Email from Scott Fullwiler:

Check this out . . .

“As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills.6 In this sense, the government is not dependent on credit markets to remain operational. Moreover, there will always be a market for U.S. government debt at home because the U.S. government has the only means of creating risk-free dollar-denominated assets”

Somehow they then go on to say that there can be crowding out if the US is not dependent on credit markets. Doh!

65 Responses

  1. I think most mainstream economists understand that the US can not go bankrupt, however, since they do not understand its implications it does not matter if they do.

    Can a person claim he understands that a sovereign currency issuer can not be forced to default on dept denominated in its own currency, and still support giving up that currency? I do not think so.

    Same with St. Louis Fed. They understand and yet they do not. Makes it hard to discuss MMT, because some of the theory perveived as to obvious to mention, and the rest of it as plain wrong.

    1. @Hoffa It’s frustrating how the mainstream can occasionally trip across a truth, yet fail to understand the implications. Earlier this year Krugman announced that having one’s own currency is much more important to national solvency than he’d realized, but then went on to say that insolvency is still theoretically possible. I have wondered whether he actually understands the implications but felt he needed the caveat, lest he be ejected from the mainstream.

      1. @Ben Johannson, Krugman and other mainstreamers believe there is an loanable funds market, and government could potentially crowd out other borrowers.

        And if deficits are financed by direct money creation, outside conditions of so called “liquidity trap” they cause hyperinflation. They believe all hyperinflations in history have been caused in this way. They have fanciful theory where bank calculate complex multiples of government money they have and base lending decisions on that.

        It is clear to me that mainstream economist have been taken over by political ideologists and their lies. Their ideology is to shift as much income from bottom 99% to the upper 1% as they can.

      2. @PZ, When we applied for our second mortgage, having renovated the first house and sold it and paid off the first loan, the banker came by to see the new project,also a restoration of an 18th century house and conditioned the loan approval on our acquiring an electric saw. He didn’t think it efficient to rebuild a house that had been built with hand tools, with a hand saw.
        No magic formula there; only a desire to be a wise guy.

    2. @Hoffa,

      This is spot on. I have argued with people in my place of work (financial) and they will happily acknowledge that a sovereign cannot go bankrupt under debts in its own currency — but the implications of truly understanding why that is so are a step too far for them. People are too used to the traditional (powerful) economic camps to accept their failure. So frustrating to deal with every day.

  2. They were so close here, yet so far. They understand the US creates dollars, and that government spending can use up real resources, yet they still go down the financial crowding out road. We can’t be too picky though, this is progress and we should be thankful.

  3. That article can be summarized as someone wearing a belt and suspender at the same time. Just as the belt and suspender wearer obviously does not truly understand what a belt or suspender does, the authors of this article do not truly know what they, themselves, mean when they wrote what you quoted because the articles overall conclusion is counter to a full understanding.

    1. @Roger, Wait a minute. My body shape wpon’t let me wear just a belt. My trouser continue to go south without suspenders. So have a little tolerance for us big bellied fellows.

      1. @MRW,

        We can top that. “Suspenders” here in the USA are now what are used to hold the appropriately rose-shaded eyeglasses for politicians conveniently donated by Wall St.

        Turns out it’s easier & cheaper to swap out the politicians than it is to bother changing the propaganda tinting.

        From there it’s not much of a leap to understand “suspenders” as the code name for campaign donations keeping politicians tethered to the properly suspended beliefs.

        Are you following this? Do try to keep up with political lingo.

  4. In my opinion the root cause of the misunderstanding is the set of mental models hammered into the minds of first semester economics students. It is not necessarily a neoliberal conspiracy – more a kind of honest mistake or acquired mental disability.

    What is money? Money is something one can spend to purchase goods and services.
    Generally speaking money is somebody’s else liability – either the Government (Treasury or Central Bank) – the “currency” or commercial banks (the non-MB component of M3).

