Understanding Inside Money and Outside Money

One of the keys to understanding Monetary Realism and the modern monetary system (see full explanation here) is understanding the various forms of money that exist within the system.  For this piece I am going to focus on the system as it’s designed in the USA to describe the various forms of money and their relationship to one another.  

Money, as it exists in a modern monetary system, is a social construct that serves primarily as a medium of exchange.  Money also serves other purposes, but for this piece we will focus primarily on its most basic function.  As a social species we exchange goods and services via the use of this tool.  Throughout history many things have served as money and still do serve as money.  The most prominent form of modern money is fiat money.  Fiat money is a specific legally mandated unit of account.  These forms of money have no inherent value.  That is, this money is not a physical “thing”.  Instead, it serves as a specified unit of account by virtue of law.  In the USA, the US Dollar is the legally mandated form of money that we use as a medium of exchange and unit of account.

To understand the structure of the US monetary system it helps to understand why we have the system we have today.  The USA was founded on the idea of a market based economy with deep skepticism towards centralized government powers.  Thus, the design of the system in the USA has always remained consistent with keeping the power of money creation from being controlled entirely by the government.  Money creation in the USA is dominated by a private oligopoly that competes for business.   But this system designed around private money issuance has proven terribly unstable at times and in need of a stabilizing force.  What has evolved over the course of hundreds of years is a complex private/public hybrid system.

Money is primarily distributed through the private competitive banking process.  Banks compete for the demand of loans in a market based system.  The primary form of money in existence today resides in bank accounts as bank deposits.  These deposits exist as a result of loans.  Loans create deposits and banks can create these new loans independent of their reserve position.  It’s crucial to understand that the money multiplier is false.  Banks do not multiply their reserve balances.  Instead, banks lend first and find reserves later if necessary.  This mechanism to distribute money is essentially a privatization of the money supply to an oligopoly of private banks.  That is, the form of money we all utilize on a daily basis is controlled almost entirely by private banks (though it’s growth is largely contingent upon demand).

This form of bank money is called “inside money”.  Inside money is created inside the private sector.  Inside money includes bank deposits that exist as a result of the loan creation process.  It is the dominant form of money in the modern economy and as the economy has become increasingly electronic it has taken on an increasingly prominent role in the modern economy.  Money is no longer a physical thing, a cash note or a gold bar.  Its most common form is now numbers in a computer system.

But inside money is inherently unstable as the entities that issue this money are inherently unstable.  The 1800′s and early 1900′s, for instance, experienced substantial volatility in banking as an inherent conflict of interest developed.  Banks, as private profit seeking entities are inclined to maximize profits at all times.  As Hyman Minsky once noted, “stability creates instability”.  This is particularly true in banking as economic stability tends to result in banks relaxing their lending standards to maximize loan creation and profit potential.  But this stability is often a mirage that results in future instability and often banking crisis.  Those who understand the credit crisis of 2008 know this all too well.

The early 1900′s were a turbulent period in US banking history that resulted in massive changes.  The US government created the Federal Reserve System to create a stabilizing entity for the private banking system.  This independent entity would serve as a buffer that avoided having a nationalized money system (where all money was created and issued by the government) and maintained the private competitive money issuance system.  Prior to the Federal Reserve System the USA had what was essentially rogue banking dominated by these private entities.  And when one of these entities experienced a crisis the system was often thrown into turmoil as Bank A would refuse to settle the payment of Bank B due to solvency concerns.  The Federal Reserve system reduced this risk by creating one cohesive and internal settlement system.  The interbank market is the banking market controlled and regulated by the Federal Reserve.  Banks are required to maintain accounts with Federal Reserve banks where they maintain deposit accounts.  This creates one clean market where banks can always settle payments and where the Fed can intervene and provide aid and oversight where necessary.

As the Fed has explained:

“By creating the Federal Reserve System, Congress intended to eliminate the severe financial crises that had periodically swept the nation, especially the sort of financial panic that occurred in 1907. During that episode, payments were disrupted throughout the country because many banks and clearinghouses refused to clear checks drawn on certain other banks, a practice that contributed to the failure of otherwise solvent banks. To address these problems, Congress gave the Federal Reserve System the authority to establish a nationwide check-clearing system.”

The Fed system was created to support the private for-profit banking system.  So, in a sense, the Fed is a servant to the banking system as its design is consistent with a mandate to always support the private banking system.  This system helps to maintain private competitive banking while also leveraging the strengths of the Federal government to create a support mechanism to help keep the banks from imploding on themselves due to their inherent inability to properly manage risk.

This brings us to the other form of money in our monetary system – outside money.  Outside money is money created outside of the private sector.  This includes cash notes, coins and bank reserves.  Although cash is quickly becoming obsolete, it is still a prevalent form of money in many economies.  This cash form of money primarily serves for convenience purposes that allows one to draw down a bank account of inside money to make transactions in physical currency.  Coins serve a similar purpose, but are becoming equally obsolete as the modern economy evolves into a fully electronic system.  The most important form of outside money is bank reserves or deposits held on reserve at Federal Reserve banks.  These deposits are held for two purposes: 1)  to settle payments in the interbank market; 2) to meet reserve requirements.  Reserves are also how the Federal Reserve implements monetary policy via changes in the level of reserves, but this brief essay will not touch on this subject.

What’s crucial to understand here is the way that outside money serves primarily to facilitate the existence of inside money.  That is, the creation of outside money is almost entirely a facilitating feature to influence or stabilize inside money, the primary form of money in the economy.   Through its vast powers the government can serve as an important stabilizing force in a system that is designed primarily around private competitive banking.   Private competitive banking is not inherently evil.  But like any system it can be corrupted by its users.  And as a social construct, we have the need to properly regulate money as its corruption has far reaching impacts.  The system in the USA is probably the most developed of all the monetary systems in the world.  It is not perfect and one could even argue that it remains deeply flawed.  But it is the system we presently have.   This brief essay is intended to help shed light on the basics of this system and the important forms of money that exist within that system.

 

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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Comments

  1. I sometimes wonder if we should avoid calling reserves “money”, as doing so only seems to add confusion. After all, the public can’t use reserves to facilitate exchange. Calling reserves “money” seems to be at the root of the mistaken belief that QE is inflationary.

    • “There can be no doubt that besides the regular types of the circulating medium, such as coin, notes and bank deposits, which are generally recognised to be money or currency, and the quantity of which is regulated by some central authority or can at least be imagined to be so regulated, there exist still other forms of media of exchange which occasionally or permanently do the service of money. Now while for certain practical purposes we are accustomed to distinguish these forms of media of exchange from money proper as being mere substitutes for money, it is clear that, other things equal, any increase or decrease of these money substitutes will have exactly the same effects as an increase or decrease of the quantity of money proper, and should therefore, for the purposes of theoretical analysis, be counted as money”.
      – Friedrich Hayek, Prices and Production, 1935, p. 96

  2. Great essay. I think you should add this in its own section in your big paper on the monetary system.

  3. I still don’t understand the inside/outside money distinction or what purpose it serves.
    Loans create deposits. No problems here. Banks create loans which generate a deposit somewhere else in the financial system with money that wasn’t there yesterday. First question- Does MR believe that public loans (sovereign debt) create deposits as well? I believe the answer is yes, but this outside/inside discussion blurs things for me.

