The Power of Understanding Monetary Realism

I formulated Monetary Realism largely out of frustration over politics.  I had basically bounced around from economic theory to economic theory for years and years continually becoming frustrated with various ideologies.  It had become clear to me that every single economic school that exists is based largely on promoting some sort of policy agenda.  For instance, the Keynesians will almost always respond to an economic problem with “more government spending”.  Monetarists will almost always respond to an economic problem with “the Fed can fix that”.  Austrians will almost always respond with “the government can’t fix that”.  Market Monetarists will always respond with “NGDP Targeting can fix that”.  MMTers will almost always respond with “bigger deficits and our government Job Guarantee can fix that”.   They’re all cookie cutter approaches for the most part.  But you could also argue that they all have valuable contributions to make.

I was reminded of all this as I read Dr. Krugman’s latest piece which I think is off the mark.  He says (implying that his approach has not been politically motivated):

“The key to understanding this is that the anti-Keynesian position is, in essence, political. It’s driven by hostility to active government policy and, in many cases, hostility to any intellectual approach that might make room for government policy. Too many influential people just don’t want to believe that we’re facing the kind of economic crisis we are actually facing.

I know, the critics will respond that I’m the one who’s being political — but again, look at how the debate has run so far.”

Keynesians are no different than every other school.  Yes, the author of the “Conscience of a LIBERAL” blog is politically motivated (shocking, I know!).   We know this for a fact because of Dr. Krugman’s harsh criticism of the deficit back in 2003 when it was a Bush deficit driven by the Bush tax cuts.  He said:

“…we’re looking at a fiscal crisis that will drive interest rates sky-high….But what’s really scary — what makes a fixed-rate mortgage seem like such a good idea — is the looming threat to the federal government’s solvency.

…How will the train wreck play itself out? ….my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt. And as that temptation becomes obvious, interest rates will soar.”

Anyone who understands MR knows how flawed this thinking is.  But more importantly, the reason he’s bad-mouthing the deficit in 2003 is because it was driven mainly by a Conservative tax cut approach as opposed to a government spending approach.  Of course, now that the current deficit is Obama’s and driven largely by government spending Dr. Krugman says it’s not large enough.  Talk about having it both ways!

There are, of course, plenty of examples of this in other schools of thought where the thinking is clearly motivated by political cherry picking so I don’t mean to single Dr. Krugman out.  But that’s all beside the point.  The point is, politics and policy agendas shouldn’t steer our thinking.  We should start by understanding the modern monetary system so we can then begin to diagnose specific economic problems as they arise.  Then we can apply the right medicine.  At times it will have a Keynesian flavor.  At times it will have a monetarist flavor.  At times it will have an Austrian flavor.  The economy is a complex dynamical system.  This idea that there is some sort of cookie cutter one trick pony approach to fixing the problems only contributes to making the dismal science that much more dismal.  There’s a better way to approach all of this and it starts with a better foundational understanding of the system and an open-minded approach to solving the problems we will inevitably encounter.


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

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. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • FrankH

    It’s easier to have a strong bias and a strong policy agenda than to try to convince people that they should actually form their opinions based on something they have to learn.

  • krb

    Excellent piece Cullen!

    Can you refresh my memory….

    I understood you to say a couple years ago that deficits are acceptable, but that they should be sized to the private sector’s level of savings? And that how we spend our deficit should be the focus of debate, specifically, how efficient is the spending at creating jobs?

    Do I have these 2-3 points correct, and is it what you still believe?

    My high school and college age sons are in the midst of classroom discussion about these topics and have asked me for comment, and I want to be sure of what I provide them. Thx, krb

  • John Daschbach

    No, we should start by understanding real macro economics at the fundamental level! There is only productivity and consumption which balance. It’s a system that involves billions of flows of these two fundamental components every day. Money is a common medium (but not the only one) used to account for these flows. In fact, there are both explicit barter economies (my late sister opposed nuclear weapons and to keep her income below the level at which she would have to pay income taxes [thus supporting nuclear weapons in her view] she participated an an active barter economy in both Berkeley and later Eugene) and implicit ones (both quid-pro-quo exchanges and more explicit trades of services or goods between two parties).

