Wednesday, February 17, 2010

Two Sides To Every Story

The news-making piece today comes from KC Fed President Thomas Hoenig.

"The United States is moving into an era in which government finance is taking center stage. Fiscal measures taken to bring the economy out of recession, mounting longer-term liabilities for Social Security and Medicare, and other growing demands placed on the federal government have invited a massive buildup of government debt now and over the next several years. Congressional Budget Office (CBO) projections have the federal debt reaching a unsustainable level of two to five times our total national income within the next 50 years, which leads us to an inescapable conclusion—U.S. fiscal policy must focus on reducing this debt buildup and its consequences.

In managing our nation’s debt going forward, it strikes me that we have only three options. First, the worst choice for our long-term stability, but perhaps the easiest option in the face of short-term political pressures: We can knock on the central bank’s door and request or demand that it “print” money to buy the swelling amounts of government debt. Second, perhaps more tolerable politically, although damaging to our economy: We can do nothing so long as domestic and foreign markets are willing to fund our borrowing needs at inevitably higher interest rates. Or third, the most difficult and probably the least palatable politically: We can act now to implement programs that reduce spending and increase revenues to a more sustainable level."

later (emphasis mine):

"Someone recently wrote that I evoked “hyperinflation” for effect. Many say it could never happen here in the U.S. To them I ask, “Would anyone have believed three years ago that the Federal Reserve would have $1¼ trillion in mortgage back securities on its books today?” Not likely. So I ask your indulgence in reminding all that the unthinkable becomes possible when the economy is under severe stress."

Now, readers of this blog will be able to guess that I find Hoenig's piece to be completely reasonable, and a pretty accurate enunciation of very common fears that most Americans (myself included) have.  However, there is a contra-view that says that holders of my view are completely crazy and have no understanding how how our monetary system works.

In the interest of avoiding another lengthy comment thread discussion with those who hold the opposite view, I point you toward Billy Blog where you can read for yourself the other side of the story.  Bill Mitchell is a leading proponent of Modern Markets Theory (MMT).  He is intelligent and responsive, although I think his points would be much better taken if he could somehow express them with 90% fewer words - sorry, Bill, we Americans have narrow attention spans.  I would do a disservice to Bill's writing if I pulled out a few select quotes which anyone unfamiliar with the basics of MMT would find completely preposterous, but I'm going to do it anyway, with the hopes that the reader will think not "what a f'n moron, " but rather "how on earth could he make a claim like that, maybe I'll go check out what he's writing."

from Bill:

“If the Chinese do not want to buy US Government bonds then they will not. The US government will still go on spending and the Chinese will have less $USD assets. No loss to the US.”

In reply to that, I left the following comment on his blog:
"So, let’s say that when the debt China is holding matures, instead of buying new debt with it (rolling their position), they say they want their money back. We print up a fresh trillion dollars (digital or otherwise) and give it to the Chinese. Now, they either 1) sell the $$$ and buy Yuan and take them back to China (unlikely?) or 2) buy real assets in our country with our currency (more likely?)

when China takes its trillion dollars and starts buying up US real estate, ports, sports teams, and businesses, doesn’t that have a real (negative) effect on me – The American Who Now Has To Pay Higher Prices Because I’m Competing With The Chinese For Assets? I could have also called myself The American Who Has Savings And Doesn’t Want To See The Purchasing Power of Them Reduced."

I suggest readers check out Billy Blog for his models on simple "business card economies."  First read this one, and then progress to this one.   It will be up to the reader to figure out how these models expand to real world concepts - I still have not figured it out, but I am willing to read on, frustrated. 



James said...

I think what we have seen in the last year and a half is incompetence on scale the world has never seen before.

Everything our leaders have done has sent us in the exact opposite direction of where we should be going.

Fed Chairman Bernanke has now put the nation on the course for a potential hyperinflation, something Im sure he considers impossible or "unlikely". Famous last words.

The entire western economic system is not viable in its current form. A better form of capitalism needs to take its place or else our leaders will destroy the west for good.

Brad said...

Hey Kid, excellent site! Can you contact me directly as I'd like to talk about what you're doing for partnerships and site growth.


Игры рынка said...

Kid, it is a good start. Keep on!

We all know this side of the story and if you try to understand the other side of the story it will only improve all of us.

scharfy said...

I childishly blasted MMT on NakedCap, then spent the next few days trying to figure out what it was.

I think examining MMT represents an interesting thought experiment in understands the relative flaws of fiat versus hard currency.

99% of the analysis occurs with respect to the functional aspects of MMT , but it fails the moral smell test even quicker than our current system. I encourage anyone who wants to gain a further insight to the perils of Fiat, to go to Billy Blog and learn about it.

As I continue to do so, I am coming to a deeper understanding of relative strengths and weakness of various currency systems. However, I will say it again - The MORAL implications of MMT are astounding, the mind repels them.

