Warren Mosler comments on Keynes blog, Italy

warren mosler 8 dicembre 2012 alle 15:33

First, let me remind that MMT was originally ‘Mosler Economics’ which began with ‘Soft Currency Economics’ (1993) which can be found at http://moslereconomics.com. Also, highlights of the ‘history of MMT’ are in ‘The 7 Deadly Innocent Frauds of Economic Policy’ free online also on my website. Note too that ‘Soft Currency Economics’ was a result of my first hand experience after 20 years in banking and monetary operations. I had never read Keynes, or even heard of Lerner, Knapp, or had any knowledge of any ‘post Keynesians’. So while it may be true that MMT can be derived from one school of thought or another, it didn’t happen that way. And, for example, when I put forward my ‘real vs nominal’ discussion of fiscal transfers in a monetary union earlier this year, explaining how the production of public goods and services for the benefit of the entire union is in fact a real cost to the region that receives the funding to produce these public goods and services, that was also ‘original MMT thought’ (fully recognizing the shortcomings of such a statement!).

Second, if there is a ‘fundamental’ contribution of MMT to ‘the literature’ it’s the explicit recognition that a currency like the dollar is in fact a simple public monopoly, and all the rest follows. Along those lines I have lectured on the long standing ‘Keynes vs the Classics’ discussion, where the Classics argued there can be no unemployment without monopoly, and Keynes argues there in fact can be persistent unemployment even without monopoly, due to the effects of unspent income, etc. in the monetary system. My response is they both failed to explicitly recognize the currency itself is a public monopoly. Notional demand is from taxation and from savings desires, and notional supply from state spending and/or state lending. And unemployment is the evidence of a restriction in supply from the monopolist- the failure to spend enough to satisfy the need to pay taxes and the desires to net save in that unit of account. So the classics were right in that unemployment does come from monopoly, but they failed to recognize the applicable monopoly. And Keynes was right, the problem was on the monetary side, but he failed to recognize the currency itself was a simple public monopoly, even though he described it much along those lines. If Keynes had recognized the currency was a monopoly, he surely would have explicitly said so in this discussion, and many other places as well to support many of his contentions. I’ll post this and then go on with additional response to the above blog.

warren mosler 8 dicembre 2012 alle 15:50

With regard to circuit theory, when I first met the Post Canadians 😉 in the mid 1990’s who I very much respect, especially the M&M’s (Mario and Marc), and read a bit of circuit theory, it seemed so ‘intuitively obvious’- a case of ‘goes without saying’- I wondered why it was even worth writing about! And my first comment was that while I fully agreed with what they were saying, it didn’t ‘start from the beginning’ in that it began with firms borrowing to pay workers, but never discussed why anyone would work for the currency in the first place. I explained to them that it about the currency being a simply public monopoly, with tax liabilities the ‘driving force’ behind the ‘government circuit’ where, at the macro level, taxation creates sellers of real goods and services, including labor, which is why people work for businesses, etc. Professor Alain Parguez immediately picked up on this and added it to his model in his next paper, only to be severely criticized and isolated by much of the ‘Circuitist’ community for many years! Most came around to accept it over the years, though some continue to fail to do so.

warren mosler 8 dicembre 2012 alle 16:16


“I think it’s worth remembering that this thesis is a rigorous foundation of the theory of relative prices and distribution in the development of the so-called “theory of production”, which, among others, Leontief and Sraffa have made outstanding contributions above (see Pasinetti 1975; Kurz and Salvadori 1995, cf. Petri also 2004). In particular, in the light of the theory of production and the above-mentioned argument and its implications can be extended to so-called “long term”, and the objections of Krugman (2011) to the MMT can be effectively criticized.”

Relative prices, yes, but MMT reveals the source of absolute nominal prices. And it’s very simple. As everyone knows, a monopolist is ‘price setter’ rather than ‘price taker’.