    It’s critical to understand that the system operates far from equilibrium. This is trivial to show in multiple ways. The price for some assets has almost zero relationship to the productivity required to produce that asset (take Rembrandt’s as an example). The fact that in developed countries, at the median income, less than half of income flows out to support the essentials of life (food, shelter, clothing) and even then, we “consume” far more housing, more food, and more clothing than required to sustain life for the same population.

    Developed economies depend largely on money to account for the flows between productivity and consumption, and MR is useful to understand this aspect of the flows. At the fundamental level, the policy issues are based entirely on how each persons, or their tribes, relative position and power are perceived to vary with different policy choices. The classic Kalecki essay provides a wonderful effort to understand this.

  • SS

    It’s about time someone called out Krugman on his persistent double talk about the deficit. When it was the Bush deficit it was bankrupting the country, but now that it’s the Obama deficit it’s all good.

    What a fraud.

  • Andrew P

    It isn’t just Krugman. Most other politicians do the same thing. Harping about the deficit is for opposition parties. Rarely do politicians of the party in power harp on the deficit.

  • TomPaine

    The job of academics is to pull the wool over the eyes of the populace so their bosses can exploit them. Forget all the financial ‘theories’ theyve been brainwashing you with. (If youre an ‘A’ student, youve probably been very successful at learning . . . . what is wrong.) If you want to get a real education, you would be better served by renting out the ‘Godfather’ DVD movie series and watching it over the weekend. That’s how things really work. This much more useful than what they taught you about ‘economics’ or ‘finance’, and much less expensive.

    As for Krugman, he’s doing what he’s paid to do. The Nobel prize wasnt even originally endowed by Alfred Nobel. They came up with it in 1968 and the endower is the Central Bank of Sweden. Its a bankers prize.

  • Tom Brown

    Krugman kinda-sorta acknowledged the 2003 error though:

    Like I say… kinda sorta.

  • Anonymous

    It’s true he’s very political and I wish he’d stop pretending otherwise, but it’s completely possible/consistent to think Bush’s tax cuts were bad policy and also that the economy RIGHT NOW could use stimulus. Keynesians don’t argue that spending is always appropriate. What makes it appropriate now is the nature of the economy’s malaise.

  • SS

    That’s not what Krugman did though. He used the same fear tactics that the right now uses by implying that the USA was going bankrupt. He was doing the exact same thing back then that he accuses conservatives of doing now. The only difference is the party of the President.

    He’s admitted he was wrong about that, but only because he’s trying to save face rather than admitting that “conscience of a liberal” is a blog dominated by the promotion of liberal talking points when they’re convenient.

  • Frederick

    It’s surprising to me that more people haven’t pointed this out in the past. The profession of economics has been muddied by ideologies. It won’t be fixed until it’s dominated by objective thinkers who aren’t pushing a policy agenda.

  • Rich

    Great post. As described in Jonathan Haidt’s book “The Righteous Mind”, humans usually inuitively,subconsciously and automatically arrive at an opinion or conclusion and then the mind creates the narrative to justivy that conclusion or opinion. Humans, including me, are not naturally “objective”.

    I appreciate your efforts in trying to be objective.

  • Lukey

    I can not recall a single instance of a Keynesian ever arguing for a cut in spending (except in the abstract or in hindsight).

  • Austerity Sucks

    He definitely messed up by endorsing that line using the mythical bond vigilante argument.

    But people evolve as well (and I’m pretty sure you know that he has mentioned as much). Bush’s method of deficit increase through tax cuts was wreckless and inequality-inducing.

    Also the economic conditions back in 2003 were far different from now (as we recover from the deprecession) — the medicine differs from time to time as circumstances differ. If you have full(er) employment and more moderate inflation, you’re more at risk for what Krugman was concerned about. Right now when we’re naer deflation in price level and an unemployment crisis, the variables are different enough where the policy prescription will be appropriately altered as well.

  • liberal

    John Daschbach wrote, “The price for some assets has almost zero relationship to the productivity required to produce that asset (take Rembrandt’s as an example).”

    Completely true, but not the best example, and very revealing in light of “No, we should start by understanding real macro economics at the fundamental level!”

    A much better example than a Rembrandt—better, because it’s a fundamental productive factor—is land.

    Land has substantial value, yet the owner of the land contributes absolutely nothing to that value. (Yes, he might contribute to the *improvements*, but that’s distinct from the land value.)

    What do we call the income that derives from an asset like land? *Rent*.

