Economist Warren Mosler on the economy – Part 1

72 Responses

    1. @Talvez…,
      And WRKO tends to be conservative (Laura Ingraham and Howie Carr) to ultra conservative (Michael Savage). It would be interesting to know what feedback the station gets following Warren’s interview.

  1. JG again. You are gonna light up the internet again. But that’s good. It will never happen until it is all talked out.

  2. A couple things. It seems that there’s the official Federal deficit, and then there’s the Federal Reserve activity creating and lending (giving?) money to the Fed member banks. I assume that’s not part of the official deficit, but is a form of deficit spending. What is that annual value?

    Second, the very phrase “aggregate demand” suggests that the actual distribution doesn’t matter. So one could follow Mosler’s suggestions — stopping the payroll tax, $8/hour federal jobs, distribution to the states. Alternatively, one could greatly reduce the tax “burden” on the wealthy. (The quotes mean the word is a lie.)

    With the tax-cut-for-the-wealthy option, I see it going two ways. Part goes into the grand casino on Wall Street where it has about as much to do with the ordinary person’s economy as last week’s dead petunias — perhaps a small amount of trickle-down. Another part goes into building grand estates with lots of servants, his-and-hers Boeing Business Jets, giant luxury cruise ships with spacious multidecamillion-dollar condos, etc.

    Brian Czech’s term “liquidator” comes to mind. This will, of course, contribute to aggregate demand, and employ lots of people. But we don’t want that kind of aggregate demand consuming our limited resources. Nor do we want to further the gilded age that we already have.

    I’ve been convinced by MMT as theory of money, but I still firmly believe in ecological economics — economics informed by the laws of physics and the natural world.

  3. Question to MMT:

    Why does MMT choose to satiate the demand for savings by bloating the private sector’s net financial assets (i.e. make everyone feel richer by putting money in their bank accounts through spending) in order to restore aggregate demand, rather than punish the savers by charging a (negative) interest rate on deposits (simply through open market operations and charging banks interest on excess reserves).

    Carrot & stick analogy aside, I for one, think that at -5% or -10% nominal interest rates, cash savings will feel like a hot potato and everyone will want to get rid of it by either spending it or investing it–which is exactly the goal, no?

    The reason I like this better than govt spending is because I like the idea of having the people decide how they spend/invest their dollars rather than having the government make capital allocation decisions (That said I’m all for the job guarantee program because it has so many desirable economic and ethical properties and it would be a great replacement for current unemployment programs)

    Looking forward to hearing your thoughts.

    1. @DOB,

      Why does MMT choose to satiate the demand for savings by bloating the private sector’s net financial assets (i.e. make everyone feel richer by putting money in their bank accounts through spending) in order to restore aggregate demand, rather than punish the savers by charging a (negative) interest rate on deposits (simply through open market operations and charging banks interest on excess reserves).
      it can be through tax cuts as well depending on your politics and philosophy. MMT doesn’t necessarily mandate that increasing NFA has to happen increased gov spending


      Carrot & stick analogy aside, I for one, think that at -5% or -10% nominal interest rates, cash savings will feel like a hot potato and everyone will want to get rid of it by either spending it or investing it–which is exactly the goal, no?

      Where/when has interest rate jiggering ever worked? That will given incentive to putting money under mattress or offshore. The public will always have some desire to save. Using taxation to add and remove NFA’s based on upon employment and price stability goals seems easier. We could get rid of IRS and impose a simple federal real estate tax as Warren has proposed

      1. @jcmccutcheon,

        Thanks for your response.

        I take your point about reducing taxes. I should have written “net spending”. Still if the problem is that folks are hoarding cash, I like the idea of targeting the incentive to pushing savings only, rather than affecting the people’s entire net worth in order to achieve the same behavior..

        “Where/when has interest rate jiggering ever worked?” -> I could say ‘during the great moderation’ but you would probably shoot that down, just like some people shoot down the idea that government spending ever did anything. So rather than argue over the effect of past policies on historical economic performance which is subject to interpretation, we’re probably better off working conceptually: would you not agree that at -X% nominal yield, for some X sufficiently large, spending/investing would resume and cash hoarding would stop?