And a monopolist is price setter for two prices. The first what Marshall called the ‘own rate’ which how his ‘item’ exchanges for itself. With a currency this is the rate of interest, which we know is set by the CB and not ‘the market’ as we know the CB is monopoly supplier of reserves to its banking system, and therefore is price setter as it prices the banking system’s marginal cost of funds. The second is how the monopolist’s ‘item’ exchanges for other goods and services, which we call ‘the general price level’

I say it this way- the price level is necessarily a function of prices paid by the issuer when it spends, and/or collateral demanded when it lends.

warren mosler 8 dicembre 2012 alle 16:28


“However, as Lavoie has shown, it is derived from a simple accounting convention: some modern monetary theorists analyze the central bank and the state as if they were a single sector consolidation. The mystery is easily solved, then. However, it should also add that this consolidation, in the current political and institutional reality, does not exist.” First, I do very well know, recognize, and account for the institutional realities at all times. As I do know that no matter how you look at it, spending comes first before taxing of borrowing for the issuer of the currency, which includes his designated agents.

Congress is the issuing authority, and has assigned various tasks to the Treasury and Fed to carry out its will.

The Fed operates a spread sheet that contains the accounts of its member banks, as well as an account for the Treasury.

I begin, for purposes of this discussion, at inception, with no balances in any accounts.

Any payment of taxes would require the Fed to debit a member bank account and credit the account of the treasury.

This is impossible with no balances in the member bank accounts, unless they are permitted to have negative balances.

However, negative balances- overdrafts- are functionally loans from the Fed, an agent of Congress. This means paying taxes via overdraft is paying taxes via obtaining a loan from the Fed. That is, in this example, the Fed must lend the dollars that it accounts for as payment of taxes.

The way ‘insiders’ say it, there can’t be a ‘reserve drain’ without a ‘reserve add’

That is, the dollars to pay taxes and to buy treasury securities necessarily ‘come from’ govt. spending and/or lending.

There is no way around it. Any issuer must issuer before he can collect the thing he issues as a simple point of logic.

warren mosler 8 dicembre 2012 alle 16:36

regarding trade, with a floating exchange rate there is ‘continuous balance.’ For example, in the case of the US, with perhaps a $400 billion trade deficit, it can be said that we have the goods and services we imported, and non residents are holding the additional $400 billion of $US financial assets they received in payment, and at this point in time there is that ‘balance’ which has resulted in the current exchange rate martix.

So I see only ‘balance’ at any given point in time, never ‘imbalance’, as a point of logic. Am I missing something? If so, rather than I write about every possible question I can imagine you might raise, can I ask for any of you to give me an example of why this is a ‘problem’ so to speak? Thanks!

warren mosler 8 dicembre 2012 alle 16:45

“In a period in which the theme of the insertion of foreign capital in the ownership and control seems to go beyond the scope of the last strategic assets in public hands and even get to lick the banking system, it would be good to do a lot more clarity on this point .”

Yes, at any time I see public purpose in sourcing matters of strategic purpose domestically. For example, you do not want to outsource the programming of your military software which could render it useless in time of war. And I see public purpose in producing goods and services with strategic military purpose domestically, like the steel that goes into maintaining the military, and domestic sources of energy, food, etc. etc. Again, government is there for public infrastructure that serves public purpose, which includes strategic planning.

On the other hand, I don’t see the public purpose in not allowing non residents to sell us most of what we call ‘consumer goods and services’ where, for example, a cut off in time of war would not alter the outcome of the war.

Along these lines, I see a serious problem with the euro zone’s dependence on Russian energy supplies, even though Russia has ‘promised’ never to cut them off.

That and $20 will get you a cup of coffee in Rome…

I see the euro zone as paying a heavy price in regards to real terms of trade with Russia and others, due to arrangements that I don’t see serving public purpose, though the certainly do serve influential private purpose.

warren mosler 8 dicembre 2012 alle 16:53

Remember, economically speaking, employment is a real cost to the worker. He is selling his time. The real benefit is the output. So I suggest you look at real consumption with regard to the euro members, to see who’s winning and losing economically. But yes, any monetary union needs a system of fiscal transfers to ensure full employment and price stability. And I suggest the reason it doesn’t happen is because it’s not widely understood that if a region is assigned the production of public goods and services, in real terms that process is a real cost to that region, as it’s employed to produce real goods and services that other parts of the union are consuming. Instead, because that region gets funding, it’s assumed that region is benefiting in real terms. In other words, fiscal transfers can be effected to use the areas of higher unemployment to produce goods and services that are exported to the rest of the union. This all comes back to exports being real costs, and imports real benefits, etc.

warren mosler 8 dicembre 2012 alle 17:00

let me conclude today that as a matter of simple game theory labor is not a fair game, and if not supported in some manner real wages will stagnate at very low levels. This is because people must ‘work to eat’ while business hire only if they can make a desired return on investment.

