK, lets nationalize and have a single bank – the central bank.

    That’ll sure confuse the MMT point on reserves – there won’t be any.”

    Excellent point!

  290. I was traveling so you may never see this. Sorry. Anyway, I would agree with your characterization of Austrians. We shouldn’t judge the whole group based on the behavior of the most zealous among them, just as I wouldn’t want anyone to do the same with MMT.