I’ve been incredibly vocal over the last year about QE2 and its likely impact on the US economy and US government bond market.  Time and time again I have said that the policy was largely a waste of time and effort and unlikely to have any real substantive effect on the economy (see here and here).  The policy was flawed primarily due to one rather simple mistake – it focused on size and not price.  This resulted in no real transmission mechanism through which it could impact the economy and failed to control interest rates.

Most investors did not believe this perspective and maintained that QE2 would not only cause surging inflation, but would also cause US government bond yields to surge when the program ended.  This was primarily due to the many myths that have persisted surrounding QE2.  These were the myths of “debt monetization“, “money printing” and “stimulus”.  These are nothing more than common misunderstandings, but investors who listened to these myths failed to assess how QE2 would impact the asset it targeted – US government bonds.  None of these misinterpretations was more famous than Bill Gross who incorrectly analyzed QE1, but also misunderstood QE2.  Yesterday, the WSJ discussed the investment performance of the PIMCO Total Return Fund as a result of this analysis:

“Bill Gross, long a rock star in the fixed income universe, has been a laggard this year as his bearish view on Treasurys has been confounded by their bull run during the past few months.

Mr. Gross, 67 years old, manages the world’s biggest bond fund–the $245.5 billion Total Return Fund–at Pacific Investment Management Co. The fund has handed investors a return of 2.99% this year through Wednesday, ranking 157th out of 179 funds in the category of intermediate-term bond funds tracked by Lipper.

Over the past three months, the fund just broke even, with a return of negative 0.04%, compared to a return of 2.7% from the benchmark Barclays Capital Aggregate Bond Index, according to data from Morningstar Inc.”

Unfortunately, the WSJ doesn’t appear to connect all of the dots.  You see, what PIMCO misunderstood, was not just the impact of QE2, but the actual operational realities of the US monetary system.  We’ve tracked PIMCO’s comments in real-time and called them incorrect at several points in the last year.  For instance, earlier this year, Bill Gross said June 30th could be “D-Day” when the US government could experience a shortage of buyers in government bonds which would lead to surging yields.  Bill Gross asked “Who will buy the bonds?”  Mr. Gross misunderstood how QE functions to “finance” the US government (they don’t).  And in doing so, he misinterpreted how government bond auctions work.  I said these funding fears were unfounded and unlikely to impact bonds.  Last year at this time, I vigorously argued that US Treasuries were not in a bubble.  And just days before an epic 10% surge in long bonds I said US Treasuries served as part of “the perfect hedge” in this environment.  I followed-up to these pieces in greater detail than I cover here (I’ll spare you the repetitious commentary).

The point here is not to say “hey look at me, I was right and Bill Gross was wrong”.  The point is that understanding the monetary system matters.  Economics is largely “dismal” because the myths of neoclassical economics dominate our classrooms and media commentary.  This causes an extraordinary disconnect between the way investors perceive the economy and the markets.  And it results in underperformance by fund managers who make mistakes by incorrectly assessing the US monetary system.  It doesn’t have to be this way.  Hopefully, as time goes on, more and more investors will better understand the monetary system in which we reside.  Not only will this avoid investment losses such as the above, but it might actually translate to better public policy.  Unfortunately, we’re a long way from that reality….


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

Cullen Roche

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

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  • http://Www.sofiasgr.it Daniele

    Very good point, thank you! Do you think tnx will follow again the same pattern?

  • InvestorX


    well done!

    If I may add, this may not be the only explanation for the behavior of Treasuries. Here are two other possible ones:

    – QE stimulates animal spirits and risk taking / speculation (largely due to misunderstanding), which in a balance sheet recession caused a ramp up of the “risk on” trade and a sell-off of the risk free assets or hedges. After “risk on” was over / economy softened, it was back to the hedges.

    – The transmission mechanism was non-existent to the real economy due to the lack of horizontal traction (no willingness to lend or borrow), as 80% of money creation is via fractional reserve banking (thus making the distiction between “debt monetization” or “just a maturity swap” less important).


  • Jo

    And yet, Bill Gross is the billionaire and you’re not.

    Go figure.

  • DanH

    Isnt Cullen like 30 years old? How rich was Gross at 30? Had he even started PIMCO? I dont think so.

  • Cy Hailow

    A “Hat Tip” and a citation for Pragcap within 2 days on FTav! bravo, that’s recognition Cullen.
    Now perhaps some of your more myopic commenters will start folowing FTav as well and get some facts rather than mere supposition to back their opinions. One can always live in hope.

    PS your editorial policy remark is welcomed here :)

  • http://Pragcap.com Cullen Roche

    No one is undermining his achievements. Total Return has a great long-term record and I greatly admire the PIMCO team’s management skills.

    But maybe give me 35 more years before kicking my achievements down the rathole though :-)

  • http://Pragcap.com Cullen Roche

    Thanks Cy.

    For those who dont know – FT AV is FT Alphaville. Perhaps the best blog on finance around. If you dont read it you should. http://ftalphaville.ft.com/

  • InvestorX

    Haha, I prefer your blog, although I do not agree (or do not accept as self-evident as true) on 40% of the MMT aspects.

    Do not get me wrong: I really like what you do. Especially on capital markets. But I personally think there are more relevant economic theories than one.

  • DanH

    “yes, he’s an MMT type”. WTF. Is that? The article in the FT refers to Cullen as if he caught some disease. Cullen is one of a handful of people who understands the monetary ystem well enough to actually know what QE does and doesnt do. I am a little stunned that people still think MMT is bunk. The accuracy with which Cullen connected the dots on QE2 was a near masterpiece.

  • pookiesnackenburger

    Cullen, I’m clearly missing something. Bill Gross gives a positive return of 2.99%, below the returns of both the market and the majority of his peer group, but nevertheless a positive return. When you talk about “investment losses”, therefore, you actually mean foregone profits, and Mr. Gross presumably failed to secure these profits by having less risk on the table. Unfortunately, your article fails to recognise the concept of risk-adjusted returns, which is unfortunate as Lipper supplies this data. The importance of risk-adjusted returns will probably be of more interest when yields peak (at whatever level that is )rather than at the current moment.

  • beowulf

    If only Gross had listened to Cullen, he wouldn’t have underperformed the market by 3.01%– well by 3.00% after giving Cullen a minimal “.01%” bump for his sage advice (works out to $24.5 million). :o)

    Ha ha, Cullen should write Gross to point this out and suggest that Gross can thank him not with money but by building (or renaming) a temple in his honor, he could ask one of his philanthropic beneficiaries to name a building after Cullen (and thereafter, Duke undergrads will always wonder why the guard shack is called the Cullen O. Roche building).

  • Michael Cullen

    Dear Cullen,
    I refer you to FT Alphaville, and a piece yesterday entitled
    “An important lesson from Jackson Hole 2010
    Posted by Izabella Kaminska on Aug 24 13:31″, and in particiular to the link to Prefessor Lew Spellman’s lectures on the effects of QE2, which I am certain were the fully intended consequences sought by the Federal Reserve Bank. He explains why the US Dollar continues to depreciate against other currencies, and how that inevitably leads to the US importing the inflation that QE has created in the countries of its trading partners.

  • Willy2

    No comment !

  • InvestorX

    Here a nice list of structural problems from Barry Ritholtz that no monetary policy will solve:

    1) An excess credit problem, left over from the 2000s Housing boom and credit bubble — being solved v e r y s l o w l y through deleveraging and passage of time;

    2) Slowing economy and high unemployment (including increasing High School drop out rates creating a structural employment problem);

    3) Crumbling infrastructure: Electric Grid, Bridges, Tunnels, Roads, Naval Ports, Airports;

    4) Medical Costs that are double the rest of the industrialized world’s yet produces worse results.

    5) Systemic deficits caused by unfunded tax cuts, unfunded entitlements, and a military bigger than the next 20 countries combined, (plus a lack of fiscal discipline);

    6) A wholly dysfunctional electoral process, including corporate control of what was once a democratically elected legislative branch;

    7) Increasing wealth and income inequality (Historically not a long term positive for social unrest and political legitimacy)

    8) An overt hostility to empiricism and science (which helped create most of our wealth) and an embracing of “magical thinking”

    9) An intellectually bankrupt political class married to outmoded, disproven, fantasy based economic ideas.

  • Austin


    I’d like to throw something against the wall, if I may. Banks are never reserve constrained, and the $1.6 trillion currently parked at the Federal Reserve is doing little to help the economy recover (obviously the banks are paid .25% interest on the reserves.) Why not take that $1.6 trillion and use it to fund a one-time taxpayer stimulus? That would amount to $12k-$16k per taxpayer depending on eligibility. Consumers can ten use the money to pay down debt, purchase durable goods, etc.

    I’m no socialist, but that kind of stimulus would lead to lower loss reserves and fewer delinquent accounts for the banks, and would provide a huge jump-start for the economy that could be a win-win for banks and consumers. And Uncle Sam doesn’t have to fork over a dime.

  • Oroboros

    Koo Says U.S. Economy Is Following Japan’s Pattern (Bloomberg)

  • Oroboros

    Too bad Bloomberg does not have an automated (I assume) transcription service like CNBC does with its videos. Great quotes in this interview, I must say.

  • Colin S.Toe


    I’ve spent my adult life mystified by how ‘money’ is created (because of the apparent contradictions: e.g. ‘If the government can create the stuff, why would it need to tax or borrow to ‘fund’ itself?’ The simple answer: ‘It doesn’t.’, comes as a huge relief).