    In many ways, if not exactly, markets in land behave like markets in collectibles (your “Rembrandt”). Land is in fixed supply, unlike capital and labor.

    Strangely, it’s one part of economics that economists (of all political persuasions) either refuse to understand, or don’t understand. Well, not so strange, given the obvious policy implications, which have been known as far back as Adam Smith.

  • liberal

    But more importantly, the reason he’s bad-mouthing the deficit in 2003 is because it was driven mainly by a Conservative tax cut approach as opposed to a government spending approach. Of course, now that the current deficit is Obama’s and driven largely by government spending Dr. Krugman says it’s not large enough.”

    Yawn. The fact is that the Bush tax cuts were bad policy. It’s also a fact that cutting the deficit now would be bad policy.

    “Of course, now that the current deficit is Obama’s and driven largely by government spending …”

    Wait…I thought we weren’t supposed to be political here. The claim that the deficit is largely driven by “government spending” is a right-wing trope. The deficit is simply the difference between spending and tax revenues. If we’re arguing on _a priori_ grounds, you could just as easily say that the deficit is due to inadequate tax revenues.

    “We should start by understanding the modern monetary system so we can then begin to diagnose specific economic problems as they arise.”

    Sure, I think MR is a valuable contribution to the discussion. But the notion that understanding MR will put an end to debates about political economy is naive at best, and big-headed at worst. MR has nothing to say about economic rents, for example, except for it perhaps being compatible with the claim that bankers are the recipient of a form of rent (government-granted privilege in the creation of money, from which they can extract lots of income). And if you don’t think that economic rent is a big problem for the economy (it is both inefficient and leads to more income inequality—a lose/lose), then you need to get your head examined.

  • liberal

    Frederick wrote, “It won’t be fixed until it’s dominated by objective thinkers who aren’t pushing a policy agenda.”

    It’s impossible to completely divorce economics from normative questions.

    One can do as much of this as one can—for example, I think Cullen is completely right that MMT is unnecessarily muddled because of normative considerations. But the claim that one can get rid of normative considerations entirely is just flat wrong, unless you want to make it an entirely descriptive science with no policy statements at all.

  • Johnny Evers

    Not sure I see that — land’s primary value is in either what it produces (crops, minerals, etc) or whether its location provides economic advantages for trade or business, or standard of living advantages.
    The land has value in relation to its ability to produce value, real or intangible.
    That value is generally unlocked by industry or ingenuity, or in the case of real estate, by the social conditions of the neighborhood.

    Perhaps a better example of Mr. Daschbach’s statement would be parenting. A good parent spends money and time to produce an ‘asset’ (a productive citizen) with no real reward other than intangible benefits.
    Too many economic disciplines — MR included — have no way to measure the value of the labor, time, energy or ‘money’ that gets put into the system.
    Economics is more a part of social sciences than it is a free-standing discipline.

  • Tom Brown

    I think Cullen is well aware that a deficit is the difference between spending and revenue. And I’m sure he doesn’t think that understanding MR will “put an end to debates about political economy.” He invites people to bring their different takes to the table, but the discussion can be a bit more focused if we can all agree on some basics about how the system actually works.

    Perhaps that’s not all clear from this single post, but it is if you’ve been reading this site for a while.

    I’m actually a fan of Krugman in general, but Cullen is correct here to call out Krugman for statements like “But what’s really scary — what makes a fixed-rate mortgage seem like such a good idea — is the looming threat to the federal government’s solvency.” Solvency was never an issue!

  • perpetual neophyte

    As Tom Brown mentions, Cullen may have failed to explicitly clarify in this post, but has in many others that even if everyone understood and agreed on the operational DEscription of MR, you could still have a half dozen different opinions on the PREscriptions for a given environment but that the conversations and dialogues should be much more constructive and productive.

  • John Daschbach

    The Rembrandt example was used on purpose to differentiate it from an asset like Land. I said that the value of “some” assets had no relation to productive value, not that “all” assets had no relation to productive value. Land has both a “real” economic value (what, with the application of human productivity, it can produce) and a “speculative” economic component.

    However, it’s not true that the owner of land always contributes nothing. In fact in the condition of equilibrium I referred to, in subsistence economies where the land is owned by the residents of the land they work to produce food. In this case the owners of the land contribute all of the human productivity to extract value from the land and rent does not enter the equation.