    Then- Loan is made, deposit is created, “Inside” money increases. But doesn’t that deposit become some “outside” money sooner or later? When that deposit is created how can it not be either turned into cash notes or added to the depositor’s bank’s reserves? I suppose that bank could go buy an asset with that money, but then the recipient is in the same situation- cash it out, or add it too bank reserves. So by that logic, all money is outside money, and most/all (see question 1) is inside money too.

    • Paciocco,

      I beleive MR would say that public loans (sovereign debt) “recycles” or “uses” inside money, not that it creates a new deposit. When looked at it that way, your blurryness should clear up.

      To reiterate a point Cullen often makes: MR says that outside money most facilitates inside money.

      With that said, I have an issue with Cullen’s description. I’ve asked him about it, and he’s kindly responded. But so far I’m unable to wrap my mind around it and am thus still unsatisfied with his explanation. That is: is ‘outside money’ a NECESSARY feature of a properly functioning banking system where ‘inside money’ is the dominant form of spendable money in the economy.

      To me it seems like it is (because of compounding interest). I may just not fully understand what I’m talking about though.

      • Don’t primary dealers expand their balance sheets when they extend credit to government in the primary bond market? That means new banking liabilities, i.e., new “inside money” created by the banks.

        • The answer is not so cut and dry as you might like. It depends. In the example I used above where the buyer is a Tsy Direct customer the money to buy t-bonds comes from existing inside money. For simplicity, this money is simply recycled. The question of where money comes from to buy bonds at auction is much more complex than that though because of the way the securities are issued. For various reasons, tsy securities actually trade before they are even publicly sold in the “when issued” market. So, technically, the securities trade entirely on inside money before the auction process is even completed. This is highly technical. You might review this process here. http://www.newyorkfed.org/research/current_issues/ci11-2.pdf

          Another point of contention is the view that the banks don’t hold their inventory. They divest non-banks of their deposits by on-selling their inventory. So one could even argue that the creation of inside money in this process is actually negated by virtue of the bank holding the deposit. Either way, this all starts with inside money as the govt does not use outside money to spend. It uses inside money to spend.

      • The example I usually use is Tsy direct because it’s the easiest one to understand. If you buy a bond via Tsy Direct you are recyclying inside money through the system. The Tsy is borrowing your inside money to spend on something else. And the system receives a net financial asset in the form of the bond.

        You might be more satisfied with my answer if I describe the banking system like an old man who walks with a cane. Is the cane necessary for him to walk? No, but he’s unstable and could fall at any time breaking parts of the system unnecessarily. The cane (the govt and fed system) is a support mechanism. It helps keep him upright.

        Hope that helps.

      • Thanks JK.
        I’ve been thinking about how public loans being recycled money combines with the idea of QE being only an asset swap. Good post over at FTAlphaville on this today, haven’t really processed it though.

        Anyhow, my second question though still stands unanswered. Maybe you addressed this when you mentioned how Cullen describes outside as facilitating inside, but I don’t think that’s completely cleared it up for either of us.

        Perhaps my question can be better restated as this: When is the medium of exchange anything other than cash notes, coins, or reserves?

    • Inside money actually stays as inside money. It must for functional purposes. So, when you take cash out of the ATM someone obtains that cash and deposits it back in the bank at some point. This is just a drawing down of the account for transactional purposes. It is literally impossible for the banking system to be drawn down into 100% cash. Even in an armageddon situation the whole banking system would implode before this occurred.

      Also, reserves don’t get transformed. Reserves are held at Fed banks as a % of inside money. These are loans made by the Fed for regulatory and settlement purposes. Outside money is independent of inside money in this sense. Think of them as two separate things and do not blur the lines between the two.

      Hope that helps.

      • Are taxes piad with inside money? Said another way, are taxes transferred into outside money during tax payment? What does the U.S. government “receive” ?

        • What does the govt want? It does not want its own money. It wants your money. It wants inside money. When you pay your taxes you pay with inside money. Mosler likes to use the cash example, but no one pays their taxes in cash so he might as well use a gold bar example. It’s equally silly. The govt gets inside money, which settles in outside money and gets spit out on the other end as inside money. So ultimately, the govt wants inside money so it can credit accounts with inside money. To blur this process because of the reserve settlement process is a crime against logic and a serious misrepresentation of the way things actually work.

  4. would you consider the origination and securitization of mortgage loans as an increase in “inside” money?

    Also, during the events leading up to the 2008 crisis, I have wondered if something as simple as a requirement for loan originators to keep a portion of each loan securitzed might have been enough discipline on underwriting. it would have been an automatic capital control as those originators used up capital with those set-asides.

  5. Cullen,

    Can you explain how inflation develops under MMR? Does the velocity of money concept still have validity?

    Is this an incorrect statement?:

    “Inflation is always and everywhere a monetary phenomenon.” —Milton Friedman, 1963

    Thank you,
    Franc

    • Inflation can develop in many ways. You can have cost-push inflation which is the result of things like an oil supply decline. You can have demand-pull inflation which is the result of various things. Primarily, it is the result of a strong economy and producer pricing power. This is relatively benign and is consistent with a relatively healthy economic environment. Or you can have the really bad kind of inflation which is demand-pull due to production collapse. This is generally consistent with a very high or hyperinflation. In both cases, it is too much money chasing too few goods, but one is an extreme production collapse whereas the other is consistent with production increase in a strong economy.

      The key to focus on is demand outstripping productive capacity. But understand that inflation can occur when production is increasing and can also occur when it’s collapsing (but this is highly unusual).

            • Thanks, that was quite good. I was more concerned about MR either ignoring or denigrating the concept of velocity than anything else. Austrians for example, as you probably know, grant that it exists but then basically ignore or dance around it,

              I actually much prefer the view from 20,000 feet or more, and only get down to the nitty gritty when I have to. It’s too easy to blow up on nuances like word choices when at lower and more detailed levels.

          • Ya, I just noticed you didn’t include a monetary push inflation in your list so was wondering if that’s something that is also a possibility in MR.

            Maybe not at QE levels today, but at a theoretical point I’m pretty sure you’d agree that it is possible to have monetary push inflation.

            Wondering if you have an opinion as to what level that is.

            • I still don’t know what you mean when you say the central bank prints money. Are you referring to the creation of reserves via something like QE?

              • Ya, since I view base money as the lone form of USD in the economy, my question is basically: can increasing reserves impair the value of reserves or currency via QE?

                Maybe it’s a little clearer if there were a form of QE in which the Fed simply increased reserves without buying assets on the other side. What would happen if the Fed just added an extra 0 onto the reserve account of every member bank without asking for any asset in return.

                Would that affect the value of reserves/cash/USD?

          • Maybe we could define inflation a little further too.

            Are we talking about rising price levels or depreciating value of currency? I think the two are different but extremely difficult to measure in practice because it’s almost impossible to isolate the variables. Rising price levels can be driven by changes in output, the value of the currency should be (relatively) output agnostic in my opinion.