    (A “normal” person would start yawning profoundly at this point. But I assume that we are not “normal”)

    How does money come into existence? From the Govt sector point of view – is money a pre-existing commodity which needs to be acquired before it is spent? Or is money created by the very act of spending? The answer varies depending on whether we live in commodity money era, gold standard or a fiat monetary system. In the modern fiat era there is ZERO crowding out. Applying models describing economy from circa 1600 to the modern system is just sheer ignorance but this is how it is.

    But the root cause of the mental disease goes deeper, it is an incorrect mental model of “money markets”, the “loanable funds” doctrine. Even Paul Krugman falls prey of this oversimplification. It is the assumption that the role of banks can be reduced to brokering transactions between savers (lenders) and investors (borrowers) of currency. Yet in the same first semester of economics students are supposed to learn about various monetary aggregates – MB, M0, M1, …

    If a bank issues a loan – where this money comes from? Is it just the currency which has been deposited prior to the act of re-lending? Or is the money lent out created on the balance sheet of the bank when the loan is extended? Obviously the money multiplier model taught to the students of Econ 101 hinges on assuming that banks merely re-lend the currency which circulates multiple times before the allowed leverage level of the bank is reached. Yet nobody questions that commercial banks liabilities (bank deposits) constitute the bulk of the money in the monetary system. I can spend money using my credit card – no gold or currency involved. Enforcing the reserve ratio as in the previous era and not supplying reserve funds would limit the amount of money generated by the banking sector and lead to changes in interest rates depending on the supply and demand of reserve funds. This is not how banking sector operates in the modern era – central banks supply reserve funds on demand in order to control the overnight interest rate. The key point is however that even in the absence of the reserve bank, the functioning of the banking system cannot be merely reduced to loan brokerage-on-steroids. Banks do not re-lend reserves. They lend their own liabilities (deposits) created simultaneously to the bank assets (debt). This is the difference between banks and “building societies” or mutual funds. Banks can leverage their capital.

    What does it mean? It means that even if we operate with a floating interest rate and constant rate of growth of the stock of currency, there is no strict causality from savings to loans in the form of “savings generate loans”. Loans still generate savings in aggregate even in a 100% money multiplier / gold money system – as long as the quantity of base money increases. Again – no strict financial crowding out even in the private sector. Otherwise we operate in a token economy – one dollar in, one dollar out. Only if we assume ZERO growth in monetary aggregates there can be some validity in the claims about crowding out. Then one has to repay his/her loan in order to make room for another person to take a new one. Saving in the sense of repaying loans becomes a prerequisite of lending. But these arrangements were tested very thoroughly – and failed.

    It is this horrendous mistake of analysing the functioning of a static system and applying the results to the dynamic reality what makes the modern economics similar to medieval scholastics or pre-Newtonian physics. I have to admit that Steve Keen got this bit right in his critique but his models are also broken.

    Contrary to what the Austrians say the era of gold money and free banking was not the golden era.
    The system did not reach asymptotically the stable rate of growth. There were periodic credit-financed bubbles and bank runs. The stability and full employment were never observed even in the 19th century, the era of gold standard and free banking.

    Studying economics is like spreading the HIV virus. People who are infected with the virus (incorrect and obsolete mental models and memes) when they study Econ 101 later become teachers and spread the same disease. In order to build proper mental models young people need to study finance and/or theory or electronic circuits or similar branches of applied physics before even touching microeconomics and macroeconomics. I know that these topics are perplexing but there is no easy escape.

    Maybe a cartoon or set of diagrams explaining the process of money creation and destruction by the government and banking sector can help immunising young people against the institutionalised ignorance.

    1. @Adam (ak),

      There’s also a more systemic distortion created by the Fed’s largess. And by it’s power to exclude competing schools of thought from exposure in under graduate and graduate classrooms, to say nothing of its intimidation of mass media, elected officials including the WH.


      “Just how dominant is the Fed today?

