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The following article was written by Post-Keynesian economist Robert Skidelsky over at Project Syndicate. Post-keynesian economists are more thoroughly anchored in reality than mainstream orthodox monetarist economists like Greg Mankiw and Paul Krugman. This is because post-keynesians reject the myths of 1) loanable funds aka fractional reserve lending and 2) rational markets and general equilibrium. However, Skidelsky's article Messed-up Macro repeats a number of mainstream myths that only serve to reinforce the death-grip of ignorance with which the mainstream has clutched the general public since the neo-liberal monetarists started to take over in the late 1970's. This ignorance and mythology that surrounds monetary and fiscal operations are the dual weapons economic conservatives use to force market fundamentalism down the throats of the voting public against our best interests. As it pertains to Skidelsky's article, we'll focus on three parts:

1) Loanable funds. In other words, the concept that deficit spending by the Govt "crowds out" private spending which leads to either A) higher interest rates, B) reductions in private sector spending or C) both.

2) Ricardian equivalence. Which essentially states that deficit spending is ineffective because people believe that taxes andor inflation will be higher due to the need to pay back this so-called Govt "debt". Which means that the fiscal multiplier is effectively zero in the medium term.

3) Bond markets are in charge of Govt interest spending and so we must pay heed to the bond vigilantes.

Now to be sure, Skidelsky brings up each of these three points in the context of posing legitimate questions where there are two sides debating in good faith and the answers to the questions are uncertain and open to interpretation and the opinions of a particular economic school.  He does not come out and take a clear stand one way or another, so I'm not trying to invalidly claim he personally believes these three fantasies. While there are many complicated issues in macro-economics that boil down to political points of view and value judgments, none of these three issues is subjective. There is no ambiguity, and to pretend that the mainstream orthodoxy has a legitimate POV wrt these three concepts is an example of false equivalence and only serves to legitimatize economic myths that dont bear any resemblance to reality. And which are hurting the future of human progression in the same way as religious fundamentalism hurts human progress. If I havent lost you yet, follow below the fold for the discussion.

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Here is another interesting article by Geoff Coventry. Make sure to visit Geoff's blog: Its The People's Money, A nation's money belongs to the people and should serve the public good to enjoy his many months worth of contributions to the MMT economic community. And please follow Geoff on twitter @gladkiwi

There is a lot of discussion these days about tax reform, and there are plenty of folks ready to parade out their solution to the problem of funding government and tax "fairness".

Wait, did we say funding a sovereign currency-issuing government? What do taxes have to do with that? Well, as we've gone over already, absolutely nothing! Which is probably why we tax almost everything wrong! How many of our economic and societal troubles stem from bad tax policy? I hazard a guess that it's not an insignificant quantity.

When you start with an outdated and obsolete understanding of how our national currencies work, then you end up with counterproductive (at best) or outright destructive policies that hurt the economy and society as a whole. It seems to me that there is no cohesive economic framework (but there's no shortage of ideology) behind the ideas currently being debated by our politicians and political interest groups.

All parties approach the subject from the faulty perspective of raising money for the government to spend, and much less thought is given to:

1. what objectives we are trying to achieve with each and every tax;
2. what effects our tax policies have on the decisions of individuals and businesses;
3. how do these effects fit into the picture and health of the entire economy, considering the net flows between the private sector and the government, our trade balance, and the levels of private debt; and
4. what are the impacts to society and the maintenance of our liberty and democratic ideals.

The previous post attempted to reorient our thinking about why we tax and what principles should guide us as we think about tax reform. These principles are based on a careful understanding of how our monetary system functions in the real world, so that we can understand the implications on the economy of our current and proposed approaches to tax policy and tax rates.

Applying taxes to the real world

Remember that our approach to what to tax and how much to tax is guided by our real-world objectives: the will and desires of the people; the health of the economy; the stewardship of the land we inhabit; the availability of real resources; the development of national capital. Simply maximizing the number of its own IOUs the government collects back from the people (e.g. the concept behind the so-called Laffer Curve) is irrelevant and counterproductive to achieving our priority objectives.

What are our national objectives?

-A sovereign currency that provides maximum policy space for our nation?
-An economy that provides meaningful work at a living wage for all who desire it?
-An economy that doesn't disproportionately favor the rich and powerful to the detriment of the poor and weak?
-An economy that provides incentives for innovation and entrepreneurs?
-An economy that grows and rewards productivity and progress that benefits all?
-An economy that is in balance with our environment and that sustains & rejuvenates life in all its diverse forms?
-An economy that encourages giving?
-An economy that encourages saving?
-An economy that protects the democratic process and the voice of the people?
-An economy that respects other nations and seeks trade arrangements that are mutually beneficial?

We could go on... the point is that defining collective objectives should be part of our public discourse and political process.

Once we have our objectives, we can determine whether the way we tax is helping or hurting our ability to successfully realize our goals. I am (thankfully!) no expert in the intricacies of the tax code. But let’s try to apply our principles and see how we would rethink our tax system to achieve certain goals*.

Social Security taxes and Trust Funds

Here we have a classic "pay for" error. We have implemented a tax on incomes under the guise that we can collect government money and hold it for the future so that those who worked hard today can get some income after they retire. There were political reasons why Roosevelt did this at the time, but I suggest it's time we remove the veil of deception. The greatest assurance of its protection isn't pretending that the people put in the money to pay themselves back later, but rather that the government never has any excuse that it can't afford to pay.  

-Our objective is to provide adequate incomes for retirees so that our elderly are not living destitute or in poverty. Fine - we can always credit bank accounts with whatever amount of newly issued money we deem adequate for the purpose. We don't need taxes for that. Not today and not 40 years from today.

-What is the effect of our payroll tax? It reduces the income today of all our workers, which means they have less money to spend or save or give away, and this also means businesses have less customers and sell less product.

-What could we do differently? Eliminate the Social Security taxes and the so-called Trust Funds, and replace it with a constitutional promise: the government will guarantee all future social security payments forever. Period. And we can make sure the amount paid adjusts as needed to ensure it is adequate for the needs of our elderly.

-What is the effect of this change? People have more income to spend, which means businesses will expand and more jobs will be added to the private sector. The Government's positive fiscal flows will increase and the net financial savings of the private sector will also increase.

-The same concept applies to Medicare taxes.

Income taxes

Here we usually make the error of considering this as a primary source of revenues for the government. Why do we want to tax incomes? Are they "bad"? Do we need to?
There are some possible valid objectives for income taxes:

-reduce the spending capacity of the private sector to give "space" for what we want the government to do so it isn't competing for scarce resources and driving up prices (the mass of unemployed and underutilized resources today tells us we have the opposite problem - taxes are too high);

-reduce the incomes of certain sectors of the economy more than others (such as high income earners versus the poor) to avoid excessive inequalities that harm the economy, the political process, and the social structure of the nation;

-maybe income taxes are one of the taxes we should use to create universal demand across the economy for the nation's currency;

-it is an easier tax to collect since employers take it directly out of paychecks, whereas other taxes might be harder or costlier to enforce and collect;
perhaps it can be useful as part of our automatic stabilizing function since as incomes fall, tax receipts fall, which is counter-cyclical to the economy.

-The question economists should study is whether this tax is the optimum solution (or part of it) to the universal tax need and counter-cyclical flows, and if so, at what level.

We should also study the effects of income taxes on various income brackets to see how income taxes affect spending and investing decisions, and its impact on the poor.

Progressive taxation is not about taking from the rich to give to the poor. It is about achieving objectives such as reducing inequality or placing a governor on excessive wealth concentration because due to the threat such concentrated power has to the political process, the fair representation of the people, and the health of the economy.

How could we do it differently? We could lower the income taxes to the minimal amount needed, change the tiers by income levels, or replace it entirely with alternatives that achieve the same or better societal and economic results. Today, I believe a lower tax overall and some adjustment to the tiers would be an improvement.

An alternative to relying on taxing income as our base tax, which could also be "progressive" in an environmental or carbon sense, would be to have a property tax based on square feet of space (or even cubic feet of space as suggested by L.R. Wray). The idea being that those that own larger living and business spaces are using more energy and producing more carbon emissions. Combine this concept with credits for energy savings and renewable energy, and ensure the minimal living income for the poor is sufficient to cover any resulting increase to their rents.

Remember, the amount the government collects is irrelevant for its own needs - it is the effect on the economy that matters.

Business profits & Capital Gains

Liberals love to talk about taxing businesses more so that they "pay their fair share". Conservatives love to justify low taxes on capital gains and dividends due to "double taxation" (the business profits get taxed first and then we tax the distributed dividends). But why do we tax business profits at all? Why not just tax the distributed income or capital gains from a sale and treat it all the same?