  6. Excellent piece, Cullen. A couple of questions. In the first paragraph, you used the term “medium” in two different contexts, i.e. “medium of account” and “medium of exchange”. Was that intentional, or did you instead mean “unit of account” for the former?

    Secondly, you said that Outside money consists of currency and reserves. Does that mean you do not consider Treasury securities (the third leg of the NFA stool) as outside money?

    • Record of account might be better.

      T-bonds are securities. They are “money-like” instruments like stocks and corporate bonds. But they are not inside or outside money. They are simply a claim on some underlying output. I would argue their “moneyness” is higher than corporate stocks and bonds though because the govt has a perpetual revenue stream whereas corporations do not and therefore are inherently lower in credit.

      • Thank you for the reply, young man. I definitely agree that T-securities have a very high degree of “moneyness”. The fact that both US dollars and US T-securities are liabilities of the federal govt also lends support to this argument. They are pretty much inter-changeable. See QE.

  7. Interesting new terminology — i.e. “inside” and “outside” money.

    I find Wray’s pyramid of liabilities much more helpful in understanding the financial system, however…

    • Wray says high powered money is “leveraged” by banks. That’s another false version of the money multiplier. MMT is wrong. MR has been saying this for a long time now. Where have you been?

    • It’s only “new terminology” if you don’t know what MR is. Wray’s pyramid of liabilities is based on the same false understanding that much of neoclassical econ is built upon. It starts with the govt and builds out. The reality is that we have a monetary system designed around the private sector and money creation is dominated by private banks. The most important piece of a pyramid is its base, not its capstone. and in this case, just about the entire pyramid is inside money. To misrepresent the capstone as the key piece of the pyramid or to describe inside money creation as a “leveraging” of outside money is entirely wrong and will mislead people to believe an assertion that is incredibly similar to the money multiplier (though worded slightly differently). They’re both wrong.

      • That banks write liabilities denominated and ultimately settled in govt liabilities is a fact, not a theory. Hence the pyramid: you always promise to repay with higher order liabilities. So you can’t repay a bank loan with your son’s IOU and bank also promises to pay govt money on demand, not some bank’s customer’s IOUs. Only govt liabilities are special: since they are on the top of the pyramid they promise to repay… identical liabilities. Nobody else can do that and have his liabilities accepted. A GBP 5 pound note says “a promise to pay 5 pounds”. No multiplier is ever involved.

        It is not a matter of starting with government but observing the reality of how the monetary system is structured. Not that there is anything wrong with terminology of “inside” and “outside” money, I think this is standard terminology. Always good to define clear terms and stick to them.

        • “That banks write liabilities denominated and ultimately settled in govt liabilities is a fact”

          Transactions within the same bank do not “ultimately” settle in govt liabilities. You are not stating facts. You are regurgitating myths propagated by MMT. It is 100% factually incorrect to claim that all transactions ultimately settle in govt liabilities. They absolutely do not. This alone proves your point wrong.

          MMT has built this incorrect understanding designed around the reserve system. I am sorry to break it to you, but it’s totally wrong. It’s as mythical as the money multiplier and it takes only a one bank example transaction to prove it wrong. Rewording the money multiplier as “leveraging” (as Wray does) does not make it any more correct. You’re just creating a relationship to satisfy the MMT myth about the govt being the money monopolist (which is patently absurd when you rant about banks issuing money on a daily basis as Bill Black does)…

  8. Excellent piece Cullen!

    As I understand it, the current design of private banking and fed banking can have positive, stabilizing benefits. But it also appears clear that it can be abused by capture of the fed. We always discuss how fed capture by politicians must be avoided, and that is true. But your simple and clear description seems to also show that fed capture by the profit seeking private banks must also be avoided…..and that never gets discussed. In my view, the lack of fed oversight and restraint of private bank gambling, over leveraging, etc is what significantly lead to our global collapse. And now the fed’s ability to create reserves is being used to bail out the same banks who were guilty of the bad practices, which should have been prevented by the same fed oversight doing the bailing out!!

    This is a HUGE flaw in the design…….and like the way water will find the hole in a bucket a profit seeker will find the weakness in a system of oversight and support.

    From your description, fed independence from the private banks it is suppose to be overseeing is at least as important as independence from the politicians who would manipulate it for their own selfish pursuits…….the private banks just did the same thing to it the last several years. Private bank servitude seems like the WORST way the fed bank’s role should be viewed.

    I mentioned several weeks ago that perhaps fed bank leadership ought to educate, campaign and be voted into office by the public like politicians are…….I feel even stronger about it now. Perhaps the “end the fed” crowd would be more likely to improve the system if they chose to support the fed instead, by making it MORE independent from BOTH the politicians AND private bankers who will attempt to capture and corrupt it.

    Your clear description of how the system SHOULD work makes me even more angry than before at the incompetence of Greenspan, Bernanke and Geithner in their fed bank culpability for the crisis we’ve experienced. krb

    • I have said it before here: The Fed was created and still serves the banks’ interests. Its major function is lender of last resort, i.e. to bail out overstretched FRL banks. All the other “economic management” (aka central planning) is a smoke screen / enables the state to get in debt (and pay interest to banks). I came to this conclusion myself by observing its actions (not words).

  9. “Although cash is quickly becoming obsolete”

    Hardly!
    Currency & coin growth is growing at roughly 4x GDP, well over 10% per year.

      • I wish you wouldn’t have made the statement such a sweeping generality then.

        I also submit that the “black” market will always find a use for things like currency or similar.

      • I’ve also never been terribly find of it being different this time. I’ve heard about cash disappearing as far back as the 70s, and it has over 20x’ed since then… which is way than than M2 growth since the 70s.

        • I’m not making it up. There are countries that are literally getting rid of cash. The fact that the USA still issues it doesn’t mean its of some higher importance than other types of money. It just means we’re all still obsessed with being able to touch and feel our money. Which is silly.

          I think we need to move past this obsession with money as a physical thing. Slowly, we are….

          • I believe that you still substantially undervalue the black market, numerous and real privacy issues, and just simple history.

            Characterizing it as an obsession doesn’t change those and other significant issues, and has little to do with touch or feel… although I have been known to infrequently enjoy playing with gold coins in Uncle Scrooge. -g-

            And I don’t think you made it up either. What I’m questioning are the very real points about privacy, etc. Folk have been calling for cash to disappear ever since credit cards started to be significant in the late 60s.

  10. Cullen,

    How does the existence of shadow banking impact your definition of “inside money”? — can it still be simply defined as bank deposits, or is it more complicated than that?

    • Shadow banking is the creation of “money-like” instruments. Important to understand, but well beyond the realm of this discussion.

      • So would you agree that the scope of “inside money” is not confined simply to deposit accounts at commercial banks? I would think that the amount of “money-like” instruments such as repurchase agreements and money market funds far outweigh the amount of bank deposits within the system. I feel that the emergence of shadow banking has muddied the waters on this topic.