    Rather than due to the complexity of the basic concept, what some of your readers (and I’m afraid many others) manifest, is more like a resistance to recognizing that ‘The Emperor has no clothes’.

    I appreciate what you are trying to do; I have to believe the need for this kind of understanding to reach the general public, so that public policy can be based on debating the real issues rather than irrelevancies, is critical.

    I also believe that the role of educator is as important to society as that of entrepreneur, even if the pay does not bear comparison.

  • JKH
  • beowulf

    Your head’s in the right place, but let’s unpack this sentence:
    “Why not take that $1.6 trillion and use it to fund a one-time taxpayer stimulus?”

    Only Congress can levy an income “take” and or appropriate funding for anything. There’s no way that Congress would vote to double what it collects from theincome tax nor hike the deficit by $1.6 trillion. Of course, there is way Congress could do this without taxing or spending anything.

    Since Congress won’t do jack before next year’s election, I’m starting to think the best play is for the Fed and Tsy to set up a dual exchange rate system to plug the $600 billion demand leakage created by the trade deficit. Economist (and longtime doom predictor– I guess he was right after all) Ravi Batra has been pushing this idea for years.
    This action, applied to exports only, will improve the U.S. economy and cut the trade deficit. There would thus be two dollar-exchange rates, one fixed unilaterally by us would apply to our manufactured exports, and the other set by free markets would apply to all other international transactions.

    Tsy and the Fed could do it without Congress (though Bernanke probably would have to slip Tim Geithner a roofie first). In theory, Tsy could do it without the Fed– but remember Tsy is constrained by a debt ceiling and the Fed isn’t.
    “The Secretary, an agency designated by the Secretary, with the approval of the President, may deal in gold, foreign exchange, and other instruments of credit and securities the Secretary considers necessary.”

  • http://frontrunthedelta.blogspot.com JSW

    With all due respect, the purpose of QE was to lower the value of the dollar – which it did – in order to stimulate exports. The tools of QE were debt monetization and policy statements forced at the zero bound. Debt monetization is not a result, it is again, the means, and far from a “myth.” See Bernanke, Reinhart, and Sack (2004).

    To confuse the end result with an operational tactic belies the subject and compounds misinformation. Bottom line, QE succeeded in its goal: a cheaper dollar.

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

    Hadn’t seen that. Thoughts?

  • JKH

    As it turns out, I’m actually avoiding thoughts today.


    But it looks to me like an invitation for you to post.

    I guess my first reaction is that you aren’t making “much the same argument” at all, just one that happens to have a similar conclusion in one respect. But in another – the idea that expectations management rather than operational results would make QE effective – I assume you would differ with quite strongly.

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

    Avoiding thoughts sounds like a really great plan today. I am pretty sure Bernanke had this same plan in mind when he wrote that speech for Jackson Hole!

  • Oroboros

    At the risk of ruffling feathers with this …

    “Economics is largely “dismal” because the myths of neoclassical economics dominate our classrooms and media commentary. This causes an extraordinary disconnect between the way investors perceive the economy and the markets. And it results in underperformance by fund managers who make mistakes by incorrectly assessing the US monetary system.”

    Given that this game is (nearly) zero sum, this also serves as an advantage for those who do understand (more) correctly. I have no problem taking Bill Gross’, or his client’s, money away from him. Those who believe in illusions deserve to suffer the consequences of their delusions.

    “It doesn’t have to be this way.”

    But I want it to be this way.

    “Hopefully, as time goes on, more and more investors will better understand the monetary system in which we reside.”

    As a nearly zero sum game, hell no, that’s the last thing I want.

    “Not only will this avoid investment losses such as the above, …”

    Yes but their losses are our gains.

    “… but it might actually translate to better public policy.”

    Well that’s true.

    “Unfortunately, we’re a long way from that reality…”

    ‘Unfortunately’ depends upon where you stand. Unfortunately from a jobs/domestic growth/public ‘debt’/pubic policy perspective, yes. Unfortunate from an investing perspective, no.

    Any investment growth rate exceeding the combined growth rate of the planet is garnered from someone else losing. Let’s not completely forget what this is all about here. You want your average 2-4% per year, using a broad-based global bond & equity mix, fine, general human ingenuity will cover you, over time. But if you want more than that, you’re taking it from someone else. If your goal is to “save what you got”, great, you’re a fine, prudent global citizen. But if you goal is to “make money”, don’t kid yourself, that additional money is mostly coming from someone else’s account. Like Bill’s.

  • JKH


    On that basis, I’m not quite sure why I wasn’t invited.


  • Peter D

    First, awesome to see you again being paid attention too! You really became THE blog representing MMT to the world!
    Second, it again underscores the difference between liquidity trap view and balance sheet recession view. If you read the famous Krugman’s babysitting economy article that explains the liquidity trap
    you’d see that the problem he thinks of is very different from the one you believe is the case with balance sheet recessions. The solution of affecting inflations expectations may make sense in a liquidity trap but it hardly does in a BSR.

  • Humblepie2008


    Thanks for the free education you have been providing for your loyal readers.

    I have a question: what effects will Operation Twist 2 have on the economy and the treasury/credit markets (US, and/or global) should the Fed decide to launch some version of that come September 20th?

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

    Well, we should be clear about one thing first. Op twist only works if the Fed actually pins the long bond. I’ve said I don’t think they can do that because it would be viewed as mass monetization by the hyperinflation crowd and the world would generally misinterpret that. The reason is because the Fed would have to establish an open ended policy response at the long end. They’d essentially say – we are willing buyers at a 1% rate on the 10 year regardless of size. That would be a bold statement. And it would “work”. But I don’t know what the collateral damage would be. If QE2 is any guide, it could be quite high.

    They could also raise IOR to flatten the curve, but I don’t see how any of this really helps anyhow. The problem is too much aggregate debt. So these debt based solutions might ease some balance sheet strains, but they’re really intended to get the debt flowing again. That’s sort of like fixing a high cholesterol problem by eating at McDonalds every day.

  • LVG

    I have seen this before, but I am not sure what it means. What is the difference between the liquidity trap view and the balance sheet recession view? Can someone explain?

  • Ted

    Peter, always enjoy your posts. Care to elaborate on this for the benefit of us MMT novices? I’ve read Krugman’s babysitting example before and had thought that the liquidity trap and bs recession were complementary, not competing theories, but now realize that may have been wrong. Thanks.

  • Humblepie2008

    I have been quite confused by what I have been reading on Operation Twist 2:


    “And here is the rub: when the Fed announces Twist it will be extending duration, it effectively means selling everything 10 Year and older (yes, QE3 could very well be LSAD or Large Scale Asset Dumping instead of LSAP). The goal of this action: make the 2s10s will go vertical and to pancake the 10s30s”

    Is this assessment correct? I believe the original Operation Twist involved buying the longer dated and selling the shorter ones?

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

    Right. The goal was to flatten the curve by pushing yields up at the short end and down at the long end. But the ZH analysis is not correct. They would implement this policy not by selling long dated bonds (or even short dated bonds), but by raising the rate on IOR and buying an unlimited # of long bonds with a specific target. That’s the only way this would “work”.

  • haris07

    Cullen, While evryone and their mother is singing your priases, I will go the other way (slightly)! Pinning prices (your second sentence) will ALSO NOT WORK! You are wrong in your assumption that pinning the long end at a certain price (and a commitment to buy whatever it takes) will actually work.

    Shows that you don’t fully understand the problem either – it is NOT a lack of credit or lack of liquidity problem! It is a lack of “demand for credit” problem. So, announcing a target for the 10 year at 1.5% or whatever Bubble Ben dreams up is also unlikely to work because, people don’t want credit! 10 year JGB at 1.1% has done jack for the Japanese economy (yeah yeah I know they staretd late etc. but the main point is still valid).

    Essentially, there is no good monetary solution to this problem, fiscal spending is the only possible solution and that too only if targeted very very efficiently for productive uses and not for speculative investments. Fat chance of that happening (for a variety of reasons including the moronic Republicans calling for austerity and Obama the politician trying very hard to get re-elected, the country be damned) and so my projection that this WILL ALL END VERY BADLY.

  • Peter D

    LVG, Ted
    Basically, Krugman’s view is that liquidity trap is somewhat of a savings glut – people are reluctant to spend for some reason, like he says of Japan:

    “Perhaps because of its aging population, perhaps also because of a general nervousness about the future, the Japanese public does not appear willing to spend enough to use the economy’s capacity, even at a zero interest rate.”

    But BSR says that they save not because of accumulation of debt. IT is very different form saying they are lacking “animal spirits” or something similar. Because private debt is like a dead weight that just keeps dragging the economy down so the best we can hope for is to tread water for quite some time till it is being paid off. Krugman misses this point. He say that for each debtor there is a creditor – why wouldn’t the creditor spend? To me, the answer is obviously that creditors and debtors are two very different groups with very different propensities to spend.

  • Peter D

    Oops, this sentence

    “But BSR says that they save not because of accumulation of debt.”

    should read

    “But BSR says that they don’t spend because of accumulation of debt.”

  • Humblepie2008

    If the Fed does raise the IOR rates, will that effectively raise short term (1, 2 yr) rates also?