-In an economy that has capitalism at the core we generally want a profit incentive. Taxing businesses disadvantages then to foreign companies and reduces their ability to grow. Why would we want to discourage profits? Eventually, all business profits have to end up being either reinvested in something or paid out as dividends.

-If our objective is to provide incentives for entrepreneurs and investments in productive businesses and technologies, then taxing profits only takes away from the ability of businesses to reward risk-taking investors and to reinvest profits into R&D or growth.

-Capital Gains and dividends are often the only sources of income for the very wealthy so why does it make sense that their incomes are taxed at such lower rates than the lower-income workers that produce the gains for the capitalists? Do we want to give incentives for the growth of a "rentier class" that makes money from money without being productive or enhancing the nation's capital stock? Low capital gains and dividends tax rates versus higher income tax rates contributes to growing wealth inequality.

What could we do differently?

-Eliminate all taxes on corporate profits, and just tax all income, capital gains and dividends in the same manner.

-A carefully designed progressive tax rate or alternative concepts such as energy-based or property-based taxes could be applied to find the right incentives and disincentives based on what best produces a healthy economy and society (see income taxes above).

-There's plenty of room to find the right balance that doesn't dampen the investment appetite for entrepreneurs, businesses owners, and capitalists.

-Now businesses have more money to invest of expand, which is good for economic growth and jobs, but if they choose to distribute funds to investors, those are taxed as ordinary income.

-There would likely be additional benefits of simplifying the tax code but also bringing to light special interest group treatment: any subsidies for businesses would have to be out in the open not hidden in the tax code in the form of credits, depreciation allowances, etc.

-Impact on investors decisions and portfolio choices of such an approach should be carefully studied.

Gas taxes and the Highway Trust Fund

By now we all know that we don't need to sock money away in the trust fund drawer in order to have it available for future needs. We can always create money on demand when we need it. And taking it out of the economy today hurts the economy today. It's simply irresponsible management of the people's currency. Put it to use today for our real needs.

Let's separate our objectives into two parts: the trust fund and the gas tax.

-We have no need to save money to pay for future road improvements, so we can eliminate this one. Let's leave that money in the economy where it can do good today instead of putting it on the sidelines.

-However, we may decide that we want the cost of gasoline to be higher than the market price to provide a disincentive: use less gasoline.

-If we take this approach, we should study whether the marginal increase in taxes on gasoline has any real impact on demand for gasoline in the economy, and secondly, how that impact is distributed over our income demographics.

-Are we disproportionately taxing the poor because they spend a higher percentage of their income on gasoline and have less efficient cars? Do they have an alternative if the cost goes up or are we just hurting their disposable income and contributing to their poverty? Are the wealthy ambivalent to what they pay for gasoline at these marginal price ranges?

-What could we do differently? Obviously, eliminate the trust fund and just commit to maintaining gear roads for the nation's commerce and leisure needs. If we tax gas use, consider providing offsets to the poor and investing in alternatives such as public transportation. As an alternative, consider larger incentives for alternative transportation technologies to drive positive change rather than just punishing the use of oil. And invest heavily in public transportation systems that move away from oil dependency and provide options for the lower income and general public to use less gas.


We have structured into our tax code all kinds of incentives for saving money, much of which ends up in the hands of money managers. 401-k retirement plans, IRAs, 529 college savings plans, pension funds, etc.

-What is our objective? Saving is considered virtuous and prudent by society. On an individual level, we all recognize the value of saving money. But was also know that in the aggregate, saving hurts the economy unless more spending power comes from outside to make up for the reduced spending that results from our saving.

-So it's great to provide an incentive for saving more as long as we simultaneously provide for supplementing aggregate spending in some way so that businesses can sell all their goods and we maintain full employment.

-What is the effect or tax-free saving? When the portion of our income that we save is free from payroll taxes, we are deliberately driving down aggregate spending in the economy. Would prudent savers save anyway? These issues need to be studied.

-Are we doing this for savers or for Wall Street? If we are driving large quantities of tax-free savings into existing stocks, we may be doing more to drive up the prices of existing assets and not contributing as much to the stimulation of new productive investments.

-What could we do differently? Firstly, we should ensure that any incentives to save don't harm full employment. The Job Guarantee may be the best approach to this fallacy of composition problem. If Social Security is turned into a constitutionally guaranteed living income for the elderly, and higher education were an investment by the State in its youth, then the incentives to save today become much less critical, and we could study the effects of reducing or removing such tax incentives.
This would have an effect of potentially increasing aggregate spending in the economy and shifting investment portfolios.

-In general, we should be increasing the incentives for new, productive investments and reducing the incentives for the exchange of existing assets (e.g. stocks, real estate) which lead to booms and busts.

Energy & environment

Full disclosure, my business is developing large-scale renewable energy projects. The science of anthropomorphic climate change is quite straightforward, although the politics and corporate influences on the discussion are disappointing. Why? In my view, it comes down to economics. No politician can stay in office if they are perceived by voters as hurting the economy, and no one seems to understand that we can have economic growth while solving environmental and climate challenges.

-We have many tax incentives across the spectrum of energy production and distribution, from nuclear to oil and gas, to coal, to wind and solar, to bio fuels. Most are there because of lobbying efforts, not because we have a well thought through national energy policy, and certainly not because of any environmental or climate policy or objectives.
This needs to change.

-Debates on tax policy for energy focus on issues like job creation and how it "pays for itself". As we've seen, neither of these are valid approaches to tax policy. We can make jobs out of anything, and tax incentives never need to be paid for.

-What is the effect of our policies? We continue to provide incentives for questionable investments in fossil fuel energy extraction without careful evaluation of the impacts and regulation of the activities to ensure water and air protection. We implement poorly designed and inefficient tax incentives for new energy solutions, such as tax credits, which provide above-market returns for banks and distort energy markets.

-What could we do differently? You begin to see how these issues tie together. If corporate taxes were eliminated and income taxes reduced, tax credits (which were always inefficient) become less useful. We could eliminate them entirely and just provide direct subsidies for the things we want more of, which adding taxes on the things we want less of.

-Remember, these are not tied together! We don't tax oil companies to pay for renewable energy companies: we tax because we want to raise the cost and lower the demand for something we decide is harming us, and we provide subsidies if we think the market is not adequately stimulating the development of necessary resources or to protect businesses and consumers from the cost of such products if they are currently higher than existing ones.

-When viewed this way, subsidies can keep energy costs low while adequate investments are made to move our nation's energy portfolio to one that reduces carbon emissions and doesn't pollute the land, air or clean water resources.
Real resources need to be stewarded in a way that is sustainable and even regenerative (where we have degraded them below a healthy regenerating state). Tax policy can be a useful tool to find this balance, by redirecting investments and resources.

-As described above, one proposed solution is to bring our primary tax policy in line with environmental stewardship, so that we encourage a sustainable relationship between human needs, economic activity, and the rest of the biosphere that provides us with life and health.

-Moving toward a tax based on carbon-based, non-renewable, and polluting energy use makes a lot of sense, but should also be carefully constructed to avoid being regressive in nature and a burden to the poor.

-In a capitalist system, incentives can often be more effective than disincentives, and we must always caution against thinking of taxation as a means for paying for things - it is just a means to an objective.

-Investing in the "goods" should be emphasized at least as much as taxing of the "bads" - let's focus our nation's political energy on the right investments that build our shared future, not the tearing down and demonizing of past decisions.

States, Counties and Municipalities

Finally, a brief word about those parts of our government that are not currency-issuing but are rather currency-using.

-In the United States, much is made of the importance of State and local governments, and the need to keep the federal powers to a minimum and drive as much as we can to the local level.

-However, the more we push down to the local level, the more the local level has to potentially fund, and since they don't issue their own currencies, they have to tax or borrow in order to pay for what they are required to do for the people.

-Shifting the burden to the States or municipalities or counties adds a tax burden to the people, and creates a strong disincentive for appropriate funds to be spent on important priorities such as roads, regional infrastructure, city services, education, and more.

-For example, if we say states should have responsibility for health care, then they must raise taxes to pay for it. If the federal government had the responsibility, new money could be issued to pay for it without additional taxes.

-Across our nation we have aging city water and sewage systems, inadequate urban mass transportation infrastructure, and many other areas where we could all agree improvements could and should be made for our children's future.

There's an alternative.