  11. One question. How do you deal with the theoretical problem of the extreme example, with the theory of “loans create deposits” – in that, if reserves were set at 100%; clearly there would be no loans.

    I think the starting point – that money is spent into existence is undeniably true and accurate. It is also obviously true that banks lend in accordance with their capital to a greater degree than they’re effected by reserves (particularly with IOER) – however, I’m not sure I’m entirely convinced about the loans first theory. It lacks theoretical compactness.

    Of course, the US banking system is ridiculously simple – the Canadian even simpler, but when you look at banking systems like India or even China – you get into SLRs, CRRs, etc – and in those systems it’s an undeniable reality that banks are in fact liquidity constrained. Central banks in those systems use cuts to SLR ^ CRR for the precise function of injecting liquidity into the system. I think there are perhaps shades of grey in here.

  12. I still think that it is flawed to say that bank deposits are USD for many reasons that we’ve discussed in other discussions.

    Just as a t-bill is “money-like,” deposits are “USD-like” in that they are money at zero maturity (MZM).

    Saying that the USD is the domain of the federal government is not a subscription to a conspiratorial government controlled view of the monetary system. Money is a broad term, USD is a narrow term.

    Almost anything can fit the definition of money a means of exchange and store of value (you have admitted in the past that perhaps even ipods could technically be defined as money).

    In this sense, banks manufacture money in the form of deposits, this is true. And it is a particularly functional form of money in that it is MZM and accessible at a fixed price relative to cash, but that does not make it cash. The important reason that it is not cash or USD is that ever individual banks’ deposits have a value element which is dependent on the credit of that particular bank. True USD does not have such an attachment.

    I will continue to contend that inside and outside money draw the lines of the monetary system at arbitrary points. The simplest and most elegant description of the monetary/banking/savings system is that all savings are composed of a collection of ASSETS which have a tradable value in relation to each other. Each of these assets have a variety of characteristic properties. In the case of USD vs. banking deposits, subtleties in these characteristics mean that they are similar but not equal–perhaps like fraternal twins.

    I guess you could say that the USD and bank deposits are like the Mary Kate and Ashley Olsen of the monetary system. Fin.

    • “The important reason that it is not cash or USD is that ever individual banks’ deposits have a value element which is dependent on the credit of that particular bank. True USD does not have such an attachment.”

      This is an incorrect assertion. First, cash is a pointless construct that is going away with time. There are already monetary systems in the world preparing for this reality. And it is a reality. So, to build an argument around cash is entirely pointless and will be proven wrong with time (is already being proven wrong). To build this argument around reserves or base money is equally silly. Reserves are not utilized for any real economic transaction and only appear to serve a purpose for transactional purpose due to the settlement process between SOME banks in the interbank market. Obviously, all transactions do not settle in outside money so your assertion simply cannot be true.

      You’re describing what is essentially a money multiplier argument where banks create money dependent upon the value of base money when the reality is that there is no real relationship there at all except a spread that the Fed helps (loosely) determine through reserve requirements and rate setting (that’s monetary policy though so it’s entirely separate here). Starting with base money and working out is totally wrong and will get the emphasis of importance totally backwards.

      Further, to claim that the USD has no attachment to value is not correct. Yes, the US govt can always issue USD at $1, but that doesn’t mean the value of that dollars is constant. True, an issuing bank can become insolvent, but a govt can become insolvent in much the same sense. The only reason a govt has any power at all is because it can extract taxes from the private sector. The govt is the biggest rentier in the economy. And when it loses this ability to tax any money it issues is worthless regardless of the numbers printed on it. This is simply a different kind of insolvency than a private sector entity might confront. To claim that 1 USD always settles at par is a concept that is void of value.

      Money does not have value because the govt says $1 is worth $1 or simply to due legal decree. That’s part of the story, but not even the most important part….

      • I think in reality we agree on a lot more than we disagree on.

        1) On the cash point we agree. Physical cash could be going away. However, whether or not there is physical cash is not really important to the argument, and also not what I’m arguing. The point really relies on whether or not there is a central clearing unit, which as you point out in the article is the entire purpose of the Federal Reserve–so that unlike in the 19th century you’re not clearing xyz bank’s currency note at abc bank. USD, “outside money,” is how we have solved that problem in a post-Fed environment. Agreed.

        2) I’m not really saying much about the money multiplier. I will say that it does exist to the extent that a bank has to allow its borrower to spend the loaned funds at another bank. You cannot leverage your bank in a vacuum or loan funds that you cannot reasonably attain.

        3) Totally agree that the USD has an intrinsic value and that the government can become insolvent. This is my whole point actually. USD is different than deposits because of the creditor whose full faith and credit backs the instrument.

        The government’s (more specifically the Fed’s balance sheet) backs the value of the USD. JPM or BAC’s balance sheet backs the value of their deposits. That does not mean that the assets on any of those actor’s balance sheets cannot go bad and therefore the value of the liability (USD, BAC deposits, JPM deposits) can fall.

        • No, I did not say the purpose of the Fed is to settle ALL transactions (which is what your definition of USD requires to be true). I said the Fed was created to help facilitate interbank payments on SOME payments. Yes, the govt uses its powers to support the system, but that doesn’t mean that bank money is suddenly subservient to outside money. It just means the govt is used as a support mechanism at times.

          The govt is like a brace on a football player’s leg. To imply that the govt rules the monetary roost is like saying the knee brace keeps the player from falling down. I think you have the balance wrong. And in my opinion, it’s crucial to get the balance right.

          For some reason, these arguments all revolve around the myth that the Fed system is some pseudo nationalization of the money system whereby the Fed controls the money supply and the value of money simply by creating reserves. If anything, the Fed system confirms the privatization of the money system as its entire purpose is to support modern private competitive banking. Most of the economists who write about this have it all backwards!

    • I’d like to test your theory that bank deposits are not USD. Why don’t you send me all your bank deposits through wire transfer and I’ll see how many merchants consider them USD. I think those merchants will come to a different conclusion than the one you have.

      • I’d like to test that theory out as well. Anyone who doesn’t think their bank deposits are USD can contact me privately for deposit transfer instructions so we can begin testing this theory IMMEDIATELY.

      • Note I never said that deposits don’t have value only that they aren’t USD. Thanks for your input though LVG.

        You can expect a check from me in the form of all of my deposits. Mysteriously however my secretary will have accidentally added three extra zeros onto the check. She is so SILLY!

        Nevertheless if you could please deposit this check and wire the funds back to me, it would be much appreciated. I can’t explain exactly why I need you to do this, but I am an African prince, so my word is highly credible.

        Also my children are sick, so the faster you can do this the better. Thank you.

  13. What you described above sounds very much like the circuit theory of money (Graziani, Parguez). How is MR really different than that?

    • Agreed. That was sloppy of me. I’ve changed it to unit. Thanks for clarifying JP.

      I’ve read pieces of the literature there. Why do you ask?

      • The free banking narrative is that inside money can be highly stable. Rather than act as stabilizing influences, forces that monopolize aspects of the system (the Fed, FDIC, etc) create instability.

        The Minsky literature says the opposite.