  • Adam2

    It is not that people don’t want credit. But the current price of credit plus deflating assets make both banks and their customers less likely to create credit (buy homes with a mortgage).

    You are correct in saying that only fiscal policy can work though. But as you point out, our politicians are useless.

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

    Yes. The rate of IOR is acting as a de facto Fed Funds Rate.

  • FundofFuns


    I’m seeing this news hit all over mainstream now-
    QE2 benefited foreign banks


    What was the mechanism for the actual cash transfer? Was this another credit/debit entry on every participant’s balance sheet as the zero-hedge article would imply?

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

    You’re just repeating what I’ve been saying for 3 years now :-) I always say that QE3 with rate setting will “work” (in quotes) in that it will actually set the rate. But it won’t fix the balance sheet recession which is a more structural imbalance between incomes and debt levels. So we agree Haris. Always have!

  • Humblepie2008

    In that case, wouldn’t it severely crimp bank NIM?

  • Adam2

    Tom from the FT blog said this.

    “Saying QE isn’t debt monetization is like saying the sea isn’t saltwater. The Fed takes debt off the market and replaces it with money. That’s what debt monetization means. There is no other definition.

    (There are some actions wrongly called QE – changes or substitutions of Fed assets that don’t increase the total, eg “QE lite” – which are neither real QE nor debt monetization, but that’s not the point here.)

    Saying QE2 didn’t cause inflation is also completely ridiculous.QE2 obviously caused both asset and consumer price inflation, the latter mostly in Asia which filtered back to the West as commodity and import inflation. Western wage inflation after all is not the only possible kind of inflation. In this environment it would be the last place to expect inflation.

    As for Pimco’s call on Treasurys, it made a lot of sense at the time. Keep in mind that he was expecting net Treasury issuance net of monetization to hit the market in early July (because of the debt ceiling, it was delayed till end July), and he was not expecting the downward revision to 1h GDP, the debt ceiling debate debacle, the S&P downgrade, the plunge in August economic and confidence data.”

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

    It’s been our opinion all along that QE does exactly that by reducing the size of the Federal deficit via fiscal transfers from the pvt sector’s int income to the Fed (to the Tsy).

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

    We’ve had some good talks on this. See this entire thread. Mediocritas, a regular here, has done some nice research on this and we both basically conclude the same thing – ZH is digging for more headlines that don’t matter too much. http://pragcap.com/qe2-and-the-ensuing-disequilbrium/comment-page-1#comment-69138

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    FYI, I’m comment 36. I basically said the same thing as JKH did above. I also provided Krugman with a link to Kregel’s critique of his 1998 paper. http://www.levyinstitute.org/pubs/wp298.pdf

    The whole thing is fabulous, but the conclusion could just as easily have been written last week:

    “Clearly, in present conditions it is not the lack of a credible inflation policy, but a credible interest rate policy that is creating difficulty. As Keynes notes in relation to Fisher’s recommendations of inflating out of the Great Depression: “The stimulating effect of the expectation of higher prices is due, not to its raising the rate of interest (that would be
    a paradoxical way of stimulating output –in so far as the rate of interest rises, the stimulating effect is to that extent offset), but to its raising the marginal efficiency of a given stock of capital” (JMK:VII, p. 143) that is, raising the expectation of returns on new investment relative to the rate of interest, and this requires a credible policy that
    interest rates will not rise along with the rate of inflation, which is to say that the Fisher relation and the quantity theory should not hold. But the failure of a higher rate of increase in the quantity of money to increase prices and the rate of interest is what Krugman calls the liquidity trap and he identifies as the cause of Japan’s recession. In Japan
    even if the Bank of Japan could mount a credible inflation policy, there would be no guarantee of the stability of the yield curve. What is required is a credible policy to ensure increased higher rates of return on investment, which may or may not be accompanied by rising prices. In general in Japan it has not. This requires credible increases in aggregate demand. Traditionally in Japan this has come from exports. Given recent Yen strength and other structural changes in global markets this is now unlikely. What Japan needs is a credible policy of increasing the return on producing for domestic demand. From a Keynesian point of view it might be more appropriate to say that Japan is in an underemployment equilibrium with deficient aggregate demand than in a liquidity trap.”

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Yes, well said, Peter. And also note that the creditors in the case of household debt are largely banks. Paying off those debts destroys money rather than “shifting it from debtors to creditors.” I had this same discussion for a bit with Beckworth at WCI and had to just stop. They think this whole thing is just a “coordination problem” whereby if savers/creditors would just spend it would be over. Seems to me we just had two asset price bubbles in the past decade or so in which people just spent without regard to cash flow or any reasonable expectations thereof.

  • wh10

    TPC, it’s just awesome Krugman is going out of his way to mention you (and MMT) amongst some of the most famous economists of our time. Maybe it’s his backwards way of saying he doesn’t understand/agree with MMT yet, but perhaps there is something there.

  • Adam2

    I knew you could debunk that misinterpretation. But I have a feeling that QE2 did not cause speculation. The speculative vices were and are already part and parcel to our economic system. In other words we could have had that speculation without a QE2.

    Of course this speculation can’t sustain itself because demand cannot keep up. Wages are not being raised. Taxes are not being cut. And more people are not being employed.

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

    Right Adam. I can’t “prove it” either. But there is a fair bit of evidence backing the speculation claim….

  • Ted

    Thanks, agree that the BSR is the right view here. Can’t understand why leading economists aren’t embracing this explanation of private debt as the underlying problem. It’s so obvious and would be more easily embraced by the American public. Instead we constantly get this talk that focuses on QE that does nothing but confuse and frighten the average Joe.

    The BSR view continues to worry me when I still see a housing market that’s probably 10-20% overvalued and homes in the suburbs that are still double what they were a decade ago. Can’t be good for the private sector when income hasn’t kept up with home prices over the previous decade. Not only does the popping of the housing bubble hurt, but the lingering high prices from the bubble also serve as a drag on private sector demand.

  • Peter D

    To me, this comment summarized a lot of what is so shaky about using monetary policy to end recessions:
    “So the economic confidence fairy is fictitious BUT the inflation expectations fairy is real? ” (http://community.nytimes.com/comments/krugman.blogs.nytimes.com/2011/08/26/academic-debate-real-consequences-wonkish/?permid=4#comment4)

    Bingo. Affecting “expectations” seems like such a backward way of attacking the problem! I’ll take a dollar that I can see and touch over a dollar that I have some ill-defined “expectation” to touch. Fiscal policy puts the dollar there, monetary policy says “expect the dollar to be there”.
    And of course the same critique that Krugman applies to Riccardian Equivalence applies here. People are supposed to
    “have perfect foresight, live forever, have perfect access to capital markets, etc”

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Yes, those are excellent. Thanks for pointing them out. I’ll go “recommend” them now.

  • ocean

    It appears, think PK and MMT are much closer than is commonely believed.

    Under a liquidity trap folks “won’t” borrow at any interest rate.
    In a balance sheet recession folks “can’t” borrow at any interest rate.

    The key difference are
    1. A person loaded with debt, faces a higher “interest rate” and thus needs a higher expected return than maybe suggested in liquidity trap.
    2. Under a Balance sheet recession, the expected returns on borrowing is negative (unless government deficit spends to offset deleveraging). Thus there is no non-negative interest rate the fed can set to ensure a positive expected return. The liquidity trap does not conclude that specifically.

    One other point, it is interesting to note that real yields have been negative, which is effectively trying to improve “expected returns” from borrowing.

  • VII


    In reading your investment process(which I had printed out a while back) it caused me to think differently. I am constantly trying to see what could help us and that is why I stay close to this site. It has helped.

    …”as a risk manager I think it is important to focus more on teh potential dangers. Within this macro outlook I have ben and will continue to be wildly bullish at times in a micro sense”…”The pragmatic Capitalism is largelythe first step in the process…” and my favorit part of your process…”VII is handsome and smarter than beowulf”

    That macro piece needs an understanding of monetary theory. Some may argue and dispell alot of MMT etc. That is there choice. There right. We have taken to try and understand it and use it to help us make money. To this…I thank you Cullen you have helped add to my knowledge and clients.

  • ocean

    Also if you are “debt laden” consumer and saw “negative real rates” what would be a rationale response? Borrow more because your current debts will decrease in real terms tomorrow.

    Sounds like the Fed is trying to keep the consumer debt bubble from deflating but he maybe overestimating the rationale behavior of consumers.

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


    I am trying to work the handsome part into my trading model. If am confident if I swap my handsomeness (of which there is little) with your handsomeness we can create greater alpha. Have a handsome weekend.


  • http://thundereyez.blogspot.com Gary Causer

    What bank, after what the system has experienced in the last few years, will lend money to customers who have no credit, no assets, no income, or much desire to go through bankruptcy trauma, a loan!

    In the fullness of time these people recover and business will recommence. That is, If the government would only stop politicking and fishing for panic induced solutions and compound this mess.

    I still wonder if the solution for ending this crisis is to cut all of us on the F.I.C.A rolls a large check and we spend our selves back to prosperity.

    Hey, that’s pretty much what the gang in Washington did for their “benefactors” who fund political campaigns!

    But that wouldn’t be fair, would it?

    My Bad!!!

