James Montier Joins the Hyperinflation Debunking Train

James Montier never disappoints.  This time he discusses how hyperinflation is “not just a monetary phenomenon” (if that doesn’t sound familiar to readers, it should).  His latest note out of GMO covers the subject of hyperinflations and he’s obviously been reading MMT.  He writes:

“However, there is an alternative view of hyperinflations, one that I find much more credible than the quantity-theorybased argument outlined above. This alternative viewpoint recognizes that money supply is endogenous (and hence that interest rates are exogenous), and that budget deficits are often caused by hyperinflations rather than being the source of hyperinflations.

If simply “printing money” really did lead to hyperinflations, then we should expect to see hyperinflations all of the time. Any government that issues its own currency under a floating exchange rate effectively spends by printing money (as a matter of logic, if the government is the sole issuer of currency, it has to spend before it can collect any taxes at all, otherwise there is nothing to pay the taxes with). Yet, rather than two-a-penny, hyperinflations are thankfully rare events, representing occasions when populations lose complete faith in their currencies.”

Obviously, I have a bit of a beef there (though I came to many of the same conclusions on hyperinflation several years ago – see here).  It’s important to understand that the money supply is almost entirely endogenous as Montier states.  That is, money is created almost entirely by banks and used by everyone else.  The money supply has been outsourced by the government to private banks who rule the monetary roost.  This requires a more in-depth understanding than the simple idea of a “currency issuer”.  As JKH has noted in the Contingent Institutional Approach, the US government, for instance, is a strategic currency issuer.   In essence, the US government harnesses the banking system in what is essentially a system that bribes them to bid at auctions.  The government basically leverages its enormous ability to tax the output of the private sector to have the banks do their bidding.   So, banks issue the money and the US government chooses to use this bank money.

This doesn’t mean the US government is not susceptible to hyperinflation just because it has the power to tax its output.  In fact, the loss or even reduction in the power to tax this output base has been the foundation for many hyperinflations. A sovereign government that cannot tax its output is essentially bankrupted (even though it will never technically “run out of money”).  But again, the money supply is truly endogenous.  It comes almost entirely from INSIDE the private sector.  So the key here is really understanding how BANKS issue almost all of our money.  In a balance sheet recession the odds of hyperinflation are extremely low because the money supply cannot expand substantially.  When you combine this with an extremely advanced nation with a powerful productive base and a sovereign that can tax that output the odds of a hyperinflation are extremely low.

Read the full piece here.


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

Cullen Roche

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

More Posts - Website

Follow Me:

  • LVG

    Cullen, I read this earlier today and it sounds exactly like your paper from 2011. No citation. Coincidence? Or just two smart guys on the same train of thought?

  • SS

    Wow, Montier has swallowed the MMT pill. How long before he transitions to MR?

  • HankB

    I noticed that Zero Hedge hasn’t published this piece by Montier. I wonder what they would think if they knew their bestie JM was a MMTer.

  • James Kostohryz


    I would like to add a qualification to your comments on endogenous money. The endogenous money paradigm works well in an economy in which the conditions exist for significant credit creation. In various third world countries such as some of the ones Montier mentions, credit creation essentially comes to a halt and virtually all of the money creation is by the government money issuer. Furthermore, this “disintermediation” of the money supply can happen over a period of time culminating in hyperinflation. One sign is that the ratio of the monetary base to broader measures of the money supply such as M2 or M3 increases very dramatically. This happens because deposits are pulled from the banking system, the demand for currency rises, while the supply of credit dries up. It’s the money multiplier in reverse — but it is not deflationary because the monetary base expands faster than intermediation shrinks.

    In sum, I fully agree that hyperinflation is a complex phenomenon that cannot be explained simplistically by the QTM model. Having said that, it would be a mistake to take the endogenous model too far when trying to explain hyperinflations. In any hyperinflation the money supply — to the extent that it is expanding at all — is not expanding endogenously through the credit system. To the contrary, credit as a percentage of nominal GDP and the monetary base will tend to decline.

    A final point: I enjoyed Montier’s paper. But as a student of hyperinflations, I believe his selection of examples and well as the narratives of the cases he chose were somewhat tendentious and excessively minimized the role monetary policy in each case. In virtually each example, this flaw in the exposition can be discovered simply by asking the following question: What would have happened if the various nations in question had been operating under a strict gold standard or currency board when the various shocks alluded to occured? Or what if the monetary authorities has simply refused to to accomodate the fiscal deficits brought about by the various shocks mentioned? The answer is that there would have been no hyperinflation. There might have been something even worse (such as horrific deflation), but it would not have been hyperinflation. Thus, although it may be true that monetary policy was not the original cause of these economic crisies, it is an undeniable fact that monetary policy played a central role in determining whether such crises ultimately resulted in hyperinflation. To this extent, any narrative of a hyperinflationary episode is grossly lacking if it omits an analysis of monetary policy responses.

  • Johnny Evers

    Interesting that one of the pre-conditions for hyperinflation is a government that has lost the ability to tax the population.
    Considering that the U.S. government has to borrow to fund 40 percent of its routine expenses (in peacetime), and has no plan in place to address future rising expenses, could you say that for political and economic reasons this condition now exists?

  • LVG


  • Johnny Evers

    I guess it’s a matter of 1. ‘can’t’ finance spending through taxes, 2. ‘won’t’ finance spending through taxes, or 3. believes government spending can be financed through debt issuance permanantly.

  • Charles

    It seems very chicken and the egg sort of thing. Since the U.S. took so much of the world’s production capacity post WWII, and combined that with an environment for creativity and capital formation (up to the mid to late 90s when it seems the finance sector has become a leech on society) it now has a huge economy. And can keep tax rates VERY low relative to just about every 1st world country WHILE providing benefits near to what even the most socialist countries do. In those countries they tax incomes 45-55%+ for most people while providing a lot of benefits. Most are now stuck in the EU but if independent it would appear they could lower taxes to a degree since you dont need to match taxes with spending as long as you have X productive capacity. This is always the argument for the U.S. – there is no need to tax because we can deficit spend, up to and to a point it exceeds productive capacity of the economy. Which in turn will cause inflation of a higher level.

    But how do you get that productive capacity in the first place? Again for the U.S. it was just like any other country pre 1940s, doing its thing – some wins in economy, some losses – a great depression etc. Then it had a massive 1x benefit from the war’s effects on others, plus the benefit of natural resources only possibly Canada or Australia enjoys. And from that it can always run substantial deficits and not need to tax, but only have the capability to tax it appears. It’s interesting that’s for sure.

    Makes me wonder how Ireland would have worked out if they were not part of the EU, and had taken things more slowly. They had a very low corp tax rate of 12%ish which was bringing in tons of corporations. It seems if you are a country that can do this for 20-40 years you could become the next U.S. since you would attract productive capacity, could constantly lower taxes, to bring in more, and spend in a quite luxurious way as the U.S. does year in and year out. As you gain more productive capacity you could lower taxes even more, sucking even more of the world’s companies from other countries until yours – which creates a positive feedback. You could spend even more on your citizens, and constantly lower taxes as long as you get more productive capacity. It is almost like having oil (what Im describing sounds like Kuwait or Saudia Arabia)

    I don’t know – it just seems far too easy for the U.S. go forward. What is the stumbling block – no country on earth save China has any chance of matching this economy’s productive capacity so whats to stop a “socialist” spending state combined with uber low taxes (which many argue the U.S. already has) from being the constant? Anytime it is question you just can say well we have the CAPACITY to tax our people but we choose not to. And that seems to be satisfactory.

  • PeterP

    Great success for the MMT/MR community, the news is spreading!