For me it suits public purpose to make sure people actually working for a living and producing real goods and services consumed by the majority are worthy of being supported with high levels of education, health care, and other such publlc services, as well as being fed, housed, and clothed at levels that make feel proud to be members of that society. The proposals on my website are intended to work to that end.

59 Responses

  1. BRAVO. Your stream of consciousness brought it all together.

    The only new question that has occurred to me is whether the response to the rationing of currency, which is what the Congress is engaged in, actually generates the hoarding of currency by other agents, just as rationing other commodities does. If so, then the entire economic downturn can be laid at the feet of Congress whether it was intentional or not. And why would a monopolist ration or hoard?

    There must be some non-economic explanation. Lust for power? Sadism?

  2. 99% agree. The 1% of doubt is this: with regards to what you said about Russian gas, or Gulf oil for that matter, the problem is that there is no way Europe can produce that domestically, simply because gas and oil exist here in Europe but not in sufficient quantities. So, when it comes to energy, unfortunately, we Europeans must depend on foreigners, unless we went 100% nuke, but even then we would not be totally self reliant. Alternative sources of energy are there, but not fully developed yet. Thx P

    1. understood. the problem i see is that with the gas coming by pipeline from Russia there’s no substitute.
      At least with oil coming by ships or with coal being transported by rail, for example, it’s possible to access other sources.
      But with the nat gas your just stuck with that particular bear of a monopolist who can charge whatever he wants, financial or otherwise.

  3. Warren,
    Nice comments. Apologies if I missed it but could you pls mention which Italian Keynes blog you are referring to ? Thanks and always looking forward to your thoughts…

  4. A bit off-topic here.. but what is your view on household debts? I don’t see much mention of private banks and their ability to create debt out of thin air in the MMT blogosphere. How do you account for this from a sectoral balance approach, does it all just net to zero since if I go in debt 50K then someone else in the economy is getting 50k?

    I’m aware my wording here is probably rather poor but I guess the main concern is how we can avoid the seemingly ingrained American way of living off of increased debt levels based off of ever-rising asset prices. Household debt-to-income looks like still above 110%, down from 130% before the crisis but still way above the 90% in 2000. Would a larger government deficit be a good way to combat the ravenous appetite for debt in America (for the banks as well as consumers). Or maybe some modifications to our banking system? Perhaps you have some reading on this that I’ve overlooked.

    1. Yes

      And see my proposals for banking, fed, FDIC on this website

      The ‘important thing’ is to watch aggregate demand/unemployment and be ever ready to make fiscal adjustments to close any output gap

  5. ‘Remember, economically speaking, employment is a real cost to the worker. He is selling his time. The real benefit is the output’

    `’For me it suits public purpose to make sure people actually working for a living and producing real goods and services consumed by the majority are worthy of being supported with high levels of education, health care, and other such public services, as well as being fed, housed, and clothed at levels that make feel proud to be members of that society.’

    I like the last paragraph very much. But it raises some questions concerning the terms ‘real benefit’ and ‘real cost’. Would you agree, that ‘to be proud of doing something’ is a real benefit?

    Does it make you feel proud, if you consume as much as you can?

    Does it make you feel proud, if you are able to produce goods that other subjects want to buy?

    I think your definition of real cost and real benefit is a little bit too materialistic. It is not all about producing and consuming but also if you are proud or ashamed of doing this or doing that, at least for some human beeings.

    1. @Ben,
      “I think your definition of real cost and real benefit is a little bit too materialistic.”

      I think he’s only talking about economy and not the rest. So economy is only materialistic, the non-materialistic part is up to you me, people.
      We vote this economics for give the best chances to let people have the necessary to make choices.

    2. @Ben,

      With all due respect, and I am basically razzing you, but it is you who puts the materialistic cast on this. 😉

      Consume isn’t just food and Rambo. How about pride in consuming self-education through reading books (goods) or membership in a pay-walled library (service) or hours spent on iTunes U watching free lectures from MIT and Stanford on Medieval Literature and the birthing of the secular class (goods and services)?

      Or the pride in spending hours, months, years producing a new prosthetic that lets vets without legs forego a wheelchair with a titanium fully-functioning bionic leg replacement?