  • Peter D

    The second part is mine – I forgot to close the italics tag, I guess :)
    TC is also chiming in along the same lines:

  • Peter D

    The problem is also that while you might be rational as hell and want to borrow more, the lender might not agree to lend, because to her you still look like a shitty borrower, despite your perfect rationality ;)
    Monetary policy is just so divorces from reality at time, geez…

  • Y

    Funny thing: according to Koo’s book, he and Krugman have interacted a lot over the years. Krugman has undoubtedly read his stuff. In his “Holy Grail of Macroeconomics” Koo basically says Krugman acknowledged his arguments, but then said it didn’t really matter why Japan was experiencing consumer and asset deflation, and why the private sector had turned to saving rather than spending.

    Krugman appears to be doing this as part of his general tendency to simplify things as much as possible. But in this instance Koo is baffled, and rightly so: immediate unemployment or deflation do not give you a sense of the problem’s magnitude like examining underlying debt does. Consequently, one’s fiscal prescription will, at best, only unintentionally be undertaken at a scale and of a type appropriate to deal with the deflationary pressures.

    Krugman should like Koo’s (and SFC’s and MMT’s) more thorough approach to stock variables. Understanding the underlying problem and modifying fiscal policy to accommodate it dovetails with his view that political realities only give us ONE CHANCE at it.

  • Y

    It’s weird. Chapter 1 or 2 in most intermediate macroeconomics books basically leaves you with a proto-MMT view of things: other things equal, public deficits finance private saving. But everyone seems to forget national income accounting.

  • Y

    On a related note – hopefully related enough to avoid banning – has anyone read Woodford’s textbook? Is there any useful overlap between the fiscal theory of the price level and MMT?

  • ocean

    Trader Crucible:
    “MMT will use direct action on getting the economy moving. Attack the demand problem directly with a payroll tax cut and infrastructure spending.”
    Nope…the real problem is “too much debt”
    The right solution to directly address the impaired consumer and banking balance sheets is through an orderly write down of impaired debt, wiping out TBTF and restriction of the political power of the banking cartel.

    Than fiscal spend or chose austerity afterwards. If you apply Fiscal on top of bad debts you get some variant of Japan.

  • Willy2

    Totally agree ! Although this not limited to the US. But as long as interest rates don’t go through the roof the system will somehow.

  • ocean

    And the “faith based economic” from Trader Crucible is overstated:
    “They think that Ben Bernanke a changing a few words in a speech will cause people to spend and lend trillions of dollars more than they would have otherwise.
    I say: This is faith based economics.”

    But questioning the “faith in fiat” and maybe a “bond collapse” is fearmongering?

    There seems to be a double standard here or I am being a pedantic?

  • Peter D

    “The right solution to directly address the impaired consumer and banking balance sheets is through an orderly write down of impaired debt, wiping out TBTF and restriction of the political power of the banking cartel.
    Than fiscal spend or chose austerity afterwards. If you apply Fiscal on top of bad debts you get some variant of Japan.”

    First, I agree we should be restructuring and writing down debt. Second, chances of that are about as remote as of what TC is proposing. Third, I don’t think that applying fiscal on top of debts would be a variant of Japan in our case. I think there are enough societal differences with Japan to warrant a different outcome. Lastly, Japan is not at all that bad; it starts looking more and more like a bargain for us, with 4% unemployment and even some small inflation for a change.

  • http://www.traderscrucible.com TC


    You’re my number 1 pick for new Fed Chair. :)

  • VII

    Thanks Cullen..for alot.
    When I get a moment I’ll go back and read the dialogues on the Zimbaw..thread.
    Alot of good stuff in there. I have many of the same questions. So I’m looking forward to reading the transcript on that. Working on my weakness this weekend if you will.(yes..I know not enough days for that for me..I beat you to it my 3 nemesis..u know who you are)

  • http://www.traderscrucible.com TC

    Peter D,

    I was thinking the same thing about inflation vs. confidence. It’s a fools game. If you think confidence can be restored by Bernanke saying a few words, then even thinking about inflation has gigantic real world impacts.

    I’m going to think about a glass of wine and see if one appears in my hand. My wife is usually pretty good about this stuff.

  • Peter D

    “But questioning the “faith in fiat” and maybe a “bond collapse” is fearmongering?”

    I don’t follow. MMTers are actually pretty adamant that what underlies fiat is not “confidence” but the power of the state to stick a gun to your head and make you pay taxes.

  • CF

    I guess what baffles me the most – although maybe it shouldn’t – is that those in finest research institutions don’t get reality. The fact that anyone could actually refute the fact that a balance sheet recession is real – come on. It happens over and over on a micro basis – a company levers up their balance sheet and then they have to either raise equity or cut spending. Consumers cannot issue equity, so they must cut spending. It isn’t that difficult to understand and almost impossible to refute (although I admit I did take reading Koo’s book for me to really get it…but I’m not a Nobel laureate.)

    Anyone who has scratched their head at bond and currency behavior that is so counter to what is considered normal logic will quickly come to the conclusion that within the MMT framework, all of this behavior makes sense.

    While there is still lots of other variables to think about, accepting and embracing these two principles makes one open to lots of other possibilities that are not possible using classic dogmas.

    Good luck to those that continue to resist reality.

  • D Michael

    Cullen, thanks for your contribution via TPC. Question for you and all out there:

    Do you suppose that the government (POTUS & the Hill specifically) knows why we tax?

    Further, in any context does it make sense for one to say “we tax in order to pay our (the country’s) bills?” Or, when a politician/pundit makes such a statement are we correct to label this as baseless rhetoric?

    One of the MMT basics, as you’ve pointed out, is that we “tax in order to create demand for the currency”. Also the notion of taxes as the glue that binds the monetary system makes sense. (pragcap.com/resources/understanding-modern-monetary-system).

    Clearly while these ideas are not prevalent in mainstream financial media, I wonder if the people on the Hill (except for Tea Party) actually get it, and merely use the age old “taxes vs. budget cuts” to play to their respective party bases.

    One of Ted Kennedy’s best friends was none other than Orrin Hatch. When they battled politically/ideologically, it was often done with a wink and a nod in private. Of course, today’s political climate is nastier and there are clearly some who don’t get it.

    Still I wonder, do our elected officials know why they tax? Perhaps they do, and they’re only guilty of perpetuated a tooth fairy myth (we tax so we can pay our bills, etc).

    Thanks for any thoughts.

  • Colin S.Toe

    But I believe Cullen has also considered the possibility of loss of faith in the currency leading to hyperinflation.

  • JohnnyBravo

    Hey Cullen,
    you describe our monetary system as “fiat” system, correct? Eric Janszen of iTulip defines it not as a fiat system, but a hybrid, public-priviate credit money system. Is he splitting hairs, or using some kind of classical definition of fiat money? I would think you are both correct. If I understand MMT, it wold appear that Janzsen is correct, but it’s still a fiat system in that the currency only have value because of the full faith and credit…yada yada and because of the legal tender laws that make the government currency good for taxes and all debts public and private, etc.

  • ocean

    Hyperinflation is the loss of faith in the currency?

    Also taxation cannot be a complete answer because taxation existed in currencies that went hyper?

  • http://www.traderscrucible.com TC


    I’d disagree with this for a few reasons. I don’t think we are that far apart.

    First about the cramdowns vs. fiscal policy.

    The problem with cramdowns is that it is only stimulative if people then use their smaller balance sheets as a reason to then immediately increase their balance sheet.

    Cramdowns can work because people are now able to borrow and lend again. I’d say this is a bad outcome.

    I prefer stimulus – and keeping the CB out of the way of fiscal policy because:

    1. Lots of income allows people to pay off bad debt and not screw creditors.
    2. Lots of income allows people to avoid future debt

    The problem in Japan is that the BoJ didnt’ stay out of the way.

    My preferred policy would be cramdowns plus fiscal. Then fiscal by itself. then cramdowns by themselves.

    There are lots of reasons why Monetary Policy sucks:


    But the debt slavery one is absolute gigantic. Why would we want to force people to borrow to stimulate our economy?

    Why in the world would we want to put a business in between our stimulus and the target of the stimulus?

    These are questions that economists do not talk about when they talk about monetary policy. Any reasonable answers to these questions make it clear that monetary policy sucks.

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

    There is a section in the primer on the mainstream misconceptions and why they persist.

    Yes, it is incorrect to say that taxes “fund” spending. But this doesn’t mean taxes aren’t necessary. They are for the reasons you list. This might sound like a semantic point, but when you connect the dots and consider policy responses, it is hardly a semantic point at all.

  • http://www.traderscrucible.com TC

    As far as I can tell, most hyperinflations were decisions, not accidents. The gun to the head isn’t all powerful.

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

    I’ve argued that hyperinflation is more complex than just a collapse in the tax system. Ultimately, the collapsing tax system generally plays a vital role, but there have tended to be preceding exogenous circumstances that lead to this result. The main culprits are generally regime change, loss of war, VERY weak productivity base and a ceding of monetary sovereignty.

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

    Exactly. For instance, in Zimbabwe, they had 85% unemployment before the hyperinflation occurred. So, 85% of the population was ready to say “just pull the trigger” when you held the gun to their heads….

  • ocean

    It seems there are at least two criteria for hyperinflation
    1. And exogenous event (rather than a graph with an increasing M3), that
    2. Produces a “loss of faith” in currency by sufficient number people.

    Loss of faith is effectively expectation of “massive” decrease in purchasing power (or increase in inflation). And sufficient could be some “tipping” point portion of the currency users. [No wonder gold bugs might dislike your story Cullen :-)]

  • D Michael

    Cullen thanks for your thoughts re: taxation. I agree with your point.