        “Money under mattress” -> would not work as parity between digital and physical cash would have to be discontinued (ATMs/bank tellers would convert the physical cash to it’s lower digital value at the time of transaction). Or eliminate physical cash altogether, it has limited value in a modern economy such as the U.S./Europe..

        “Offshore” (I assume you mean foreign currency) -> that would drop Foreign Ccy/USD exchange rate which would boost net exports from the U.S. thereby stimulating U.S. economy. That other country now has the unemployment problems and must lower its rate to prevent its currency from appreciating vs. USD.

        “Federal real estate tax” -> Singling out housing as the sole/main taxable asset feels like it would lead to an underproduction of housing.. I would buy a smaller house than I otherwise would in the non-distorted world and therefore builders would build smaller houses than we can otherwise “afford” based on productive capacity. Feels like shooting ourselves in the foot, no?

      1. @MamMoTh,

        Not negative enough.. In a liquidity trap, keeping the cash at slightly negative real returns is more prudent than spending and more profitable than investing. (Same as Japan).

      1. @WARREN MOSLER,

        So you’re saying that if the Fed tomorrow moved the Funds target to -10%, this would have a negative impact on aggregate demand?

        I believe your usual argument on this goes along the lines of: govt debt with high coupon payments rolls off and gets replaced by govt debt paying lower coupons -> less net financial assets in private sectors -> less aggregate demand. Is that correct?

        If so, let’s make the assumption that the lower interest payments by the treasury are matched with a tax cut, such that net financial assets are left unchanged. Now, would you agree with the following statement: for the same level of net financial assets in the economy, and everything else being equal, aggregate demand will be higher when interest rates are lower?

      2. yes. dollars would be debited from the economy by the Fed. that reduces income and savings/nfa
        same with lowering rates in general.

        yes, cutting taxes would remove fiscal drag.

        but hard to say if it’s ‘one for one’

        I’d leave rates at 0 permanently and adjust taxes accordingly

      3. @WARREN MOSLER,

        “dollars would be debited from the economy by the Fed. that reduces income and savings/nfa” -> Actually the Fed is a net lender of dollars so if interest rates were negative, it believe it would be *crediting* dollars into the economy.

        That’s moot though, as the loss in seignorage experienced by the Fed would probably be transfered over to the treasury, which would then either tax/issue debt to remain balanced.

        “I’d leave rates at 0 permanently and adjust taxes accordingly” -> I feel the adjustment of taxes is almost always going to have re-distributive/distortion side-effects. Besides, taxes are controlled by congress, which is highly influenced by political agenda as we’ve seen during the debt ceiling debacle and with all the austerity non-sense flying around. Would much rather have the Fed be in charge of regulating aggregate demand.. while not everyone agrees with their forecasts/actions, I think few doubt that their intentions are pure and that they are order of magnitudes smarter than congress.

        Wouldn’t it be better, then, to keep a relatively stable tax structure along with the job guarantee program such that net spending moves counter-cyclically but target long-run public debt to trend as a fixed fraction of GDP/taxable income? (Yes, that is somewhat arbitrary). Then let the Fed use interest rates (including negative ones) to regulate aggregate demand..

        I’m no economic historian so feel free to correct me, but seems like the public debt really flew off in Japan and in the U.S. when interest rates hit the 0% ‘floor’.. Maybe exploring the negative range is a simpler, more politically acceptable solution than letting public debt grow to arbitrary multiples of GDP? (even if that’s theoretically sustainable)

        Even if we don’t come to an agreement on which is the better solution, are we in agreement that both would work (i.e. achieve full employment and price stability)?

      4. If I have 100 on deposit with the fed, and they pay -10, doesn’t my account get changed to 90?

        And it’s all up to Congress in any case, right?

        And it’s all politically easy when the monetary system is understood.

      5. @DOB,

        First, negative interest rates are not practical, unless you get rid of the 1:1 convertibility between dollar reserves and dollar currency. That would be a huge change, with all kinds of uncertain consequences. The beauty of many MMT prescriptions is they don’t involve doing anything radical. The existing structure is sufficient, and if we were running a $1T surplus instead of a $1T deficit, no doubt Congress and the President would be doing the right thing (i.e. taxing less or spending more). We just need Congress and the President to recognize that whether the budget is in deficit or surplus is of no consequence. What is important is the slack in the economy.