That being said, everyone who's instincts are suspiciously aroused by such theories, would do themselves well to take the time to learn about it, and learn how to constructively debunk the functional aspects of the theory. I am on my way - I hope.

Kid Dynamite said...

scharfy - how about an example of what you find morally reprehensible about MMT?

(note: i'm not disagreeing with you)

Jeff65 said...


The moral implications of MMT are irrelevant in a way. This is because the USA and other countries with fiat currencies and floating exchange rates already function according to MMT. It simply serves those with real power to pretend and act as if the system doesn't function according to MMT.

The money is always found to do things this group wants to do (wars, bank bailouts) but when the things it doesn't want to do reach the public mind (poverty, health care) there is not enough money. Adhering to monetarist ideas in tough talk, but then going against those ideas whenever it suits them is exactly what has been happening for decades.

The moral problem you see is that with MMT it is clear that the govt picks winners and losers. What you don't see is that the govt does this now and it always has. It is our job to force the govt to make moral choices. Operating according to MMT would be a disaster if practiced by a govt captured by special interests as it is now.

Recognizing how the monetary system really works is still important. If people knew the real story, it might make them react to poor and self serving choices made by current elites in govt and business, choices that most people do not realize are choices because they don't understand the system.

scharfy said...


MMT presents, in a streamlined fashion, how arbitrarily our current system appropriates the labors of its citizenry.

But it goes a step further, and asserts that it is NECESSARY to do so in order to facilitate production.

In order to keep the amount of goods relative to currency stable, it "purchases" goods with additional currency. ?!?

My take is that the proceeds of a productive economy should be shared equally across its participants. Whether you accomplish injecting this liquidity through a national lottery, lower prices, or doing a reverse "zimbabwe" and turning 50 bucks into 500 by adding a zero on the new currency, is up for debate.

I guess I am just offended by a scheme that is so brazen and bold to imply that government spending is required to facilitate private sector production.

Required? I cannot accept that GOVT surpluses stifle productivity, even if his chart says so.

I am not sure why this is called "Modern" Monetary Theory, it seems like gaming the currency is as old as time.

Help me out, I'm having a hard time getting my brain wrapped around this

@jeff65- So true....

Игры рынка said...

scharfy, MMT never said that. All it says is how fiat money works. The rest is political consensus imposed on the fiat money system. You want to have unemployment? No problem. You want government to run surpluses? No problem. You do not want to issue bonds? No problem. And so on. But MMT allows you to understand consequences of your political choices.

So there is no moral ground to MMT. It is like genetic modification of food. In the US it is a common thing however in Europe it is forbidden. Nothing about morality. Just a basic political consensus.

Kid Dynamite said...

hmmm scharfy - that's not what i expected you to say. you wrote "My take is that the proceeds of a productive economy should be shared equally across its participants"

to me, that sounds like the OPPOSITE of capitalism, and it sounds to me like what MMT attempts to do - which is why i don't like it. If you don't have any money, you don't care if more money is created and your existing money is devalued - I feel like MMT is all about redistribution in a non-standard sense.

Under MMT, savers see their savings redistributed to everyone else. Why bother saving when the government will just provide for everyone? without making it political, it sounds like communism to me.

Kid Dynamite said...

this article from The Onion seems hauntingly relevant to this discussion:

scharfy said...


that's what i meant. If your dollars are gaining value, and you have more of them, they go up equal to mine as a %.

I have 6 you have 6000.

We gain purchasing power equally - as a %

not redistribution.

That came off wrong

Kid Dynamite said...

scharfy -

what i meant is that, for example, i have savings. i don't work. My dad has savings. he doesn't work. inflation hurts my dad and I - it decreases the purchasing power of our savings so we can buy less goods and services.

if you're working, however, you have wage inflation to offset your cost inflation. if you're working and you have no savings, you're almost indifferent to inflation! bread used to cost $5 and be the equivalent of 1 hours work. Now it costs $500 and is still the equivalent of 1 hours work!

I, (the non-worker with saved money) however, am totally screwed - all the money i had budgeted to buy bread for the next year must now be spent on the next loaf.

Jeff65 said...

Kid Dynamite,

>Under MMT, savers see their savings redistributed to everyone else.<

This is as it should be. Those holding the most private property have benefited the most from the state system.

The existence of the state system is also the source of poverty. Therefore the state is obliged to look after its impoverished.

It is also as it must be. You can't soak up excess demand through taxation or erode savings through inflation of those who don't have anything!

scharfy said...

Ok. You are saying MMT's inflationary bias punishers savers, correct?

getyourselfconnected said...

Why work, the government can make aggregate demand whatever it wants!! Why have industry, the government can step in and make it all up! This sounds great! USSR did not work out, but that was a blip I guess.

This redistribution crap serves those that cannot help themselves. I am retiring tomorrow!

Jeff65 said...