      Costs the consumer and inventor in real terms. Time and money fueled by desire, pride.

      Warren uses macroeconomic terms. Consume. Spend. Save. Don’t be so quick to judge with a limited sense of those words.


  6. Warren,

    OK. Time to hold my hand. I got this far and this sentence tripped me up because of my understanding of the word “notional,” which to me means imaginary or theoretical. Or is this another macroeconomic term I am missing the understanding of?

    “Notional demand is from taxation and from savings desires, and notional supply from state spending and/or state lending.”

    Would you mind wasting two sentences expanding on it taking into consideration the previous sentence:
    “My response is they both failed to explicitly recognize the currency itself is a public monopoly.”


    1. Notional is vs real.

      It’s just a number, for example.

      In this case the notional demand for dollars is for the number of dollars being taxed.

      Real demand would be like the demand to buy food, cars, etc.

      I use the distinction to keep picky economists from taking statements out of context.

  7. “For me it suits public purpose to make sure people actually working for a living and producing real goods and services consumed by the majority are worthy of being supported with high levels of education, health care, and other such publlc services, as well as being fed, housed, and clothed at levels that make feel proud to be members of that society. The proposals on my website are intended to work to that end.”

    This is a very human and social element of MMT, which probably don’t get discussed enough when it comes to marketing of MMT to the general public.

    1. @jack,

      This is also quite sensible from a cold-hearted efficient use of resource point of view too, happy workers are usually more productive! 🙂

    2. @jack,

      Let me second that. The public purpose part is the only reason why this has captivated me, since I’m not an economist. It’s not only the humanity of it, which underscores the utility from private to public and back again or the other way around, but as a system, it’s how it works and it works for everyone. It’s inclusive, and an advance in civilization. Globalization for me (and this will probably seem naive) does not mean that multi-nationals get to use the laws of their home governments to hoover the world’s resources for themselves and their shareholders, it means everyone has access to electricity and water; people can read and invent, feed and heat/cool their families and dwellings, and they have adequate sanitation.

      In November 1994, I saw Sir James Goldsmith on the Charlie Rose Show, and he gave an impassioned description of the purpose of an economy, which I never forgot. Towards the end of this is 9+ min clip of an hour show. He said an economy was not there to serve financial indices but to serve a public purpose.

      1. @MRW, Thanks for pointing out the Goldsmith video. It got me thinking about how WTO and all the free trade agreements that have been signed have led to his predicted rural to urban migration, although these migrant workers have gained greater social and economic mobility via arguably desirable working conditions. MMT addresses full employment with idea of employment of last resort, rather than unemployment checks, but we can agree that those jobs, maybe manual labor such as road construction, would not be preferred work for most people. Question of a happy population’s full employment is maybe a more philosophical one than I expected. I assume we have the technology to produce more than enough food, shelter clothes for all. Is it such a bad thing (other than a political one) to have some unemployment where people can enjoy time living rather than holding an unpleasant job?

  8. Dear Warren Mosler,

    I have not been fully convinced by your comment to Professor Emiliano Brancaccio’s speech (http://www.emilianobrancaccio.it/ricerca). Among other things, Brancaccio seems worried about the consequences of FDI in the Italian banking system. You seem to undervaluate this problem. Does this depend on the fact that you are American, and do not know very well the effects of foreign ownership of banks on the direction of loans? The “protection” of the national baking system is a “must” in the literature on “development economics”. We would like to know your opinion on that. Thanks. Roberto

    1. government regulation limits what loans banks can make,
      and bank management selects from there.

      furthermore banks are competitive.

      So if one bank won’t make a particular type of (profitable) loan because of politics,
      others are sure to take up the slack.

      And if one bank wants to take excess risk they run up against regulatory barriers.

      So if there is a problem it’s a problem of regulation?

      Am I missing something?

  9. This is because people must ‘work to eat’ while business hire only if they can make a desired return on investment.

    And that explains the social contract.

    I need to make sure that everybody else has an income because their spending is what provides the income to pay my salary.

      1. I think that’s too wonky Warren.

        You can just about get it across to people that their salary depends upon other people spending.

        So if they’re saving (to excess), they’re not spending.

        That then leads to the idea that you have to have an active entity to provide the ‘pump’ to get things moving around.

        Taxes have too big an emotional impact. It’s always best to avoid mentioning it if you can. Nobody likes taxes – any more than they like sewers. You might need them, but nobody like to think about them.