        Second, and perhaps more important, is that you’re trying to set up a system to force people to do something that they don’t want to do. And in particular, you are trying to force people to be spendthrift and wasteful. Does that sound like a good idea to you in general? If some Wall Street miser wants to accumulate a pile of $100 bills and just save it, I say let him wallow around it to his heart’s content, like a pig in slop. It doesn’t hurt me at all. In fact, it leaves more real resources for me to consume, assuming the government is acting rationally.

      6. @DOB,

        “If I have 100 on deposit with the fed, and they pay -10, doesn’t my account get changed to 90?” -> Ok so I looked it up it looks like the Fed indeed does pay/charge interest on required reserves now (since 2008). But since all dollars deposited at the Fed were created when the Fed lent them in a repo trade vs the street, and if we assume the repo rate is roughly equal to the interest on reserve rate (not a big stretch), that means the fed net is NFA neutral, always. i.e. the Fed never creates nor destroys NFAs regardless of level of rates (ignoring QE, swap lines, and other non conventional stuff.) — am not 100% sure about that one so please let me know if there’s a flaw.

        “And it’s all up to Congress in any case, right?” -> Are you basically saying that Congress can do anything it wants? While that’s technically true, that doesn’t mean that some institutional structure can’t be erected (by Congress itself) to protect the country from political gyrations.. For instance, even if congress unanimously thought that the Fed should raise rates, enough in congress might think that Fed independence is even more important than raising rates and therefore block Congress from twisting the Fed’s arm.

        “And it’s all politically easy when the monetary system is understood.” -> No disagreement here..

      7. @ESM,

        “First, negative interest rates are not practical, unless you get rid of the 1:1 convertibility between dollar reserves and dollar currency.” -> Yes, convertibility has to be broken. Fed just announces that it will redeem/issue paper currency at a different rate than 1:1 than reserves starting on date X and banks just have to fix their ATMs/processes before then.

        “That would be a huge change,” -> It’s operationally a little bit involved but it’s a one time fix and I’m sure Japan would pay the cost gladly if it could get them out of the liquidity trap they’ve been stuck into 🙂

        “…with all kinds of uncertain consequences.” -> are those the same mystical consequences that deficit terrorists foresee when you let public debt grow above some arbitrary threshold? 🙂

        “[..] Congress and the President would be doing the right thing (i.e. taxing less or spending more).” -> My problem is taxing ‘who’ less and spending more on ‘who’? The ‘who’ matters because that’s where the distortions/re-distributions are…

        “We just need Congress and the President to recognize that whether the budget is in deficit or surplus is of no consequence.” -> I think it’s easier to put smart people in the Fed than in political office. In fact they’re already in there..

        “Second, and perhaps more important, is that you’re trying to set up a system to force people to do something that they don’t want to do. And in particular, you are trying to force people to be spendthrift and wasteful. Does that sound like a good idea to you in general?” -> Not forcing anyone to spend, but if one is not spending when the economy is slowing down, (s)he should pay the price for it in the form of economic loss. Much like if one is polluting by burning fossil fuel, (s)he should pay the cost in the form of tax on gas. Some people will stubbornly stick with their cash (and drive their cars) but on the margin, some will respond to the incentive and spend/invest. The rate just has to be set in the right place to have aggregate demand “empty the department store”.

        “If some Wall Street miser wants to accumulate a pile of $100 bills and just save it, I say let him wallow around it to his heart’s content, like a pig in slop. It doesn’t hurt me at all. In fact, it leaves more real resources for me to consume, assuming the government is acting rationally.” -> I’m sure that’s not what you’re trying to say, but when I paraphrase this it reads: “cash hoarders are good because they cause deflation/output gap which makes stuff cheaper for me to scoop up.”

