Tea Party’s Economic Agenda Would Cause Next Great Depression
Says Former Tea Party Democrat

Waterbury, CT – August 30, 2010, Warren Mosler, Independent candidate for US Senate, former Tea Party Democrat, and frequent speaker at Tea Party rallies, lashed out today at the political movement for its ill-thought demands to balance the budget which he contends is based on abject ignorance and counter to true Tea Party values. “The Tea Party’s demands to balance the budget and reduce the Federal deficit aren’t merely misguided, but dangerous, and would cause the worst depression in history,” stated Mosler, a financial expert with 37 years of experience in monetary operations. “I have been, and continue to be, a strong supporter of the core Tea Party values of lower taxes, limited government, competitive market solutions, and a return to personal responsibility. However, their proposals to balance the budget are the same suicidal policies that caused the 6 horrible depressions in the U.S. over the past 200 years. At the worst possible time to take money out of the economy, the Tea Party’s proposals would remove an estimated $1 trillion and cause the worst depression in world history, destroying tens of millions of jobs and ruining our children’s future.”

Explanation of the Modern Monetary System
Modern money, after the demise of the gold standard, is akin to a spreadsheet that simply works by computer. As Fed Chairman Bernanke explained on national television on 60 minutes, when the government spends or lends, it does so by adding numbers to private bank accounts. When it taxes, it marks those same accounts down. When it borrows, it simply shifts funds from a demand deposit (called a reserve account) at the Fed to a savings account (called a securities account) at the Fed. The money government spends doesn’t come from anywhere, and it doesn’t cost anything to produce. The government therefore cannot run out of money, nor does it need to borrow from the likes of China to finance anything. To better understand this, think about when a football team kicks a field goal; the number on the scoreboard goes from 0 to 3. Does anyone wonder where the stadium got those 3 points, or demand that the stadium keep a reserve of points in a “lock box”?

Moreover, government deficits ADD to our savings – to the penny – as a fact of accounting, not theory or philosophy. This means the Mosler payroll tax (FICA) holiday will directly increase incomes and savings, thus fixing the economy from the bottom up. For example, if the Mosler tax cut amounts to $20 billion per week, that will be the exact increase in income and savings for the rest of us as anyone in the Congressional Budget Office will confirm. For the Federal government, taxes don’t serve to collect revenue but are more like a thermostat that controls the temperature of the economy. When it is too hot, raising taxes will cool it down. And in this ice-cold economy, a very large tax cut is needed to warm the economy back up to operating temperature.

While Mosler fully supports the Tea Party desire to cut taxes, and recognizes the need to cut wasteful and unnecessary spending – in fact, his economic proposals will save the government hundreds of billions of dollars of unnecessary interest expense – he also recognizes that tax cuts have to be much larger than spending cuts in order to ensure that less money is taken out of the economy, and not more as the Tea Party is currently demanding.

About Warren Mosler
Warren Mosler is running as an Independent. His populist economic message features: 1) a full payroll tax (FICA) holiday so that people working for a living can afford to buy the goods and services they produce. 2) $500 per capita Federal revenue distribution for the states 3) An $8/hr federally funded job to anyone willing and able to work to facilitate the transition from unemployment to private sector employment. He has also pledged never to vote for cuts in Social Security payments or benefits. Warren is a native of Manchester, Conn., where his father worked in a small insurance office and his mother was a night-shift nurse. After graduating from the University of Connecticut (BA Economics, 1971), and working on financial trading desks in NYC and Chicago, Warren started his current investment firm in 1982. For the last twenty years, Warren has also been involved in the academic community, publishing numerous journal articles, and giving conference presentations around the globe. Mosler’s new book “The 7 Deadly Innocent Frauds of Economic Policy” is a non technical guide to the actual workings of the monetary system and exposes the most commonly held misconceptions. He also founded Mosler Automotive, which builds the Mosler MT900, the world’s top performance car that also gets 30 mpg at 55 mph.
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52 Responses

  1. You keep using that Bernanke quote.

    Bernanke was talking about Fed lending, not government spending.

    Here’s the actual quote:

    “It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It’s much more akin to printing money than it is to borrowing.”

    It’s you that’s applying that quote to government spending, not him.

    You may be right about the extension of the idea to government spending, but it’s not right to suggest that’s what he said about it.