      The Federal Reserve’s Board of Governors employs 220 PhD economists and a host of researchers and support staff, according to a Fed spokeswoman. The 12 regional banks employ scores more. (HuffPost placed calls to them but was unable to get exact numbers.) The Fed also doles out millions of dollars in contracts to economists for consulting assignments, papers, presentations, workshops, and that plum gig known as a “visiting scholarship.” A Fed spokeswoman says that exact figures for the number of economists contracted with weren’t available. But, she says, the Federal Reserve spent $389.2 million in 2008 on “monetary and economic policy,” money spent on analysis, research, data gathering, and studies on market structure; $433 million is budgeted for 2009.

      That’s a lot of money for a relatively small number of economists. According to the American Economic Association, a total of only 487 economists list “monetary policy, central banking, and the supply of money and credit,” as either their primary or secondary specialty; 310 list “money and interest rates”; and 244 list “macroeconomic policy formation [and] aspects of public finance and general policy.” The National Association of Business Economists tells HuffPost that 611 of its roughly 2,400 members are part of their “Financial Roundtable,” the closest way they can approximate a focus on monetary policy and central banking.

      Robert Auerbach, a former investigator with the House banking committee, spent years looking into the workings of the Fed and published much of what he found in the 2008 book, “Deception and Abuse at the Fed”. A chapter in that book, excerpted here, provided the impetus for this investigation.

      Auerbach found that in 1992, roughly 968 members of the AEA designated “domestic monetary and financial theory and institutions” as their primary field, and 717 designated it as their secondary field.

      Combining his numbers with the current ones from the AEA and NABE, it’s fair to conclude that there are something like 1,000 to 1,500 monetary economists working across the country. Add up the 220 economist jobs at the Board of Governors along with regional bank hires and contracted economists, and the Fed employs or contracts with easily 500 economists at any given time. Add in those who have previously worked for the Fed — or who hope to one day soon — and you’ve accounted for a very significant majority of the field.

      Auerbach concludes that the “problems associated with the Fed’s employing or contracting with large numbers of economists” arise “when these economists testify as witnesses at legislative hearings or as experts at judicial proceedings, and when they publish their research and views on Fed policies, including in Fed publications.”

      Gatekeepers On The Payroll

      The Fed keeps many of the influential editors of prominent academic journals on its payroll. It is common for a journal editor to review submissions dealing with Fed policy while also taking the bank’s money. A HuffPost review of seven top journals found that 84 of the 190 editorial board members were affiliated with the Federal Reserve in one way or another.

      “Try to publish an article critical of the Fed with an editor who works for the Fed,” says Galbraith. And the journals, in turn, determine which economists get tenure and what ideas are considered respectable.”

      That’s why Comparative Economic History is no longer an undergrad or graduate course.

      It’s so sad, that so many who could do so much good have opted for the fist full of silver.

    2. @Adam (ak),

      “This is the difference between banks and “building societies” or mutual funds”

      Technically there is no difference. A building society can leverage as well. The difference is that a building society is limited in its ability to transfer its deposits to other institutions because the deposits *are* the capital. So it can only make payments to other institutions to the extent that those other institutions will accept a transfer of a part of the building society’s current assets and liabilities.

      And that generally boils down to having to accrue an amount of state assets and liabilities ahead of time to allow net transfers out.

      A bad loan to a building society is allocated to the accrued interest reserve and then the depositors in sequence.

      However a traditional non-permanent mutual building society that makes all the payments within its own set of accounts can get houses built and transferred without requiring any external money at all. Essentially it creates its own little closed economy.

    3. @Adam (ak),

      “In order to build proper mental models young people need to study finance and/or theory or electronic circuits or similar branches of applied physics before even touching microeconomics and macroeconomics.”

      Or, just learn SOMETHING else except just economics alone.

      It boils down to adequate situational awareness among an adequately distributed proportion of the populace.

      A team can’t play basketball well if only one player – sitting on the bench ‘cuz others think she can run or jump well enough – knows the actual rules. This ain’t rocket science.

    4. @Adam (ak),

      Agree with Warren, good comment

      The most destructive of those mental diseases is the one that makes you think you have to have previously saved something in the last period in order to invest something in the next period.

      This really makes no sense at all when you look at it in real terms.