  • http://howfiatdies.blogspot.com/ Vincent Cate

    There were people who believed about the same thing as MMT saying it was good for the government of Weimar Germany to print money. Those ideas were discredited for a long time, particularly in Germany. When the US dollar gets hyperinflation Krugman and MMT/MR will be discredited for a long time. Cullen, how about a post explaining any errors in my Hyperinflation FAQ?


  • Andrea Malagoli

    I agree that the risk of hyperinflation is ‘hyped’. However, the other possible scenarios are no fun either … I am more in the camp of a permanent balance sheet recession. There is not way to ‘graciously inflate’ one’s way out of a 100%+ Debt/GDP ratio and massive central bank balance sheet. Something has to give.

  • Andrew P

    If a country runs perpetual deficits, doesn’t that slowly destroy its productive capacity? The other side of perpetual deficits is a large current account deficit. Foreign manufacturers gain competitive advantage, and productive capacity slowly leaks away to China and elsewhere. The process of losing productive capacity may be slow, but it is inexorable.

  • Andrew P

    Germany owed its war reparations in gold, so printing money put them over the event horizon very quickly. Other hyperinflations may be more relevant to the USA and EU than this special case.

    Of course, if there is a massive geopolitical oil shock, I could see countries trying to buy oil with massive amounts of printed money. This would be somewhat analogous to the Weimar experience.

  • Andrew P

    Not without real growth anyway. In a no growth, energy constrained world, the BSR could be more or less permanent.

  • hangemhi

    Inflation is also rising in China and making them less competitive than they were before, and therefore making us more competitive. Like any trend, it can’t continue forever. Charles mentions Ireland lowering taxes forever…. well, sooner or later you hit zero, and sooner or later your competition lowers taxes. This is one thing the “lower taxes produce jobs” crowd never mentions – lowering taxes just creates a race to the bottom. The less desirable your location, the lower your taxes must be to compete. The more desirable, the higher you can tax. But if the desirable place is sick of losing jobs to the undesirable place and competes with them on taxes, guess who wins? Or rather, guess who is going to get crushed if the desirable location keeps at it?

  • hangemhi

    All these months… years… you clearly haven’t read any of Cullen’s work on hyperinflations. If you had, you could critique your own paper.

    and add some citations… you appear to have made up the 80% debt/40% deficit stat. overall I give it an “F” since it reads like the ramblings of someone who shared his stream of conscious thoughts on a topic he knows next to nothing about

  • hangemhi

    we need to help the private sector get out of debt, and force lenders to consider risk (no more bailouts). there is so little perceived risk by just about every participant that here we are, 5 years after a major bubble burst, inflating a new one.

  • Greg

    One problem with your comment Mr Cate is that it was private bankers who drove the hyperinflation, not the German govt.

  • http://howfiatdies.blogspot.com/ Vincent Cate

    Most MMT/MR people understand that the central bank is really part of the government. The government had a huge deficit and needed to sell bonds. The central bank monetized them. It is the same everywhere. If you call the Fed a private bank do you think it really changes anything?

  • http://howfiatdies.blogspot.com/ Vincent Cate

    I have read Cullen’s stuff. A number of the questions come straight from his claims. The debt 80% of GNP and deficit 40% of spending are referenced in the question “where do the numbers come from” and there is also a link on the right to Bernholz book at a PDF. I include it below.


    MMT/MR people agree that you need some amount of taxes to support the value of a currency, but they never say how much. If you look at history as Bernholz has done, these are the numbers you get.

  • Johnny Evers

    The U.S. had the world’s greatest economy in 1939; it just didn’t realize it.
    But once the war began, we very quickly began produce multiples more than Germany could.
    Then the post-war world brought free trade and an influx of high-skill and/or motivated workers and the U.S. was the best-equipped to thrive in that atmosphere.

  • flow5

    Under monetarism, the first rule of reserves & reserve ratios is to require that all money creating institutions have the same legal reserve requirements, both as to types of assets eligible for reserves, as well as the level of reserve ratios. Monetary policy should limit all reserves to balances in the Federal Reserve banks (IBDDs), & have uniform reserve ratios for all deposits, in all banks, irrespective of size.

    The International Monetary Fund (IMF) said.”Raising reserve requirements could dampen capital inflows better than tweaking policy rates, with “limited” effects to economic growth”

    The roc in MVt (the proxy for inflation) = 24 month delta
    The roc in MVt (the proxy for real-output) = 10 month delta

    Required reserves are substituted for bank debits as the proxy for MVt since the G.6 release was discontinued.

    Legal reserves lag transaction deposits 30 days.

    Economic prognostications are infallible.

  • Greg

    Im not saying it was their fed equivalent but their private banks who were mostly responsible. I will connect you with the article later

  • SteveF

    question for anybody

    When Cullen states that Banks create virtually all the money, is he including the purchasing of Federal debt?

    ” money is created almost entirely by banks and used by everyone else.”

    Is there any distinction between money created by banks issuing loans and money created by banks purchasing government debt?

  • Greg
  • http://howfiatdies.blogspot.com/ Vincent Cate

    I have seen the article before, it was linked to on pragcap.com. But I am saying the central bank in Germany then is equivalent to the Fed, the central bank in the USA now. Some claim central banks are private but most MMT/MR people understand that really they are creatures of the state, controlled by the state, with personnel appointed by the state, and at least in the US case, profits paid to the state. There is a very good chance that after the government destroys our money the government and history will blame private banks. It won’t really be true though.

  • Tom Brown

    SteveF, you are correct to note that the way in which banks purchase government debt is very similar to the way in which they create loan/deposits for private non-banks. The deposit-liabilities they create on their balance sheets (BSs) for Treasury are called TT&L accounts. But instead of holding loan documents as the offsetting asset, they hold the Treasury-bond.

    However, before the government can make use of the funds in these Treasury TT&L accounts, they must be transferred to Treasury’s Fed account. This is analogous to a private non-bank’s deposit transfer from one bank to another. In particular, it requires the transfer of bank reserves, but in the TT&L case, these reserves go to Treasury’s Fed account rather than another bank’s.

    Thus the result of both steps is equivalent to the bank simply purchasing the Treasury bond from Treasury by sending it reserves. So really the bank’s must use outside (Fed created) money (reserves) to purchase the bonds.

    To see the process illustrated on the various players BSs, I recommend using this tool:


    The last two items in the operations pull down list illustrate these two TT&L account actions.

  • Tom Brown

    Of course those reserves will be created by the Fed when needed! Say for example, that Treasury requests that the bank transfer it’s TT&L deposit to Treasury’s Fed account and the bank doesn’t have enough reserves to make the transfer… then it can borrow those on the interbank-market (just like it does when transferring any other deposit). Ultimately the Fed must issue enough reserves to the banking system as a whole, through OMOs or discount window loans, to back that transfer. If we ignore reserve requirements, we can state that the difference between the two cases, is that the transfer of the TT&L account actually results in a net loss of reserves from the banking system (since Treasury’s Fed account is not part of this system), whereas a transfer between banks may require the Fed to temporarily create reserves to cover an overdraft or to make a loan through the discount window, but by the end of the day the Fed is re-paid, and thus the reserves are destroyed again. Adding in reserve requirements means a small fraction is not destroyed. And of course, in our present circumstance wherein there are $1.5T in excess reserves (ERs) on banks’ BSs, the Fed shouldn’t have to create any reserves permanently… they can always be obtained from other banks.

    Also I should note that as soon as the government spends the funds in Treasury’s Fed account, those reserves are returned to the banking system, and it’s pretty much a guarantee that that will happen!