    1. yeah had he been interrupted in the interview “And what about the Treasury, how does it spend?”, he would have said “By taxing and borrowing”

    2. In the midst of the crisis, Bernanke had freedom to act immediately – he doesn’t need permission from Congress or the president. While they debated on Capitol Hill, Bernanke cut interest rates nearly to zero; then he used Depression-era emergency powers to launch a dozen rescue programs of his own. There was support for money market funds, mortgages, short term lending to small business, and support for auto loans, student loans and small business loans – commitments of a trillion dollars [TO FOREIGN BANKING SYSTEMS…YES!], doubling the size of the Fed’s balance sheet.

      Asked if it’s tax money the Fed is spending, Bernanke said, “It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It’s much more akin to printing money [THANKS BEN, you and Peter Schiff] than it is to borrowing.”

      “You’ve been printing money?” Pelley asked.

      “Well, effectively,” Bernanke said [AGAIN THANKS!…dufus..]. “And we need to do that, because our economy is very weak and inflation is very low. When the economy begins to recover, that will be the time that we need to unwind those programs, raise interest rates, reduce the money supply [OH YES! THANKS!], and make sure that we have a recovery that does not involve inflation.” [How about a recovery that doesnt involve employment!]

      This guy is a major part of the problem…

    1. It’s operationally equivalent to a “private placement” of structured Treasury debt with the Fed, in exchange for a credit to Treasury’s account at the Fed.

      It becomes fiscal assuming (reasonably) that the money is then disbursed from Treasury’s account at the Fed.

      Assuming that disbursement, it amounts to a helicopter drop of sorts, created at the Fed and executed by Treasury.

      The disbursement creates additional M1, reserves, etc.

      The author is concerned about deficit appearances, and repaying the bonds, etc. To alleviate this, one way the “private placement” could be structured is to make “repayment” of the bonds contingent on both the future Treasury budget position and future Fed profit performance. Assuming both are aligned, “repayment” of the bonds could be effected contingently by structuring a “retained earnings claim” to future Fed profits whereby the Fed would claim those profits to “pay down” the bonds rather than to be submitted to Treasury as is usually the case. This is cosmetic but interesting, because it means Treasury operationally/technically never has to pay back or renew those bonds directly, while the Fed could still manage its balance sheet as desired.

      Or you could just merge Treasury and Fed operations and go full tilt MMT. But my suggestion could be a way of dealing with it in the current accounting and institutional framework.

    2. Very interesting JKH. Nice explanation.

      The voxeu author seems to be worried about the fact that the yields are low and auctions may attract lesser attention due to this.

      However I think his story doesn’t work so well. The bid/cover ratio is already high and if gradually goes down, some investors may try to sell off some Treasuries putting the yields at a higher level and re attracting the ones who were not so interested in the auctions.

  2. Only a highly trained economist would think such an idea was simpler than having the Treasury spend without issuing debt.

  3. looks to me functionally identical to just doing the fiscal adjustment and issuing, say, 30 mo bills?

    Just another professor at a name school who doesn’t quite grasp monetary operations?

    1. Yeah, he’s acting like it matters to the Fed how much it earns in interest. And, as I noted in my post to NC, you can’t actually reduce the interest on the national debt below what the Fed’s target is even in this case unless the private sector desires to hold massive currency balances. He did get QE largely right, though, and is right about the need for fiscal action instead of QE.

      1. Scott,

        I read it more as the “free lunch” being the avoidance of the differential cost of the consolidated Treasury curve, defining the consolidated curve as beginning with interest on reserves (just after zero interest on currency).

        (Although maybe the author overlooked the interest on reserves cost)

        The “helicopter drop” he defines is fiscal with “borrowing” done “off-market”.

        (If you assume instead the same amount of QE, with that QE matched in turn by the same amount of fiscal “borrowing” done “in-market”, it ends up being the same thing)

        Either way, it’s a bastardized version of the presumably “pure” helicopter drop of currency.

        I never like the term “helicopter drop” anyway.

        It always just leads to difficult discussions required to translate the variation at hand into some understandable near-real world context.

      2. Yes, it’s “off-market,” but once the Tsy spends, there’s still IOR at the very least. It’s the functional equivalent of the Tsy getting overdrafts. Perhaps you’re right about consolidated curve, but I generally don’t give that much credit–haven’t seen much reason to in the past.

      3. It’s the functional equivalent of the Tsy getting overdrafts.

        That’s what I was wondering about. What’s the accounting trick that makes this legal?

      4. Well, as long as the Fed’s limited legally to obtaining Treasury obligations only on the “open market,” it would seem that Caballero’s plan (if I understand it correctly) won’t work without Congressional action enabling it. And if so, then why not just do overdrafts?