      The investment is always made first. Its the investment which creates the “new” something to be able to save.If there are no new somethings we arent investing, we are just trading already existing goods, which is a perfectly okay endeavor, Im not knocking it per se, but you arent making investments when you take last periods saved goods and put them to a different use this period. What you are really doing in that instance is spending down your savings.

      I think one corollary to this which may explain the confusion that many have is the notion that supply creates its own demand. Now if you realize that anything you demand or consume had to have been previously produced or supplied its easy to take the step and say demand follows supply, but imagine the time before the first “thing” was produced. All there is is the stuff that the earth produced for us; food, fallen trees,holes in sides of mountains etc and we are simply consuming them. One day I shape a rock into something to make my killing of animal more effective. I have invested time, ingenuity and energy into production and now I can save a hunting tool. But I wanted or demanded that tool first which is why I made it. I used natures rocks for a while but I improved on them because I wanted more. So its the wants and desires that first drive production

      Just some wednesday thoughts

    5. @Adam (ak), Money is a token, a standard measure of value, a tool, if you will, that is not very different from the centimeter and the inch. The latter measure distance; the former usefulness in general. Distance is related to various physical realities. What people value is amore amorphous, but ultimately related to sustenance and action. Also,money helps account for the passage of time.
      I suspect that is a hang up. Lots of people seem to have no sense of time as a linear entity made up of sequential events.

    1. @Jbh,

      We’ve been printing money for some time now and it has indeed led to just that. So the question is “Are we printing the right amount of money for this situation?” There isn’t an amount that is right for all circumstances. Sometimes we will need more, sometimes less.

      1. @Unforgiven, I don’t think Saudi and china gonna take dollars for much longer. Maybe 10-15 more years? Then who gonna do for us old farts? College princess that partied til she puked? Not on your life lady gaga ain’t doin shit for u. We are doomed!

      2. @sdvan, warren can’t Eben get sada to give him a big flock of grandkids and keep thus site up to date w the latest technology. When the rest of world shuts off the export spigots we are doomed. Lady gaga is gonna go soylent green on u old farts and eat u. Her and sada ain’t gonna waste their fun and lives on doin for u old farts. Me me me not u u u. Billy Joel sang about she will always be a woman to me. She will cut u and laugh while u bleed!

      3. @Unforgiven, Isn’t that always the recipe for success with MMT monomaniacs and even Keynesians? Just print more money and everything will be fine. Of course, some Goldilocks will determine how much is just right, not too much, not too little, just the right amount. The problem for those that feel that the all-powerful nation/state is a perversion of human progress is that they don’t feel that there should be a currency printed by the government or maybe even a government at all. The idea that a medium of exchange should be primarily a tax credit follows the warped logic of Plato, Hegel and Bismarck, pseudo-thinkers that have done incredible damage to individual freedom in their worship of the state.

      4. @chuck martel, You’ve demolished your own argument by structuring it around political rhetoric. This is why austrians and libertarians produce so little of value in economics. It’s akin to announcing one is going to study earth magic because one finds science politically offensive.

      5. @chuck martel,

        “Of course, some Goldilocks will determine how much is just right, not too much, not too little, just the right amount.”

        Assuming sarcasm was intended, this is a very good point. Setting up a fiat currency system gives human beings in the government great power to do harm, whether it be out of ignorance or malice.

        I doubt very much that what we have is the optimal system, but I haven’t coming across sound ideas for a better one. We have what we have. MMT does not suggest that what we have is optimal. It only suggests a method of using it which is more optimal.

      6. A good point.

        Democracy is a very poor system. Benevolent dictator is much superior – but that requires a Solomon.

        So although democracy is a very poor system and has significant weaknesses, we stick with it because all the other systems are even worse.

        Least Bad is what we’re aiming for. It might not be inspiring, but getting there would be progress.

      7. A benevolent dictatorship is only as good or bad as its dictator. A democracy is only as good or bad as its people. Dictatorship takes responsibility away from the population, whereas democracy gives responsibility to the population. Having responsibility encourages you to think and act; having none encourages you to be passive and uncritical. Democracy is better.