    So I wonder: if the general public really knew the purpose of taxation, would they be so apt to support the tax regime as we know it?

    While taxation may be the glue of the monetary system, the glue of the glue seems to be a massive misperception of why we tax. Scary.

    A parent might not care that his child behaves better because Santa Claus is coming to town as long as he behaves.

    If Uncle Sam can collect taxes because from me because I believe he ‘needs the $$ to pay the bills”, fine by Uncle Sam.

    But what is my propensity to pay the ‘glue’ when I (and my fellow Americans) turn on 60 Minutes one day and learn we’ve been ‘lied to’ about why we’ve been paying taxes?

    I guess to Peter D’s point, Uncle Sam can always unholster his 9mm and make me pay, like it or not.

    All you US East Coast residents be safe. Keep up the high quality dialogue.

  • Dear god!

    Wait a second, these Modern Monetary Theorists are always dichotomus and propose these vague remedies that make absolutely no sense. They sit on both sides of the economic fence as a means to prevent falsification. The theory is nothing more than tautology and circular.

    I read a “analysis” by James Galbraith the other day and it was an horrendous application of logic (if you could even call it that). In one regard, the “stimulus” was too small to be effective but on the other side, “stimulus” is not the answer…. but wait, stimulus is the answer because it the the IV bag to the economy. But wait, throwing money at the problem isn’t the answer, but wait, it is, we just need a different kind of money thrown at the problem from a new government body known as the Infrastructure Bank. But wait, QE is just an asset swap (yes, newly created currency for bonds)and not inflationary (ummmm, what numbers are you looking at? Measure CPI with the pre-1983 methodology and you are at 11%).

    The reason yields dropped behaved as they did is because US debt is still the best looking pig in the slop house of garbage. Anybody who thinks the US currency will be the world reserve indefinitely and “deficits don’t matter” is a fool. What happens to yout theory when the G-20, IMF have their way about a world reserve? Can’t happen? Then you are too yound to remember the Pound Sterling or were born after 1971 and the creation of the current global fiat system. Additionally, anyone who believes that fiscal and monetary policy are neatly compartamentalized simply has this view to have their assumptions be the bases of a seriously flawed theory. How does government spend money if not from taxes, from the central bank right? Hmmmm, what does the central bank do to provide the government currency and credit? So, wait, the stimulus was not financed through a devalued dollar and Federal Reserve book keeping entries? Where did all the stimulus money come from? Taxes didn’t cover that spending by your own admission, had to come from somewhere (but uses some semantics and don’t call it “money printing”). Wanting it both ways do we?

    But when you call a MMTer on their complelely scatterbrained, indecipherable approach to technocratic economic management, they simply imply that you are too dimwitted to understand their grand unified theory of economics. Continue with your self reinforcing statements while actually saying nothing.

  • ocean

    I prefer writedowns as the first step.
    If that is politically unattainable, than I prefer “quality” deficit spending
    If that is also politically unattainable than either way we are “expletive”

    Austerity leads to massive recession, unemployment and forced debt purge before organic growth can resume
    Malinvested Deficit spending leads to some decade(s) of economic malaise

  • http://www.traderscrucible.com TC

    The wine arrived eventually. I guess just thinking about stuff can make it happen!

  • ocean

    If you consider that foreign business between two non-US countries is often transacted in USD but it is not “taxed” by US, than I find it interesting that “demand” for a currency can exist without taxation as MMT would suggest.

    Of course transactions are still taxed in the domestic economy.
    And also the literal “gun to head” by the US military we know is also effective.

  • Wildebeest

    It is interesting how when the data, in this case inflation, doesn’t meet with expectations (expectations drawn from faulty theory) the Austrians etc. tell us we need to refer to the “real” data, such as that from shadowstats. Data that exists that debunks some of these Austrian fantasies is not to be trusted. To me this is kind of like creationists claiming that Satan “planted” the fossil record to fool us. Never trust data that doesn’t fit with your beliefs.

    At the end of the day you can’t debate someone wedded to a belief system by presenting them with empirical data.

  • JohnnyBravo

    Thanks for the clarification, Cullen.

  • http://www.traderscrucible.com TC

    I’d add that most economists haven’t done enough other things in the world of money to make sense of it.

    There are four professions that deal primarily with money.

    1. Bankers
    2. Accountants
    3. Economists
    4. Traders

    Economists try to tell the other three that they don’t know anything about money.

    It’s like a physicist telling an engineer that he doesn’t know anything about electricity.

    I’ve come to the conclusion that accountants rule the world.

    If you’ve ever read the book “Anathem”, Neil Stephenson talks about facts that are “truer” than other facts. Accounting is like that. Some of the facts of accounting supersede facts of economics. And some facts of economics supersede other facts of economics.

    In the end, if you’re talking about money, it needs to conform to the basics of accounting. Any economic theory that says S = I by defining Government away is getting the accounting wrong at a very fundamental level.

  • Cirrus

    Hey, if virtually no one understands MMT (which is true), which view is truly moronic?

    The one that says balance the budget? Or the one that says tax and spend like there’s no tomorrow?

    There’s an elephant in this room.

  • Andrew P

    I beg to differ on point #4.

    “4) Medical Costs that are double the rest of the industrialized world’s yet produces worse results.”

    First of all, our medical system is subsidizing the rest of world b/c we are paying the drug discovery costs. Second, the aggregate “bad outcomes” do not necessarily have anything to do with the medical system. Culture and lifestyle probably matter much much more than medical systems when it comes to measuring health, lifespan, and other measurable aggregate results. We have to spend more to get worse results because of these other counterveiling factors. If we spent what the EU spends on medicine per capita, our results would even be that much worse.

  • Dave Doe

    As somebody who understands Austrian Theory better than MMT, I still feel it makes more sense as has better real work empirical evidence behind it.

    I’m still trying to understnad MMT though. Do the MMT folks here try to understand Austrian or other points of view. Not an accusation just a question.

    I do think it important that MMT be able to reconcile real world empirical data when proposing solutions.

    My biggest hangup to date is that no fiat system has ever survived – not because it wasn’t theoretically possible – but because the politicans will always spend money they dont’ have to try and extend the status quo and their careers.

    So to me – any proposed theory has to pass that litmus test. Otherwise, MMT is just a theory without a pratical application. How does that help us.

  • Octavio Richetta

    I am still reading your MMT paper. Great stuff! I am wondering if for teaching pourpeses, it would make sense to further simplify the the problem by showing an example that gets rid of the time dimension. i.e., looks at the one period problem. This simplifying the problem greatly since then demand and suply of goods and money happen all at once allowing you to ignore the time value of money. This allows you get rid of banks and the bond market and focus on what you call the vertical component of MMT. AM I on the right track?-:)

  • Dave Doe

    I don’t think Austrians deny the need for government. As I tell people all the time, the argument is really what role Government needs to play. But, again, if you look at the historical record, Government is terrible running things but is an absolute need in providing the rule of law, infrastructure, and basic research.

    Your right in that all monetary systems eventually end – and through the same means – public and private coruption.

    If there’s a missed lesson in the last 4 years, it’s that Lord Acton appears to be right. Concentration of power (public or private) is a bad thing and leads to bad outcomes.

    Having said all of that – I appreciate all the econ blogs and the people who take such a large amount of time to try and educate folks. It is our only hope.

    Now on a lighter note – some comic relief:

    The Fight of the Century: Keynes vs Hayek Rap
    Part #1
    Part #2
    (Notice how Hayek knocks out Keynes. Then Keynes is carried off and has his hand raised in victory by his fans. )

  • Octavio Richetta

    my first This should read Thus.

  • ocean

    Schumpeter -> Minsky –> Wray
    Mises–> Hayek –> Lerner

    MMT has roots in Austrian :-)

  • JWG

    Shadow Stats does a nice job of presenting current inflation statistics using metrics that existed in the recent past, before hedonic adjustments, owners equivalent rent and other somewhat questionable “innovations” in inflation analysis. These “innovations” had the effect of reducing CPI growth, which suppressed growth in Social Security payments and TIPS adjustments, among other agenda items. Using OER rather than housing prices for CPI analysis allowed policy makers to blithely inflate the housing bubble by pretending inflation did not exist. Just because John Williams is batty about hyperinflation does not mean he is wrong on his adjusted inflation measurements and his critique of reported CPI. Let’s take the truth where we find it.

  • rhp

    Not to mention that one creditor could be demanding payment from 1000’s of debtors. Witness the growing wealth concentration into the upper 1% It is not only propensity among the different groups to spend, it is also simply the practical aspect of a single extremely wealthy individual not contributing to money velocity in the same manner as a large diverse group of creditors…..

    Hard for me to see how Krugman would not get this point, considering how obvious it is to a novice………

    Always enjoy your comments, Peter.


  • Greg Colvin

    Andrew, I doubt we are subsidizing that much of the world’s drug discovery costs: European universities and drug company do a lot of work too. And if we are, it seems a tariff on drug exports would be more fair than high costs for American consumers. I also doubt our lifestyle is that bad either. Europeans enjoy their alcohol, tobacco, and saturated fats too. What they have that we don’t have is a single-payer system that covers everyone, negotiates fair prices on their medicine, and subsidizes the cost of medical school.