  10. Warren,

    The discussion ‘from inception’ is a crucial issue. Especially when we take into account the reality of cb next to tsy.
    You state that Congress is the issuing authority, but accounting technically the Fed is the issuer. You mention yourself also a little further that the Fed first has to issue.

    Your statement “That is, the dollars to pay taxes and to buy treasury securities necessarily ‘come from’ govt spending and/or lending” is a fundamental change with what you have on the right top corner of your blog. There you mention: “The funds to pay taxes and buy government securities come from government spending”.

    If it comes from govt spending it implies that the govt first has to run a deficit.
    We also know that govt spending is done by the tsy, not by the cb. So then comes the question how did the tsy get these first funds taking into account there is a no overdraft rule and debt monetization is not allowed.

    If it comes from govt lending then the govt does not run any deficit prior to us being able to lend to the tsy or to pay taxes.
    We know that govt lending is done by the cb, not the tsy.

    I think that in this respect it is important to keep in mind that the currency is always created by the State, but the economy existed prior to the State.
    In other words: Real Economy comes prior to State, which in turn comes prior to money.

    Could you please clarify what according to you the sequence of events and bookings are from inception, with no balances in any accounts?

    1. Congress has the ‘business licence from the people’ aka the constitution.

      Congress now uses it’s Fed to make the actual debits and credits on its spread sheet.

      It’s like the Treasury is in the car giving directions and the Fed is driving.
      And Congress has given both of them various ‘rules.’ Or something like that.

      Under current institutional arrangements, which probably didn’t actually exist at ‘inception’,
      from inception the Fed must conduct what’s called a ‘reserve add’ (credits to reserve accounts) before there can be what’s called a ‘reserve drain’ (debits to reserve accounts).

      Reserve adds can come from direct lending by the Fed or by the Fed purchasing assets.
      And if lending is done via repurchase agreements you could call that spending or lending- it’s all about your definitions.

      If you look at lending as a spot buy and a forward sell, you could call that spending, and then say spending comes first.

      1. @WARREN MOSLER,With regards to “current institutional arrangements, which probably didn’t actually exist at ‘inception’ “:
        It seems to me that if a system has rules today that could not have been there from inception then there is a very strong case to have them cancelled today.

        But as indicated by your answer the situation does not seem to be as simple as that.
        If the system can start with a loan from the cb to the private sector against collateral or the cb buying assets from the private sector then that implies that the non-govt will have the currency prior to the govt having run any deficit.
        In other words, in such scenario the tsy can tax and borrow from the non-govt before running deficits.

        In this context of the reality with a cb and tsy it is the cb as issuer that is ‘not revenue constrained’ and for tsy to be considered ‘not revenue constrained’ comes down to the ability and willingness to break the rules for the tsy of no overdraft or no debt monetization. We are then talking the probability that the cb will be there as lender of last resort (LLR) for the tsy.

        It seems to me correct to state that this probability is higher when the configuration is one cb and one tsy (1:1) (US, UK, Japan etc) than when the configuration is one cb and seventeen treasuries (1:17) (Eurozone), but that is something else than what many MMT advocates regularly state, namely that:
        1. The euro is like a foreign currency to euro members
        2. Euro members are currency users like private households

        Such analogies seem to me as an oversimplification.
        The ECB is not directly under the control of any single member state, but it is created by the member states and as a group they control it. Together they have the ability to clear any payment instruction of any member state tsy. This is fundamentally different from the position of a (developing) country adopting the currency of another country or from the position of a private household.
        Furthermore euro members have taxing capacity that no private household has.

        I also have the impression that the use of these analogies by MMT people confuses a lot of readers / newcomers.
        First they are told that the govt is the issuer and all others the users of the currency and that net financial assets (nfa) come from deficit spending by the govt.
        Then when it comes to the Eurozone they are told that govts are currency users.
        Combined with the fact that all the lending from the ecb (LTROs etc) does not add nfa this practically always leaves them behind puzzling with the question ‘where do euro nfa then come from’?