        You’ve adopted the latter narrative. Just curious if you’ve done so after having read both sides, which it seems you have.

        • Ah, yes. I certainly don’t claim to have all the answers, but my interpretation based on my readings and historical review is that inside money is inherently unstable just as all business is inherently unstable (primarily because humans are inefficient interpretors of the market place). Although the private profit seeking form of money distribution is ideal, it must be properly regulated and stabilized so that its inherent instability does not produce outsized market disequilibrium thereby exacerbating volatility in the business cycle.

          I am certainly open to alternative interpretations if you have them or recommend some reading….

  14. Cullen,

    You make it sound like credit money came first, and then notes came in to stabilize the system.

    I tend to think that gold came first, then banks and fractional reserve banking, but this was still based on gold first and leverage later. Gold was slowly-but-surely pulled out of the system to mimic some kind of private/public partnership, where the hard “reserve-requirement” tended to be a thing of the past.

    However, I still view the deposits, which we have the right to withdraw as base-cash at any point, as being representative of our willingess to take our base money, and for convenience and interest-sake, allow the bank to use it within their paradigm, which, due to fed processes, may not be truly “multiplying” our money, but it does expose our money to some risk that the bank & FDIC can’t pay us back when we walk in for it.

    So while I love this article, making it seem like banks “issue” money, and the fed/treasury create other forms of money and payment systems to stabilize it, seems a bit too much. I’d simply say they’ve developed into a symbiotic relationship to a point where trying to separate their roles the way you are is forgetting that there is a circular equation here, and with one (fed) effecting the other (banks) so much, and vice versa, trying to segregate their roles can be as dangerous as it is useful.

    For instance, banks, on the macro level, if approaching their “reserve limit,” have to approach the fed for more lending, do they not? Now the fed will oblige, but it doesn’t have to. Similarly, banks have shown remarkable willingness to participate in treasury auctions, but in a hyperinflationary scenario, they’d abandon that role… so they don’t really “have to” in the end.

    So all we’re left with is what the fed & banks have the POWER to do vs what they’ve SHOWN they’ll do in the past, and there’s such a huge difference between what they CAN do and what they DO do that this discussion becomes very complex, and assigning hard rules like “there is no money multiplier” is a bit hasty. The money-multiplier COULD rear its head again should the fed decide to behave in such a way that means the bank actually WANT my deposits of cash.

    Further, if banks pay interest to people for their money, there must be SOME money multiplier aspect. Because if we are REALLY saying there’s no MM, then why on earth would banks pay us for something they don’t need/want? The fact is, reserves make it EASIER for banks to lend (right?), just as a vehicle makes it easier for me to get where I want to in time. That’s why they pay interest, and I pay for a car. Does that mean I can’t get there by other means?

    I hope this “assertion of a layman” is helpful and well-received. I certainly don’t envy the job of the guy who’s mission in life is to simplify macroeconomics & modern money.

    • Dan, credit money preceded gold by thousands of years. See “Debt the First 5000 Years” by David Graeber.

      • Very interesting. I’ll have fun with my gold-bug friend’s with that one.

        However, it still doesn’t change the fact that the chasm between what fed and banks CAN do vs what they USUALLY do creates some level of difficulty in determining who controls what…

        For instance, the treasury has never minted a trillion dollar coin to put into their account… however they CAN do that, and people here rightly point that out. We know the fed COULD set restrictive reserve limits and make money expensive at the window… we should treat that as a similar possibility, and not forget that what the fed/banks can do and what they actually do in practice are vastly different, and our descriptions of their interactions would be as well if they did some of these things differently.

        I’m not saying you’re wrong, Cullen. It’s just that you COULD be wrong if the Bernanke decided to do things differently.

        • I 100% agree. The gold bugs are just as wrong as the statists. JKH’s contingent institutional approach is all about this. The current reality is that the govt COULD take complete control of the money supply, but instead chooses to outsource money creation to private banks. In the current structure banks rule the monetary roost and govt facilitates/supports. That could change of course and if it did my description would also change.

    • Promises or credit preceded all this. Loans today are just contracts between parties in a much more sophisticated form than promising someone you’ll do something….

    • The wonkier way of saying this is that endogenous money has ALWAYS been the precedent. All of these theories that design money around govt and exogenous money creation are incomplete and provide a false view of the history of money….

  15. “the govt does not use outside money to spend. It uses inside money to spend.”

    So what’s inside the treasury’s account? “Inside money”?

    • Phil,

      You keep doing this. Now, I know you’re a die hard MMTer, but you need to get over the reserve settlement idea. It’s totally wrong. The fact that the govt settles bond purchases in reserves is totally misleading in the MMT material. MMT does the same thing in the interbank payment process. You claim that just because (some) payments settle in interbank money that that is the definitive type of money. Never mind that not all payments settle in reserves (which totally debunks the reserve importance myth in MMT), but you need to understand that payments begin in inside money and ultimately end in inside money. That is, when you buy a Coca-Cola using your Bank of America credit card (which settles at the merchant in inside money), the funds might settle at a different bank requiring a reserve maintenance operation. But the funds ultimately appear in someone else’s account as inside money. If the transaction is done at the same bank then outside money never even enters the equation. You need to stop misrepresenting the importance of reserves in the payment process. They are an intermediary in settling (some) of the payments that all ultimately end up as inside money. You don’t get paid in outside money. And you should stop presenting this argument as though outside money is the type that matters most. It’s misleading and wrong.

      • I don’t question your comments because I’m a “die hard MMTer”, whatever that’s supposed to imply, but because I think they’re questionable.

        It’s well known that there is more “inside money”/bank money in existence than “outside money”, that people pay each other with credit and that transactions within a bank don’t involve interbank settlement. There is no disagreement there with MMT, and it’s also perfectly consistent with the “state theory of money” (Knapp himself discusses the various forms of money in existence, though of course he uses his own terminology).

        The state theory of money isn’t about there being more of this or that money in circulation, about how big or powerful banks are, whether the central bank supports the banking system, or whether government should issue all the money – it’s just about the basic logical structure of the money system.

        Saying that we don’t have a “state money system” because most of the money in existence is bank money is like saying that the gold standard wasn’t a gold standard but a bank money standard because there was more bank money in existence than gold. Today fiat money issued by the state plays the same role as gold and silver coins did in the past. Gold and silver coins were minted and issued by the government and established as money by law. They stopped being used in the banking system, and effectively ceased to be “money” when the government decided to switch to a different system. We now have a money system without any commodity basis at all because in 1971 the government decided that was what it wanted.

        “Outside money” didn’t come into existence with the Fed (which as we know wasn’t the first US central bank either). The silver dollar described in the coinage act of 1792 was “outside money” or state money, as were the Continental notes issued during the revolutionary war, and the scrip and foreign coins used before that.

        Since the beginning of the US, banks have issued their own money in one form or another, with or without a central bank, and their ability to do so has been largely determined by law. During the “rogue” free banking era, what banks could and couldn’t do was still determined by legislation and state regulation as it is today, though it was looser then and there was no state central bank or deposit insurance. During the free banking era gold and silver coins – state money – were the monetary base as fiat money is today, and an inability to redeem bank notes for gold or silver repeatedly caused banks to collapse.