  • mdm


    This is the way I think about it (disclaimer: I’m only a student):

    hyperinflation is a complex phenomena with many underlying social, economic and political factors.

    Social and political factors ,for instance: how effective the state can enforce its taxes, resentment for the state, how effective the state operatives, general faith in the state, etc.

    The economic factors: include possible shocks to the the productive capacity of the economy. So for instance, if the productive capacity of the economy is severely destroyed, then the supply side of the economy will adjust by increasing prices, this coupled with increases in demand by government spending, will mean that the government finds that it can purchase less and less with its currency, so it increases its spending to compensate. There will be feedbacks between the economic factors and the social and political ones.

    The basic conclusion is that whilst excess government spending (‘printing money’) is a necessary condition, it is not a sufficient condition to cause hyperinflation. So when a MMTer reads an argument that states printing money -> hyperinflation. It’s interpreted as non-sequitur: what were the factors that lead to the excess spending, why did the government’s purchasing power decrease, what is the structure of the real economy, what was its level of productive capacity? The MMT argument is X, Y , Z -> decrease in the government’s purchase powering – > excessive spending by government – > social and political factors -> hyperinflation.

  • mdm

    [MMT] theory is nothing more than tautology and circular.

    If MMT was a tautology, then it wouldn’t be saying anything about causality, the significance of various accounting identities or emphasising things such as Net Financial assets, and the liability structure of the private sector. Considering that it does do these things, then it can’t be a tautology, because tautologies don’t say anything about these things.

    Just because a person supports a stimulus doesn’t mean that they support all stimulus! If you look through MMT polical prescriptions a key requirement is that they are timely and targeted, hence why they support policies the job guarantee.

    Anybody who thinks the US currency will be the world reserve indefinitely and “deficits don’t matter” is a fool.

    Good, because MMT doesn’t say either of those things, but then you knew that right? This scepticism that you have some straw person version of MMT is only reinforced by statements such as:

    “How does government spend money if not from taxes, from the central bank right? Hmmmm, what does the central bank do to provide the government currency and credit? So, wait, the stimulus was not financed through a devalued dollar and Federal Reserve book keeping entries? Where did all the stimulus money come from? Taxes didn’t cover that spending by your own admission, had to come from somewhere (but uses some semantics and don’t call it “money printing”). Wanting it both ways do we? “

  • beowulf

    That’s very cool Krugman name-checked you. You should think of him as Steve Carrell in Crazy, Stupid Love, sitting at the bar forlon and confused and you can be Ryan Gosling, his unlikely but very wise mentor (awesome movie, saw it last night). :o)

  • Adam


    You do realize that when you say, “My biggest hangup to date is that no fiat system has ever survived – not because it wasn’t theoretically possible – but because the politicans will always spend money they dont’ have to try and extend the status quo and their careers,” that it actually applies to any regime regardless of the monetary system. Corrupt regimes eventually fail and they will use any means necessary to stay in power as long as possible. The fact that they can abuse a fiat currency doesn’t mean that taking it away prevents the corruption or abuse of power. Look at Assad. He could have tried to “buy off” his people with “money printing” but instead he rolled the tanks. It was just a policy decision for him which one he chose. In the end either approach is just an attempt to keep the regime in power.

  • Greg

    I still think that the entire basis for disagreement amongst Austrians and just about everyone else is in the nature of savings.

    Austrians are quite wed to the idea that ones saving is sacrosanct. When I say that I mean that they believe that whatever it is you saved today, meaning whatever present consumption you decided to forgo, you are later entitled to the full buying power of that previously saved income.

    This is quite problematic for many reasons, first and foremost is that no one should expect ANYTHING to “retain value” for 15,20 or 30 years. The goal of a society and its monetary system should NOT be to make sure that savers form 30 yrs ago can get today the equivalent (or more) of what they could have gotten 30 years ago. Its quite unrealistic and requires too many people in the present to forgo something.

    Saving for a rainy day is fine and we all need to do some of that but it is taken to an extreme by many of our citizens today. Thing is these people accumulate wealth/power and simply bully policies which keep THEIR past savings paramount to the present welfare of too many people.

  • Greg

    Very well stated Cullen

    The problem with too may Austrian types is that they dont believe in “society”. They take Thatchers view that their are “only individuals and families”. The idea of collectivist thinking beyond their nuclear family smells of creeping “socialism’ so they avoid it like the plague. Many hyperlibertarians/Austrians are sociopaths.

  • ocean

    Calling libertarians sociopaths doesn’t accomplish much here.

    Their starting point for monetary systems is fundamentally different than MMT.
    They believe in
    – “individual property rights” above “government provided welfare rights”
    – “rule of law” (Republic) and fear the “rule of majority” (Democracy)
    – Money as a “store of wealth” not a “currency of exchange”
    – Fiat is theft of private wealth through inflation for social programs
    – Taxes are redistribution of private wealth for social benefits
    – “charity” (society will care of the needy) rather then government activity

    I’m not saying it is “better or representative or even plausible” rather their idealogy is largely different from how modern society and monetary system works.

  • Colin S.Toe

    Answer to D Michael: Does the government “know why we tax?”.

    I think MMT accepts the need to maintain an ‘optimal balance’ between price stability and employment. Taxing would also be one of the tools to do this (by taking excess currency out of the ‘horizontal system’).

    I’m not sure how it would come down on the use of taxation for wider policy purposes, which has certainly been part of the historical reality. (Highly progressive taxation was instituted in the US, with I believe the support of both the largely Protestant rural farmers and mainstreet businessmen, and the urban Catholic working class, in order to arrest the concentration of wealth and political power in the hands of industrialists and financiers.)

    By the way, a paper by VIJAY BOYAPATI: WHY CREDIT DEFLATION IS MORE LIKELY THAN MASS INFLATION: AN AUSTRIAN OVERVIEW OF THE INFLATION VERSUS DEFLATION DEBATE, that I believe was favorably cited by TPC, led me to an appreciation of MMT; and the role of aggregate demand and the effects of QE2, relative to this issue.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    No fiat money system has ever survived?????? Then how do you explain the fact that there are probably about 100 of them or more in existence right now??? In fact, what we DO know is that no commodity money system has ever survived–there are none of them in existence right now. We also know that the vast majority of systems based on some sort of reserve, like a gold reserve or a currency board, also have usually failed. There are some in existence now–Hong Kong, for instance–so, while I think these systems have serious flaws, I wouldn’t say something as obviously false and even stupid as “no such system has survived.”

  • Ron T

    “Schumpeter -> Minsky –> Wray
    Mises–> Hayek –> Lerner

    MMT has roots in Austrian”

    Of course, nobody is denying that.

  • CF

    CR – Thanks for the reply..I guess we will have to accept the fact that will most probably never get it – which means the rest of us can take advantage of the cycles they create.

  • Cy Hailow


    I may have missed it but have you posted anywhere what MMT says should be done from here?
    Whether you agree with him or not (mostly not it seems) PK at least has said that current environment / policy is leading to 1937 revisited and like Richard Koo advocates increased Govt spending SHORT TERM. In a concise reply, please list the key policy setting differences that MMT would indicate vs the PK, Koo formula for recovery.

    As observed elsewhere in this blog “history teaches us that curtailing budget deficits prior to the end of a balance sheet recession leads to a deflationary recession” (ex. Paisley Financial – H/T El Vielo)

  • jjames

    you mean it was rocket science that the fed buying bonds would support bond prices?

    and inflation is occurring. in an economy this weak, prices should be dropping.

    bill gross probably just want another government hand out.

  • jjames


    no commodity system(or gold standard, if thats what you mean) has survived because they eventually became fiat systems. and you can see the shape they’re.

    and these fiat currencies will eventually fail, and gold will still be gold, like it has been for a few thousand years. do you know of a fiat system that has out lasted gold?

    and meanwhile the fed and the government continues to rob savers by manipulating money supply and interest rates.

    some people just don’t understand the nature of big government.

  • Kman

    Completely agree, we are subsidizing drug discovery costs in a huge way. This is not to say that Europe and increasingly some of Asia are not doing valuable research, rather they are able to do this research due to the fact that they can rest assured that they will have a huge profit margin on any “discovery” that is even slightly positive. To evaluate this correctly ask yourself – what drug CLASS was invented outside the US? There are not that many.
    This actually ends up being a specific example of a broader problem of US intellectual property being a joke in the rest of the world. In this specific example the reason it is impossible to police or tariff is that once invented drugs are frequently quite easy to copy. So a third world or even a second world country cant afford these drugs at the US cost and will have these choices: Let their people suffer or turn a blind eye as someone copies the drug and sells it for pennies. It is to make this choice less obvious that companies sell their drugs elsewhere so cheap.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    “no commodity system(or gold standard, if thats what you mean) has survived”

    Thanks you. That’s all I needed to hear an Austrian admit, just once, so I could verify they weren’t completely delusional (just mostly). And commodity systems were abolished because they didn’t work. You may be right, for all I know, that these fiat systems will fail as well–they’re have their own flaws, obviously (and in that case I could say, “no fiat systems survive because they eventually became commodity systems” and sound just as ridiculous and meaningless as you just did). But for now, the scorecard reads—fiat money 100+, commodity money 0.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Hello Cy,

    Your query wasn’t addressed to me, but since I understand well the MMT’ers differences with Krugman, I hope you don’t mind me interjecting here.