There is no reason there has to be a direct link between the federal government paying for something and the federal government doing something. We could very easily direct some portion of funds to the various local governments, perhaps on a per-capita basis, and perhaps by simply making certain major infrastructure projects the fiscal responsibility of the federal government. All planning and decisions could be made locally, but the burden of taxation and funding is lifted from the local governments, freeing their budgets up for the truly local and discretionary government decisions.

We've obviously just scratched the surface. Tax reform is greatly needed, but not for the reasons most are talking about, and certainly not in the manner in which it is being proposed. Start with the right framework of how money functions, and then we can rethink our entire tax policy in a way that balances our national priorities.

Separate taxing from spending. Place the people and the environment at the top of our priorities. We can then solve for a prosperous economy. Reversing the order: making "The Market" our god, removing a proper investing and balancing role for fiscal policy, and leaving people and the environment to suffer the consequences, can only be detrimental to our future prosperity.

Let's build the national awareness and corresponding political process where we can use the people's national currency to fund all the things that we know will make for a better nation and world for the next generations; challenging them to outdo us when we pass the baton.


Here is another interesting article by Geoff Coventry. Make sure to visit Geoff's blog: Its The People's Money, A nation's money belongs to the people and should serve the public good. to enjoy his many months worth of contributions to the MMT economic community. And please follow Geoff on twitter @gladkiwi

In Part I, we summarized the basics of how monetary systems actually work in the real world, and in doing so, found that we needed a new glossary of terms to describe many of our familiar government monetary/fiscal operations so as to avoid confusing ourselves. Our old familiar terms simply don’t make sense and make us think that our monetary system works in ways that it really doesn't (they made more sense when we were on a gold standard or perhaps for nations using the Euro).

Sovereign currency-issuing nations are very different from “non-sovereign” nations (“non-sovereign” in the sense that they have given up their national currency or promise to exchange their currency at a fixed rate to, or otherwise created fiscal dependency on, a currency or commodity they cannot produce at will).

If we were to consider an “ideal” sovereign nation (like Freedonia), it would have a government that is “of the people and for the people”, but also a currency that is “of the people and for the people”. In other words, the ability to issue that currency at will for public purpose. Neither the government itself nor the nation’s money should be separate from or not under the direction of the will of the people. It’s theirs to use for their collective needs and desires, via their representatives in government.

It’s not the banks’ money.
It’s not the politicians’ money.
It’s not “The Economy’s” money.
It’s the people’s money!  

So how do they do it?

After a sovereign nation is formed, a monetary unit is defined so as to be used throughout the nation to account for all debts, obligations, contracts, valuations and transactions in the country (e.g. “Liberties” in Freedonia, or a Dollar in the US). The people then grant their government a monopoly on the issuance of money that is denominated in that unit. Note: the people don’t have this money so it can’t be first taken from them by the government – it is created and flows into the economy when the government pays for things.

Why? For the expressed purpose of providing the nation with the ability to afford things it otherwise couldn't! The very reason we invented State money is to enable the nation to afford things! We can recruit and pay soldiers to fight off invaders, invest in big infrastructure projects, pay for government employees like judges and air traffic control workers, build schools and universities, fund costly science research, and whatever else the people determine is in their interests.

Now the trick is to get the population to accept this newly created money when the government wants to buy something or pay wages for labor. That’s where taxes come in, at least from a historical perspective. Why would Freedonia accept Liberties? Why would US citizens accept Dollars? These State currencies would all be essentially worthless* until the people of these nations imposed upon themselves, through their representative government, a sufficient form of tax that could only be paid by returning to the government some of its newly issued money. Voila! A national currency has been born! As long as the government maintains some taxation, there will be need for the government’s money.

Economists like to say “taxes drive money” – they create the sufficient condition for a brand new currency to take over and become the nation’s sole form of money. And once it circulates businesses will accept the new government money for products, services, or contracts, and people will accept it for wages and other payments. Each time this happens, new money is created and flows into the economy mostly via credits to bank accounts done through a computer. It’s that simple!

The rest all follows from there

Nations direct some portion of their real resources (labor, goods, etc.) because they wish to invest in their nation and people: to develop the nation’s “human capital”, to develop productive capital and infrastructure for commerce and leisure, and to ensure the protection and well-being of the land. Continual investment is essential for a nation to advance, grow, and prosper in a sustainable way.
This is accomplished when the people authorize their governments to hire people, procure resources, perform research, build expensive projects, provide incomes for elderly, preserve nature, and much more; all of which is done via the issuance of the nation’s money, not by taking money first from the people.
In responsible and well run governments this authorization should happen via an open and accountable fiscal planning process to ensure that the money is being invested prudently and that proper controls are in place to ensure that the effects of the government’s procurement of resources and labor don’t have negative consequences that outweigh the desired outcomes. And there’s plenty of room for debate and compromise in the rough-and-tumble of democratic processes: it’s unlikely that fiscal planning ever achieves perfection or optimization, but with transparency, accountability, and fair representation the people can have their influence on the outcomes.
The government’s spending/investing/paying create positive fiscal flows of new money into the economy, building up the nation’s capital while providing incomes to businesses and individuals.
Since the people desire to save some of the government money for future needs, the government allows some to stay in the economy and it accumulates there in banks as net financial savings of all the people and businesses in the nation (and other countries through trade).

So what about taxes?

Some of the government-issued money, of course, is required to be taken back by the government in taxes, as explained above, to drive the universal demand for and acceptance of the State money as and when it is issued. Note, taxation simply takes back what was first injected into the economy. It is NEVER used or needed to fund the government’s investments.

There may be no greater invention than the sovereign currency-issuing government. It provides a society with the most remarkable of powers: the ability to organize their nation’s labor and resources to do ANYTHING that is feasible. If the people are available to work and have the necessary skills, and the required real resources are available in that nation, the government can ALWAYS issue the money required to pay for the thing to be done. It doesn't mean we should use it for anything and everything, but it means the limitations on our needs are never a question of affordability, but rather relate to the availability of real resources.

Think about how this changes how we view our national choices and the kind of future we can build and legacy we can leave for our children’s children.

Rethinking taxation

It should be clear by now that a sovereign government never taxes to obtain money. Sovereign government don’t have “income” or “revenues”. These terms are unhelpful vestiges of the days of gold standards and mercantilism.

Money is simply the governments IOU that they issue into the economy via spending, and they promise that IOU be returned in payment for the tax obligations imposed upon the people. Payment of taxes is simply a return of the IOU. It’s not income. New IOUs can be issued whenever they want to, so those collected back have no value other than to “warehouse” and re-use to save printing costs (as in the case of paper money).

A sovereign government never needs taxes to cover its investments, spending, retiree payments, interest on bonds, etc. (Of course, any non-sovereign government such as municipalities and states must still tax or borrow to cover their expenditures).

So how should we think about taxation? The following are some general principles to guide us.

First, let’s get the language right.

-Break all the links between taxing and spending! No more “trust funds” for Social Security or Transportation.

-End references to governments saving their own money units.

-Eliminate the words “taxpayer-funded” from our lexicon when referring to the national government.

-Remove the concept of “pay for” from the discussion of what we should and shouldn’t do with fiscal policy.

-End the “budget scoring” process. There is absolutely NO reason for government decisions of taxation to be part of discussions of what to invest.

-This will take some effort to re-train our minds and politics, but it’s essential to restoring a right approach to using our currency and running a government of and for the people.

Set policy and economic goals, and then solve for the right fiscal policy.

-We have made fiscal policy about foolish accounting methods that have no application to sovereign currency-issuing nations. Toss it all out.

-We are not balancing taxes with spending – we are balancing the economy as a whole, solving national challenges, investing in our nation’s future, preserving our land and resources, and fostering a prosperous, safe and happy future for our people.

-Fiscal policy is about the government representation of the people using the currency to efficiently and effectively implement the people’s desired outcomes.

-The starting position is to define the desired outcomes, then set the tax policy that best achieves them.

Recognize that some form of universal or at least very broad taxation in a nation is what drives the demand for and universal use of the government money in an economy.

-Maintaining taxation of some kind is important, even if we have progressed so much that the currency is very widely adopted.

-The key question then becomes what is the best type of tax for this purpose.

Taxation is just one part of the total net inflows or outflows of money from the government into the nation’s economy, along with how we authorize government to make payments.

-Usually the amount taxed is a bit less than the amount injected. We usually call this the “budget deficit” – I prefer to say positive fiscal flows so we don’t get hung up with the wrong metaphor again and link taxes and spending like households – remember, governments have no income.

-These flows directly impact the private sector economy – if the positive flow increases the private sector sees a gain. If they drop or become a negative fiscal flow (what we call a government “budget surplus”), the private sector has to see some other area grow or its economy will stop growing or enter recession.