      8. “Having responsibility encourages you to think and act; having none encourages you to be passive and uncritical. Democracy is better.”

        You might want to test that belief against the empirical evidence.

        There is little evidence of thinking and acting, and an awful lot of evidence of tribal behaviour – leading to rule by the ‘big man’ anyway.

  5. You’ve demolished your own argument by structuring it around political rhetoric.

    Oh, I forgot, politicians, with their rhetoric, don’t have any influence on economics or monetary and fiscal policy. The two are separated by a wall of …. well, it must be a wall of something. Ethanol production and subsidies in the US didn’t have any political input, they simply spontaneously erupted.

    The US defense department, through the legislative budgeting process, could expand their inventory of 11 aircraft carriers (ten more than any other nation in the world), maybe double it. Keystroke the pixels needed to pay for them and voila!, a whole mess of new jobs. Don’t forget that after every extended cruise the current flat-tops get refitted, along with their many support vessels. In order to further expand the tenured faculty of the parasitic higher educational complex there could also be a government requirement that all the ship-fitters be college graduates, like pharmacists and librarians. Who wants to read a book that was ordered by someone that lacks a Master’s in Library Science? Or ride around in an aircraft carrier the wiring of which was installed by someone who can’t tell Karl from Groucho?

    1. “Of course, some Goldilocks will determine how much is just right, not too much, not too little, just the right amount”

      That goldilocks is called the ‘non-government’. The government just responds by providing the money.

      “there (shouldn’t) be a currency printed by the government or maybe even a government at all”

      if enough people wanted to vote for such an imaginary situation then perhaps it could happen. At present there aren’t enough people willing to do that. And anyway, what right would they have to take away future generation’s democratic rights? Would it be ethical for a population to vote away democratic government and install a private plutocracy in its place?

      1. @y
        And anyway, what right would they have to take away future generation’s democratic rights?

        Future generations can take care of themselves, except for the part where they are forced to pay off the bonds sold by the present generation. Perhaps by the time that bonds sold to finance, for instance light rail projects or wool subsidies,those things will no longer figure much in the economic scheme of things. Why should a taxpayer in 2035 pay to redeem light rail bonds when he commutes by jetpack? How many communities do you suppose are even now still paying off on bonds to build schools that have been closed before the bonds reached maturity? Warp the argument all you wish, deferring the payment for conveniences of the now and assuming that the future inhabitants will be happy to pay for something that they never ordered is egotism in high heels and fish-net stockings.

        So why does the Treasury need to sell bonds anyway/ If they can print all the money they want, where do bonds figure in? (I know, hit the mandatory brainwashing.)

      2. thought you read the 7dif?
        tsy bonds are paid off by the fed debiting securities accounts and crediting reserve accounts.
        no grandchildren or taxpayers anywhere in sight

    1. @y,

      That’s an interesting slip, about a law having little credibility – regardless of the context. It reveals a bit about Fed thinking on working around the law.

      They could have expressed what they meant without using the word credibility. Utility? Impact? Consequence?

      A democracy has little credibility if it cannot adjust existing laws to changing conditions fast enough. Come to think of it, that rule is what frauds live from.

      1. @roger erickson,

        i.e., Frauds don’t have to do what’s right. They just have to stay one step ahead of the sheriff. In a law-abiding democracy, anyway.

        Respect for the credibility of law is the price we pay for maintaining a scalable system. Without credibility, anything is operationally “legal.”

  6. A benevolent dictatorship is only as good or bad as its dictator.

    Even dictatorships and monarchies are forced to follow some rules or they end up in a graveyard. In a “benevolent” democracy, like the US, there are more individuals incarcerated in real and per capita numbers than anywhere else on earth. When the population becomes sufficiently disgusted with dictatorial leadership they can change it completely, dissatisfaction with democracy means nothing, the parties and their attendant bureaucracies go on for a long time. Not forever, though. Eventually even the pretentious and self-important US political class will be replaced by a new generation of bandits.

  7. An astounding quote from an article whose main conclusion was

    “What no country can afford, however, are permanent increases in government spending without increasing tax revenue.”