        Now you’ll probably say something like I’m pushing a “government-centric” view to further my “extreme” political ideology, which is not true. I’m not trying to say the government is better than everyone, or that the government should control everything and issue all the money and replace capitalism with communism or anything like that, alright? It would be better to have these discussions without constantly having to face accusations of that sort. Thanks.

        • “Today fiat money issued by the state plays the same role as gold and silver coins did in the past. ”

          That’s absolutely not true. You’re building a money multiplier style argument there. It’s the same as when Wray says banks “leverage” their reserves. They absolutely do not. You just reword the money multiplier in this totally vague and irrelevant form. It makes no sense. The whole MMT description of reserve settlement and taxes is incomplete and misleading. I know you think it’s right, but it’s really not. You can’t say banks “leverage” base money when they very clearly do not. It’s just an attempt to create a relationship where there is none. In the real world, this concept is totally void of value and misleads people as to how the monetary system works.

          It’s not hard to disprove. You just need to understand how a bank makes a loan and understand that the relationship between taxes, payment settlement and lending relate to one another. Marc Lavoie made the same critique in his MMT paper.

          “Personally, I don’t see how anything can be gained by making references to vertical components or to leveraged horizontal components, but these expressions keep being used. They ought to be left aside.”

          He’s right. MMT is wrong. You don’t need me to tell you all this. Just go straight to the endogenous money master himself….

          JKH also crushed this point to death. I know him, I know his background. His experience far outweighs anyone discussing this stuff in the blogosphere or in papers publicly available. He understands banking better than any MMTer. He’s lectured Fullwiler on the intricacies of banking and accounting. And he 100% agrees with Lavoie. That settled the debate in my book. When experts like that come out verifying these points you don’t just ignore them because you don’t like what they’re saying.

          There’s no need for MMT to try to recreate the wheel here just so they can push a vague academic reasoning for the Job Guarantee. You can have a Job Guarantee without the incorrect “money monopolist” theory. But you need to reject MMT to do that. Which is what you guys are all stumped on. Get over it. It’s not like MMT was the first theory that ever came along and was proven to have holes in it. When I am 60 years old some young punk will come along and explain to me how messed up and dated my view of the world is. Welcome to progress. Embrace it.

          • And don’t take my comment the wrong way. There’s A LOT of great stuff in MMT and it’s infinitely better than neoclassical econ. But this stuff about reserve settlement and money monopolists is just wrong.

            • “You’re building a money multiplier style argument there”

              During the gold/silver money period banks could still create deposits at will if they wanted to. They didn’t need to wait for gold coins to be deposited in order to create deposits for borrowers through “loans”.

              But they still had to keep an eye on the supply of gold/silver coins to be sure that they could actually, when the crap hits the fan, redeem those promises, which is what those endogenously created deposits were at the end of the day.

              Today we have a central bank which will either loan money or buy assets in order to keep the banking system solvent, and in order to meet its monetary policy objectives. But this doesn’t change the fact that the base money – the foundation on which the monetary superstructure rests – is still “state money”, just as it was back in the day when gold and silver formed the monetary base.

              Nonetheless, you’re absolutely correct that the “money multiplier” is a myth – as MMT people have been saying for years.

              • You’re just backing yourself into a corner with this stuff. You know that depositors cannot remove bank reserves. And you should also know that we are quickly moving to a cashless economy and that cash cannot be extracted without first having bank deposits. Yes, back in the day money was backed up by gold because that’s what the people actually deposited into the bank and then extracted when they wanted it. Today, no one wants reserves or cash. They all want electronic bank deposits because this money rules the monetary roost. People obtain and receive electronic bank deposits. No one deposits bank reserves so they can extract bank reserves (of course we can’t even use bank reserves so your argument is obviously false). And no one can even get cash unless they have inside money first. So your whole argument is bunk. I find it practically comedic that you use a hard money argument to prove your point. Could you contradict yourself any worse? I don’t see how you can’t see how your argument is wrong. It’s plain as day! Your incorrect gold example makes it perfectly clear.

                But I get it. You’ll never give up MMT because you are invested in it for some reason that makes it impossible for you to admit that it’s wrong. That’s fine. I really don’t care. I am not here to force people to believe something. But when you come here comparing bank reserves to gold I am going to shoot your argument down time and time again so that my readers get a sound and accurate understanding of the system. If you want to spread the MMT gospel and this nonsense about bank reserves being similar to gold deposits then be my guest. I honestly don’t care if you willingly choose to fill other people’s minds with nonsense. Just don’t do it here. Thanks.

                • I think he’s making a sound argument about state money.
                  The dollar has value because it’s backed by the state, not by the banks.
                  The federal government can devalue the currency, print more, change the reserve system, whatever. Doesn’t that mean we have state money?

                  • No, the USD does not have value because it’s backed up by the state. That’s absurd. The USD has value because there is output that backs it up. The only thing the govt does is leverage its ability to tax this output to back up the banking system at times. This doesn’t mean the govt rules the monetary roost. It just means the govt is a very powerful player in the system.

                    • Sometimes you say that we can borrow money because debt is backed by taxing power. Other times you say that we can borrow money because we are sovereign in our currency.
                      It depends on what argument you are making.
                      On one hand, you note that the government has the enormous power of the printing press (which Europe lacks, leading to its current crisis even though the Euro is theoretically backed by an economy as large at the U.S. economy. And yet here you dismiss the government’s other vast powers — to set interest rates, to devalue the currency, to change the reserve rules, even to print a $1T coin.

                    • Cullen, Johnny just made an interesting point about what we have read here, but I can’t reply to his post as the reply button is missing, would you be so kind as to reply?
                      Thanks

                    • OT: I guess I can Reply, Why are the Reply’s missing at the bottom of some peoples post but stay at the top? Is this a parent style platform of posting? It seems to change as post get added.

                • “You know that depositors cannot remove bank reserves”

                  If I deposit $100 in a bank, I can remove that as cash. Bank reserves are cash in electronic form.

                  “we are quickly moving to a cashless economy”

                  That is true. and it is true that the move towards credit as the predominant form of payment increases the position of banks within the money system. But this does not, I think, change the basic logic or structure of the money system itself.

                  “back in the day money was backed up by gold because that’s what the people actually deposited”

                  Not necessarily. Gold or silver coins, or later bullion, was simply the base money form, as is central bank or treasury money today.

                  “They all want electronic bank deposits because this money rules the monetary roost”

                  You’re absolutely right that bank money is the predominant form of money in circulation today. But again this does not, I think, change the basic nature or logic of the money system. In fact, during the gold standard era, bank money was also the predominant form of money in circulation.

                  “of course we can’t even use bank reserves so your argument is obviously false”

                  Bank reserves are electronic versions of paper cash or coin.

                  “You’ll never give up MMT because you are invested in it for some reason that makes it impossible for you to admit that it’s wrong”

                  Not really. There are aspects of MMT that I disagree with, but I have yet to see much within MR which I think really refutes basic MMT concepts. There are some technical points and questions of emphasis which are worth taking further, however. I definitely think that your emphasis on private equity and inside money is very worthwhile, for example.