  • Tom Brown

    This last paragraph is why, in the big picture (i.e. Treas bond auction followed by gov spending proceeds) Cullen says that gov deficit spending is the same as a redistribution of money from Peter to pay Paul, while simultaneously issuing Peter an NFA in the process. This is illustrated at that econviz webiste I linked to above with the operation “Government Spends (Consolidated)”

  • Tom Brown

    That looks interesting. Thanks!

  • Tom Brown

    So to actually answer your question: “When Cullen states that Banks create virtually all the money, is he including the purchasing of Federal debt?”

    In the big picture (over the time frame from Treas auction to gov spending proceeds, with the gov continuing to deficit spend) no net money creation was required at all… only the creation of an NFA. Of course we could zoom out more on the time horizon and include the re-payment of the NFA principal and accumulated interest… and all we see (I think!) is the creation of more and more NFA to cover that (as the gov rolls over debt or sells more to pay the interest) but no net new money.

    At various places in the process zooming the other way (to shorter time horizons) the answer changes depending on how far you are zoomed in (e.g., at the level of TT&L account creation, or just after TT&L transfer but before gov spending, etc.).

    Back to the big picture, if the gov stops deficit spending, and decides to pay off all its debts then I guess we’re looking at redistribution through taxing and spending. I haven’t thought this case out much actually! … but I don’t see why offhand this requires that a net amount of money be created by the banks or the Fed. But perhaps I’m wrong about that!

    Of course there’s nothing in what I’ve written here that would PREVENT bank created money being used to purchase Treasury bonds. I’m just stating that in the grand scheme of things, it’s not required.

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

    Stop bunching us in with the MMT people. They don’t even fully understand hyperinflations and at times contradict their own theory when discussing it.

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

    It’s easier to cut through the reserve accounting (which Tom has shown below) and just cut to the chase. When banks buy govt bonds they really just redistribute bank deposits from the buyer to the beneficiary of govt spending. So, govt deficit spending is the result of Peter buying a govt bond, obtaining a NFA as the t-bond, and the govt spending Peter’s old bank deposit into Paul’s account. It’s a redistribution of money and an addition of NFA as bonds. If that’s too confusing just think through what would happen when you buy a bond via Treasury Direct. You give the govt your bank deposit, they give you a bond and the govt gives your bank deposit to someone else via spending. The reserve accounting just muddies the simple flow of funds and some people use it rather nefariously to claim that the govt is printing new money. Keep it simple. Focus on the flow of funds out of and into the real economy.

  • Tom Brown

    Oh boy, … there you go again Cullen!… making a perfectly good complex and confusing answer simple and easy to understand! Sometimes I wonder why I even bother… ;)

  • Greg

    One problem with your paradigm Robert is you act as if govts are completely separate from moneyed private interests. Moneyed private interests control govts almost everywhere. There are varying ranges of influence but its clear that at the time, German private interests were not just victims, they were perpetrators as well. Yours is a false dichotomy.

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

    Ha. Your answer is more thorough. Unfortunately, only 1% of the population can totally understand it. The reserve accounting is just too complex for most people so sometimes it’s better just to cut to the chase when trying to communicate these things. But the details matter. And I very much appreciate you taking the time to untangle the web here.

  • Greg

    Oooops I meant Vincent….. not Robert

  • SteveF

    unfortunately I’m not the 1% percent, but I appreciate both of your efforts for trying.

    I think I get it, after reading some more of the post in the eduction center. I had previously understood Inside money to mean money created when banks lent to business or individuals. I didn’t realize it was a reference to all loans, including purchasing gov’t bond. I had thought of gov’t bonds as government created money, and bank loans as bank created money. …I’m slow, but I think I’m progressing. Don’t wasn’t your time helping me, you got more important things to do. Thanks

  • http://howfiatdies.blogspot.com/ Vincent Cate

    Cullen, MR does count the central bank as part of the government, right?

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

    No, it absolutely does not. We describe the central bank as a hybrid public/private entity. JKH’s Contingent Institutional Approach, a seminal MR piece, describes all of this. You’ve confused us with MMT which consolidates the Fed and Tsy into one entity before engineering many of their accounting tricks.

  • SteveF

    I am getting this. What I really appreciate about your writtings is how you clarify many of the unspoken assumtions that others (like Mosler) would make without explanation. Molser would act as if tax money paid gets destroyed, and I knew that was BS. When you see BS, you start losing confidence in the source. I don’t think Mosler is FOS, he just forgets to fill in things that are important to us rookies. …One day I will complete all our your educational material, but even the intros have been a great help to me. I am a better voter thanks to you.

    I do understand now what you mean by stating the Banks create virtually all money (minus coinage from treasury). I do get the NFA distinction. Thanks

  • Geoff

    I thought Steve’s question was very important and well answered by Tom and Cullen, but let my try to summarize. A bank loan is not the same as the purchase of a govt bond because the former creates money (loans create deposits) whereas the latter does not.

  • phil

    You don’t even need to consolidate the Fed and Treasury, because the currency is simply a US government liability. It says so very clearly in the US Code.

  • KB

    Excellent, just excellent piece! “budget deficits are often caused by hyperinflations rather than being the source of hyperinflations” and “hyperinflations are representing occasions when populations lose complete faith in their currencies”are two key thesises here.
    What it means, is that essentially we already entered the state of hyperinflation, and huge US and, broadly, worldwide budget deficits are first and clear indication of this!
    The reason why nobody sees it is becasue “population faith loss” has not occured yet. For some reason, the consensus thought is it should happen almost immediately after hyperinflation “starts”. Yet, it is not necessary nor proven theory. Even in Weimar, destroyed by war, the interval between “start” and “faith loss” was several years. And who said US should be like Weimar? Apparently “faith” in US dollar, backed by US economy and long history of USD existence, is still very strong, and is supported by the reserve currency status.
    We already fell off the cliff, and we are observing some signs of it – air noise, a pleasant feeling of levitation (in all asset classes), but the abyss bottom is not reached yet, it is not even seen! Given really strong “faith” in USD, the fall may take years and years.
    And although we can not see the bottom, we have an excellent indicator, heh-heh, Japan. It is falling off the same cliff, same direction, and is somewhere below us. We can see it, and we will see when it hits the bottom.

  • KB

    One more thing – in our case, it is not necessary for hyperinflation to occur that US population should loose “faith” in USD. It would be enought if significant part of other countries and/or foreign corporations loose “faith” in it.

  • KB

    well, no. It is the means to finance deficit. The cause of deficit is government decision ot spend more then it taxes. And if these means would become unavailable, it would not stop the government from overspending if it decides so, it just would force the government to resort to other means.
    Some supid greeces do have limitations in “other means”. Yet it is not the case for the US, or UK, or Japan.

  • phil

    I disagree with you completely, but there’s obviously no point in arguing with you.

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

    Of course you disagree. And of course you won’t argue back (which is a first). You have been presented with FACTS. Indisputable facts (that govt spending does not destroy or create inside money) and you have chosen to reject it in favor of your policy agenda. Your argument doesn’t hold up and you know it. But you have chosen to defend the agenda and not the facts. You are no better than gold bugs who hate the govt (and, when presented with facts, still reject fiat money) or anyone else with a political agenda. I’ve said this about MMT for over a year now and you kept coming back saying MMT was describing “operational reality” and that I was misconstruing the facts. Then I went straight to the source (the NY Fed) and collected all the facts so I could describe the real operational reality. It’s all been confirmed by people in the know and explained here in a way that just about anyone can understand (aside from those playing politics who don’t want to understand it). I am fine with you rejecting it, but at least tell people the truth about what you’re doing. You’re forcing a square peg into a round hole in an attempt to spread a policy agenda. If you want to spread that message on your own sites then fine. I have zero problem with that. But don’t confuse the readers here on these matters. That’s all I ask. Thanks.