Kid D,

>Ok. You are saying MMT's inflationary bias punishers savers, correct?<

No, you are saying that. I'm not conceding that MMT is inflationary. If the state is willing to use tax policy as necessary to soak up excess demand, there wont be inflation.

Of course, you'd then claim the taxation was redistributive.

Jeff65 said...


>This redistribution crap serves those that cannot help themselves.<

Very few people willingly starve to death. The default condition of humans was as hunter-gatherers, or subsistence farmers. It was not as a wage slave.

The state system should allow for people who can't or don't want to be wage slaves. If you can't grant them some land for subsistence farming, welfare is about all you can do unless you just want them to go away and starve.

This is exactly what the genocide of indigenous cultures was all about. Getting rid of the choice to be hunter gatherers or subsistence farmers.

Jeff65 said...

The last post I addressed to Kid D should have been addressed to scharfy. Sorry.

getyourselfconnected said...

that kind of debate strays from things economic a bit much.

I fail to see why every citezen cannot have their own sovereign certified printing press at home if said sovereign nation can never default?

I am sure there are many super intelligent MMT thinkers (they will tell you!) out there with big bucks; why not buy a island and test this theory out in cold hard practice? Seems like a huge winner as told.

Jeff65 said...


You may want to separate economics from political and social issues so you don't have to think about the consequences of economic choices, but they are very much tied up with each other.

MMT is already practiced in the US as it suits those in power. Even Dick Cheney knew that deficits don't matter. He said so himself when questioned about spending on the Iraq war. MMT is not practiced when the money is to be spent on the masses - like health care or home owner bail outs.

Jeff65 said...

The stock flow models central to MMT aren't a theory. They don't need to be tried out. They are accounting identities and represent how things work.

I think the difficulty in grasping the ideas of MMT is mostly the difficulty of accepting that what you thought you knew is totally wrong and that you're being regularly lied to.

It's pretty easy to imagine how your life would be transformed if you had a household printing press able to print money. Why would you think a government with a printing press is remotely similar to a household without one???

Kid Dynamite said...

jeff, when you write "This is as it should be. Those holding the most private property have benefited the most from the state system," i think you really hit the nail on the head as to why us US Americans think MMT sounds crazy.

We're a Capitalist country, we see the monetary printing press as the enemy to everything that makes our country great, and a threat to our way of life.

i absolutely do not agree with your statement "this is as it should be." I'm guessing most of my readers don't agree either.

however, i have no interest in debating it with you - it's not a debate anything good can come out of. I did notice on another comment thread that i was involved in on Billy blog - a few people who were discussing things with me suddenly went the "blame the big US banks" route, and I really started to see some true colors of MMT - intensely redistributionist beliefs.

Jeff65 said...

Kid D,

The problem is that what you see as redistribution is really just paying your own way. Imagine having to hire your own private security to look after your pile of non-monetary assets. If you were wealthy and there was no state this is exactly what you'd have to do. Then you'd have to worry about the risk in holding those non-monetary assets - a great deal more risk than inflation. Then you'd have to worry about the trustworthiness of the private security. They might sell you out to another wealthier person or steal from you.

Jeff65 said...

Completing the thought in my previous post - the state almost entirely facilitates a low risk way for you to save and accumulate assets and even protects them for you. You expect this for free?

There is nothing inherently redistributionist or big government about MMT. You could soak up excess demand with a regressive tax if you wished. You'd starve a bunch of your citizens and tax base in the process. They might even fight back.

I'm probably not doing MMT any favors by adding my political biases in to this discussion.

MMT describes how the money system works. You can still make whatever choices you want to make. The difference is you can no longer hide behind deficits as a reason not to spend money on something. Not spending money is always a choice.

Kid Dynamite said...

no no no jeff. redistribution is about paying MORE than your own way. although i'm a free markets capitalist, i'm not suggesting that it's insane that the rich pay a higher percentage of their taxes. i'm a compassionate capitalist, but that compassion has a limit.

taxes are absolutely redistibutionary, but inflation is much much worse in terms of its effects. I continue to read comments from people about how inflation hurts the poor the most. hogwash! inflation hurts those who have their purchasing power destroyed. the more money you have, the more purchasing power you have.

Kid Dynamite said...

"I'm probably not doing MMT any favors by adding my political biases in to this discussion." this is definitely true, but i'm starting to fear that it's not just "oh - never mind jeff - he's a crazy socialist." - it's that in order to believe in MMT, you almost have to have similar political views as you do - you can't really be a capitalist or a lover of free markets. You have to love big government - you have to believe the State has an obligation to provide everything for its people, and that successful people should see their success marginalized for the good of the state. I don't. and i don't think that means i prefer a dog eat dog world - there is a middle ground, and we're not too far from it in the US.

as a totally random aside, i would be in favor of many more state supports IF we imposed restrictions at the same time. in other words, i'd be in favor of more welfare if people couldn't use the money to buy drugs and alcohol, or flat screen TV's. I'd be in favor of more health care if people receiving those benefits couldn't destroy their bodies by eating McDonalds.