    First, off, yes there is significant agreement in the short run on the role of fiscal policy. But, even there, there are two very significant disagreements. First, Krugman is largely against tax cuts, as many so-called progressives are. Second, he doesn’t really agree that there is a balance sheet recession; he’s been very clear on that. What he thinks is happening is a very neoclassical interpretation of Keynes’s liquidity trap (which, btw, has very little to do with Keynes). As such, his first choice actually isn’t fiscal policy in theory, but a low–and in theory, negative–“real” interest rate. Even in his latest piece here he is discussing a credible monetary policy to raise inflation expectations, which is exactly why he referred readers to his (largely flawed, in my view) 1998 paper on Japan.

    Second, and even more important, is the view of the longer run. Krugman again hitches himself to the neoclassical view that once the current “liquidity trap” is over, the bond market vigilantes will be out in force and the govt will have to deal with its long run deficit “problem” to avoid becoming like Greece. This is roughly equivalent to the deficit hawk view except for the timing. Further, as he’s shown in his various attempts to critique MMT, his understanding of banking and monetary operations is severely deficient to the point that he’s invoking the loanable funds market, money multiplier, and so forth.

    Overall, then, in MMT’ers view, while it is a fact that he is in favor of fiscal policy stimulus for now–and this advocacy is quite welcome and we also readily acknowledge he’s been one of the better advocates of the past few years–it’s a rather small part of what in the long run is a debate about alternative paradigms for understanding the monetary system and then organizing macroeconomic policy as a result that understanding. And on that larger point we are on quite different sides at least for now.

  • http://ralphanomics.blogspot.com/ Ralph Musgrave

    One point missed in the above discussion is that QE counters the crowding out effect of fiscal policy. That is, where government borrows and spends, the crowding out effect to some extent negates the effect of the spending. There is widespread disagreement on the size of the crowding out effect, but whatever the size of this effect, QE negates it.

  • Willy2

    The best way to reduce US medical costs is to kick the lawyers out. In the US they can sue everyone (patients, doctors, hospitals, insurance companies, government, etc.) “”from here till the kingdom comes””. And that pushes up prices/costs up for EVERYONE in the US. That’s a MAJOR reason why medical treatment in the US is so insanely expensive. And why insurance premiums over here in Europe are MUCH lower than in the US.

    But you shouldn’t worry. The upcoming default/bankruptcy of the US means that a lot of folks don’t have any money any more. It won’t be profitable for laywers anymore to sue anyone. Then they can try to find a more productive job.

  • Cy Hailow

    Thanks Scott,

    You feedback was most helpful. As I read it the main difference MMT vs PK et al. short term is the difference regarding the mode of Fiscal stimulus.

    Two problems exist regarding the taxation approach, 1) US is already a relatively low taxation country and taxes at current levels don’t cover ongoing expenses, 2) tax cuts are sticky and reversal is political suicide. So who ever wants to or is able to reverse them then get re-elected? As Yogi Berra said “in theory there is no difference between theory and practice, in practice there is” Hence tax cuts from here sound good in theory but to my mind fail the practicality test!

    In the longer term response, MMT might differ from PK / Koo but I suspect that is a minor consideration at this juncture. The die has been cast in austerity mode. Good luck going down that path.

  • Kevin

    “Krugman misses this point. He says that for each debtor there is a creditor – why wouldn’t the creditor spend?”

    It’s a good question. It seems to me that the answer is that most of the credit in our system is locked up in:
    – pension plans and pension funds (held until retirement)
    – insurers (float held for solvency)
    – banks (held as required capital)

    And credit that is locked up can’t be spent.

    At first one might think that the banks are the biggest creditors. However, the banks can’t be the ones to spend (in the way Krugman means it) because banks don’t have free equity. Banks are the first creditor in line, but banks have creditors of their own: the textbook example is a bank with 90 dollars in liabilities for every 100 dollars in assets. The remaining 10 dollars are the bank’s capital. The textbook bank has no room for spending: it must hold 90 dollars against its liabilities, and it must hold the other 10 dollars as required capital.

    The question is: where is the free equity (wealth)? It seems to me that most of this will be locked up in pensions, float and required capital. I don’t think Krugman is making a case against insurers holding reserves or banks holding required capital. It seems to me that his case is really one against pensions. Most western nations are collectively saving for their retirement (eg. baby boomers). Making a case for spending today is making a case for forcing people to spend their retirement money early.

  • Greg

    Rob savers?! This is exactly what I’m referring to in my above post. What exactly is reasonable for a “saver” to expect? Should I expect that the 100 dollars I dont spend today and tuck in a bank account instead will be able to buy me the 100 dollar equivalent in 10 yrs? 25 yrs? 50 yrs? Why is that a reasonable expectation? What does everyone else have to do for that “saver” to guarantee his return?

    The whole expectations of savers is completely messed up.

  • Greg

    I call ‘em as I see ‘em.

    The modern Tea Party/Hyperlbertarian/Austrian movement is extremely sociopathic. They are hyperindividualistic and go to great lengths to distance themselves from ANYTHING that seems collectivist. They are also prone to threatening violence as a way of getting their way. Of course they justify this by arguing that the state is, by nature, legalized violence via coercion.


    “Their idealogy is largely different from how modern society and monetary system works”

    pretty much sums it up. They are ANTI everything the modern system operates by………….. hence they are ANTI social or sociopathic.

  • marparker

    going back to national accounting

    and breaking savings down to corporate and individual levels

    we can see that there is a corporate savings glut at the highest levels its been since i can find numbers for which is 1985


    the economy has never done well since 1985 when corporate savings has been at a high level

    it seems to me that spending cuts are necessary to cut into the corporate savings glut

    the problem will be where to cut off the cuts before they become too deep and we end up in a clinton/bush cycle again

    i personally wont mind that cycle since i will be properly armed this time thanks to Cullen and Crew

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    On the taxation issue, actually taxation of lower/middle income people isn’t nearly as low as one might think. MMT’ers favor cutting regressive taxes, like the payroll taxes. And we have no interest in having tax revenues cover expenses aside from inflation. It wouldn’t be hard to put a sunset on a payroll tax cut–indeed, they’ve already done it.

    Yes, a bit hard to get rid of politically as the sunset on the Bush tax cuts has shown, but I think a democratic president would rather easily let the Bush tax cuts sunset in the absence of a recession (or, with any negotiating ability at all–which Obama clearly doesn’t have or desire to have (not sure which). Similarly, it’s pretty clear that a Republican president would allow a payroll tax cut to sunset. In either case, they would have leverage to get a deal of their liking (again, though, I admit Obama clearly doesn’t care to use leverage, or doesn’t understand what it is).

    At any rate, the past 15 years have shown that (a) structural deficits for the US were too small, and (b) even with the Bush tax cuts, a modestly expanding economy as in about 2007 still gets deficits to about 1% of GDP. So, a tax cut that would permanently raise deficits by a few more % of GDP isn’t problematic in my view.

  • ocean

    Great point and the other part of the puzzle hidden in “macro” aggregation and “accounting identities” is the economic effects from wealth concentration. Said, differently, if the high wage earner group after making some threshold of income, begins to “hoard” money and invest those funds in “unproductive asset speculation” rather than more “productive” spending or creating new businesses we would expect from capitalism.

  • Colin S.Toe

    Given the political winds, I think it would be easy to reverse a payroll tax holiday.

    However, I would like to see this regressive tax on employment abolished.

    How about a plan that would phase in a tax on consumption (e.g. a VAT), if and when recovery occurs as a replacement?

    I know this would also be somewhat regressive, but could be presented as having the beneficiaries of SS/MC still contributing; this aspect would appeal to conservative sensibilities.

    It might also be designed to reduce the current account deficit, and support exports.

    (I have also encountered an argument that a payroll tax cut would actually work to lower real wages, but found it unconvincing.)

  • kim

    Dear Mr. Roche,

    I’ve been exploring your site – it’s very interesting and provocative, thank you. MMT is startlingly new to me, but where I struggle is not the concept (which seems quite simple, in principle), but its seeming inconsistency with FRB documents and research papers. I wondered if you could help me with one example (“Why are banks holding so many excess reserves”). It seems germane.


    Which claims that the excess reserves simply reflect the size of the Fed’s interventions and that they are not inflationary. You may agree.

    Yet, beginning at the bottom of page two, it diverges sharply (I think) from your description of how this arises.

    It describes how a stressed bank, imminently faced with a deposit withdrawal, may be helped by the Fed crediting it with reserves which it can use to honour the deposit obligation without shrinking its balance sheet. I don’t think the MMT description allows this “withdrawal of reserves”. Under MMT, the stressed bank has to reduce its assets or go to the discount window. Perhaps it can do the former by buying UST from the Fed, which debits its reserves, and selling those UST. Perhaps it can do the latter using reserves as collateral. But both of those are quite different operations to the one described. The former is a monetary operation.

    Do you have a source which states quite categorically that reserves may not be used for settlement within a bank’s lending and borrowing operations ? Eg a clear legal distinction between reserves and money used in the settlement of commercial transactions. (I have read that notes are reserves, but that may be wrong, and may be de minimus.)

    Sorry for the long question – I see you have a missionary’s zeal but it must get quite tiring. Anything you can do to help would be appreciated. As you (I hope) see, on my side I’ve been giving this a lot of thought and working the internet hard.