    The point of the post, which was not clear enough, is more subtle. The idea of applying the well developed ideas of equilibrium from thermodynamics to the economy, the core basis of the free market ideologies, is fundamentally flawed. Equilibrium in a closed, isothermal, isobaric system, obtains when all ability to do useful work has been removed. The closest economic situation is the one I have described, where people do the least amount of real work required to sustain life (making the extrapolation that the closed integral in this case requires maintaining a constant population).

    MR provides a useful way to understand the role of fiat currency in our system. But it’s not macro economics. At the core macro economics is describing the flows and balances of real entities in the system (productivity and consumption). Fiat money has zero value and thus does not appear in the understanding of macro economics at the core level. The beauty of thermodynamics is that it describes, so far as we have been able to determine, the core of understanding energy in the physical universe. But the nature of the flows of energy embodied in this are not at all part of the core understanding. MR is simply realizing that an important part of energy transfer in our economy occurs through money as well modeled by MR. It’s akin to saying that the energy balance between the earth, Sun, and universe (agreed, not a perfect closed system, but contrary to what some people say, it’s close enough) is primarily dependent on radiative transfer. But when I cook I use more than one method of energy transfer, radiative and conductive. It’s completely possible for the global economy to behave in this fashion as well (although it doesn’t for the most part). The US may choose to have a fiat currency, but it’s possible for other countries or blocks to adopt another system. The Saudis, or others, could base their system upon something else, like gold, and require all payment for oil was in gold. But, at the global level, the macro economics, are independent of these choices.

  • Cullen Roche


    Macro is about understanding the aggregate parts of the economy. MR emphasizes that ANYTHING can serve as money and many things DO serve as money. I focus on fiat money because it is the dominant form of money and by far the most important form. You might believe there are forms of money that are more important than fiat money, but fiat money is BY FAR the most dominant form of money. It’s as I am discussing modern cars and how they’re designed and you’re here criticizing me because I don’t talk about solar powered cars. Ironically, you’re making a micro argument within a macro picture. I am focusing on dominant trends, the most important forms of money, the most important institutions, the dominant trends in behaviors, the dominant pieces of the economy, etc.


  • John Daschbach

    No, not at all. I don’t think your reading what I wrote critically. I said that MR provides a useful way to understand the role of fiat currencies in the system. And I clearly made the point that other countries may choose another system and gave a fictitious example of the Saudis requiring payment for oil in gold. I tend to think that MR is a more useful model than other extant models, but all models have limitations.

    But my view is decidedly non-micro. I absolutely start with the real economy, production and consumption. I have made the point, based upon both this thinking and evidence from having lived in 3rd world countries and having friends who still live or work in these countries. I don’t have a good calculation, but I can conceive that across the entire world population, fiat money is, even today, not the dominant form of economic flow on a per-capita basis.

    So, to someone who’s background is like yours in the business and finance world, what is dominant is, as you say “the most important institutions, the dominant trends in behaviors, the dominant pieces of the economy”. This is a statement based upon a limited view of the world and a narrow intellectual breadth in thinking. One can easily find a robust academic literature that disagree with such a bold statement as “the most important institutions”. Many argue that the family, tribe, clan, ethnicity show institutional robustness that far exceeds both in strength and duration what you appear to be referring to as the most important institutions. Similar arguments are cogently made by many on the other issues you refer to.

    I’m not taking a position against the relevance of MR to understanding the money flows in the current system in which I currently reside. I find your insight greatly mirrors my thinking on the large scale micro financial system in which I am embedded. My investment history has had ups and downs, but my personal understanding of the system has resulted through some combination of thinking and purely stochastic events, resulted in a nominal return over the past 28 years that exceeds 10%/year. I think over almost 3 decades that’s a reasonably good performance. Sure, some, or most is luck, even given how much data analysis I put into it (I bought Apple late, at $35, and sold early, at $170, but it paid for my current house).

    But I think it’s critical to think about macro economics from the perspective of thermodynamics. Human productivity, integrated across the globe, is probably an order of magnitude or more below it’s potential. This has very little to do with MR as you view it, and everything to do with relative power and policy. What disturbs me is that you have quoted Kalicki in the past, who had a valuable understanding of this, yet you appear to be disregarding this in your response to me.