-If we tax too much or have too small of a net fiscal flow, there will be unemployment and the economy will lose productivity and fall below its potential.

-So the total level of taxation matters. Economists should be paying much more attention to the net fiscal flows and how they can be optimized for the health of the economy rather than fretting over relatively meaningless accounting ratios like debt-to-GDP ratios and imaginary concepts like trust fund account balances.

Taxation has an effect on the economy.

-The questions we should be asking in determining taxation are: i) what is the effect of the tax? ii) Is the effect desired? iii) If not desired, is the effect understood and permitted for the sake of achieving some other outcome.

-Since taxation reduces disposable incomes it affects the amount of spending power in the economy, for both individuals and businesses.

-Changes in spending will vary across types of businesses and individuals in different income brackets since their propensity to spend varies considerably.

-Taxation can cause shifts in investments & portfolios as investors evaluate the after-tax yields or returns.

-Taxation can affect the level of savings and the how that varies by age and demographics.

Taxation can be a useful tool to direct or redirect resources in the economy that may be in the public interest but that are not being recognized appropriately through market economic forces. They can be structured to provide incentives and disincentives for spending and investment decisions.

-For example, the US currently provides significant tax incentives for various capital investments which benefit the very wealthy, while the taxes on the wages of the average worker reduces their spending power and ability to save or invest.

-Increasing taxes on “bad” things and reducing them on “good” things is a generally accepted principle to help in issues of public health and safety, environmental concerns, or to address societal and economic inequalities.

Political processes are not optimized for tinkering with the economy.

-It can be difficult for a political process to be counted upon to make necessary adjustments in a frequent manner to help the economy in the way the Central Banks believe they can.

-Political processes may not come up with the best answer and they may not be able to react very quickly.

-This suggests that much careful analysis should go into designing approaches to fiscal policy, especially taxation but also certain types of spending, to enable the net fiscal flows of the government sector to automatically adjust in a counter-cyclical way to the private sector economy.

-Such a “buffer” will result in less taxation and increased spending/investment during times of economic downturn, and vice versa.

-This does happen already to some degree (tax receipts go down when incomes and profits fall), but much more can be done to achieve a better outcome.

-Many of us would suggest that the primary desired outcome is that the economy maintains full employment of workers, but other outcomes can also be designed in.

And one more time for good measure: not one taxation principle here relates in any way to paying for government spending, financing government, or raising funds to balance budgets.

Throw away that textbook and let’s focus on a balanced economy!

Next, we will put this into practice by rethinking our approach to many of our common tax policies.


Here is another interesting article by Geoff Coventry. Make sure to visit Geoff's blog: Its The People's Money, A nation's money belongs to the people and should serve the public good. to enjoy his many months worth of contributions to the MMT economic community. And please follow Geoff on twitter @gladkiwi

By now, many of you have grasped (or are at least wrestling with) the key concepts behind how monetary systems actually work in the real world. It’s time to begin rethinking how to use it properly – redefining what responsible fiscal policy looks like for modern sovereign nations.

First, a quick summary.

We've uncovered many of the myths about money that have clouded our vision and that of our political leaders and economic pundits. Our ethical and moral values have been applied in destructive ways to our economy and our national interests because we've misunderstood how the monetary system actually works.

To recount, we now know the following:

We can’t run out of money.
We now know that sovereign nations can never go broke as long as they i) issue their own currency, ii) have their own central bank to control interest rates, iii) do not borrow money in another currency, or iv) never promise to convert their own currency into something they don’t control (i.e. gold or a larger country’s currency). This is the core distinction between nations that run into financial trouble and those that don’t (setting aside the extreme cases of civil wars, rampant corruption, regime change, etc.) We can’t run out of money but we can use it poorly.

Currencies are a creation of governments, not us.
We now know that sovereign nations are the monopoly issuer of their own currencies. They create money when they credit bank accounts of businesses and citizens in the economy and they remove it when they tax. Money proceeds first from the government and later returns to it (like any redeemable token), while some gets left in the economy for us to save. Government money doesn't first originate in the private sector to be later taken by the government via taxation. This sequence is the opposite of how most of us were taught and the implications are profound.

Taxes don’t give governments money to spend.
Since money is created when the government credits bank accounts, the private sector can only get government money AFTER it has first been spent into existence. Hence, taxes are never needed to fund government spending. In fact, it is the opposite: the private sector needs the government to “spend into existence” the money that we must obtain in order to then pay our taxes. Taxes then generally serve the purpose of creating demand in the private sector for the money units that the government chooses to issue so that we will accept those money units when the government pays us for the resources or labor it has been authorized to obtain. This dramatically changes how we think about what and how to tax.  

Bank money isn't like government money.
Banks can also create new bank money out of thin air when they issue new loans. Bank money is often made to be exchangeable for government money and called by the same name (e.g. Dollars or Yen), but it never adds to the net financial wealth of the private sector because for every bank dollar created there is a corresponding financial debt owed. For every bank-money saver, there is a bank-money debtor. Government money gets added to the economy as a net financial asset for the private sector but bank money never does.

Deficits are really net money injections.
All money flows are connected in a giant balance sheet for each nation, and it helps to think of this balance sheet divided into three sector balance sheets, all summing to zero: the Government, the Private Sector and the Foreign Sector. What happens in one sector of the economy must, by definition, affect another sector. If imports rise, the private sector (or government) is sending the national currency to the foreign sector (e.g. US Dollars held by China is simply a result of mutual trade decisions). If the government spends more into the economy than it taxes back out, the private sector is gaining money and businesses or individuals gain income. As we will see, this has important implications on how to approach the issue of government fiscal policy.

Sovereign “debt” isn't debt.
Money that the government creates via crediting business or individual accounts usually ends up sitting in the banking system. Banks, of course, don’t need to keep that money in order to lend it out to new borrowers since we know that they simply create new bank money every time they issue loans. So the money is sent back to the Fed in the form of excess bank “reserves” (banks only keep a little in their vaults for cash withdrawals). This injection of government money that floods the banking system with excess reserves would cause the inter-bank interest rate to collapse to zero. How does the Fed “suck up” the excess? Simply by converting the reserves into interest-earning government bonds, like moving money from a checking account at the Fed to a fixed-term CD at the Fed. The sum total of all these is what we call the government “debt”. Note that there is always exactly enough excess money already in the banking system to buy up every Treasury bond issued since the issuance of Treasury bonds happens after the government first injected new money into the economy and, ergo, the banking system. So this isn't debt in any real sense of the word. An issuer of a currency can never be in debt for the money thing they alone can issue in unlimited quantities. It is simply a means of managing interest rates between banks and also a policy choice to provide interest to bond holders.

A New Money Glossary

Words matter because they are the images that create metaphors and perceptions in our minds. We can see now that we have a very inaccurate glossary of terms when talking about government money. These words and metaphors are a troublesome vestige of the gold standard, and unfortunately, they cause us to think and behave as though we were still under its rule. When we use words like “debt” to describe something that isn't anything like debt, we fool ourselves into thinking we have constraints and problems that are not actually there.

A new glossary of sovereign money can help us appropriately define what it means to be fiscally responsible with government money. We shall see that in doing so, we will upend some bad moral metaphors. Setting the metaphors right-side-up will give us a positive language with which to move forward and inform the public opinion.

National Investment/Net Savings (not national debt)
“Debt” implies a burden of earning future income to repay what is owed. This simply doesn't apply to sovereign currency-issuing governments, so let’s stop using the word to describe government bonds.
The total accumulation (or stock) of money that has been invested/injected into an economy by the government has a corresponding balance sheet identity as the net financial savings of the non-government sectors.
Net investment in the economy (or some may prefer to say net injection of money into the economy) is a much clearer and more positive description of what’s going on.
Sovereign governments are never in debt! Let’s stop pretending they are. (In fact, they don’t have to issue it at all but we’d have to solve some other problems before making that shift).

Interest Rate Maintenance (not debt funding)
We observe the Treasury issuing bonds and it looks to the public as though the government is going to the money market to borrow so it can fund its spending for the month. It looks as though we are at the mercy of whether banks, funds, and other nations will lend us our national money. In fact, the government has already made its investment/injection of new money into the economy when it turns around to issue bonds.
The sale of bonds is used to clear out excess reserves from banks so the Central Bank can hit its interest rate target. It has nothing to do with raising funds. And since the overnight interest rate is established and maintained by the Central Bank, "bond vigilantes" have no mechanism to pressure sovereign governments with rising interest rates.
These interest-bearing accounts at the Fed effectively "vacuum up excess reserves" so the inter-bank interest rate doesn't collapse to zero.
Simply put, sovereign governments don’t borrow their own money. Let’s stop saying that they do.