      8. @DOB, Warren says congress is the boss:

        http://www.businessinsider.com/goldman-sachs-borrowed-30-billion-fron-a-secret-fed-lending-program-in-2008-2011-5

        Goldman Sachs, Credit Suisse and RBS borrowed at least $30 billion from the Fed in 2008 via top-secret loan facility that not even Congress kmew about, Bloomberg reported

        Bankers are in the dark too:

        Across Wall Street, bankers and traders — including company executives — are aggravated that the Fed “is refusing to engage in scenario planning for a US downgrade or default”

        Read more: http://www.businessinsider.com/s?q=congress+in+the+dark&page=2&sort=date#ixzz1jogEEpU1

        China isn’t in the dark though:

        SEC In Massive Probe Of Chinese Reverse Mergers That Have Cost Investors Billions

        Scott Eden, The Street|Dec. 21, 2010, 3:05 PM|5,654|3

        NEW YORK (TheStreet) — The Securities and Exchange Commission is investigating allegations that U.S. firms and individuals have joined with partners in China to steal billions of dollars from

        Read more: http://www.businessinsider.com/s?q=congress+in+the+dark&page=2&sort=date#ixzz1jogZfwTY

        Congress in the dark AGAIN during dodd-frank:

        http://www.nakedcapitalism.com/2012/01/matt-stoller-fed-transcripts-%e2%80%93-why-was-congress-in-the-dark-during-the-crafting-of-dodd-frank.html

        Hard to be the boss when you don’t know sh*t. On cspan yesterday I saw the former senate leader talk to a bunch of middle east experts about the middle east and he admitted he didn’t know anything about it, but when he started his senate career he was told to go talk the tax code to a room full of expert CPA’s and to just WING IT – LOL!

      9. @DOB, Congress is the boss?

        Warren says congress is the boss:

        http://www.nakedcapitalism.com/2012/01/matt-stoller-fed-transcripts-%e2%80%93-why-was-congress-in-the-dark-during-the-crafting-of-dodd-frank.html

        Hard to be the boss when you don’t know sh*t. On cspan yesterday I saw the former senate leader talk to a bunch of middle east experts about the middle east and he admitted he didn’t know anything about it, but when he started his senate career he was told to go talk the tax code to a room full

      10. @WARREN MOSLER,

        “When the fed pays interest it adds income and net financial assets.” -> My point is the Fed receives as much interest as it pays and therefore it’s NFA neutral.

      11. @WARREN MOSLER,

        “how is that counter to what i wrote?” ->

        I interpret what you wrote as:

        The Fed drains dollars from the economy when it charges interest on reserves but it’s NFA neutral because it remits that P&L over to the Treasury which uses it to increase its net spending and offset the Fed drain in the economy.

        What I’m saying is:

        The Fed does not add/drain any dollars from the economy as part of conventional monetary operation. The interest on reserves flow offsets the interest on repos flow and therefore there is no P&L and the transfer to the Treasury is 0.

        (Disclaimer: This ignores noise, QE, swap lines, etc. and I could be missing something in which case I’d appreciate someone pointing out the flaw)

      12. @WARREN MOSLER,

        “the fed has a net ‘profit’ which it turns over to the tsy.” -> The Fed has zero net profit on conventional monetary operations.

        I would guess whatever profit they got recently must have been from QE (they bought bonds which carry positive?) but happy to be corrected.

        Googling this, I found this which seems to confirm that the majority of the Fed’s PNL is coming from QE:


        The Federal Reserve Banks’ 2011 estimated net income of $78.9 billion was derived primarily from $83.6 billion in interest income on securities acquired through open market operations (U.S. Treasury securities, [..])

      13. yes, correct. i see your point now,
        I had lost some of the context, sorry!

        to your original point,
        when the Fed pays interest on reserves it adds nfa to the economy.
        if it didn’t own any securities that would be a net add.

        but it does own tsy secs, and the dollars it debits from the tsy’s account are not a reduction in nfa for the economy.

        but the tsy secs were previously held by the economy, and the dollars paid by tsy did add nfa to the economy.

        so when the fed bought those tsy secs/did qe the economy lost that income/nfa add.

        so the net payment of 76 billion the fed just made to tsy represents a net loss of 76 billion for the economy compared to what it would have had without the fed owning those securities and without the fed paying interest on reserves.

        makes sense now?