        To my impression markets have also moved beyond the picture as described by those 2 analogies, realizing that the situation is not so rigid.
        We previously had seen already that the ecb acted as LLR for solvent, but illiquid sovereigns, and for clearly insolvent sovereigns. But as you correctly pointed out this was the case only when ‘the plant was about to die’ and not as sound policy on a regular basis.
        Since the OMT announcement (Aug/Sept) the situation has clearly changed and we see that translated into converging yields.
        I think that the situation that no member wants to leave or wants any other member to leave also reaffirms this process of convergence.

        To me it looks like the whole situation in the Eurozone will ultimately evolve a bit like your option 1 in your Rome presentation.
        Despite all the self imposed restrictions (Maastricht limits and even stricter pact of last year) the reality is that a member can run any deficit as long as the group has approved its policies beforehand. This makes these restrictions more a target than a real restriction.
        It is already clear that austerity makes these targets unachievable and thus as restrictions untenable. The waste from the created high unemployment is recognized worldwide. Draghi, Bernanke etc they all mention it in each and every speech they hold. Recently (Oct) we saw the IMF make a U-turn on their austerity policies. (Under pressure now that it’s the US’s turn?)
        With all member states very aware of the unlimited spending capacity of the ecb, especially after the OMT announcement, it seems the time for fiscal stimulus is getting considerably closer.

    2. @walter, walter, good post. it is part of the challenge i have been having as a new reader here. (chicken/egg theory comes to mind)

      Since every dollar govt spends is backed by a dollar of debt, the govt doesn’t really spend first, it borrows first (ok, it borrows from itself, more or less). then its spends the borrowed funds so it can tax & borrow back it’s own borrowed money…..to further spend…..in addition to borrowing more from itself.

      So, as long as private sect = govt’s debt, we are required to continually indebt the govt in order to grow the private sector, is my understanding. thus forming our “diametrical monetary conundrum”.

      So as warren put it, we are dealing with “under current institutional arrangements”. This is the “it is, what it is” way we currently do things. and “it” has been an evolution of sorts. so, if thats the case,i agree with your point there has to be ways to improve “the rules” as you put it.

      with that said, the only time in history i know of when govt spent money first, without creating a debt, was 1862-1865 (no fed). Lincoln and congress, strait up printed $450m direct from the treasury, with no off setting debt, and spent it. Yes, there was some inflation, but the benefits were rather astounding. And for some reason, this never seems to get talked about much in economic discussion from what i can see.

      my contention is that if we had, “current institutional arrangements” amended in someway, that allowed for the govt to actually spend more than the debt it creates, we would at some point find a better balance in the the govt debt management, govt budget management, and still have healthy private sector growth.


      1. @Ed,

        I think the catch is, when a monetarily sovereign govt, like US, borrows, it swaps one form of govt liability with another form of the same, both denominated in its own sovereign currency, agrees to pay an interest of its choosing, and puts up no collateral other than the full faith and credit of the govt/nation. Therefore, there is no debt management problem other than the Congress!

      2. @Nihat, That is all correct of course, but applicable when you look at the govt on a consolidated basis, i.e. cb + tsy together. This is a crucial axioma in MMT.
        We here look at ‘current institutional arrangements’ however that are quite different.
        We all agree of course that Congress can change any self imposed restriction.

      3. Walter, I understand that. My knowledge of the technical side of govt finances is practically non-existent. I am trying to more fully understand the core MMT teachings, which struck me as so very logical and true that I found myself suddenly interested in this stuff.

        Thus, I can’t yet comment on whether or not the cb-tsy separation is consequential/

      4. as a practical matter the cb/tsy as separate agents of Congress isn’t consequential.

        what happens is people dream up near 0 probability events where it would matter,
        but of course, should that happen, Congress can easily change its rules.

        Nor do markets generally price in that kind of near 0 probability event.

      5. you’d have to include ‘levying a tax’ in your definition of ‘borrowing’

        but even then, that’s not an ‘operational’ constraint on spending, unless you expand the definition of ‘operational’
        beyond the debiting and crediting of accounts.

      6. @Ed,The fact that the system can start in a way that respects the limits of the no overdraft rule and no debt monetization is to my impression supportive to mainstream’s view and their claims that it should function like this and is supposed to function like that from inception onwards.
        It simply indicates that mainstream’s view is that issued money should be backed by collateral, not by deficits. This implies that mainstream does not support chartalism.
        In MMT’s chartalist view the value of money is derived just from taxation, so monetizing deficits is no problem.
        The fact that we hold much more money than what is needed for taxes, is as far as I can see not explained by chartalism. Warren indicated before that whatever the reason is taxes can be that much lower. Warren is right in his conclusion, but at the same time I think that this very fact is for mainstream just a confirmation that there is more than just taxation that gives money value.