  • SteveF

    Now your just messing with me. My understanding is they both create money, but only one creates a net financial asset in the private sector. Both are created by the banking system. This all makes perfect and simple sense to me, and I really don’t want it challenged because it fits like a perfect glove.

  • Tom Brown

    SteveF, perhaps my long explanation above involving TT&L accounts is what’s confusing you. Viewed over that narrow time horizon, before the account is transferred or the funds are spent, and in the special case of a bank making the purchase of the bond (which is what your original question seemed to focus on), these TT&L accounts are similar banks making loans in the way I identified.

    However, it’s probably better to ignore those details. What Cullen and Geoff say is correct. Furthermore they’re looking at the process in general (not just bank purchases of Treasuries) all the way through to the gov spending the money (i.e. paying Paul), which is the most useful way to look at it. Viewed in that way there’s nothing that looks like money creation by the banks.

  • Geoff

    Money creation no, NFA creation yes! Of course, some schools of thought (who shall remain nameless) define NFA as money. It took me a while to understand why Cullen was so adamant about distinguishing the two, and not defining T-securities as “money”. Now I get it.

  • FDO15

    Nice to see you finally stating in clear terms why MMT is just wrong. I told you this years ago Cullen and you didn’t see the light. They’ve never had the banking details right. Welcome to reality. Better late than never.

  • phil

    Cullen, what you wrote above is incorrect.

    I do not wish to respond further to your rants. I might post something on another site at some point in the near future, addressing your particular “arguments”.

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

    Phil, I’ve been nothing but kind to you in entertaining your persistent propaganda. The NY Fed has confirmed that you’re wrong. That’s enough for me. Thanks.

  • phil

    where can I find your NY Fed quote?

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

    Why don’t you start by explaining to everyone how taxes “destroy” inside money? Thanks.

  • phil

    This is your NY Fed quote that I was looking for:

    “The primary way dealers finance their bond purchases is in the repo market. So here is one scenario. Funds are wired from the dealer’s account at its clearing bank to Treasury on issuance day. During the day, the clearing bank provides intraday credit to the dealer, so the dealer is borrowing from the bank….” etc.

  • phil

    Do you have any others I should know about?

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

    Yes, there are other quotes from my NY Fed sources, but that really has nothing to do with our conversation here. You’re just changing the point to avoid having to answer the only pertinent question at hand. Just answer the one simple question.

    Please explain how taxes “destroy” inside money. After all, Wray says “In modern economies, bank money is the most important” so any explanation of MMT should explain the precise flow of funds in this “most important” money. Thanks.

  • phil

    You said “The NY Fed has confirmed that you’re wrong” so I’m asking you for the relevant quotes.

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

    Forget the NY Fed. We both know they have nothing to do with this and that you’re trying to deliberately design a straw man that you can barrel over. So just answer the question, if you can.

  • phil

    I like how you edited your comment to throw in a little more insult.


    “Please explain how taxes “destroy” inside money.”

    Let’s say you have $1 in your bank account. That deposit is your bank’s liability, i.e. inside money.

    Now let’s say you have to pay $1 tax to the government. Here’s a simple explanation of what happens:

    1. Your bank debits $1 from your account.
    2. Your bank credits $1 to the Treasury’s T&L account. That deposit is your bank’s liability.
    3. The Treasury calls in the tax payment.
    4. Your bank debits $1 from the T&L account.
    5. The Fed debits $1 from your bank’s reserve account.
    6. The Fed credits $1 to the Treasury’s account at the Fed. The Treasury spends from this account.

  • Tom Brown

    7. Whoever is the recipient of that $1 of government spending, puts it in a bank deposit account (and behind the scenes the Fed debits Treasury’s reserve account and credits the bank’s reserve account by $1 to match)

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

    You mean how I mentioned that you were building a straw man? You have pretty thin skin if you call that an insult. Anyhow….

    Your reserve based explanation is precisely what I thought you’d type. Suddenly, bank liabilities magically become liabilities of the govt in your world and “destroy” money. The real world accounting in the matter is that the inside money never gets destroyed. The money doesn’t change from inside money to outside money just because there is a reserve system. The accounting is inside money in, inside money out. All that reserve hocus pocus you do is just a fancy sounding way of confusing people into thinking that the govt actually creates all the money when the reality is that it’s all bank money and the govt is a mere user of it. The settlement process doesn’t change any of that. Your ridiculous example implies that the govt didn’t need the inside money to create the outside money – as if the reserves just magically appear in the Treasury’s Fed account from thin air! But in reality, there’s a flow of funds. Not a destruction and creation. The only reason the outside money even exists is because the reserve system is built to support inside money! If there was one bank in the money system there would be no inside money because all money would be outside money! There, MMT debunked in one paragraph!

    Your 6 step, start, stop, destruction, creation process is easier described as a clear flow of funds:

    1. Your bank debits $1 from your account.
    2. Your bank credits $1 to the Treasury.
    3. The Treasury credits $1 to the recipient’s bank account.

    Simple, clean, realistic. This is what the actual economic agents in the private sector get as a result of a clear flow of funds. They send a bank deposit in and it comes out on the spending end as a bank deposit. It wasn’t transformed and altered in form just because you decided that the reserve system is some form of magic money transformation system or some nationalization of the banking system that changes inside money and destroys it. And that doesn’t even touch on the fact that you misconstrue the legal ramifications through consolidation. As I’ve explained to you a million times, the system is designed so that banks rule the monetary roost. The whole Fed system is designed to support inside money. Not to nationalize money as you imply. Your historical misrepresentation and operational existence for the reserve system is flabbergasting. The govt is a self designated user of inside money. The fact that reserves settle payments in the interbank market doesn’t change this. In fact, the whole reserve system supports this system built around inside money. The govt is not a pure issuer of money as your example might imply.

  • phil

    Wow. You’re completely nuts.

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

    Ah, the last refuge of the losing argument. The ad hominem attack. Good riddance.

  • LVG

    Phil, If the spending in the last step (step 6) results in the creation of money then that means the government would have a new liability. But really it’s the private bank that has the new liability. The original loan that funded the inside money didn’t go away from the process you just described. It got redistributed through the system.

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

    It’s not even a new liability. It’s a liability that some other bank already created and then someone paid their taxes with it and the govt redistributed it around. Phil is acting as though the govt is the one doing all the lending in essence. That’s a blatant misrepresentation of the actual money creation process and the flow of funds during taxation/spending….I mean, this stuff is really simple. Banks create the money, you pay your taxes with it, the govt spends it into someone else’s account. The govt isn’t creating new money or something here. It’s redistributing it.

  • LVG

    Sorry. I didn’t mean to say “new”. I mean to say that the government is just spending bank money. They don’t actually create new money in this process. In fact, some bank still has a loan on their books that created the inside money in the first place. The government can’t destroy the inside money because the bank loan is still outstanding and created the deposit to pay taxes in the first place.

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

    Precisely. A loan created that original deposit. Not the govt. And that deposit gets redistributed through the system. The only way it gets “destroyed” is if it is paid back to the bank who issued the loan in the first place. Hint: the govt is not that bank. This is accounting 101. It couldn’t possibly be any easier to understand than that bit right there. This component of MMT is purely wrong and easily understood. Frankly, I can’t believe they’ve gotten by for so long without anyone calling them out on this simple reality. But very few people actually understand the reserve accounting that they’re using to trick people here. So, unless you consolidate the entire banking system into the govt it makes no sense!

    As I keep saying, there’s a very clear flow of funds here. Banks create the deposits, you pay your taxes with deposits, the govt spends those deposits. Repaying the loans destroys the deposits. That’s it! Understand that and you know more than 99% of the people out there….