Positive Fiscal Flows (not deficits)
When the government invests/injects more money than it taxes, there is a flow of new money into the economy.
The word “deficit” is a negative term that implies the government is in a hole and needs to get back out of it. It isn't and it doesn't.
The net accounting position after the government is done with its investments, purchases, payments, and taxation is a positive or negative flow of money to the economy.
Positive Fiscal Flow is a more accurate way to describe “deficit spending”, and Negative Fiscal Flow is a better way to describe the so-called “surplus”. Note how this reverses (appropriately) the moral framing of the position. Positive flows into the economy are good for the economy; good for capitalism; good for the private sector!

Fiscal Planning (not budgets)
We need responsible and efficient government. We don’t want governments that squander resources, waste money, corrupt bureaucracies, or create perverse incentives in government of the private sector. We deserve better government that what we have.
We do need a government that functions well and that performs the tasks and makes the investments that we collectively need to progress and prosper as a nation.
A process that sets goals for the government, allocates costs, and holds them accountable for the results is appropriate – even essential – for good fiscal responsibility. It doesn't have to be annual but it does need to be regular and required.
But it isn't a budget!
Budgets are for households and businesses that have to balance their incomes and expenses. Sovereign governments don’t have “incomes” and they create their own money when they need something.
Congress should debate and keep a fiscal plan that i) authorizes what the people have requested that the government to do on their behalf, and ii) defines the type and level of taxation that maintains demand for the currency, directs resources in the interests of public purpose, and maintains price stability where possible (given that inflation is significantly a result of commodity supplies/prices, there are limits to what monetary & fiscal policy can do during supply shocks).

Balance the Economy (don’t balance the budget)

By now it should be crystal clear that requiring that the government removes all the money that it invested/injected into the economy every year is an incredibly foolish way to operate a national monetary system. Those promoting such approaches to fiscal policy are promoting a highly destructive economic policy that will end quickly and tragically (as it always does).
What really matters are the goals set before the nation by the people (e.g. via the Fiscal Plan), and the effect such net flows have on the economy and on real resources.
If the economy is growing, people are fully employed and prospering, and resources are being used appropriately and in a sustainable manner, the account balances and metrics economists and politicians love to scare us with (such as debt-to-GDP ratios) are completely irrelevant.
We need a balanced, healthy, and sustainable economy, and the flows of government money in and out of the private sector can and should be used to that end, with no thought given to annual budget balances.

Citizen-Authorized (not tax-payer funded)
If there was one term we could banish from the policy debates of sovereign nations, it would be “tax-payer funded” (of course, it still applies to all state & local governments since they are users, not issuers, of their currency).
Unfortunately, the clear message behind the term is that all federal government investment/injection of money into the economy first came from some hard working citizen who had their money taxed away by the government. This drives a sense of moral outrage and leads to views that the best government as the smallest government since government can only do something by first taking from the people.
Of course, we now know that word-frame is all up-side down.
What we should be talking about are the actions, investments, and services we desire our government to perform. What is in the public interest? What can or should the government do that will help the citizenry and private sector and economy? We can then direct our government to issue whatever amount of money is necessary to achieve the goal, after careful consideration to the effects on the economy for doing so.  
Fiscal plans should refer to citizen-authorized government monetary and fiscal operations, and end the damaging and erroneous meme of “tax-payer funding”. The decisions on what and how much to tax are completely unrelated.

Investment (not spending)
We've implied this throughout, but it warrants repeating for emphasis. Spending is a word that has connotations of using up, exhausting, and maybe even wasting. In fact, when used in reference to government, we often hear of “wasteful spending”, or “spending like a drunken sailor”, or “out-of-control spending”.
Very often, the moral outrage driving the use of these phrases stems from the confusion above. I.e. the mistaken belief that the government has too much “debt”, “deficits” are too high, and spending more simply means taking/taxing more.
We now know better.
We no longer fear accumulations of savings in the economy.
We recognize that positive fiscal flows help the economy when it is struggling.
We recognize that we can authorize our public representatives to tackle important economic, environmental, national security, and social tasks that benefit the people without burdening them in counterproductive ways through higher taxes.
Investing implies taking excess money stock and deploying it in a way that is productive or beneficial, in ways that are economic or social or simply for general well-being. People invest in their education, their health, their pleasure, or their future. Nations can and should do the same, especially investing in their people and capital (i.e. resources that can be used to create more resources).
When we have idle resources, human or otherwise, we can authorize our government to invest the necessary amount of money that will employ these idle resources to meet the people's needs and desires and to develop the national capital stock.
And when we have resources that need to be preserved for the common good, such as national parks, city commons, clean water supplies, biological systems, and other natural resources, we can direct our national monetary system to find creative ways to best preserve and sustain our nation’s natural heritage.

So with a correct understanding of our monetary system and a new language to provide the appropriate positive metaphors, we can now apply our moral values to the challenges ahead and find new hope-filled solutions.

We can design a responsible fiscal plan that provides for employment to all our citizens.
We can design trade arrangements that don’t suppress other nations to benefit our own.
We can look at the increased automation of the workforce and smile, knowing we never need to leave our people unemployed, and we can unleash a world of creative possibilities of how to take this gain in productivity and make it benefit all.
We can invest in our children’s education, including the education and training of the next generation of workers through advanced degrees and skill development.
We can afford to move to a sustainable energy supply through the right investments and incentives, while keeping costs to consumers and businesses down.
We can find ways for everyone to access and afford health services, and restore the relationship between physicians and their patients, without burdening businesses with higher taxes and mandates.
We can change our tax system to provide the right incentives and disincentives that are in the public, economic, and environmental interest, without ever burdening the poor or stifling innovation and entrepreneurialism.
We can look to the future and make wise and bold investments for future generations, building state-of-the-art national transportation infrastructure, communications systems, beautification and art projects, and much more.
We can steward the beautiful land we have the privilege of sharing together, and restore and regenerate the ecosystems that our industrialization processes has harmed, while still providing for strong national economic growth and prosperity.

We are only limited by our imaginations, our creativity, our frame of mind, and our real resources. Never by money.

This is the road that leads to hope-filled economics. Jump on board!


Here is another interesting article by Geoff Coventry. Make sure to visit Geoff's blog: Its The People's Money, A nation's money belongs to the people and should serve the public good. to enjoy his many months worth of contributions to the MMT economic community. And please follow Geoff on twitter @gladkiwi

Austerity, rationing, and "shared sacrifice" belongs to the realm of real resources, not to money or the readily-available things that money can procure.

If we run out of oil, we'll need sacrifices to ration oil until there are alternatives, such as more electric vehicles and public transportation.

If we have drought or disease that creates food shortages, we may need to ration and sacrifice to share the food until the next harvest.

If we run out of peace, we may need to sacrifice to restore freedom, as in World War II.

But we have created rationing arbitrarily based on a perceived lack where none really exists, or where it can be easily remedied through the right incentive structures and funding.

For example, there is a prevalent idea that we don't have the resources to provide health care for all citizens, so we have to either ration economically (i.e. only the rich get it), or via the government choosing who gets it.

But why do we say we can't train enough doctors and nurses to care for everyone? Are there not enough people who desire this career or is it just that we don't provide the path for them to get there or the incentives to make it worthwhile?

Remember, a sovereign nation can always create the money necessary to pay for the full deployment of resources within that country.

It's our narrow thinking and allegiance to bad economic ideas that clouds our vision and leaves huge segments of our society living as paupers when we have abundance all around us.

So how can we provide health care for all?

We can pay for the education of as many doctors and nurses as we need if education costs are the reason for a lack of trained care givers.
We can provide salaries at a level needed to attract them to the field.
We can build medical facilities in under-served areas of cities and states.
We can credit health savings accounts for all citizens with money to pay for health care.
We can underwrite the costs of expensive and critical care.

The same applies to the unemployed in all fields. We say there isn't the money to employ them because the private sector hasn't found them jobs, but it isn't as though we have nothing productive for people to do in society. And it isn't as though we can't credit bank accounts with money from our national monetary system that was created for this very purpose. We have simply chosen not to because our outdated economic ideas tell us we shouldn't.

Money is never scarce for sovereign nations. We can always afford whatever is for sale in our currency, including all kinds of labor. Even doctors and professors. Scarcity is for real resources - never for money. We certainly may need to sacrifice, ration, and share if we run into constraints of real resources, but let's save the austerity for then (and work hard to develop the alternatives and protections now so that we can prevent such scarcity in the first place!)

It is the height of folly to hold a nation in economic poverty while its real resources lie idle.