        Seems to me the “accounting trick” to make it legal is for the Fed to purchase Tsy’s in the “open market” at a bid price that it selects so that the Tsy’s debt service remains the same as it would be if there were overdrafts. (That’s obviously not an “accounting” trick at all.)

      5. My suggestion for the “accounting trick” was to make it a private placement of structured treasury debt (repayment contingencies as per the article) with the Fed. That circumvents accounting overdraft.

      6. Right.

        Maybe structured and private characteristics open up a higher probability of doing an end run around current restrictions. But I see both sides as well.

      7. Stated more simply:

        Suppose you’re told that you can have one of the 2 following options:

        1. Overdrafts on your bank account at 5%, or
        2. Issuing debt at a guaranteed rate of 5% in the open market before you spend

        Besides some very minor transactional issues, do you really care?

      8. Scott,

        I’m missing something:

        “Seems to me the “accounting trick” to make it legal is for the Fed to purchase Tsy’s in the “open market” at a bid price that it selects so that the Tsy’s debt service remains the same as it would be if there were overdrafts. (That’s obviously not an “accounting” trick at all.)”

        That certainly adjusts debt service on the existing budget, but how does that get additional balances in the hands of Treasury unless it’s matched by the same amount of additional fiscal borrowing as I suggested above?

        Or is that what you implied? Or something else?

      9. Point is that if Treasury can issue debt at the Fed’s target rate guaranteed without that rate changing regardless how much they issue, this is the same from the Tsy’s perspective as receiving an overdraft at what will effectively be the Fed’s target rate. Either way they can run a deficit of whatever size they want at the Fed’s target rate, which is far more economically meaningful than the technical issue of whether they receive an overdraft or not.

      10. I think Scott used “open markets” in quotes so he means direct purchases only.

        Assuming the authors fears are plausible, the Fed purchases in the open markets (no quotes) will not add balances to the Treasury General account. If the Fed does that, it makes the author’s claim even more plausible because it puts an even more downward pressure on yields which auction participants may not want.

  4. OK, comments aren’t going where I want them, so repeating here:

    Stated more simply:

    Suppose you’re told that you can have one of the 2 following options:

    1. Overdrafts on your bank account at 5%, or
    2. Issuing debt at a guaranteed rate of 5% in the open market before you spend

    Besides some very minor transactional issues, do you really care?

  5. I still don’t see how this gets around the problem, even if it is granted that Treasury can get around the overdraft rule (which I am not yet persuaded it can).

    But say that does get the funds using the platinum coin gambit. Even if Treasury gets reserves in its account from the Fed by running a platinum coin over there, it still cannot legally credit accounts (“helicopter money”) without Congress appropriating it, at least as I understand how this works.

    1. 1. It’d be cheaper to just sell 3-month T-bills (0.013%), IOR for even a platinum coin drop would be 0.025%.

      2. This proposal’s intent is to get around 1. statutory restrictions on the Fed just giving money away instead of lending and 2. Tsy’s statutory debt limit. This isn’t quantum mechanics, either this is the Fed giving away money without collateral (or a loan!) or its Tsy breaching the statutory debt limit, if Tsy has plenty of room before it hits the debt limit, I’d go back to point 1, just sell T-bills.

      3. There is no federal sales tax! There are however, $250 billion in state and local sales taxes. Tsy doesn’t need to be in the picture, the Fed can meet with the National Governors Association an work out a per capita distribution to states, contingent on state sales tax holidays (or per capita tax credits for those states without a sales tax). No reason to limit stimulus to $250 billion tax level. Create larger per capita payout, Refi existing and create new state debt at zero interest. After all, states don’t need Congress to get off its duff to fund infrastructure work. Fed’s weird administrative status, is it a bank? is it the federal government? will be helpful in figuring out how to structure the payout to states without triggering their own debt limitations.

  6. In the present system, the Fed can only purchase for the amount expiring. “at most the Desk’s acquisition at Treasury auctions can equal maturing holdings.”

    The voxeu proposal is to make the Fed purchase more from the Treasury directly however, and the way people are persuaded is by telling them that the Fed does not distribute its profits from time 1 to time 2 to the Treasury. During that period, the Treasury would need to raise an additional amount equivalent to the profits that it could have received “otherwise”. The argument given to defend this scheme is that the Treasury will need to “work harder” etc etc. Is that right JKH ?