Jeff65 said...

Kid D,

MMT is no more or less redistributionist than you want it to be.

And by the way - why do believe you should get to set the price on the state's framework enabling you to accumulate assets? Doesn't it cost whatever it costs? The govt doesn't have the ability to opt out of providing you that framework.

Jeff65 said...

Kid D,

>it's that in order to believe in MMT, you almost have to have similar political views as you do<

There is nothing to believe in. MMT is reality.

People denying that it is reality tend to have opposite political views to mine because the status quo of misunderstanding suits their point of view.

You can have a small government and free markets (as free as they can be - there must be rules) based on the ideas of MMT. All MMT does is describe how the money system works.

Kid Dynamite said...

interesting question jeff - and i think the answer is that they set this "price" via taxation. if i decide i no longer want to pay the price, i stop working. This played a role in my decision to quit my job. I didn't want to pay 50% taxes anymore. The people trust the government to maintain the value of the currency, however - not to further tax them by destroying it.

Atlas Shrugged is not just wingnut fantasies. The reason some people really love the book is because it embodies real sentiments. I "went John Gault" before i'd even read the book - and then as i was reading it, i said "hey - that's exactly what i did!"

Kid Dynamite said...

"You can have a small government and free markets (as free as they can be - there must be rules) based on the ideas of MMT. All MMT does is describe how the money system works."

that's not my understanding, Jeff, especially when a key component is controlling employment. Bill Mitchell's simplified business card economy illustrates in a simplified way how the money system works - but that's not all there is to MMT. Full employment via government spending is impossible with small government. I think it's impossible in any situation, but that's a topic for another day.

Jeff65 said...

If you want a description stripped of politics, here is a very good one:

Kid Dynamite said...

here's a question - it seems like many of the MMT big name professors are from Australia. What is it about Australia's belief system, philosophy, or monetary system that makes it especially conducive to MMT? anyone? i don't know the answer - i'm asking genuinely.

Jeff65 said...

MMT doesn't have to say anything about employment. That is another issue.

Read my link in the previous post. It describes how things function. There is no politics in there.

Kid Dynamite said...

thanks for the link, Jeff - i'm actually past that point already, but it's a good primer.

here's my bottom line: 1) there is a flaw in applying MMT's deficits = good for private sector, surpluses = bad for private sector mentality to the US, because we forget to run the surplus in good times and reign in our deficits, so we are constantly increasing our debt (or money supply). 2) despite the fact that we currently have deflationary forces at work in terms of private and corporate debts that need to be written down, if we MMT our way out of them with continued massive deficits (MORE debt or more money printing), we will at some point reach a tipping point for our currency. That's it. simple. when that happens, there's no going back.

It's not something that can be controlled in the real world as easily as it is in a laboratory, a blog post, or a spreadsheet model. If it were, we wouldn't have the bubbles we've seen in the past few decades - bubbles reinflating bubbles, all missed by a central bank who claims they can't identify them until it's too late.

If we continue to increase the money supply, although the CURRENT velocity of money is very low and may not result in inflation, it will eventually, and that is what people fear. Then, there is also an entire political/moral hazard side of the equation - why should we, the state, compensate those who bought bad bonds (we're talking corporate/private now) and lost money? The thing that makes America great is the ability to succeed. To have success, you also have to allow failure. but that, again, is getting back to a more subjective/belief oriented/political discussion.

Jeff65 said...

Kid D,

A lot of MMT proponents are from Missouri, too.

Austrlia's monetary system is quite similar to the US. Mainstream Australian economists are just as clueless as the mainstream US economists.

Re: "Atlas Shrugged" - no humans would exist now if the first humans had read that book. When a 20th century hunter-gatherer tribe was studied, one researcher asked a tribesman if he stored meat from kills made. His answer: "I store meat in my brother's belly."

Kid Dynamite said...

"i store meat in my brother's belly"

note how that is very very different from "i store meat in YOUR brother's belly."

really - i could do this all night long, but i don't think it would be productive.

my problem with MMT, as i don't think i effectively explained it in the previous comment, is that it somehow assumes that money can be destroyed (via taxation and reduced govt spending) at precisely the right time to avoid inflation caused by all the money creation. I don't know why anyone who lives in the real world would think this is a valid assumption - and it's a key assumption.

Jeff65 said...

Kid D,

But you aren't passed that article because you keep adding things in to our discussion that aren't in those descriptions. (So do I, but I'm not arguing that MMT is incorrect.)

You aren't making the effort to understand MMT. Before the currency reaches the tipping point, MMT says you do something about it: raise taxes to reduce demand. I can't help it if you don't like that idea, but that's the remedy. You can't say that MMT ignores the tipping point.