If it makes sense, then spread the word. Ignorance is a cruel master that must be overthrown with truth.


Here is another interesting article by Geoff Coventry. Make sure to visit Geoff's blog Its The People's Money, A nation's money belongs to the people and should serve the public good. to enjoy his many months worth of contributions to the MMT economic community. And please follow Geoff on twitter @gladkiwi

2015: A year to learn hope-filled economics

Conservative economics has forgotten that spending equals income.

One business's income is another person's spending. In the aggregate, income = spending.

If spending falls, income falls. If income falls, businesses cut investment and costs and lay off workers.

Conservative economics has taught that we must reduce spending even more to grow income... Huh???

...all because of tragically mistaken concepts of how money works.

Such as the mistaken belief that governments only spend what they first take from the private sector. This has not been true since we left the gold standard and stopped having what was essentially a fixed exchange rate by tying our money supply to the availability of a somewhat rare commodity. That made as much sense as tying our drinking water supply to the amount of dinosaur fossils we could find.

Government spending is also simply another business's income. It is a net increase in private sector wealth. The government can buy and deploy otherwise unutilized resources. It can spend when sales/incomes are needed to avoid contraction.

It is essential whenever the economy lacks sufficient spending to purchase all the output of a fully employed society.

We need to rethink what we think we know.

Redefine what it means to be Conservative or Liberal based on a correct view of money, and a world of possibilities will open up to us.

A path to prosper while solving our nation's social, economic, and environmental challenges.

We can afford to put people back to work.
We can afford to shift our energy to a sustainable supply.
We can help other nations prosper without harming our own.
We don't need to go to war over resources.
We can afford to educate our children and working adults without burdensome debt.
We can afford to provide health care to all our citizens and help doctors return to a focus on patient care.

Greed (an apt word to describe Western capitalism) is not good, Gordon Gekko.
Selfishness does not provide a sound platform for economic prosperity and societal well-being.
Exponential growth through resource extraction at lowest cost is not a sustainable or just system.
Free trade for the poor and protectionism for the wealthy is not a righteous or sustainable global economic system.
Unemployment for the youth is not a solution to an economic crisis, nor will it bring nations back to prosperity and growth.
Reduced investment in public infrastructure, research, and education will not lead a nation forward to a prosperous future.

I met a fork in the road between Western capitalism and Marxist socialism, and I realized I was on the wrong road. The highway to sustainable prosperity is found on a different track entirely.

When presented with two false choices, the "lesser evil" is still just evil.

2015 is a year to learn hope-filled economics. It will take all of us to bring the changes we all desire, but they are there for the taking.


It may seem contradictory at first but its actually quite obvious after further analysis. Progressives are constantly going on about how we need to increase taxes on the 1% in order to fund Govt spending on policies that support the middle and working classes. This hurts our cause in two very important ways:

1) It perpetuates the lie that the Govt's budget is like your personal budget. In that the Govt must first obtain its own IOUs from the public before it can issue them.

2) It inflates the egos and social importance of the wealthy even more than they already are.

First of all, as a purely technical matter, its logistically impossible for taxes to fund Govt spending. The Govt spends using its own IOUs (liabilities), and as the issuer of something, you cant ever receive it before you issue it. This is totally obvious when we look at any entity other than the Govt.

Where do Google shares of stock come from? Or Google bonds? Well, they come from the only place on earth they can, Google.

Where do the tickets that are being sold in Denver for the Denver-Colts NFL playoff game this weekend come from? The Denver Broncos.

Nobody would ever make the mistake that NFL tickets come from the ticket holders when they arrive at the stadium. Or that Google must first get its shares of stock from stockholders before it can issue them. But such is the nature of ideology that so much confusion has been spread about this matter when it comes to US Currency. However, the Constitution is extremely clear on this matter.

Article 1 Section 8:

To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;

To provide for the Punishment of counterfeiting the Securities and current Coin of the United States;

Only Congress has the authority to create the laws that govern our national currency, and thats exactly as it should be. The public shouldnt be beholden to some non-representative authority when it comes to our national currency, otherwise we'd end up like the Eurozone. For example, Greece has forfeited its sovereign authority over the Drachma, and replaced its use with a foreign currency controlled by the Troika (the ECB, the EU commission, and the IMF).  Which is why Greece is subservient to the bond markets, whereas the USA is not.

Or to put it another way. The Govt spends by issuing its own IOUs, and when you pay taxes, all that happens is the total number of outstanding Govt IOUs are reduced. Its meaningless to say that the Govt has this many or that many IOUs, as US Currency is  nothing but promises recorded in an electronic journal at our national bank, the Fed. How many promises does the US Govt have? If you return promises to the Govt, do they now have more promises? Obviously not. Its only when we name these promises "dollars" or "money" does the confusion and ideology set in. These IOUs or promises can either take the form of reserves (can also be in cash form) or T-securities, either way they are Govt liabilities. What is accomplished by calling T-securities "debt" and reserves "money"? Deception, thats the only thing the conventional framing of Govt IOUs accomplishes. And the wealthy have spent many millions of dollars and decades of time making sure that the public is as confused as possible about Govt finances in a pure fiat monetary system. Which is a point well made many years ago by Paul Samuelson:

The wealthy worry about inflation and especially about full employment because it tips the scale of power into the direction of workers. As Michael Kalecki put it in his ingenious article from 1943 Political Aspects of Full Employment:

The reasons for the opposition of the 'industrial leaders' to full employment achieved by government spending may be subdivided into three categories: (i) dislike of government interference in the problem of employment as such; (ii) dislike of the direction of government spending (public investment and subsidizing consumption); (iii) dislike of the social and political changes resulting from the maintenance of full employment.  
As Samuelson mentioned, the myth of balanced budgets and Govt as a household comparisons are used in similar ways as old time religion, to keep the masses in line. But just as we dont need bronze age religions to guide our social morality any longer, we dont need bronze age economic religion to guide our economic morality.

This explains #1 above. By refusing to acknowledge the nature of the USA's monetary sovereignty, progressives shoot ourselves in the foot. every. time.

As for #2, every time I read an article by Dean Baker or Robert Reich that calls on increasing taxes on the 1% in order to spend more to stimulate the economy, I cringe. The wealthy already have all the power, so why are we giving them even more by tying productive Govt programs that help tens of millions of Americans to tax policies that the 1% are going to fight tooth and nail against? How many rich assholes feel even more important when the President of the freaking country is constantly telling us that we need their money? That nothing can be done unless we get the rich to acquiesce to letting us use their money. "Thank you sir, may I have another", Its insulting!!! We dont need their money, we have an unlimited supply of our own through our democratic institution aka Congress. In fact, the rich need our consumer dollars way more than we need their tax dollars. Even if republicans reduced taxes on the wealthy to zero, this would not change by even one dollar the ability of our Govt to issue its own IOUs for the rest of us to use and hold as financial wealth.

Tax the wealthy because extreme income inequality is a gross social ill that needs to be remedied, just like smoking or pollution. Not because we are a desperate nation that is paralyzed without first confiscating the funds of the wealthy. All the conventional stories do is further cement the power and authority of the 1% over our national policy making. Lets turn the narrative upside down and finally start to heal our broken nation by recognizing what should be obvious:

The US Dollar comes from the US Govt, via the authority that We The People have given ourselves; established in Our Constitution. It doesnt come from rich people or from China.


Far too many times have I seen the "debt monetization" or "money printing" canards put forward about the supposed dangers of deficit spending without issuing TSY securities. After a long and frustrating twitter exchange with the excellent Frances Coppola, I feel compelled to expand on the logic for why this is much ado about nothing. Her position repeats the conventional opinion that deficit spending without issuing TSY securities is inherently inflationary because TSY securities "sterilize" the dollars the deficit spending adds to the economy. Lets break this down into two parts:

1) The accounting impact of the deficit spending
2) The accounting impact of the TSY security issuance

First of all, we need to recognize that all Govt spending and taxing transactions are settled exclusively with US currency aka reserves at the Fed. The Govt does not spend in cash so we can ignore that part of the US Currency supply in this analysis. So what happens when the Federal Govt makes an unemployment insurance payment of $1000 to unemployed Joe and this is all done via deficits? Well, Joe presumably has a bank account at a private bank, and in turn, that private bank (lets assume he uses Chase) has a bank account at the Fed.

So step 1:

The TSY General Account's (TGA) checking=reserve account at the Fed = -$1000
Chase's checking=reserve account at the Fed = +$1000

But Chase doesnt get those funds for free, they must in turn credit unemployed Joe's checking account = +$1000

So far, so simple. The TGA account is reduced by $1000, Chase's net financial position does not change as their assets (reserves) increase by the same amount as their liabilities (Unemployed Joe's deposit account), and unemployed Joe gets a nice net credit to his checking account of $1000.