                  “when you come here comparing bank reserves to gold”

                  The point I was making is that bank reserves or paper cash are the contemporary form of state money, whereas in the past the basic form of state money was gold and silver coins.

                  “this nonsense about bank reserves being similar to gold deposits”

                  You haven’t really said why you think that what I am saying is nonsense. You have simply dismissed it, without any real argument whatsoever.

                  “Just don’t do it here. Thanks”

                  No debate or dissent is allowed at Pragcap anymore?

                  • “The USD has value because there is output that backs it up.”

                    I think you have a point there. But that does not in itself refute the state theory of money, though it may undermine some of Mosler and Wray’s theories.

                    • It doesn’t just undermine Wray’s theory. It puts a wrecking ball through it. His comments about the monetary system existing for public purpose are totally wrong. His history of money is totally deficient. And when you understand MR this all becomes very clear. JKH was right from the start. MR is post-MMT.

                  • Where do you get cash from? Only from someone else who has drawn down a bank account of inside money. You just skip a step in the process and magically you have outside money as if it’s a bar of gold you extracted from the ground….You’re totally misconstruing the way cash is even obtained. No one in the real economy can obtain bank reserves. And no one can use cash unless they first draw down an inside money account. You just skip a step in the process to rationalize your reserves = gold thinking. It’s not correct as I keep pointing out. You don’t deposit cash in the same way that someone used to keep gold on reserve at a bank. It’s not the same!! When you deposit cash you’re only able to do so because someone has already drawn down an inside money account. This is totally different from extracting gold from the ground and keeping it on deposit at a bank.

                    In the old days of banking, gold was the base because that was what depositors deposited in the vaults. The bankers just realized they could multiply those deposits because no one came for the gold all at once. Today’s system is NOTHING like that system. There are no reserves being held awaiting removal.

                    Of course you can debate here. But you don’t come here to debate me. You’ve been coming here for a year telling me why I am wrong to ever say anything bad about MMT. That’s not debate. That’s just a blind protection of an ideology. I’ve been very open minded throughout this process. From the start of my disagreements with MMT I sought one thing and one thing only – clarity on the actual workings of the system. I disagreed with the money monopolist and it caused outrage. I made a mistake to promote MMT so aggressively because I should have realized its flaws sooner. But I’ve realized the flaws and moved on. I made mistakes. But I’ve rectified them. MMT is great. And I am not here to bad mouth the founders or be cruel. And while MMT is FAR better than most neoclassical econ, I think it’s become clear that some further clarity is needed. MR fills the holes where MMT went wrong. And I think we have the intellectual firepower and understanding to connect all the dots. Hell, JKH and Brett could carry MR on their shoulders if they really wanted to….

                    • “His comments about the monetary system existing for public purpose are totally wrong”

                      That doesn’t follow.

                      Your point is that money is as much a private thing as it is a public thing. This, in itself, is not a coherent argument against the idea that the state issues money and controls the money system (just as it controls the legal system – the two are similar) in order to pursue its goals – independently of any binding dictates from “the market” or any foreign power.

                      Controlling one’s own legal system, and thus one’s own money system, is a fundamental and basic power for any government which wishes to have sovereignty over its own territory.

                      A government which doesn’t have control over its own money is a government which is necessarily controlled by some other power, be it private or foreign.

                      See Greece.

                    • You act like it would be impossible for the USA to ever have any sort of problems just because it has devised this clever system to harness banks as funding agents. That’s totally wrong. The banks and private sector could very easily tell the govt that it cannot procure funds for public purpose. Just study any hyperinflation. Once you lose the output and the govt can’t tax the output that previously existed (see Zimbabwe) then the govt is broken. It doesn’t matter how powerful or how much legal authority that govt has. Robert Mugabe did not run out of guns and power and money. He ran out of private production to tax. And when his govt couldn’t procure funds from the private sector the whole monetary system broke down. Although Zimbabwe could issue Z Dollars it couldn’t procure funds from the private sector and when this occurred the system collapsed. Their govt was most certainly a user of the currency in this regard.

                      I know this is an extreme example, but it’s a very real possibility in any society. To ignore this or claim it’s impossible because the Fed could just print money in such a scenario totally misses the point that the govt is in fact a currency user in some aspect.

                      Regardless, none of this even touches on the fact that it is the private banking system that controls the money supply. You’ve somehow managed to convince yourself that the state controls the money supply just because it settles (some) payments and collects taxes. Sorry, but you can’t complain about banks and their vast powers on a daily basis (as MMT does) and at the same time claim the state has a monopoly on money control. Yes, IN THEORY, the govt could impose its complete will over the money supply. But that’s not the system we have. The money supply is privatized and controlled by an oligopoly of private banks. That’s reality. MMT is some alternative reality that doesn’t apply

                    • “No one in the real economy can obtain bank reserves”

                      Bank reserves are basically Federal Reserve notes in electronic form. JKH makes this point in his “Contingent Institutional Approach” text.

                      “You don’t deposit cash in the same way that someone used to keep gold on reserve at a bank”

                      Do you think that the average Joe had gold in his pocket?

                      Most people went to a bank for a loan, as they do now, and the bank created a deposit for them on the spot, as they do now. The difference between then and now is that the base money – gold/silver coins – was more difficult to come by. There was no central bank that could just magic it out of thin air (that’s the whole point of a gold standard system – you can’t just magic gold out of nothing . You have to kill some Indians and steal their land first).

                    • No one uses reserves for purchases. You know that. They are purely for interbank settlement. Yes, they’re like cash, but only for banks. Not for anyone who actually buys anything in the real economy.

                    • “In the old days of banking, gold was the base because that was what depositors deposited in the vaults.”

                      Gold was only money because Uncle Sam said so. It stopped being money when Uncle Sam changed his mind.

                      “The bankers just realized they could multiply those deposits because no one came for the gold all at once”

                      You’re talking about the middle ages now – a long time before the US got going.

                      “That’s not debate. That’s just a blind protection of an ideology.”

                      Listen, I’m not a “blind ideologue”. I just disagree with some of what you say, that’s all.

                    • Gold hasn’t stopped being money. That’s ridiculous. It’s just stopped being the ideal form of money. Which is only natural given the fact that it’s heavy as hell! :-)

                    • “Gold hasn’t stopped being money”

                      Gold might still be a sort of money, in certain circumstances, within certain parts of the financial industry, or for certain inter-governmental transactions (on a very limited scale at present).

                      It still has value, of course. But it has been relegated to the status of a minor “complementary currency”, or (an admittedly significant) investment vehicle – whereas before it was the very centre of the monetary universe.