      1. Thanks a bunch, Ramanan. Can’t believe I missed that, but it has been years since I’ve read Akhtar’s pamphlet. It’s truly one of the best, but a bit dated since the Fed went to lagged reserve accounting in 1998 shortly after it was published. Still very worth absorbing for anyone who wants to know this stuff.

      2. Thanks for the info Scott … didnt know about this change in 1998.

        The Caballero article we were discussing has been discussed at many places …

        and even Felix Salmon

        Unfortunately they divert the issue and unlike our discussions on some mere technicalities, they think its the only way the government can spend whereas in reality, the government can announce its fiscal without worrying about these technicalities.

    1. FS: Treasury would still need to spend that money, though, and I do wonder whether it might need some kind of Congressional approval to do so. Anybody care to weigh in on the constitutional implications of this idea?

      Salmon has the same question I do.

      Treasury would still need to spend that money, though, and I do wonder whether it might need some kind of Congressional approval to do so. Anybody care to weigh in on the constitutional implications of this idea?

      1. Congress does provide for “automatic appropriations” for entitlement programs such as food stamps and unemployment benefits. The magic words are “Notwithstanding any other provision of law, the Secretary of the Treasury shall transfer from the general fund of the Treasury (from funds not otherwise appropriated)…”

        Of course these “automatic stabilizers” are going to be fully funded whether Tsy uses Caballero’s Rube Goldberg plan, stays with the existing Treasuries sale system or goes to a no bond system. So Caballero’s plan adds no new money to the economy until there’s a new congressional appropriation– or the Fed cuts out the middleman and works out a sales tax holiday with State governors.

    1. Even I saw that today when I thought I should check whats happening to him – donno what to say!

      Purchasing stocks may cause increases in prices and capital gains and hence increased consumption, but … purchases of stocks added to the GDP to make a new quantity – strange !

      1. thanks for the sanity check

        i find it absolutely bizarre to define aggregate demand that way; makes no sense to me in any conceivable paradigm of aggregation

      2. JKH,
        Do you think Keen acknowledges ‘stocks’ (point in time) and ‘flows’ (per unit time) as economic concepts? Maybe he doesn’t follow/accept these concepts.

        (I’m not economist) Are stocks/flows mainstream/widely accepted economic concepts? They seem like a good way to break down the data. I think he is mixing them together here in trying to model Aggregate Demand. I dont think ‘demand’ can be really be quantified/measured, but perhaps this is where he is trying to do some groundbreaking study….Based on his website name and his focus, it seems he is pre-occupied with ‘debt’ levels (stock) measured against other economic data of all sorts.

        This is where he loses me: ” my definition lumps them together: aggregate demand is the sum of expenditure on goods and services, PLUS the net amount of money spent buying assets (shares and property) on the secondary markets. This expenditure is financed by the sum of what we earn from productive activities (largely wages and profits) PLUS the change in our debt levels. So total demand in the economy is the sum of GDP plus the change in debt”

        From physical standpoint, its like saying power (think ‘flow’) can be measured in volts (think ‘stock’) or something….power is in Watts (/unit time) and electrical potential is in volts (measured at a point in time)…the units are different (W & V) so one would never add them together to obtain a useful value in circuit design….indeed, power consumption is dependent on the operating voltage. Or one would be asked: “do you know how fast were you diving?” and you would answer: “600 miles officer.” Something like that…I dont see where he’s going with this…


      3. Matt,

        I have no idea about this, which is why I was looking for some other views on it. I haven’t spent much time on the post in detail, because the approach seems so weird. Steve Keen also has an unusual approach to accounting in other areas of modeling, which I’ve pointed out to him previously.

        Here he defines aggregate demand to include GDP plus the demand for (existing I think) assets, and then relates that to debt somehow. First of all, new assets are taken into account directly in GDP demand. As far as existing assets are concerned, well, I don’t necessarily have to go into debt to buy an existing asset. I can just swap another asset for it. E.g. sell stocks and bonds to buy a resale house. The crude aggregation of either debt or asset transactions or both as aggregate demand seems very wayward to me.

        He’s mixing up GDP demand with swaps (effectively) of existing assets, presumably tied to debt. I don’t know how you do that, and make any sense of the idea of aggregate demand in total. If I buy a stock from you, does that constitute part of aggregate demand? What do we gain by classifying activity so broadly in this way?

      4. The other thing, Matt, is that obviously debt plays a role in GDP. If I take out a mortgage to buy a new house, is my contribution to aggregate demand supposed to be the sum of the house and the mortgage? That’s nuts.