  • LVG

    You know the best part, cullen? the only reason we’ve actually come to this understanding is because Phil and his friends kept on coming back to the site and push your buttons and pry for answers. So their own trolling is the cause of their own debunking. That’s poetic justice.

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

    I’m over it. I’ve spent a year going back and forth with MMT people. I hate the interactions and I hate the argumentative tone of the discussions. They’re the only people who call me names and engage in this sort of combative discussion. MRists need to just move on.

  • phil

    At the end of my example $1 of ‘inside money’ no longer exists.

    You’re saying that after step 6, when the government spends, the inside money pops back into existence again as a credit to someone else’s account.

    And the process of destruction-creation, or alternatively creation-destruction, could be simultaneous if spending and tax are perfectly coordinated.

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

    Sorry Phil, but govt taxation doesn’t destroy the loan that created the original deposit so of course the inside money is redistributed back to the private sector. Besides, what do you think happens when Tsy spends out of the TGA account? It credits a bank account with the original inside money resulting in an increase in the banks liabilities. This is basic stuff man….

  • Tom Brown

    Cullen, did you mean to write:

    ” If there was one bank in the money system there would be no inside money because all money would be outside money! ”

    Or did you swap “inside” for “outside” in this sentence?

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

    Doesn’t really matter. Technically, if there was one bank it would be a national bank so all money would come from outside the pvt sector. But we have a system designed around inside money where outside money was created to support the use of inside money. What Phil is trying to claim is that the Fed system essentially nationalized the money system and makes the govt the issuer of all money. In my opinion, this completely distorts the flow of funds and real accounting. In reality, the Fed system exists to serve and support banks first and govt second. Phil’s point is only valid in a one bank or nationalized bank system.

  • phil

    “It credits a bank account with the original inside money”

    In the example above, the Treasury doesn’t take your $1 deposit, put it in a box, carry it to another bank, and then place it into someone else’s account.

    The money we’re talking about is not some sort of physical commodity that gets produced and then passed around. It is simply numbers in different accounting ledgers.

    These numbers represent the liabilities and assets of different parties, i.e. different types of debts that are owed by and to different people.

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

    Do you also tell people that you “destroy” money when you withdraw from your ATM? Because technically you’re marking down bank liabilities in a bank deposit. Or really, by your mythical accounting we can basically call any interbank transaction “destruction” or “creation” because it involves reserve transfers. Hell, any time money is transferred at all we could call it a “creation” and “destruction”. There was probably quadrillions of dollars “created” and “destroyed” today in the US economy!

    Do you see how silly that is? The reality is that there’s a flow of funds occurring and the govt must, by law, keep a record of how these flows occur. That’s why it can’t just credit people’s account and doesn’t do so in reality (or your alternate reality). The govt must procure funds under law and then redistribute those funds. There’s a legal framework requiring a flow of funds and specific tracking of funds. The way I describe it is 100% consistent with that flow of funds. The way you describe it is a myth that claims the govt issued the money originally when the reality is that a bank issued the money originally and the govt used it.

    Sorry Phil. I hate to break it to you, but the govt doesn’t issue money. Under current design, it uses bank money. After all, they can’t even create money in your alternative reality until they have TT&L credits from taxpayers. The law says so! And MMTers should know that money is a creature of law. To reject the laws that are “self imposed” is to reject your own theory.

  • SS

    It’s actually simpler than that Cullen. The loan creates the deposit which means the banking system is forever inextricably linked to that original loan until it’s paid back. To claim that the government destroys the money is to claim that the loan was destroyed. But that’s clearly not what’s happening here. The government has to redistribute the bank deposit back into the system because it’s the private banks who need you to use it to pay back your loan at some point.

  • phil

    “Do you also tell people that you “destroy” money when you withdraw from your ATM?”

    Cash is “outside money”, right?

    If you have $100 in your bank account, you have $100 of “inside money”, correct?

    When you withdraw that as cash from the ATM, what happens to the “inside money”?

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

    Of course. That’s the whole point though. The money is actually created by a bank. No matter what you do with the reserve accounting the bank’s loan assets don’t get destroyed during the process of govt spending/taxation. Money has a life in our system. Its inception is at loan creation (mostly) and its death is at loan repayment. Nothing that we do with it in the interim changes that. We can take it out via ATM, send it to one another, etc etc. And none of that eliminates the fact that a bank created that money for you and expects you to pay it back at some point. The govt knows the system is designed like this. In fact, the whole Fed system is designed to cater to this system. Phil literally has the whole thing backwards. He thinks the Fed system caters to the govt. I am sorry, but that’s an incredibly naive view of what’s going on here. The Fed can only support govt by first supporting banks. That’s how it’s designed! That’s why MMTers hate banks! The existence of pvt banks is the antithesis of MMT.

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

    What is cash? Cash exists for convenience purposes. How does anyone obtain cash? They MUST first have an account…in inside money! Someone with a bank deposit (which was created by a bank) must first withdraw from that account before anyone can obtain cash. It’s a support feature for convenience. That’s all. And more importantly, cash transactions involve a flow of funds. Using cash works like this:

    1. Bank makes a loan to someone thereby creating deposits.
    2. Someone withdraws cash from that bank account.
    3. Someone buys a bag of rocks with cash.
    4. The recipient of the cash payment deposits cash at bank.

    Was the money destroyed? Of course not. You used outside money temporarily and there’s a flow of funds occurring from transaction to transaction. And those transactions start and end in inside money (just like govt spending/taxation!!!). Outside money ultimately represents a support feature for inside money.

    It’s all rather simple once you understand how the banks rule the system. Or are you just being difficult?

  • phil

    You didn’t really answer my question.

    Let’s say you have $100 credit in your bank account. That credit is a bank liability/ bank promise/ bank IOU, or what you call “inside money”.

    If you withdraw $100 in cash from your account, you now have $100 of “outside money” in your hand and $100 of “inside money” no longer exists. Poof, it’s been debited out of existence.

    The same thing happens when you pay $100 in taxes. Simply put, the Fed debits $100 from your bank’s reserve account, and your bank debits $100 from your deposit account. $100 of “inside money” thus ceases to exist. Your bank no longer owes you $100, and the Fed no longer “owes” $100 to your bank.

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


    That’s ridiculous. You know that’s not what really happens. Again, it’s a flow of funds. Cash gets withdrawn and redeposited into the banking system. It does not destroy inside money. It allows someone with an account to draw down their account temporarily (and if that same depositor is the person with a loan they will have to repay the bank – likely in inside money or by giving the bank cash back). You know inside money cannot be destroyed from the banking system in perpetuity or permanently. That’s why bank runs are disastrous and it’s why the Fed exists to help stop them. The system literally cannot handle what you would deem “destruction” of money because the whole system is designed around inside money.

    Without this flow of funds back into the system in repaying loans (that were definitely NOT destroyed) the system breaks. You’re acting as though the loan didn’t create the deposit or as though a loans gets destroyed when a cash withdraw is made. As if the deposit just magically appears in someone’s account. For people who claim to be so big on double entry bookkeeping and endogenous money you sure do miss some of the more important points….Same thing happens when govt spends. No loans are destroyed. Money only gets destroyed in our system when the loan is repaid. Only the bank can destroy the money it created. You know that, but your argument is flailing to defend an ideology that you now are realizing is totally wrong.

    In fact, here’s proof of the flow that you’re distorting. The NY Fed regularly takes notes out of circulation because they’re constantly “flowing” through the banking system:

    “For example, a $1 bill, which gets the greatest use, remains in circulation an average of 21 months; a $100 bill lasts about 7.4 years.”