      14. @WARREN MOSLER,

        “makes sense now?” -> yes I think we’re converging 🙂

        One last bit to clarify, and curious to hear if you agree: if the Fed did NOT own Tsy securities (no QE), it would have had to create the reserves somehow. The conventional way of doing so is by doing repos. The interest it would have charged on the repos is roughly the same as the interest it would have paid on reserves and therefore:

        When it only engages in conventional monetary policy, the Fed is NFA neutral and has no P&L to remit to the Tsy.

        This holds whether interest rates are positive or negative.

        Do you agree with that statement?

        QE means the Fed is getting NFAs out of the Economy on the steepness of the curve (since it receives long coupons and pays overnight interest on reserves).

      15. @WARREN MOSLER,

        “yes, seems right.” -> Great! Since we agree that the Fed can control short term nominal interest rates in an NFA-neutral way, shouldn’t negative (or positive) interest rates be incorporated into the MMT toolbox when it comes to regulating aggregate demand?

        After all, assuming fixed inflation targeting and for a given level of net govt spending, moving nominal rates around moves real rates around 1-for-1 and therefore folks can be incentivized to spend/invest by lowering rates. Yes, we could leave rates at 0% and use fiscal policy instead but that’s an arbitrary decision to not use one of the available knobs.

        Shouldn’t the preference between fiscal and monetary tools be left outside the scope of MMT much like the preference between small and big govt?

  4. Hmm… Not sure what all the enthusiasm is about, so I’ll present a contrary view.

    WM(paraphrased): “Additional deficit spending by gov would have increased demand for cars…”
    This is exactly the problem. Why assume that more purchased cars was what the economy deeded at the time (even if they’d already been produced)? Americans had already bought plenty of cars prior to that, using their homes as ATMs in the process. There’s simply no demand for cars, no matter how much money you give people. Should we all be driving a rolls-royce?

    Or take a tax cut. With the common tax bracket of 25%, let’s say we cut taxes by 20%. But the asset prices (e.g., houses) have been inflated over 100% compared to incomes. Thus, a 20% increase in incomes would, at best, still leave a distortion of 80% in asset prices. Not nearly enough. Of course, additional spending (as opposed to a tax cut) would do even less, as it would increase both income and the already inflated asset prices (and the former marginally at best).

    Bottom line is, if current home and other asset prices dropped 50% while incomes remained the same, Americans would be truly richer. By contrast, no amount of “stimulus” would raise incomes without also raising asset prices (thus keeping the current distorted situation intact).

    Boyd’s law: “There are plenty of financial crises where neither a tax cut nor a spending increase (no matter how large) will do the trick.”

    This is because the perverse incentives that manifest themselves as a given crisis must first be removed/re-alligned before new money is injected into the economy. Otherwise, it will just be more of the same (pre-crisis) distortion.

      1. @vincent,
        A perverse incentive, for instance, is a government guarantee of a residential mortgage loan (coupled with the process of securitization). Such a guarantee takes the risk out of the market, allows loan officers to produce “lemons” (as in the auto industry) and immediately dump those lemons onto the taxpayer.

        Another example of a distortion is a self-feeding loop, such as inflated appraisals of residential properties each of which is immediately used to further inflate the very next sale in the neighborhood. In such a situation, prices rise not because of the relevant fundamentals (rise in income) but solely b/c of a self-feeding loop. Ever since I’ve heard of the concept of residential property appraisal, I’ve been laughing by but* off. And wait till you see the math analysis models they develop starting with this concept. Then your stomach really starts to hurt…

    1. first, the real total wealth is the real goods and services, etc. how you denominated doesn’t matter.
      and a price drop while incomes remain the same isn’t an increase in real wealth. the real wealth is still the same house.

      second, i was using cars figuratively. consumers will buy what consumers will buy.

      but if you want a smaller private sector, and people want to work, get paid, and not spend it, that can be done as well.

      And you’re free to make up your own laws.

      Also, are you from New Jersey?

      1. @WARREN MOSLER,
        “first, the real total wealth is the real goods and services, etc. how you denominated doesn’t matter.”

        Not so simple, IMO. Some unusable and unsellable products that “bombed” should not be included here (most of the time they are negligible anyway, but not always).