        Please note in this respect how Bernanke during his press conference last week emphasized again that the FED’s holdings of tsy secs are ‘temporal’. ‘We are not monetizing debt’.

        Please note also the following. When a govt (via cb or tsy) lends or buys assets then this is not considered a deficit the way it is normally accounted for. From cash flow point of view however it is of course a cash-out and, assuming there is no accompanying cash inflow, this implies a deficit.
        As example I mention the case when The Netherlands nationalized ABNAMRO bank in 2008. The Dutch govt debt went up in 2008 from eur259bn per end 2007 to eur347bn per end 2008. In terms of gdp from 45.3% to 58.2%. The govt however reported a govt surplus of 0.6% of gdp over 2008.

  11. “the price level is necessarily a function of prices paid by the issuer when it spends, and/or collateral demanded when it lends.”

    Last part of that is important, and should include banks as licensed agents, I believe. Which gets into risks other than, but related to, prices and price level.

    Google Geanakoplos Leverage Cycle, and/or see Session 3 docs here: http://fcic.law.stanford.edu/hearings/testimony/forum-to-explore-the-causes-of-the-financial-crisis

  12. Slightly off topic but still about Italy – can I elicit any comments about the return of Berlusconi? Seems the Germans and Eurocrats want the bond markets to punish him even before he is elected (elects himself) again to be the PM.

    Is there any “risk” or rather chance that he raises the issue of currency sovereignty?

    1. @Adam (ak),

      “Is there any “risk” or rather chance that he raises the issue of currency sovereignty?”

      He does it but in a “dodgy” way, ie by saying that “the spread is a hoax” (=”lo spread è un imbroglio”) – Berlusconi said it today.
      It is an electoral campaign with two main protagonists: Monti and Berlusconi – the others are practically nonexistent.

    2. @Adam (ak), “Is there any “risk” or rather chance that he raises the issue of currency sovereignty?”

      Yesterday Berlusconi put it plainly and simply:


      …Silvio Berlusconi said yesterday that Italy would be forced to leave the euro zone unless the European Central Bank (ECB) gets more powers to ensure lower borrowing costs.

      Mr Berlusconi, who announced this month that he would again lead his People of Freedom party in a national election expected in February, said that the ECB should become a lender of last resort for the currency bloc.

      “If Germany doesn’t accept that the ECB must be a real central bank; if interest rates don’t come down, we will be forced to leave the euro and return to our own currency in order to be competitive,” he said…

      (P.S. As far as I know, he is the first Italian politician to raise this issue in a so clear way)

      1. @Fr@ncesco, I said it before on this blog. I am not suggesting he is the best leader for Italy, but he is for sure sharkish enough not to accept any dictate from anybody.
        How do you see his chances in the election?

      2. @walter,

        I see increasing possibilities for him to win the elections.

        Berlusconi has remained silent for one year. During that period he has never given an interview. In just one week he shook the entire political system with his comeback and regained 4 points in the opinion polls. If he gains further 10 points, he wins the elections.

      3. @walter, Francesco,
        My best guess is that he is not bluffing. I think the EU establishment is simply afraid of him and he is well aware of that. Too unpredictable, too streetwise for them. Financially independent- he doesn’t need them, they need him- kind of position.
        A year ago many Italians maybe agreed to austerity, now the mood is different. If no other Italian politician fills up the gap then his chances are not small I reckon.

        As far as I heard, Bersani, who leads the polls, has a much more moderate stance. Prepared to continue agreed reforms, but not convinced that austerity alone is enough etc. Maybe he will change tune when elected. How do you see Bersani?

      4. @walter, First of all, you have to be aware that the Italian electoral campaing starts now.

        Imagine if one of the two main US parties remains silent for a year while the other does not: clearly the latter would gain immensely on the former in the opinion polls, and this is precisely the Italian situation today.

        So it is true that Bersani does lead in the opinion polls, however this lead is the result of a false perspective that stems from the lack of his main opponent in the political arena prior to last week.

        Concerning the candidacy of Bersani: I would prefer not to add anything about this issue because I am not used to comment about things I am not interested in.

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