    Again, there’s a specific flow of funds that occurs in the system here that you’re intentionally distorting. It all starts and ends in inside money. Your govt centric & reserve centric model of the world is precisely what the neoclassicals do. You’re smarter than this so I don’t know why you’re fighting the reality of this situation. MMT is wrong. You live in an MR world. You can understand MR and still believe all your favorite policy conclusions from MMT. I can litarally explain every single reality about the monetary system that MMT claims to explain but I do it without all the silly myths. Why do you fight it? We get the institutional design right and the explanation right. I don’t know why you’re so defensive about it….

  • phil

    I’m not “defending an ideology” or “intentionally distorting”. You asked me a question, and I am giving you a simple answer.

    1. You have $100 credit in your account. This is a bank liability, or “inside money”.
    2. You withdraw $100 in cash from your account.
    3. $100 of “inside money” no longer exists.

    Poof, gone.

    4. You deposit $100 cash at a bank.
    5. The bank credits your account with $100.
    6. $100 of “inside money” has been created.

    This is simple. It is not ridiculous. There is no reason to disagree over such a simple thing.

    You said:

    “Again, it’s a flow of funds. Cash gets withdrawn and redeposited into the banking system. It does not permanently destroy inside money.”

    Now you appear to be saying that maybe it “temporarily” destroys “inside money”. I’m not sure how something can be temporarily destroyed.

    Here’s a simple way of explaining it:

    1. You owe someone $100.
    2. You pay them $100. Now you don’t owe them $100 anymore.
    3. You borrow $100 from them again. Now you owe them $100 again.

    Now let’s call your debt “inside money”. In 1. you have a debt, so “inside money” exists. In 2. you pay your debt, so your debt doesn’t exist anymore, so the “inside money” doesn’t exist anymore. In 3. You take on another debt, so “inside money is created again.

    “You’re acting as though the loan didn’t create the deposit. As if the deposit just magically appears in someone’s account.”

    Bank deposits get created in the first instance through bank lending or as the result of government spending or central bank purchases of certain assets.

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

    It doesn’t even get temporarily destroyed. That’s YOUR terminology. Inside money cannot be destroyed except when a loan is repaid. That’s it. That’s all. There’s no debate about that. It’s not even a question unless you think the loan is being destroyed when you withdraw cash, which is one of the most patently absurd things I have ever heard anyone imply. You’re really reaching here, Phil. And you know it.

    If you take out a loan and withdraw cash from the deposit account you don’t destroy the loan. You didn’t destroy inside money. You are temporarily drawing down an account that you will, BY NECESSITY, need to fund at some point with INSIDE MONEY (or by depositing someone else’s cash at the bank thereby increasing bank deposits). That’s what really happens. Not this mythical transformation or destruction of money as you claim. Outside money facilitates the use of inside money. Inside money PRECEDES outside money. You have it all backwards!

    By this sort of reasoning we could literally claim that the banking system creates and destroys trillions of dollars every day through the reserve system or use of cash. That’s a blatant misrepresentation of the actual way money works!

  • phil

    “By this sort of reasoning we could literally claim that the banking system creates and destroys trillions of dollars every day”

    You could say something like that. You said yourself that “inside money” is destroyed when loans are repaid.

    As you suggested earlier, if people were to withdraw all of their money from banks as cash and then “stuff it into their mattresses”, that would constitute a pretty disastrous bank run. Banks therefore encourage people to keep their money in the bank by (a) promising to keep it safe, and by (b) paying them interest. As JKH noted, banks attract, borrow, and keep deposits (in order to mitigate outflows) by paying interest.

    Similarly, if the government were to tax and tax and tax and never spend (i.e. run a massive surplus), this could drain enough money out of the system to make repayment of debts increasingly difficult – ‘breaking the system’ as you put it – unless perhaps the central bank were to compensate by lending ad infinitum (thereby keeping the system afloat – though this would mean that the banking system would become increasingly indebted to the central bank).

    “unless you think the loan is being destroyed when you withdraw cash”

    I didn’t say that loans are destroyed when cash is withdrawn. However, loans are not necessarily repaid. Default is a possibility. When enough loans (or other types of debts) default, for whatever reason, the banking system can begin to implode, as its debts pile up and its assets disappear. Again, the central bank can keep the banks going in such a situation by lending without limit, or by buying up their assets (both “toxic” and AAA). The government can also “inject capital” into the banks by buying them up, or it can guarantee their deposits, or it can run higher deficits thereby keeping the “flow” going and providing the system with more default-free assets (govt bonds).

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

    The govt taxes so it can spend. You obtain inside money so you can spend it. You are defying the basic laws of money’s most essential purpose as a medium of exchange. This mythical world where everyone puts money in their mattress or govt’s tax and don’t spend is absurd. It’s a fairy tale. Show me a govt that taxes and doesn’t spend at all. Show me a money system where everyone saves every dollar they obtain. This is just one more example of how MMT builds their whole argument around a mythical world that doesn’t have any real world applicability! It’s so obvious it pains me to keep this conversation going.

    You’re in denial and creating absurd counterfactuals that don’t apply! MMT is wrong. Move on Phil! Or go pitch this nonsense to other people more willing to believe in fairy tales….

  • Johnny Evers

    I’m in that school that believes an NFA is ‘money.’
    According to Cullen, ‘there is no private sector liability attached to the govt bond’, which puzzles me.
    Isn’t a government bond a liability for the taxpayer? Or at the very least, isn’t the government bond backed the by output of the citizens? Or in another sense, the bond holder knows that Uncle Sam will create money for him in a pinch.
    My sense is that we don’t want to identify government bonds as money, because then you truly are creating money (not that there is anything wrong with that!).

  • Johnny Evers

    Well, if a G-bond is a claim on future cash flows, then it’s a liability for the public.
    It can’t be a Net Financial Asset without also being a Net Financial Debit — unless you concede that it’s money.

  • Johnny Evers

    OK, I was mixed up when you say the bond isn’t a liability for the public.
    I thought you were saying it wasn’t a liability at all. You are saying it’s a government liability.
    However, in my view, a government liability IS a private liability, since we have to back that with either our taxes or output.

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

    Well, it might be YOUR view, but it isn’t the view of the laws of accounting. :-)

  • Geoff

    JE, since you will simply not let it go, let’s just say for the sake of argument that Treasuries are “money”. What next? Is hyperinflation suddenly around the corner just because the definition of “money” has been changed? No, nothing has changed. QE is still just an asset swap and is limited to the amount of t-securities, and other assets, already outstanding. The Fed has already reached its technical limit on many bond issues (it can’t own more than 70% of any individual issue, I believe).

  • phil

    “This mythical world where everyone puts money in their mattress or govt’s tax and don’t spend is absurd”

    I was using somewhat extreme examples to make a basic point. In the real world, if the govt taxes more than it spends (runs a surplus) it is withdrawing more from the economy and banking system than it is putting in. This creates basic problems for the economy and banking system. Again, this is a simple point that shouldn’t be that controversial.

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

    This has NOTHING to do with govt surpluses. It’s about understanding how the govt redistributes money by means of taxation. Of course, if the govt were just taxing people and not spending it back into the economy it would cause problems. That is perfectly obvious and should also be acknowledged as a totally irrelevant counterfactual since there is no point in taxing if the government will not use the money. But that has nothing to do with our conversation. The fact is, the govt is a redistributor of bank money. Your own example shows how the govt must spit back out everything it takes in. That’s how the system remains stable. If everyone just took their money and buried it in holes the system would obviously seize up. There’s no insight in that though. The economy is about understanding a flow of funds. And the govt just so happens to be a big part of the flow. But do not mistake a flow of funds through govt channels as the creation or destruction of money. You might be able to pawn that lie off on some unwitting fools, but it is the death knell in MMT’s work. So I recommend you all give up on it. It’s patently wrong, very misleading and entirely unhelpful in understanding how the system works.