Is this spending inflationary? Well that depends on what unemployed Joe does with this money and what the state of the economy is. Money that is sitting in bank accounts and not spent on goods and services cannot drive up inflation. Its not the money supply per se that effects inflation, its the spending. If the economy is at full employment and Joe spends this $1000, he may contribute to driving up the price of goods and services. But the economy is never at full employment any more. Since 1980 we've had unemployment below even 5% for less than 7 years out of 34:

And if spending causes more people to be employed, which in turn increases the number of goods and services available for sale, then that spending need not be inflationary at all.

So what does issuing TSY securities have to do with this? According to conventional economic mythology, this deficit spending is inherently inflationary unless we "sterilize" an amount equal to the deficit spending by issuing TSY Securities. So lets see what that looks like:

Step 2) Pension Fund A wishes to save $1000 and earn a guaranteed interest return. Pension Fund A also banks at Chase.

So Pension Fund A's checking account gets debited = -$1000
Pension Fund A's securities account at the Fed gets credited = +$1000

Chase's liabilities (customer deposit) gets debited = -$1000
Chase's assets (Reserve account) also gets debited = -$1000

The TSY General Account at the Fed gets credited = +$1000

So Pension Fund A has no change to its net financial position
Chase has no change to its net financial position
And the TGA gets a $1000 credit

I dont understand what this is supposed to accomplish with respect to inflation. Pension Fund A didnt lose anything by buying a TSY security, and they can sell it anytime they like to get back their private checking deposits at Chase. And some other entity takes Pension Fund A's place in the accounting

But what if the Fed implements QE and buys this TSY security from Pension Fund A directly? We simply reverse all the accounting in step 2) and its like the Govt never issued that TSY security in the first place. But if Pension Fund A doesnt go out and spend this $1000 on real goods and services, this money can have no impact on inflation as Pension Fund A is saving by definition, not spending.

Granted, Pension Fund A will most likely not just keep this money idle in a checking account at Chase as thats not a practical way to save money for a Pension Fund. Maybe they would buy stocks or municipal bonds instead, increasing the prices of those financial assets. But financial asset appreciation is not consumer inflation. Maybe the sellers of the financial assets to Pension Fund A are going to use that $1000 to buy real goods and services, but maybe not. Maybe the sellers buy a $1000 financial asset from other sellers and the new sellers now spend that $1000 on real goods and service. Or maybe they dont. Either way the inflationary impact of the original deficit spending comes down to the state of the economy and the spending vs savings desires of the private sector in the aggregate. Issuing TSY securities does not prevent anybody from spending money, so how can they be anti-inflationary? The people and entities that save in TSY securities are far more likely to simply save some other way than they are to go out and spend that money on real goods and services.

If QE results in the exact same financial effects as if those TSY securities were never issued in the first place, and "debt monetization" or "printing money" (aka deficit spending US Currency without an equivalent amount of TSY securities issuance) is inherently inflationary, shouldnt we have seen some of this inflation by now?  Hell, Japan has been doing QE for 20 years, and all we keep hearing about is how deflation is hurting the Japanese economy. I cant imagine a better real world example for a social science then QE for demonstrating why these mythological dangers of "printing money" are simply unfounded.


The CBO is so riddled with mainstream neo-liberal economic doctrine that it cant be taken seriously as a forecaster. And here's a good example why:

CBO estimates that federal debt held by the public will equal 74 percent of GDP at the end of this year and 79 percent in 2024 (the end of the current 10-year projection period). Such large and growing federal debt could have serious negative consequences, including restraining economic growth in the long term, giving policymakers less flexibility to respond to unexpected challenges, and eventually increasing the risk of a fiscal crisis (in which investors would demand high interest rates to buy the government’s debt).
(Emphasis mine)

This is from its The Budget and Economic Outlook: 2014 to 2024 released in February of this year.

The market is not in charge of interest spending by the Federal Govt. As the monopoly supplier of Reserves aka US Currency, the Federal Reserve has no choice but to set the base rate upon which all longer term TSY securities are built on.

"As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills.6 In this sense, the government is not dependent on credit markets to remain operational. Moreover, there will always be a market for U.S. government debt at home because the U.S. government has the only means of creating risk-free dollar-denominated assets (by virtue of never facing insolvency and paying interest rates over the inflation rate, e.g., TIPS—Treasury Inflation-Protected Securities)."

We have decades of evidence that all TSY securities rates follow the Federal Funds rate that the Fed Board of Governors sets

You would think that the CBO, or mainstream economists in general, would listen to the operations people that actually run the monetary system at the Federal Reserve. Because they couldnt be any clearer on the matter:
Flows of funds between the TGA and private depository
institutions were important prior to the crisis because the TGA
is maintained on the books of the Federal Reserve; increases in
TGA balances stemming from Treasury net receipts drained
reserves from the banking system and, in the absence of offsetting
actions, put upward pressure on the federal funds rate.

Conversely, decreases in TGA balances resulting from Treasury
net expenditures added reserves to the banking system and,
absent offsetting actions, put downward pressure on the funds
(Emphasis mine)

Deficits (TSY net expenditures) drive down the Federal Funds rate and surpluses (TSY net receipts) drive up the Federal Funds rate. Its not really that complicated.

If banks only need $1 trillion in reserves to meet their Fed-mandated required reserve ratio and settlement needs and the TSY adds $500 billion through deficit spending, the banks would have more reserves than they need. And oversupply drives prices down. Which is why the Govt issues TSY securities in the first place, not because the Govt must acquire the currency that only it can create, but because if they dont do so, the Federal Funds rate goes to either zero, or the rate of interest the Fed pays on reserves. Which is of course exactly what QE demonstrates.

How can the CBO get something so basic so fundamentally wrong? Its almost like they, and mainstream economists, are ideologically against evidence that contradicts their worldview. Markets = good, Govt = bad, so of course the market and "bond vigilantes" control things. Its just absurd.

And thats just on one level of understanding the current operations. History provides an even more explicit demonstration of this. At any time the Govt wanted, it could have the Fed directly set the interest rate on any term TSY Security by simply announcing a price (interest rate) and being prepared to buy or sell any amount of TSY securities at that price. This is the power that the Federal Govt has as the Currency monopolist. And this isnt economic theory, this is an historical fact. During WWII, the Fed operated in just this way up until the TSY-FED accord of 1951:

The Federal Reserve System formally committed to maintaining a low interest rate peg on government bonds in 1942 after the United States entered World War II. It did so at the request of the Treasury to allow the federal government to engage in cheaper debt financing of the war. To maintain the pegged rate, the Fed was forced to give up control of the size of its portfolio as well as the money stock. Conflict between the Treasury and the Fed came to the fore when the Treasury directed the central bank to maintain the peg after the start of the Korean War in 1950.

Here is an interesting follow-up article where Geoff Coventry expands on his insightful Freedonia and Moronia sovereign currency parable. He examines further the differences between having a fixed exchange rate currency (Gold standard) and a non-convertible, floating exchange rate currency (US monetary system) and how these differences relate to international trade, Govt spending and their respective effects on aggregate demand.

Make sure to visit Geoff's blog Its The People's Money, A nation's money belongs to the people and should serve the public good. to drink in his many months worth of contributions to the MMT economic community. And please follow Geoff on twitter @gladkiwi

Cross-posted from:

"Monday, December 1, 2014

Angst in Freedonia: are there no alternatives to austerity?
As neighboring countries, the Kingdom of Moronia and the republic of Freedonia could not have had more different monetary systems. What wasn't apparent at first was just how significant those differences were when it came to how they could deal with both difficult and prosperous economic times.

Moronian austerity
Moronia, with its gold-based money, was constantly at risk of the depletion of their reserves of gold. This occurred especially when the nation desired to import more goods than it exported (since it had to pay for them in gold) - and this almost always happened when Moronia was at war (Moronians often waged war). To stem the outflow of gold, wages would plummet, rations would be imposed, imports would be minimized, and after a painful adjustment they would start exporting again to restock the gold reserves.

Over time, the people of Moronia noticed that every time this happened, the large industrial business owners would end up with more and more profits, while the workers never recovered their wages from the downturn. They weren't too happy with all the wars and falling incomes.