    They “get” nothing. It is beyond me how that sentence got in there. Must have been written by a committee, and they allowed the minority one sentence of input.

  8. “The cost of government borrowing is the “crowding out effect”: Investment funds mobilized by the government cannot be used in the private sector.”

    I think what they mean is:

    If the economy is at full capacity, any increase in spending by government will require a reduction in spending by the private sector, or else inflation will increase.

    Is that correct?

  9. We can default. The Treasury can’t run an overdraft at the Fed and the Fed can’t buy directly from the Treasury, correct? That being the case, unless we change the law, we can default. It’s not because we have to but because our laws are written in such a way as to allow it to happen.

    Warren…do I have the mechanics wrong?

      1. @Neil Wilson, What do you mean someone has to say “no”? If the law is that the Treasury can’t run an overdraft, there can be a default. In reality, the Fed would buy as much outstanding Treasury debt as it wants and then rely on the sellers buying the new issue but in theory they could opt to sit out. I suppose the Fed could buy everything maturing every day as well. Still, a mechanical default is possible.

      2. @Neil Wilson,
        US default risk is mostly a willingness to pay issue. Default can be the result of not even writing the full cheque in the first place. Think sudden property tax on government bonds or a Mexican standoff over the statutory debt limit.

      3. @Neil Wilson,

        What’s your market Neil?

        10y cds
        My guess is you haven’t sold any protection yet.

        Never say never… there absolutely is a non-zero probability of default. As Warren has stated many times, it’s a choice, but it does trade.

      4. @Djp,

        I agree that the probability of default is greater than zero, but the CDS market implies much too high a probability. There’s obviously more going on there than just expected payoffs in a true default situation.

    1. Directly or indirectly Congress tells the Fed to credit or not credit accounts.

      We can default any time Congress tells the Fed to not credit the account of someone they owe dollars to.

      The MMT point is that Congress/the Fed can’t ‘run out of dollars’ or anything like that.

      1. @WARREN MOSLER,

        The point being there isn’t an independent entity deciding whether your payment goes through – as there is with a business or an household.

        The person deciding whether to default is the same person deciding to make the payment.

        With a household or business the sequence is business/household decides to pay and bank authorises that decision. The bank may overrule the decision.

        With a sovereign government the sequence is government decides to pay and that is the authority. No other entity can countermand that decision once it is made (unless you’re in a country running a constitution that doesn’t give complete payment authority to the parliament).

    2. right now congress doesn’t allow the fed to buy directly from the tsy or let the tsy fed account go negative.
      both self imposed constraints that are entirely up to the ‘spender’ which is congress

    3. @Ivan,

      Where is the law that treasury can’t have overdrafts at the fed? Has anyone found it? Seems to me we have a myth of the law.

      That I know for a fact that defaulting on debt payments is unconstitutional. No big risk to lend to the government then?

      In any case this argument is silly because defaulting on payments would cause mother of all economic disturbances. It would quickly lead to changes in the system.

      1. @PZ,

        “Where is the law that treasury can’t have overdrafts at the fed? Has anyone found it? Seems to me we have a myth of the law.”

        It is annual budget which always describes the sources of financing. It has to.

  10. Note 6:

    “Technically, the debt ceiling could render the government unable to pay its bills, but the law has little credibility because enforcing it would almost certainly cause more harm than good.”

    How can there be a law on the books that so clearly violates the constitution? It is clearly illegal – and a breach of each Congressman’s sworn Oath of Office – “to uphold, protect and defend the constitution” – to even suggest that the government can default on its debts.

    Besides that, Congress sets up the budgets each year, based on a bunch of completely arbitrary political decisions and another bunch of baseless projections.

    Since the Fed’s letter discusses the effects of health care on gov’t finances:

    Health Care is a right. The government should pay for health care for most people. Private health insurance should be for wealthy people who can afford to pay for it themselves. It will probably be cheaper for them anyway because the wealthy are usually more healthy than the rest of the population. With the sick and terminally ill taken out of the private insurance pool, the premiums for the wealthy should be reduced dramatically.

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