      5. Steve is a Minskian. I think he is trying to work out a model that differentiates between current income that is presently earned and future income drawn forward (debt). His basic thesis, as I understand it, is that examining changes in debt revels the stages of the financial cycle.

        Steve: So total demand in the economy is the sum of GDP plus the change in debt.

        So I think I see where he is going and how he is trying to get there, that is, he is modifying the concept of GDP to reflect the debt component. Again, Steve is proposing a revision in the currently accepted definition to fit his model. It’s certainly a bold move. But I don’t think that Steve pays too much attention to stock-flow consistency from the critiques I’ve read, so the model seems quirky. It seems that his redefinition involves the claim that stock-flow consistency doesn’t matter, or at least implies it.

      6. Tom, Ramanan, Matt,

        The general direction of his work on endogenous debt is fine. It’s the crudeness of the new metric that’s somewhat jarring.


        Aggregate Demand = GDP + debt


        GDP = Aggregate Demand – debt

        So now I’d like an explanation of how new debt (like mortgages) is a drag on GDP.

        I can think of one – it’s the offsetting saving effect of those who earn income from GDP but can’t spend it on GDP because the borrowers beat them to it. So their aggregate demand was stifled.

        So, apparently, new debt is a boost to aggregate demand while being a drag on GDP.

        But what does it really mean to suggest that those ex post savers all contributed to aggregate demand prior to saving? Didn’t any of them want to save in the first place? I’m just not sure what the new metric means.

        For curiosity, I skimmed the comments to see if anybody picked up of this sort of thing.

        They did, in various ways, at comments # 4, 47, 54, 86, 129, and 142.

      7. #54 (LT)’s comment seems nice.

        When neoclassicals talk of aggregate demand, they are talking of AS/AD curves in the space where price is in the y-axis and these functions in the x-axis. The point where AS and AD meet is what the GDP is.

        Sometime back I saw a preview of Yves Smith’s book Econned at She tries to argue against the supply-demand curves and quotes SK and even uses his graphs. However, Steve has fallen into the same trap he has tried to debunk.

        In a neoclassical model, you have the downward sloping AD curve and an upward sloping AS curve, the intuition being that when prices rise, supply increases and demand decreases and vice versa.

        One can modify this and have upward sloping AD etc and some Keynesians use this.

        Some amount of “intuition” in this way of thinking suggests that if debt is decreased, there is a shift to the left.

        However as pointed out by you, there are some serious issues with the definition and he got enticed to the supply-demand stuff which he himself dislikes.

        Something like that.

      8. Ramanan,

        Yes, I’ve seen a bit of that – upward sloping demand curves.

        What do they mean by it? Do they stand on their heads while looking into a mirror?

      9. I guess they just mean some reverse causalities. I don’t think they are too serious about the curves.

        The point about the AS/AD analysis is that it simply avoids all complications and there is no role for time!

        The AS/AD means nothing at a serious formal macro level. For example if price fall (debt-deflation kind of thing), it doesn’t increase demand which the AS/AD seems to suggest.

        Some stock-flow authors just define aggregate supply as the total production and aggregate demand as this less change in inventories. So there is some unsold inventories and there is no clearing. Demand creates its own supply, the Anti-Say’s law.

        Back to SK .. he is confusing a statement, change in debt will move the curve to the right to whatever he is saying. Initially there is Y_0. Increase in debt is likely to move AD_0 to the right to AD_1, though by a different amount.

        So one may have a situation in which
        AD_1 = Y_0 + alpha*(change in debt)

        which has led him to define something which has no subscripts. and no alpha. The change in debt can have complicated effects and not as simple as he has made it out to be.

      10. This part could be considered pure rhetoric,….

        “That sucking sound will continue for many years, because the level of debt that was racked up under Bernanke’s watch, and that of his predecessor Alan Greenspan, was truly enormous. In the years from 1987, when Greenspan first rescued the financial system from its own follies, till 2009 when the US hit Peak Debt, the US private sector added $34 trillion in debt. Over the same period, the USA’s nominal GDP grew by a mere $9 trillion.”

        … look at the verbs/modifiers: ‘sucking’, ‘racked’, ‘enormous’, ‘Peak Debt’ (capitalized think ‘Peak Oil’), ‘mere’….this could have been written by a Peter Schiff or Marc Farber or someone like that. Then he directly compares a stock to a flow…34T (stock after 23 years) vs 9T (flow per anum). Maybe it will get him re-invited to present at the next ‘Debt Doomsday Conference’.

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