To avoid revolt, the king of Moronia consulted his advisers and business leaders, and they came up with a clever strategy: they would broadcast repeatedly through all possible media the message that "There Is No Alternative" (they called the propaganda campaign TINA, which was later satirized by a popular folk band). The message was harsh, but (so it went) the alternative would be much worse. The only way to survive and compete in a global economy is with lower wages and higher productivity (i.e. longer hours and worse worker conditions) in order to keep the nation's economy strong.

The Moronians, who were accustomed to suffering (many believed it was virtuous), thought the logic was irrefutable and they dutifully accepted the King's meme. They held out hope that perhaps one day they would join the ranks of the wealthy if they just worked hard enough.

Meanwhile, Freedonia was experiencing a very different dynamic. The had set up their currency (the "Liberties") based not on a promise to convert to gold (a promise they knew they could never keep permanently, especially if they were forced into war -- Freedonians hated war), but on the simple notion that a tax imposed on the population would drive demand for the newly created currency (you can read that story here).

Freedonia traded with other nations (even Moronia), but they always preserved their sovereign right to protect national interests by limiting trade when necessary. Rather than using gold, goods and services were bought and sold at the going currency exchange rate between them and their trading partners. Other nations had followed their lead in forming their own national money of account, and each currency would fluctuate in relation to the others based on a variety of factors. Usually, this took the form of Freedonia's national bank holding onto currency reserves of the nations they sold goods (in selling them goods, they were "buying" that nation's currency), and the reverse would hold for nations they mostly imported from.

Over time, Freedonia became prosperous and also a net importer. They were sending more Liberties abroad than they were receiving back. Their trading partners were holding more and more Liberties (usually in the form of interest-earning government bonds). It looked like they had a mountain of debt owed to other countries but they understood that it simply represented their trade partners' desires to hold their currency in exchange for selling them products. Of course, this also meant that Freedonia was able to keep more of their nation's resources and production for their own enjoyment, in addition to receiving the work product of other nations.

But then came the big recession.

Banks were in trouble, and the economy was hurting. People were losing their private sector jobs as businesses tightened their belts (fortunately, most found temporary work & a basic income through the national job guarantee program). Businesses stopped investing, and there were some saying the government should also pull back on many of its ambitious projects, especially the national high-speed electric rail system powered mostly be renewable energy. To many, stopping spending just seemed to be the logical response when times are tough. At least, that's what businesses and households do.

Do sovereign nations with their own currency have to behave this way too?"

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I'd like to welcome a new contributor to our Money & Public Purpose Blog, the excellent Geoff Coventry who is graciously allowing us to cross-post his articles from his fantastic blog:

"It's The People's Money
A nation's money belongs to the people and should serve the public good."

Geoff has been writing at his blog since March, so there's a lot of good information over there that I urge my fellow Kossacks to take advantage of. You can follow Geoff on twitter with the handle @gladkiwi.

With the formalities out of the way, here we go:

Cross-posted from It's the People's Money

"In the emerging but scattered country of Freedonia, the people decided one day that they wanted to band together to protect their freedom as a nation, their individual rights, and to grow their economy together. They establish a constitution to form a government, courts, police, an army, and the ability to empower their government to build roads and infrastructure needed for defense, well-being, and commerce. They also wanted a way to provision for their elderly and needy.

With their constitution in place, they excitedly asked for volunteers to come and perform all the work needed in the new government … but no one stepped forward. They were all too busy working to meet their own needs and run their farms & businesses.

Freedonia's economists convened and suggested that the government create and issue a national form of money to pay for their needs. So they created a national currency called ‘Liberties’ and printed the first issue of notes. Before long, they were proudly announcing the new money to the people, promising to give it to anyone who would come and fill the government jobs and build the roads and other infrastructure projects. Again, to their dismay, the people all declined. The new money had no value to them and they’d rather keep working their fields and making their goods.

Now there was one wise history professor who had studied all the economies throughout the ages. She urged the new Freedonia government to 1) create a small tax on every household (initially suggesting the amount of 100 Liberties), 2) require that the tax can only be paid back in Liberties, and 3) ensure the new tax was collected. They debated the radical proposal (Freedonians love to debate), wondering if it would work and if the people would accept it. Eventually they all agree to proceed. The people of Freedonia had followed the debate and were well informed; the new tax passed in a national vote. Most of Freedonia really wanted a functioning government with its institutions that would protect property rights and help facilitate commerce, and to accomplish their collective goals for a great nation.

To their surprise, as soon as the tax was imposed, applications for all the work came flooding in and businesses were also willing to accept Liberties in payment for their goods and services. Everyone was willing to work for wages in Liberties because they all now needed them to pay the Freedonia government tax. Many people even began saving lots of Liberties for future needs.

They noticed something else that was new... unemployment has been created! People were looking for work to earn Liberties but couldn't find enough jobs.

The government quickly got busy issuing new Liberties whenever it needed to build a road, a hospital, or to pay judges, court staff, police, and the army. Even those not working for the new Freedonia government now accepted Liberties as payment for goods and services because they knew they needed them to pay their taxes, or they could exchange them with someone who did need them. Before long, everything in Freedonia became priced in Liberties and it become the standard unit of accounting and the sole means of trade throughout the land.

A sovereign currency was born!"

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Repeat after me, unless we run a budget surplus, taxes are never and in fact could never be used to "pay off our debt". And this post will definitively demonstrate this blindingly obvious reality. So here we go.

Sometimes its hard to know if the authors of articles written about Federal Govt financing are purposefully misleading readers with propaganda or if they are honestly misleading readers due only to ignorance and incompetence. I have to believe the following article written by Terence P. Jeffrey over at (formerly the Conservative News Service, founded and owned by Brent Bozzell Jr.) must fall under the propaganda category. Here is the link and the opening paragraph:

The Daily Treasury Statement that was released Wednesday afternoon as Americans were preparing to celebrate Thanksgiving revealed that the U.S. Treasury has been forced to issue $1,040,965,000,000 in new debt since fiscal 2015 started just eight weeks ago in order to raise the money to pay off Treasury securities that were maturing and to cover new deficit spending by the government.
So far so good. At least Mr. Jeffrey knows what the Daily Treasury Statement is and where it can be found. This little corner of the internet only holds some of the most valuable evidence for understanding that the Govt's budget is nothing like a household budget. And if more people would avail themselves of this information, the confusion about how our national finances work would be decreased and the opportunities for rational policy making would be significantly increased.

Here is the Daily Treasury Statement Archive link for my fellow bookmark junkies:

And here is the final statement for FY 2014 (which happened to be Sept. 30, 2014)    

I've pasted the table thats relevant to this discussion below:  

   DAILY TREASURY STATEMENT                               PAGE: 4
               Cash and debt operations of the United States Treasury
                             Tuesday, September 30, 2014
                (Detail, rounded in millions, may not add to totals)
      TABLE III-A  Public Debt Transactions
                                                                                This              Fiscal
                      Issues                           Today             month             year
                                                                              to date           to date

    Regular Series                                 $          0  $    364,981  $   4,773,969
    Cash Management Series                              0          15,000         236,005
   Notes                                                 106,000        260,000      2,007,289
   Bonds                                                         0          13,000         191,011
   Inflation-Protected Securities Increment          31             -160          20,698
   Federal Financing Bank                                   0                 0           9,305
   United States Savings Securities:
    Cash Issue Price                                           2               69           1,014
    Interest Increment                                        2              477           5,783
   Government Account Series                    264,233     5,434,392    62,250,161
   Hope Bonds                                                  0                 0                 0
   Domestic Series                                            0                 0                 0
   Foreign Series                                               0                 0                 0
   State and Local Series                                 571           5,692         82,117
   Other                                                        925         19,896        236,475

   Total Issues                                        $371,764   $6,113,346   $69,813,829

 (Stated at face value except for savings and retirement plan
 securities which are stated at current redemption values.)
                                                                                 This         Fiscal
                   Redemptions                         Today           month         year
                                                                                to date      to date

   Bills                                             $           0        $ 420,999     $ 5,128,966
   Notes                                                75,709           182,880       1,409,866
   Bonds                                                       0                    0                   1
   Federal Financing Bank                                 0                   0             1,388
   United States Savings Securities                   35                814           10,058
   Government Account Series                  252,457        5,408,440     61,840,795
   Hope Bonds                                                0                    0                  0
   Domestic Series                                          0                    0                  0
   Foreign Series                                             0                    0                  0
   State and Local Series                                 46              5,464        100,528
   Other                                                      933            19,850         236,339
Total Redemptions                                $ 329,180     $ 6,038,447  $ 68,727,941

 Net Change in Public Debt Outstanding     $  42,583         $ 74,899    $ 1,085,888  

So follow below the fold to see what the hell I'm going on about.

So is Mr. Jeffrey

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