  • Cullen Roche

    You’re absolutely wrong about this. It might be true that most transactions in the world occur outside of the realm of fiat money, but the vast majority of output is generated in countries using a fiat currency due to transactions within that fiat currency. If you can prove otherwise I’d love to see actual evidence rather than vague statements. Macroeconomics, being the study of aggregates within the system, therefore should focus on the components which most influence the overall system. The fact that millions of people trade black market forms of money in third world countries might be important, but in the grand scheme of global output, they’re far less significant than you seem to think. That said, I am very aware of the global nature of the macro system which is why I’ve focused so much of my time on Europe in recent years. So I am confused why you seem to think I have such a narrow view of the macro world….I might focus primarily on the USA, but I am very aware that the system is becoming increasingly globalized….

  • John Daschbach

    Cullen, it all depends on how your normalize observables. If you measure the economy in terms of how many people are sustained then your measures are distorted. In fact, the data show one of the strongest factors in all of macro economics is that the ability for individuals to accumulate financial assets to support their (potential) future consumption needs when they are old is correlated with (far) lower rates of chosen fertility.

    We can normalize in a weighted fashion with a huge range of observables. As a simple gendanken experiment, consider if the primary metric was number of progeny per couple (as it has been for almost all of human history).

    But by focussing on Europe, which is a diminishing part of the world population, you basically make clear that your view is financial and not true macro economics. It is no doubt true that the flux of financial assets, measured in terms of some normalized value of financial assets, takes place in the realm in which you (and I) engage. But if we choose another metric, like how many hours of hard labor a person puts out per day, the normalized measure is very different.

    Because people are the primary component in productivity, any viewpoint that does not treat this as the primary component is fundamentally flawed. A physicist, like myself, views the world in terms of real (fundamental) observables and the factors that impact the relationship between them. Much of the world of economics is based around a fascination with secondary or tertiary factors.

    MR is useful. I like it. But it’s not macro economics from the perspective of a physicist. And if you accept Western logic and science, that’s provable.

    If you accept Western logic and science as part of the basis for your world, then you have to accept that the economies of developed countries are at best, meta-stable, and far from equilibrium. How we achieve optimum local stability is hugely dependent upon political choices.

  • Cullen Roche

    Well, I am no physicist so we’re obviously viewing the world through different lenses! The field of macroeconomics encapsulates the study of the an economic system’s aggregates and how output relates to the various sectors of that system. In my MR paper I describe the human drive to innovate, produce and consume as “The fuel in the car that motors the economic system”. So again, I think you’re misrepresenting the obvious fact that humans are the central component of the macro machine presented in MR. I just figured this was obvious and didn’t require a great deal of detail further. Of course a monetary system is secondary to the existence of people. After all, there is no money system without people. I don’t think that needs a great deal of explaining, but maybe you think I am wrong…..As for Europe – it is one of my many focuses as you should know. It’s been en exceedingly important one in recent years as well regardless of how much you think their economy might be on the decline. That said, I track much more than Europe and the USA….

  • InvestorX


    Krugman is a shill. Don’t be, please.

  • InvestorX


    I think John is trying to point to you that you are focused on mostly nominal values represented by money as you deal with aggregates of money values, not real values.

    For example, fiscal deficit can be spent to dig ditches and fill them up and there is monetary value (and probably redistributory value), but no real value behind it. yet you would still count this as nominal GDP growth and improvement of “our standard of living”. It is tre that the price of something could reflect its value, but not always.

    Nominal money values (prices) are often like the shadows in Plato’s cave, yet your focus is mostly on them (Not that I know a better way to deal with the problem, but for example an aknowledgement that “idle resourcs” or “GDP output” are not a homogeneous mass of pulp that can be “unidled” fully productively by fiscal deficits in a recession is a start).

  • Joe T

    some economists like krugman believe that it is perfectly ok to use violence to take something that doesn’t belong to you. others believe the ideal is voluntary contracts. therein lies the argument. this isn’t about policy, it’s about understanding that trying to control someone else is immoral. a central gov’t formulating policies is a concept which needs to die right along with paper book stores and the us postal service. we need to move on.

  • Tom Brown

    Good luck with that! That sounds like an ideal all right… like a utopian ideal!! One that will never be achieved by any lifeform, carbon based or otherwise. Violence and “taking what doesn’t belong to you” sound terrible, but lie at the heart of the struggle to the death over limited resources which constitutes one of the basic qualities of living things (the other two being self replication and heredity).

  • Tom Brown

    A shill, for who? I was critisizing Krugman here…