And I agree with you 100% on corporate bad behavior with respect to the recent bail outs, and I bet most MMT proponents would as well. I said all along don't bail out the banks without severely punishing them. There is nothing in MMT that says you can't punish bad behavior.

Jeff65 said...

Kid D,

>note how that is very very different from "i store meat in YOUR brother's belly."<

Not a distinction that needs making in this situation. His fellow tribesman were all his "brothers". If you want to claim some Americans are part of your tribe and some aren't - that is an arbitrary distinction you are making.

"Atlas Shrugged" is not compatible with human existence. That's the point I was making and the above doesn't change this.

Kid Dynamite said...

jeff, i would like to make this the last comment, hopefully, because it's a cut and dry issue.. you wrote

"You aren't making the effort to understand MMT. Before the currency reaches the tipping point, MMT says you do something about it: raise taxes to reduce demand."

on the contrary - i have made an extensive effort to understand MMT, and I addressed this again in the prior comment: the assumption is that you can just raise taxes in the nick of time before you destroy your currency. I'll quote myself: "I don't know why anyone who lives in the real world would think this is a valid assumption - and it's a key assumption."

i could just retype my previous comment, but there is no reason to. the central bank has PROVEN it is not capable of evaluating bubbles until it's too late. this isn't my theory - they have even said as much.

Jeff65 said...

Kid D,

>is that it somehow assumes that money can be destroyed (via taxation and reduced govt spending) at precisely the right time to avoid inflation caused by all the money creation.<

The current method of interest rate policy is a far more blunt and indirect means of targeting inflation than controlling spending and taxation. Both of the latter directly affect the money supply. It is arguable that interest rate policy doesn't affect the money supply at all.

Bank lending controls the money supply now. If there is a shortage of bank reserves the Fed must supply the reserves.

Kid Dynamite said...

ps - regarding atlas shrugged - it doesn't have to be a model for US society - but it would do the critics well to understand what motivates the John Gaults of the world.

with your tribesman example - i understand that all his tribesmen are his brothers. What about the neighboring tribes? they kill each other when they cross paths. we don't.

as much as people want to bash capitalism as destructive/greedy/lacking morals/heartless, whatever - it's the best system available, even though IT DOES HAVE FLAWS.

Kid Dynamite said...

"The current method of interest rate policy is a far more blunt and indirect means of targeting inflation than controlling spending and taxation. Both of the latter directly affect the money supply. It is arguable that interest rate policy doesn't affect the money supply at all."

this is an even bigger flaw, then, if you're going to rely on lawmakers who get addicted to spending money to appease their constituents to reign in their spending and do the unpopular thing. It simply is not realistic in our system! That's all i'm trying to say! it doesn't work! you can blame the system - fine - that's just semantics.

getyourselfconnected said...

Thought provoking stuff and kept clean which made it worthwhile. I am not a MMT believer, but I can hardly say I am a fan of "capitalism" as practiced over the past 10 years.

Jeff65 said...

Kid D,

There is nothing about MMT that is in any way incompatible with capitalism. I think small c capitalism is great. We just need to figure out how to stop those who accumulate the most money from setting government policy.

America's political system isn't the answer. The president, the senate and the supreme court were all designed to check true democratic power. Those revered checks and balances are there to check ordinary people like you and me.

I'll stop here. Silence doesn't constitute agreement, but rather just giving up.

Jeff65 said...

Kid D,

One last thing - no system will work if you start by assuming corrupt politicians continuing corrupt behaviors. Yes, we are doomed.

The survival of a tribe was dependent on their cooperation and generosity. They couldn't afford any John Gaults.

And we do kill other tribes that disagree with us and compete with us for resources. Open your eyes.

Kid Dynamite said...

thanks for the discussion jeff.
fyi, i agree with your comment at 7:36pm.

then you made the next comment "they couldn't afford any John Gaults" and my eyes popped. Maybe you need to reread Atlas Shrugged - it's especially relevant lately with pervasive populist attitudes gaining steam. John Gault is not the villian - he's the hero - he's the PRODUCER in the economy who is taken advantage of by the leeches.

but we need not debate that - please don't, in fact - i'm going to watch the Olympics.

Anonymous said...

I think it a fairly simple observation.

Even if you assume MMT works;

What happens when it is poorly implemented?

What happens when the "corrupt politicians" actually do turn out to "continue being corrupt"?

Its absurd to think that you can use tax policy for demand control (read: social engineering). The political whims pervert the idea.


Jeff65 said...


I need to stop reading but can't help it.

>Its absurd to think that you can use tax policy for demand control (read: social engineering). The political whims pervert the idea.<

You already have this on the spending side now. Taxes are no more difficult politically than govt spending. Not with all of the deficit terrorist screaming.