        “and a price drop while incomes remain the same isn’t an increase in real wealth. the real wealth is still the same house.”

        agreed. what I meant was the purchasing power of the incomes would rise.

        “And you’re free to make up your own laws.”

        Hehe, fair enough…

        “Also, are you from New Jersey?”

        No, I’m in FL, but also lived in the DC area for a long time.

      2. Might have scrap value.

        Yes, apparent purchasing power would rise, but actual purchasing power is limited to what’s for sale

        Ok, was wondering if your name was supposed to be Bird way back…
        😉

  5. If you have a pyramid then you can increase the size of said pyramid as long as you extend the base and the sides in a uniform manner so said pyramid does not collapse.

    The result is that the people on the top of the pyramid get to remain on top no matter what size said pyramid is.

    MMT is just another explanation of how fiat currency pyramid schemes work.

    If you want to actually live in a democratic and free America then we need a sound money system that does not advantage a small class of people at the top of the money pyramid.

    The only political candidate that represents Americans in that case is Ron Paul.

    1. @Alex The Great,

      “If you want to actually live in a democratic and free America then we need a sound money system that does not advantage a small class of people at the top of the money pyramid.”

      And that happened WHEN under your “sound money” system, Pilgrim?

    2. @Alex The Great, there is a serious problem with your “sound money” issue. Unless there’s a way for money supply to increase with growth, either growth gets stalled or deflation kicks in. Deflation is a major trap.

      Growth being stalled may be a good thing, but only in the context of sustainable economics and zero population growth.

      “Sound money” also paralyzes government response to economic catastrophe. It enforces procyclic response when we desperately need anticyclic response.

      Finally, “sound money” has nothing to do with the forces turning the USA into an undemocratic and unfree America. Try corporate and extremely wealthy money in elections, corporate control of the media, and electronic voting machines that can’t be audited.

      1. @John M,

        Try corporate and extremely wealthy money in elections, corporate control of the media, and electronic voting machines that can’t be audited.

        Warren is a very rich man, all his money didn’t get him elected to the senate seat. Corporate control of the media? There is this thing called the internet, and people like warren mosler have a blog to say whatever the hell they please. What corporation is censoring him? Who is censoring you? Only Warren’s moderator has censored me, no big corporate man in black. As to the voting machines, it doesn’t matter who wins or runs, even if warren had won the senate seat, wouldn’t have mattered, the structure of our society and government must radically change for there to be real differences. Change that would require a lot of people getting up off the couch or getting out from reading this blog and walking out the front door and doing REAL WORK, that is just too much effort. Sit back and relax citizen and let time wash over you.

  6. @Alex The Great,

    So basically you’re proposing to tear down the paper pyramid and replace it with one made of gold.

    NB: I actually think Ron Paul’s heart is somewhat in the right place – I can’t help but like the guy – but his economics is just utterly wrong. Shame, really.

  7. FYI I emailed the show yesterday and the producer responded to me this morning that they will try and get part 2 posted.

  8. Warren, in his article, MORTGAGE FRAUD REVISITED, Randall Wray writes,

    “It’s the biggest Catch 22 the world has ever seen. The big banks must be resolved—shut down—to relieve the pressure on homeowners, but that cannot happen because the big banks are too big to be shut down.”

    My question is what if the big banks were to be “shut down.” Would that in fact be catastrophic necessarily? I realize of course that the question is purely theoretical.

    1. Large banks have been ‘shut down’ with their loans and deposits and buildings transferred to other banks.
      nothing much changes, except a lot of energy consumed changing the names on the buildings, etc.

  9. Thank you, Warren! So, in principle, the banks which were bailed out could have been allowed to fail and thus face the consequences of their bad bets and corrupt dealings? In short, it would not have been catastrophic–as Paulsen and others threatened–if the various bailouts, beginning with TARP, had not been paid to the banks, and instead, for example, had been used to “bailout” stranded homeowners, the value of whose houses was plumetting?

  10. Thanks, Warren. I really appreciate the MMT take on these matters. What a job of extortion (or “financial terrorism”) Wall St. has accomplished!

    (BTW, of course, by the banks having to “face” their losses, I meant their well-paid officers and their stockholders)

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