                      Here’s Hayek (an Austrian!) on the concept of gold as money:

                      “we must free ourselves from what is a widespread but basically wrong belief. Under the Gold Standard, or any other metallic standard, the value of money is not really derived from gold. The fact is, that the necessity of redeeming the money they issue in gold, places upon the issuers a discipline which forces them to control the quantity of money in an appropriate manner; I think it is quite as legitimate to say that under a gold standard it is the demand of gold for monetary purposes which determines that value of gold”

                      http://mises.org/daily/3204

                    • I don’t know why I engage MMTers. If you’re not 100% MMT you’re 0% MMT. You guys should spend more time finding where you can collaborate with others and less time trying to tell everyone else why they’re wrong about everything. You might start gaining some real traction that way.

                    • Thing is, if you get ‘traction’, what are you going to say? “We should regulate banks”? Well, who doesn’t know that? “We should spend more on tax cuts and helping startups because we can always get primary dealer banks to lend us the money”?

                      Is that really going to enlighten anyone about the government’s actual monetary powers or really inspire confidence in anyone?

                      What are your actual policy recommendations?

                      One guy on our side who has some real traction is Krugman – who’s been consistently integrating MMT-type views in order to bolster his arguments.

                      No mention yet by him of any “MR” insights, such as that the government has to borrow “inside money” from bankers in order to spend, etc.

                    • I am not in this to get “traction”. You guys are the ones trying to save the world from its own ignorance. You are the ones who parade around the whole internet occupying other people’s websites telling them how wrong they are about everything and how right you are. I am not on a personal mission to save the world from policy mistakes. That’s why MR has ZERO policy embedded in it.

                      I am simply here to help educate people about how our monetary system actually operates. I have no interest in telling everyone else how to fix it or how they should run it. I don’t think anyone even comes close to understanding the system so all you guys running around telling everyone how to fix everything have put the cart before the horse.

                      And the only time Krugman ever mentioned MMT was when he discussed MY primer. He reads Pragcap as he mentioned it the other day again. He hasn’t adopted the MMT views. He was on PBS just last night discussing how we’re going to “fund” medicaid. He’s much closer to the MR positions than he is to yours. Probably because he reads Pragcap. But I don’t even know why you bring that up. You act like it’s a competition to get the word out.

                      I am just giving you some friendly advice since you guys are on a crusade to change public policy – make some more friends rather than parading around the internet calling people names and telling them how stupid they are. You might actually start moving the ball forward that way. Take it or leave. Frankly, I don’t care. As I said, I am here to educate. Not to save the world. And I am certainly not here to parade around MMT websites telling people how bad MMT is or how stupid MMTers are. Frankly, I don’t know why you do it….It’s baffling to me that you would even feel the need. And of all the people that need convincing – why don’t you go populate Mises.org – those guys need the help….

                    • “That’s why MR has ZERO policy embedded in it.”

                      “we have the need to properly regulate money as its corruption has far reaching impacts”

                      Is that not a policy prescription, or is it not MR?

                    • That’s my personal opinion. I am not even the smartest guy implementing MR. What makes you think I am the final voice of all things MR? It’s my personal opinion that money should be highly regulated. But it’s totally possible that you could learn MR and the way our system works and say that banks shouldn’t be regulated at all. That’s fine. I don’t agree, but I won’t tell you you can’t come to that conclusion based on understanding MR….We’re not one ideological set of policy ideas. I am totally open minded about all things. You seem to think you’ve got some holy grail solution to the whole world. That’s fine. I am not going to tell you you can’t believe that, but I don’t agree with that view. That’s why I try to extend a hand to people with views that differ greatly from my own. David Beckworth and I see the world very differently, but we’re very cordial and actually overlap on some policy stuff. I am the same way with post-keynesians and even Austrians. You guys, on the other hand, just reject anyone who doesn’t believe your cookie cutter agenda. As I said, that’s fine. But I don’t agree with that approach at all.

                    • You’re just wasting your time trolling this website now. Everything in your last post was a general operational reality. According to your definition of “prescription” the fact that we have a monetary system and govt at all means I believe in prescriptions. It’s blurring the lines in the same way that one might try to claim that gold reserve systems are the same as a pure fiat system! :-)

                      The bottom line is that there isn’t a single precise prescription in the MR framework. But I am tired of entertaining your childish posts here as they’re now turning to 100% trolling and pestering. I’ve tried to be cordial with you, but as always, you’ve proven yourself a common internet troll. Like almost all MMTers you just can’t help yourself from sneaking in personal jabs or taking an antagonistic approach about everything. I really don’t understand why you insist on behaving like this. It forces me to moderate your comments and treat you like a child just because you can’t control how you act on the internet. It’s just silly.

                      I recommend you try to be a bit less antagonistic with people you actually have a lot in common with. Because if you guys can’t be cordial with a guy like me then you really shouldn’t even be wasting your time trying to talk about MMT with anyone else. Take care Phil.

                    • Phil, I delete the comments you post when they’re combative, antagonistic, rude and misleading. As that last one was. Instead of wasting all that time going through my papers you could have just said that I believe in prescriptions because I believe in govt. There’s your incredibly vague and misleading point tightly balled up into a neat little sentence. You’re welcome.

                      You’re not trying to be productive here. You’re literally just wasting time for whatever reason. You’re picking a fight with someone you actually agree with on quite a lot and you’re poking and prodding for no good reason. I don’t get it. It’s not conducive to learning or a better understanding or anything really. Why do you do this?

                      I really hate to play internet police with guys like you, but you just can’t control yourselves. If you can’t play nice then don’t interact with other people on the internet. As I keep saying, if you can’t be cordial with a guy like me who has strong post-keynesian tendencies then you really shouldn’t waste your time on the internet at all discussing these things. Unfortunately, like many MMTers, you’ve proven that you just can’t control your tongue when talking to anyone. Good luck with the crusade and I recommend fighting those Austrians and supply siders. They’re the actual bad guys.

                    • In the interest of both of us – I am not going to publish your comments here any longer. We both know you aren’t interested in better understanding MR and I am not interested in professing MMT. We’ve been going back and forth like this wasting huge amounts of time for a year now. It’s really not conducive to anything positive. So we should just stop.

                      Again, I recommend you go occupy Mises.org. That’s where the real battle is. Good luck.

  16. Remember, our system of Govt was designed to make it harder/ MORE difficult for the federal govt to accomplish things. If the debt celings does just that if for no other reason I’m OK with it.

    I can’t imagine the state this country would be in if Nancy Pelosi, Harry Ried and Barrack Obama could just write a check for what ever they wanted with undue restraints.

    The thought is frighting that a party could basically control everything with the unchecked checkbook.

  17. Why do MMT and MR peeps hate each other so much? Can’t you guys just get along?

    Cullen do you have a post that you’ve written that sums up where you disagree with MMT?

    Just want to stress again that I am not an MMT-er, don’t really know much about it other than it seems convoluted.

    • Here’s my critique. http://pragcap.com/mmt-critique

      I really don’t want to get into it, but the MMTers have a rather well known tendency to lash out at anyone who doesn’t agree with them 100%. This whole thing started when I said I didn’t support the Job Guarantee 100% because I thought its rationale was wrong. Then one of the MMT founders started calling me names on this site and it just spiralled out of control from there and here we are.

      The sad thing is I probably agree with them 75% and they hate me as much as they hate Austrians. I really don’t get it.