  • phil

    I’m not “lying”. I don’t know why you have to punctuate all of your replies with accusations and insults.

    As I demonstrated quite clearly, taxation does “destroy” “inside money”.

    The more controversial question is whether taxation “destroys” “outside money”. MMT people say that it does, in the same way that repaying a bank loan “destroys” “inside money”.

    In the case of loan repayment/”inside money” destruction, a bank liability is repaid to the bank, thereby extinguishing the bank’s liability and “destroying” “inside money”.

    The same thing occurs in the case of payment to the govt: repaying “outside money” to the govt through taxes extinguishes govt liabilities, thereby extinguishing those liabilities and “destroying” “outside money”.

  • Johnny Evers

    Thanks, Geoff. I am not saying anything about the consequences once we concede T-bonds are money. I am not predicting inflation. I just think if you’re going to have this discussion, you might as well be honest, and real, about what a G-bond is.
    1. It’s honest. The government will always redeem bonds for money. That’s why we’re not Greece. If not, the system collapses. The bonds are backed by the printing press.
    2. It’s real. I could not envision a scenario in which the government would tax its citizens to pay back bonds. That would be very bad policy and a unpopular.
    Finally, if you told people — don’t worry about debt, we can always redeem the bonds with the printing press and our only constraint is inflation … well, they would understand that.

  • phil

    “You’re essentially telling us that the Federal govt spends out of its account without first obtaining credits in inside money”

    The Federal government spends from its account at the Federal Reserve. As such, it can’t “use” inside money credits or deposits to spend. This is because its deposits in the Treasury’s account at the Fed are not “inside money”.

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

    And it can’t obtain credits in that account unless it first sells bonds or taxes people thereby obtaining the inside money! You’re just rejecting the reality of the flow of funds in favor of your own mythical world where the govt doesn’t procure funds. Call the US Treasury and see if you’re right. Because you’re 100% wrong.

    Do you even know why the reserve system exists? It exists to service inside money! If your world was right and the govt created all the money there would be absolutely no need for a reserve system. A one bank system proves that there would be only one issuer of money. But, because we have dual money issuers the reserve system is needed for interbank settlement. In a nationalized banking system there would be no reserves, no such thing as inside money. It would all be outside money.

    This proves MMT wrong. Definitively. But you misconstrue it so you can claim that the govt issues all the money and must therefore always be engaged in spending. It’s a colossal misunderstanding of the actual world in which we live.

  • Geoff


    Sorry, I’m replying to you down here because it was getting too narrow to reply above. I actually agree with some of what you say but disagree with other parts:

    “The govt will always redeem bonds for money”

    Agreed, at least 99% of the time.

    “Govt bonds are backed by the printing press”

    But you just said in an earlier comment that govt bonds were backed by the output of the nation.

    “I could not envision a scenario in which the govt taxes it’s citizens to pay back bonds”

    But that’s what they do now!

    “Don’t worry about the debt. We can always repay bonds with the printing press. Our only constraint is inflation.”

    That is theoretically true. Are you sure you aren’t an M M Ter? Problem is the Treasury and the Fed aren’t actually consolidated at this time.

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

    Now tell me how that no overdraft law is “self imposed”. And then tell me how money is a creature of law. And then tell me how self imposed constraints are laws. And then twist your tongue up and trip over your feet trying to walk your way out of the endless contradictions and word games you all play….Do you see how ridiculous this all is? Your story does not add up because it is filled with contradictions and attempts to fill the actual reality with your mythical world….

    Just accept it. The system is built by the banks and for the banks. You might not like it, but lying to people about it won’t make it go away….Rather than complaining about bankers all day (thereby contradicting yourselves again) you’d be better off telling people what’s really going on so they can decide for themselves whether the MMT alternate reality would be superior. That’s how you enact change. By telling people that the truth is this messed up world you see. Not by lying in their face.

  • phil

    “thereby obtaining the inside money”

    As I said, the Treasury’s account at the Fed can not “obtain” “inside money. This is because the Treasury’s account at the Fed is an “outside money” account, not an “inside money” account.

    Your bank account is an “inside money” account. The Treasury’s account at the Fed is an “outside money” account.

    I think, however, that it is a mistake to mix up financial and real resources.

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

    All banks have deposit accounts with the Fed. So what? It’s all for interbank settlement and efficiency of processing. It isn’t a nationalization of the money system as you imply. That’s absurd.

    Under today’s actual operating procedures the Tsy can only obtain credits in outside money by debiting accounts in inside money. Just like you cannot obtain outside money in the form of cash unless someone has drawn down an account in inside money. See how that works? Inside money precedes outside money. Not the other way around. You’re regurgitating some form of a neoclassical reserve centric model. It’s ironic how you guys claim to be so heterodox, but your view of the world is actually very similar to all the other theories that are designed around high powered money. You guys aren’t heterodox at all. You’re just a different brand of neoclassical govt centric based money.

  • phil

    “Now tell me how that no overdraft law is “self imposed”.”

    Obviously the “no overdraft” rule is imposed by Congress upon itself, like the “debt limit” rule.

    If Congress decides to bind itself by law, then yes, those constraints are obviously laws. But they are laws imposed by the Congress upon itself, nonetheless.

    “And then tell me how money is a creature of law.”

    That’s Knapp’s argument. I think it makes sense.

    “And then twist your tongue up and trip over your feet trying to walk your way out of the endless contradictions and word games you all play”

    I don’t see all the contradictions that you see, though I recognize that it is “complicated”.

    “The system is built by the banks and for the banks”

    Ok, so why (a) do the banks use the government’s money to pay each other, and why (b) can banks go bust?

    “lying to people”

    I’m not lying, I’m trying to have a civilized discussion. Stop accusing and insulting me.

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

    Why do the banks use the govt’s money? Are you even familiar with the history of banking in the USA? The banks DID used to pay each other without using outside money. And they became so huge and powerful that the govt decided to come in and bust them up because it was creating instability. The reserve system was designed (in part by bankers!!!!) so that the money system would NOT be nationalized, but would support private competitive bankers. You really need to study the history of the Fed and why it exists. I can assure you it’s not because the bankers rolled over and wanted to go from a monopoly to a nationalized system. They helped design the Fed system so the govt could support pvt banking without taking over the money system. That’s what really happened in the early 1900’s. It was not a govt takeover of the money system at all!

    I am serious. If you really waned to help people and get MMT across you’d tell them this story. Not the myth about how the govt rules the monetary system. You should be telling people how MMT is a very real potential power that the govt could obtain. The bankers rule the system. The govt just does what they need. That’s how this all really works! Instead, you imply it’s already got this power and that institutional structure is already in place. That gets you nowhere. Why do you think MMT’s been around for 20 years and no one knows about it?

  • phil

    (This comment was posted above by mistake).

    “The banks DID used to pay each other without using outside money”

    Well gold – whether its coin or bullion – is “outside money”. As far as I’m aware, there’s some debate over whether it’s inherently ‘commodity money’, or some sort of ‘credit’ or ‘state’ money.

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

    Look, what this really comes down to is this. Do we believe banks rule the monetary roost. Or do we believe the govt rules the monetary roost. I think the banks rule the roost by virtue of having been granted this power by the govt. You seem to think the govt still controls the money system even though it’s outsourced its powers to banks. In theory, you’re right. But it would require a change to the system.

    If you guys really want MMT to be a reality this is the message you should promote. Instead, you’re basically convincing people that the system you want (the one that doesn’t actually exist) already exists and many of them are turning around saying, “so what, we don’t want the govt to spend more money”. These are the people you could be reaching with your anti bank message. The Ron Paul types, the conservatives you really need. Instead, you’re getting nowhere because you keep contradicting yourselves with this idea that MMT is in place, but isn’t because of X, Y & Z. If you want to really convince people that the govt can and should create money then you need to show them why the current system doesn’t work. Teach them what is and then they’ll realize that the system ruled by bankers is or isn’t wrong….