  • ocean

    I think you are on the right track but I do not agree with your conclusion. Consider if you breakdown consumer and corporate savers in top saver, middle saver and bottom savers, what you will find is that deficit cuts will continue to skew savings to the top savers away from the bottom and middle.

    MMT completely ignores the income approach to GDP, and by focusing on the expenditure approach, they conclude the appropriate policy choice is higher government spending. Rather then an approach of lower or negative taxation that the income analysis may lead one to conclude.

    Also by focusing on the expenditure side of GDP, their analysis failed to predict and understand that the last stimulus disproportionately benefited corporations rather than the wage earners.

  • marparker


    I could be wrong but I think MMT ignores income on the basis that it all comes from govt spending.

    I make the assumption that individual savings will naturally be higher than corporate savings and therefore assume that spending cuts will have minimal effect on individual savings when corporations stop saving. That is until the cuts go too deep.

  • Colin S.Toe

    Abolish payroll tax: including the employer and self-employed portions.

  • ocean

    GDP from income approach (aka gross domestic income) as reported from BEA is

    GDP = W + NOS + D + T, where
    W = wages
    NOS = Net operating Surplus (profits)
    D = depreciation
    T= Taxes on Imports less Subsidies

    First thing to note is that direct government spending does not appear in the GDP income approach. However, government does tax on imports shown explicitly in the equation and taxes both wages and profits (implicitly).

    This suggests another policy choice to grow GDP is negative targeted taxation to wage earners and/or small and large businesses (i.e a small government solution). As opposed to a top line deficit spending big government socialization.

    The point is from an sectoral accounting sense one can argue a low/negative tax rate solution. And the detail to the productive impact of wages vs profits is so much richer in this view, I’m baffled why MMTers ignore this and focus on the expenditure view.

  • marparker


    we know that raising taxes causes an increase in the current account. A current account surplus has equaled bad times in the U.S since the 70s. It also does a good job of getting the president fired.

  • VRB II


    I read…disclaimer: I’m just a student.
    Then I read your posts.
    In Latin student means…our future.
    And from your posts..it looks like were in good hands.
    There’s a young person who calls himself/ herself Y who posts here also. A student also. Very bright.
    Your the most important persons here. Your the next….whatever you choose. Just a student..HA.
    Cool to see you here on your free time…or if your like me during class..posting.
    Enough..pep talk…get your ass to class and help us fix some of the issues before it’s too late.

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

    I don’t believe any government ever decided to have hyperinflation. There was never a meeting where hands went up in favor of hyperinflation. That is not how it works. It happens when money printing gets out of control. It gets out of control when more than 40% of government spending is deficit spending and debt is more than 100% of GNP. Around this time people stop buying bonds (foreigners dumped $17 billion in Treasuries last month) and as all the bonds come due the government has to print tons of new money. Then you get “run away inflation”. Nobody was in favor of it.


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

    Vincent, long time no see. Are you feeling better or worse about your hyperinflation prediction?

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

    There are “gold standards” like the Fed’s Ponzi Gold Standard from 1914 to 1933 where they printed $2.50 in paper money for every $1.00 worth of gold they got and claimed all paper was redeemable for gold. Of course this failed. But the currency symbol for gold is XAU and the units are troy ounces. This currency has not failed and can not fail.


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

    I still think Bernholz analysis that historically hyperinflation happens after deficit spending and debt get beyond certain limits is correct and that the US has passed those limits. So I still think the US dollar is headed for hyperinflation. My gold and silver have been doing well. Amazingly, your Treasuries are still doing well so far. :-) Do you still think interest rates will not go up? Do you still think inflation will not pick up even if the Fed tries to hold inflation rates near zero as foreigners dump their Treasuries?

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

    I meant do you think inflation stay down even if the Fed tries to hold interest rates near zero even as foreigners dump their Treasuries. I wonder if this $17 billion dump is the start of a trend. I have never seen foreign holdings of Treasuries drop before.

  • Scott Fullwiler

    Hello Kim,

    Since this is my expertise within MMT, I hope it is ok if I respond.

    “It describes how a stressed bank, imminently faced with a deposit withdrawal, may be helped by the Fed crediting it with reserves which it can use to honour the deposit obligation without shrinking its balance sheet.”

    I don’t actually see that example, though there is something similar on page 4 that is an extension of the example beginning on p. 2. I don’t see any problem with that example starting on p. 2 and running several pages from our perspective. I do have a problem with the suggestion that banks need the reserve balances before they can make a loan–and there’s quite a bit of Fed research to back me up on that which I have cited in the past–but that’s not germane to your query.

    “I don’t think the MMT description allows this “withdrawal of reserves”.”

    Yes it does. It’s central to it.

    “Under MMT, the stressed bank has to reduce its assets or go to the discount window.”

    How do you suppose the bank received the reserves from the Fed? The Fed never “gives” the reserves away, it lends them either overnight (discount window or other standing facility) or intraday (overdraft) or does an asset swap (open market operations). The article is describing this process.

    “Perhaps it can do the former by buying UST from the Fed, which debits its reserves, and selling those UST. Perhaps it can do the latter using reserves as collateral. But both of those are quite different operations to the one described. The former is a monetary operation.”

    I have no idea what you’re referring to here, unfortunately. I think you’re reading something into MMT that isn’t there.

    “Do you have a source which states quite categorically that reserves may not be used for settlement within a bank’s lending and borrowing operations ? Eg a clear legal distinction between reserves and money used in the settlement of commercial transactions. (I have read that notes are reserves, but that may be wrong, and may be de minimus.)”

    Again, I don’t know what you are referring to. MMT’ers make no claim whatsoever that “reserves may not be used for settlement within a bank’s lending and borrowing operations.” Indeed, I have stressed in my research that this is the primary thing they are used for.

    I hope that helps. If not, you might cite the portions of MMT that appear to you to support your interpretation above and we can go from there.


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

    Vincent, foreigners mainly acquire tsys as a result of their trade policies with the USA. So, your idea of foreigners dumping tsys really means that foreigners will just stop doing business with the USA. IS that a realistic reality? Do you think China is going to effectively fire millions of domestic workers so they can “dump” Tsys?

    Do you see where you analysis is flawed here? I think if you started to connect some of the dots here you’d recognize why your forecasts have been wrong.

  • kim


    Many many thanks for taking your time to read my post, download and read the file and for the extensive reply to what I now realise was a badly informed question. Your reply switched the lights on for me.

    I do need to rethink MMT to adjust my understanding of its implications but in short:-

    The reserves created by QE are neither given away nor returned to the bank holding them (that would be printing money). Rather, they are lent.

    The fact that the Fed holds so many reserves right now just means that it has a “demonstrably” large capacity to support the private banking system in lending. But it always did, just this time it has created the reserves in advance, rather than on demand. This does not in itself stimulate bank lending (whether reserves are relevant or not), nor increase the risk of inflation.

    Once again, many thanks for your effort and patience. I shall keep reading !


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

    Look at the data, on net they dumped $17 billion treasuries last month. Why do you make the incorrect prediction that they have to fire people in order to dump treasuries?


  • Scott Fullwiler

    Hello Kim,

    Please feel free to keep asking and keep critiquing!


  • Jb

    Cullen I’ve a question for you re QE and money printing that is not clear in my head:

    The Fed credits the banks reserves when it purchases Treasuries. These reserves could theoretically be lent out, expanding the money supply via the money multiplier mechanics. Expanding the money supply.. Is this not like printing money?

    I would appreciate your view                                           

  • Willy2

    Don’t forget the impact of commodities (especially oil) priced in USD and the relationship with the Foreign Currency Reserves. If all oil were priced in EUR, Yen or CAD starting today then the USD would go down the drain and US interest rates would go through the roof tomorrow. But those things are “”a bit too original”” for the braincells of TPC, aren’t they ?

    When one disregards that it’s bad for one’s portfolio as well.

  • Joe P


    There are couple of things missing in understanding MMT

    – Dollar does not derive it’s value from money management of FED / Treasury / Tax – it purely derives value from ability to exchange dollar for Petroleum, hence the term Petro-Dollars. The Iraq war conclusively proved it.

    – Understanding MMT does not explain the impact of fractional reserve banking on the economy. for eg. When bank creates “fractional” credit/loan from thin air to a corporate entity it can go out and buy capital assets then charge rent on the assets to pay back the bank. When the bank gets the loan money back, bank can again buy assets with that money. This gives the banks huge advantage, the only reason why all large oil companies are owned by the banking families.

    – MMT + Fractional reserve banking system is sinister, it needs to be dismantled.

  • Joe P

    What Iraq war exposed is the very basis of Keynesian money management system of Central Bank / Treasury / Tax. What it proved is money as a social contract is based on redeem-ability of money in terms of energy.

    The financial crisis of 2008 has exposed the “fraud” in the fractional reserve banking system. The legs of the fractional banking has been broken it is now limping along on “bail out” crutches.


    Now the question is there a viable alternate money system possible. Answer is yes ideal money system did exist in many parts of the world – using food grains as money – food grains = ideal money commodity – does not need redemption to realize value = energy.

    Today using food grains directly is not practical, but issuing redeemable food grain bonds as backing for currency system is practical for central bank of every country in the world or even a world bank, becuase to para-phrase Keynes – without food grains we are all dead.

    The banking system fix is to remove cheque issuing capability from banks make all money transactions real time online settlements and central banks should issue large denomination currency notes – transactions of which has to be registered online. This will remove “fractional fraud” from the banking system.