I'd be the first to agree that current politicians are not up to MMT, BUT a recognition of how things really work would at least start getting peoples attention. If it were generally known that universal health care is a choice just like bailing out the banks or warring around the world, people might demand a say in those choices. Now they just nod their heads in agreement with "we can't afford it" and think about something else.

Even if it's an impossible ideal because of human failings, it is worth understanding.

Jeff65 said...

Kid D,

>John Gault is not the villian - he's the hero - he's the PRODUCER in the economy who is taken advantage of by the leeches.<

Being a producer is not the problem. A tribe couldn't afford someone who was keeping score and didn't trust that the tribe's customs or laws ensured that allocation of resources were fair.

Anonymous said...


Being a producer is not the problem. A tribe couldn't afford someone who was keeping score and didn't trust that the tribe's customs or laws ensured that allocation of resources were fair.


I disagree with your notion of "fair".

Now what?

Let me guess... it doesn't matter what I think. I'm "greedy".

And there you have it.


Jeff65 said...


>I disagree with your notion of "fair".<

I never stated any notion of what is fair - only that there is some standard of what is fair according to custom or law and that this standard is widely perceived to be fair. You can disagree with this standard, but to rebel would carry consequences. You wouldn't survive long if you were cast out of the tribe, for example. This is how tribes really worked.

What we have now is corrupt from both ends. People are encouraged to be selfish by the dominant ideology and the laws are widely perceived to be unfair because they are applied arbitrarily or simply are unfair. A truly unfair law or custom could not last long in a tribe because it created disharmony.

Kid Dynamite said...

Jeff wrote: "Taxes are no more difficult politically than govt spending."

ohhh.. nonononoono. taxes are "MY" money - while government spending is "more money for me." again - people who have/make money hate both. people who don't have/make money are indifferent to taxes and love spending!

Jeff wrote: "Even if it's an impossible ideal because of human failings, it is worth understanding." - yes, it's worth understanding as a Utopian Theory, but not as a suggestion for an economic model for the United States - that is PRECISELY my point, Jeff. I would love it if the US lived like one big happy tribe you mention - but that's also irrelevant to the real world.

Jeff65 said...

Kid D,

It's interesting that your perspective on taxation and government spending exactly suits your financial situation as someone living on savings. That's quite a coincidence. You might be surprised to know that I make nearly twice the average salary and have two years of savings in the bank. I'd love to live on savings, but I don't believe the government is duty bound to enable people to do it. Money as a stable store of value has as many adverse consequences as it does good ones, but that is another story.

The stock flow descriptions used by Bill Mitchell and others of how the money works aren't idealized. They accurately describe how things work now.

The ideal I mentioned is that those in government would understand and use the ideas for public good. But we don't have that now.

What we have now is actually worse. A few elites make economic choices that suit them and tell the rest of us that the economy demands the action or austerity measure. If more people recognized how things really work, they would demand more accountability for the choices that their representatives make.

Kid Dynamite said...

jeff - i was talking about the attitudes of the people in general.

i don't work, so higher taxes don't effect me, but they still offend me.

in any case, the PEOPLE view higher taxes as "less of my money" and higher spending as "more handouts for me"

Mike K said...

In terms of foreigners buying US assets like real estate; we've done this before. Here's how it works: we let it happen; sell into the bubble, and then when the bubble bursts, we buy it all back at pennies on the dollar. We burned Japan this way and we can burn the Chinese. Sure, many Americans will get singed as well, but why not use all the parts of the business cycle to our advantge?


Jeff65 said...

Kid D,

>i don't work, so higher taxes don't effect me, but they still offend me.<


Didn't you say in a comment above that you did a John Gault due to excessive taxation? That appears to be a rather significant effect!

Kid Dynamite said...

yes jeff - i quit my job, and now the government won't get ANY taxes from me.

that's very different from saying "i am against high taxes only because i'm in the top tax bracket"

i'm no longer in the top tax bracket, but I'm still fully aware that a "Tax the rich" solution doesn't solve all your problems - i'm PROOF of that. eventually the rich give up and go John Gault on you - then your tax revenues are f'd.

Jeff65 said...

Kid D,

The govt doesn't need tax revenue to operate, so your choice is not punishing the govt in the way you believe.

Kid Dynamite said...

jeff - it's even worse than that isn't it? because now i don't have income, and the government will just print more money to spend, thus devaluing my savings. FML.

at least i can take solace in that i symbolically starved the beast of NYC's tax monster. they are not a sovereign, and do indeed need taxes to operate.

zanon said...

I love this discussion. MMT is unpopular with libertarians, conservatives, and socialists alike! It must be doing something right.

Jeff is correct, of course. MMT is not a theory. It is accounting and operational reality. It is like physics, you can do what you want, but there will be foreseeable consequences.

Kid, i also share your concerns. We have grave irresponsible Government. What will happen when they learn they really CAN spend at will and understand the awesome power that comes from going off the gold standard?