    Take is as constructive or take it as offensive. I’m not the bad guy trying to shoot down MMT. I am just trying to get the description right. That’s it. And MMT just doesn’t have the message right. Trust me, I didn’t spend 18 months cheering on MMT only so I could turn around and say “oh look at what I misunderstood, how stupid am I, hahah”. I was forced to look into the “I am wrong” well and turn around to a million readers a month and tell them precisely why I was wrong and here’s why this new view is right….I am just trying to get it right.

  • phil

    I should have said that gold “was” “outside money”. I think most people would agree that gold doesn’t currently serve any significant role in the monetary system.

    “Do we believe banks rule the monetary roost”

    I think that if banks “ruled the monetary roost” then it would be impossible for banks to become bankrupt.

    Instead, the only organization which appears to be free from bankruptcy-risk is the “currency issuer” government.

    “I think the banks rule the roost by virtue of having been granted this power by the govt”

    There’s another way of describing the bank’s privileged position: corruption. I don’t support corruption.

    “You seem to think the govt has given up this power, but still controls it”

    I think that banks are very powerful, but this doesn’t change the basic logic of the monetary system. It seems to me that banks try to use the state’s legal power to line their own pockets.

  • phil

    On the other hand, I think that privately owned banks can (and do, on occasion) serve a very important purpose.

    But I think that they should ideally be treated like any other private business, rather than being given special privileges by the state.

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

    “I think that if banks “ruled the monetary roost” then it would be impossible for banks to become bankrupt.”

    In the aggregate it IS IMPOSSIBLE for the banking system to go bankrupt. The only way this can happen is if the money system dies. Which can also kill the government money issuer. So there’s really nothing unique about you taking a micro fact and extrapolating it out to the macro reality. The fact that banks can go bankrupt is pointless in the aggregate. Again, you have to consider a one bank system. Could that system die any more so than a govt can? Of course it couldn’t. A banking system, a money system and a govt are inextricably linked. If one part dies the whole thing dies.

    So you think banks are corrupt. Fine. It’s about time you started to say what you really mean….

    The banks do use the state’s legal powers to line their own pockets.

    So, you admit that banks are corrupt and that they abuse the govt to line their own pockets, yet you’re not in favor of nationalizing the banks. C’mon Phil. Say it. You hate banking and you’d love a state run money system. I know MMT’s true colors. You don’t have to by shy. :-)

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

    Ah, just when you I thought you were making progress you go and say that “corrupt” banking is consistent with public purpose….Shame.

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

    The MMT nationalization train has grown in recent years. You shouldn’t shy away from it. It’s now boarding Tom Hickey, Bill Mitchell, Joe Firestone and Rodger Mitchell. Are you afraid to jump on for fear of exposing your true political thinking? :-)

  • phil

    There are different groups within MMT when it comes to banking.

    You have the Mitchell crowd who favour either full or part nationalization. Then you have the Mosler crowd who think that Mosler’s proposals would solve all the problems, whilst maintaining privately-owned banks as market “pricers of risk”. Then you have the UMKC/Levy Institute group who have differing views about “what to do with the banks” – generally derived from the Minsky’s proposals and theories.

    You also have some MMT people who veer towards the “100% reserves”/ “Chicago Plan” view.

    Then you have a few people who essentially subscribe to Hayek’s concept of privately issued token monies.

    There are also plenty of ‘conservatives’ who think that the solution is simply returning to a better regulatory regime.

    It’s quite a mixed bunch.

    Personally I see myself as falling between the Minskians and the ‘conservatives’, with a dash of Mosler and Mitchell to boot.

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

    Did you mean, “quite a mixed up bunch”? :-) Private bank money is at odds with MMT. But don’t rely on Mosler to give you a straight answer on that. I think he rather enjoys the “corrupt” “pocket lining” system. :-)

  • phil

    “Private bank money is at odds with MMT”

    I don’t think that’s true. Most MMT economists are specifically against “100% reserve banking” or nationalization. For example Mosler, Wray, and Fullwiler have all argued against such things.

    Granted, Bill Mitchell wants either full or part nationalization of the banking system, but this is one view within the larger ‘MMT camp’.

    You have to understand that the MMT group is actually quite diverse when it comes to the question of “what to do with the banks”.

  • phil

    What’s your opinion? Do you have any specific policies?

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

    I am well aware of the diversity (disagreement/confusion) on views here. Frankly, I don’t think MMTers fully understand their own theory and how private competitive banking is directly at odds with the concept of money for public purpose. As the primary issuers of money banks create a system that is inherently driven by private purpose since they only issue money in the means of self interest (ie, profits). I don’t think MMTers connect the dots on all of this so they end up disagreeing on a point (nationalization) that should be well confirmed and agreed upon by now.

    Of course, Mosler is a banker and has funded MMT for its existence so of course Fullwiler and Wray will not say anything about nationalizing banks. You don’t bite the hand that feeds you. Also, Minksy was an advocate of nationwide community development banks (read, govt funded banks for public purpose, ie, nationalized banks). You won’t hear him admit it’s pseudo nationalization, but there’s a familiar name on this proposal. :-)


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

    I don’t have the solution. And as you know, I am not here to play judge and juror….I think there are flaws in pvt banking, but I don’t think public banking will necessarily solve those flaws. I’d like to see some more common sense regulations in place, but I am deeply skeptical of a nationalized banking system that was purely designed around public purpose….

  • phil

    Ok, so in my book you would fall into the ‘conservative’ category. I wonder what Minsky would say…

  • phil

    “Of course, Mosler is a banker and has funded MMT for its existence so of course Fullwiler and Wray will not say anything about nationalizing banks”

    I don’t think that Wray and Fullwiler are dishonest. I think they write what they believe. If you go to the Levy Institute website you will see that these academics have been having a very heated debate about “what to do with the banks”. It’s not a simple, or settled, issue.

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

    Yes, you would label me because it makes you feel more comfortable about your own biases. The truth is, you don’t know the first damn thing about me. I just so happen to be in favor of gay marriage, a woman’s right to choose, anti death penalty, stem cell research, environmental causes, legal immigration, and govt spending. Half the people who come here see my stance on capitalism, banking, taxes and a few other things and think I am a raging conservative. Others think I am a raging liberal. The truth is, the people who label me don’t have a clue how centrist my views really are. But I am not here to impose my views on other people. I don’t run around the internet commenting on everyone else’s sites trying to convince them they should believe this or that. That’s up to other people to decide. I provide a forum expressing my views and I am fortunate enough to have a few people who come by and express their own opinions. That’s fine. I am here for the engagement and the educational nature of the discussion. That’s about it.

    But hell, if you feel more comfortable disagreeing with me because you’ve applied your own silly little label then great. You’re definitely not the kind of person I need to engage in conversation if you’re that closed minded.

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

    I don’t think they’re dishonest. I think their views are compromised. Who in the world would criticize banks when Mosler is forking over millions to fund your research????

  • phil

    I didn’t mean to say that you are ‘conservative’ in a general political or cultural sense. I was simply talking about your views on banking reform.

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

    Fair enough. Once again, I think we made zero progress here. :-)

    It’s always fun Phil. I should probably go try to get some real work done. Take care.

    And you know, in all seriousness – thanks. Your defensive posturing has really forced me to explore my own conclusions. Whether they’re right or wrong, I have greater clarity due to your comments.

  • phil

    Ok, thanks, the same in return. Here’s to further productive debates in the future.