But right now we are patient locked in operating theatre, and the creature with the scalpel is a monkey. It may kill us, it may play with itself in the corner, it may kill itself, or it may perform operation successfully. Who knows.

If that monkey by magic becomes surgeon, our lives may or may not be better -- the surgeon may be psychopath and may kill us as surely as monkey.

MMT becoming recognized in academy, and by extension politics, is monkey becoming a man. May Gods help us all

everson said...


Another great discussion on MMT on TPC at:

There were one or two posts after that as well that discussed these issues also.

MMT is an elegant theory and I think that it does a great job of explaining the workings of a fiat monetary system. However, there is a certain hubris in the assumption that the government (who the Fed? Congress?) is going to be able to manage demand/inflation without consequences.

What mechanism is to be used to make the needed adjustments to demand to prevent inflation?

I point to the 'success' of the Fed in dealing with inflation here in the US as a counter example. Without some great and enlightened Fed chair where will we end up in practice? That is the danger in it I see. The elegance of it appeals to the engineer in me, but I fear in the real world the consequences may be less than ideal.

If you could somehow work it out that the needed adjustments were automatic and less prone to political machinations I would feel much better about it but I do not see how to accomplish that.

Jeff65 said...


You should read L Randall Wray's "Understanding Modern Money". He proposes an automatic, non-political spending adjustment by way of a full employment program. Anyone who wants one can have a government provided job at a fixed wage. In this way, government spending automatically ramps up exactly when it is needed: during private sector downturns. Spending scales back when the private sector recovers.

It would also anchor inflation in a way very similar to a gold standard. He suggests that this standard would be even more stable than a gold standard because labor is an input into all finished products and services.

zanon said...

everson: The magic "mechanism" to control aggregate demand, and thus inflation, is called taxation.

i am sure you are quite familiar with it.

and it has nothing to do with Fed, gods help us, it has to do with congress.

best way to implement it would be to put in lots of automatic stabalizers and remove lots of automatic destabalizers. Also, tax rate is to high you can do whatever adjustment you want by just taking less money away, and it is progressive enough that it is a stabalizer as well.

The question of how best to impelement taxes is interesting one I have not seen PKs tackle. winterspeak argues it should be opposite of standard economic tax policy which is to raise as much money as possible with as little economic distortion as possible. He says that if goal is to kill transactions, and not to raise money, they you want very "inefficient" taxes. I think that is crazy.

Jeff: public choice issues with ELR are quite serious and underestimated by PKers. It is interesting idea though.

Jeff65 said...


>public choice issues with ELR are quite serious and underestimated by PKers. It is interesting idea though.<

I don't under-estimate these issues, but better to have people do productive work than just give them grants. As I see it, the state is obliged to do one or the other. Why? Because the state creates a framework where people must get state money in order to survive.

Kid Dynamite said...

zanon, jeff:

PK = post-Keynesianism, right?

what is ELR?

and jeff, you wrote "better to have people do productive work than just give them grants."

that's a subject I could write 5000 words on. as i commented on billy blog, the concept of full employment makes literally NO sense to me, as a result of immigration and productivity. i will save that for another post.

everson said...

Zanon, Jeff,

I am aware of the job guarantee as described by Bill Mitchell on billyblog.

Just not convinced as of yet.

Congress controlling taxes in order to balance the economy on an inflation knife-edge is supposed to reassure me?

Congress is the problem not the solution. Any proposal that does not contain checks and balances to counter the innate tendency of the political classes to screw the economy up will end poorly. Inflation is a curse upon the savers and the middle class. I can see the elegant theory of MMT being used rationalize massive inflation as the politicians give away 'free' money to each and every special interest in order to stay in office with no concern for inflation. If inflation starts to rear its head they will just alter the CPI to hide it. (Come to think of it that sounds familiar. Didn't we do this already?). China seems like another example as many think inflation is much higher there than is being admitted.

I am curious though about the job guarantee. Are you guys aware of any examples of this being put into place? Any research papers on these experiences? I have looked for studies but have not come across anything. I am aware that Argentina tried out a limited version of the guarantee but I have not seen any data on how well it worked for them. (They may not be a clean example so to speak as they seem to have had many problems at once.)


Kid Dynamite said...

everson, zanon, jeff -

please do NOT have a lengthy debate about government jobs programs in this thread! it's an important issue and i DEFINITELY want to discuss it - but i want it to be in its own thread.

i promise to write a post about this next week, and I want you all to come discuss it on THAT post... ok??

everson said...

Sure thing Kid,

Thanks for the great blog and hosting these discussions!

zanon said...


ELR stands for "Employer of Last Resort". It is job guarantee program and I do not support it, nor do I reject it out of hand. I also have no interest in discussing it in this thread.

EVERSON: We share concerns. But it is a structural fact that US has democratic government with so many "checks and balances" and there is no connection between authority and responsibility. This is not theory, this is fact.

Just like MMT is not theory, it is fact. We are running fiat regime as if it were gold standard. Monkey is in operating theatre with scalpel.

I am very interested in what dictatorial regimes will do when they figure out MMT. China in particular. It depends on whether brainwashed sea turtles appear on their shore before local accountants put 2 and 2 together.

Ingolf said...

"All MMT does is describe how the money system works." (Jeff65)

Much of the confusion and subsequent disagreements probably stem from this misapprehension. MMT doesn't describe how the whole money system works, it simply describes how the monetary base works in a fiat money, sovereign currency system.

It doesn't seem to spend much time on the broader financial system, the creation and destruction of credit within that system and the subsequent economic effects, all of which dwarf the monetary base and its effects.

To the extent a government spends without borrowing, of course, the monetary base becomes a relatively more important component of the whole financial system, as indeed it has in recent times. Still, despite a near tripling of the monetary base in the last 18 months or so, outstanding credit is still well over 20 times as large. The level of monetisation required to make the monetary base a dominant factor would be likely to have dramatic systemic consequences.

To the extent its assertions are correct, MMT doesn't seem to break much, if any, new ground (it restates monetary truisms, sometimes in a sufficiently novel fashion as to be confusing). On the other hand, the various proposals about the purposes this money creation capacity could be put to are contentious, as they always have been, and should be analysed on their merits, not as an appendage of MMT. Because these two aspects are often conflated, the resulting discussions seem to generate a good deal more heat than they do light.

Its one blessing may be to give more people a better sense (a la The Onion) of just how slippery a concept fiat currency actually is.

Sensei said...


I know this is an old thread - I just came upon it looking for your thoughts on MMT.

Just one thought I had about your question to Bill Mitchell wondering what would happen if the Chinese demanded their money: that's not new money we would give them. The US doesn't have to fire up the presses to create new dollars as those treasuries expire. That money exists already - it's just held in a slightly different form. Treasuries are really just dollar proxies. The only new money created is the interest. The principal is money already earned, which will reside in Chinese accounts at the Fed as cash (dollars) or as interest bearing securities (treasuries). Either way it represents real Chinese spending power - changing the form in which it's held is not inflationary in the way your question suggests.

Kid Dynamite said...

Sensei - but the problem is that the money has been SPENT already! see, it's the same problem AIG had: AIG was holding collateral for a bunch of people, but they reinvested it in risky assets which they couldn't liquidate it. AIG's problem was that they didn't have a printing press.

basically, what i'm saying is that when we sell debt to china, we don't just hold the money they give us in a little account with their name on it, waiting to pay them back for it... so we have to print new money (or sell new debt, or raise more taxes - but a big point of MMT is that those sources aren't essential), cause we already spent their (china's) money.

Sensei said...


I know you don't want to rehash old arguments, old debates - it's your blog, your prerogative. I'm new here, please bear with me for at least one post.

In your scenario, the US gov sells treasuries to China and then spends the proceeds on whatever the government needs to purchase or pay out. I think that's what you mean by "the money's already spent." And once that money's gone, the US must "print" new dollars to pay off principal plus interest for treasuries as they come due. That's where your inflationary concerns come in, correct? That's the Ponzi scheme you decry in this blog. Borrow a trillion, spend that trillion (or waste it), get yourself in a big financial hole: you still have to pay back a trillion dollars plus interest. US = AIG, only with the power to "print away" debts or losses.

If this is a fair statement of your position, I think your concerns are unfounded. Judging by this and other MMT-flavored threads on this site, I'm also pretty sure I can't convince you that MMT is right and you are wrong. I think there are elements to MMT that you still haven't quite wrapped your head around. But I will make an argument anyway.

Your sovereign debt Ponzi scenario is a total caricature of what really takes place when the government "borrows," from China or anyone else. It's very misleading to call this "borrowing" at all. The US does not issue treasuries to finance future government spending or make up for past spending or to pay the principal on maturing debt. There is practically no real-world connection between the dollar amounts "borrowed" and the amounts spent by the federal government. None.

The Fed issues treasuries (and buys and re-sells them on the open market) to manage bank reserves and defend/support the federal funds rate (keep it from falling to zero, basically). That's it. That's all treasuries do in our system. They don't fund anything.

Treasuries also provide an essentially risk-free vehicle for dollar-denominated savings. As long as there is a demand for saving in dollars (globally or domestically) the US will provide such a vehicle - in a state money, fiat system that is an essential government function. A treasury bond or bill is money, not debt. It's really just an interest-bearing dollar.

None of this is inflationary. It's right to be concerned about inflation, but the locus of inflationary risks is not on the "debt" side of public finance. The US could stop issuing treasuries tomorrow, and it wouldn't impact public finance in any significant way. That's where your Ponzi analogy falls apart. We don't need to find new suckers. In fact, we never needed any suckers ever. It wasn't that kind of scheme.

Love the blog, Very stimulating.