Interview by Harry Shearer,
looks like someone at NPR is willing to buck the party line:
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Better link here.
Stephanie is like old wine 🙂
Yes she is!
I think its going to take a voice like hers to break into the buys club/ “circle jerk of economics pundits”. If she can start to get some traction in a few places, the usual suspects will have to be careful of dismissing her since it could come across as sexist. She has an outstanding grasp and a fine way of advancing the simple concepts.
She needs to get on Bill Mahers show or Jon Stewarts show (before the end of the year preferably)
She completely botched the first and most important question which was “What is money?” She didn’t even mention taxes. Nobody who doesn’t already know the answer to the question would have any idea what she was talking about.
You have to have a clear, succinct answer to that, to wit:
Money is a transferable IOU, redeemable on demand. The issuer of the money is a debtor; the owner of the money is a creditor. The more creditworthy the issuer/debtor and the more widely accepted the IOU, the more stable will be its value and the more utility it will have as a medium of exchange, as well as a store of value.
A gift certificate at Macy’s or Amazon.com is a form of money, as is a NY City subway token (a somewhat depreciated one at the moment).
The US dollar is a form of money because it is an IOU of the US government, which the holder can redeem whenever he wants. What does the US government promise to give the holder upon redemption? A credit in the amount of $1 against the holder’s federal tax bill.
A bank deposit is a form of money too. It is an IOU from the bank to you, which can be redeemed at any time 1:1 in US dollars, either in currency form or as a credit against another bank (which creates a new deposit/IOU), or as a tax credit against the US government.
agreed. she somehow took the question as what is ‘bank money’
and she agreed and would like another go at it!
Yes, she seemed a bit hesitant about it, when it was really an excellent question that gets to the heart of things. (Harry Shearer really is an excellent interviewer, BTW) It would behoove every MMTer to have a thorough reply to that question ready to go as a “talking point” in similar situations, whether in public or private conversations.
Of course, there is the question of how in depth you can go such an interview. If you start talking about the heirarchy of money, etc. you can get lost in the weeds…
i don’t ever talk about that heirarchy
pls cut her some slack. i thot she did a great job. i think the message still needs to be ‘dumbed down’ – kinda like those talking bears (with a hilarious Aussie accent) in the Xtranormal videos on youtube…
what would it take to do a segment on 60minutes ? i still think this is all about a year too late as that Peterson guy Stephanie mentions has already won the next election ! still – Kudos to Stephanie.
@Rahul R, It’s not too late; because this is a war, not a battle. Also, it’s not even clear we’re going to lose. Wait till the pressure on them about not cutting the safety net starts. A lot of them will be afraid to go along with the President. A second term president starts losing power the day after he’s elected.
i expect the republicans to start doing everything they can to prevent Obama from serving a 3rd term…
“it is critical to realize that the stock of reserves, or money, newly issued by the government is not a debt of the government. The reason is that fiat money is not redeemable, in that holders of money cannot claim repayment in something other than money. Money is therefore properly treated as government equity rather than government debt, which is exactly how treasury coin is currently treated under U.S. accounting conventions (Federal Accounting Standards Advisory Board (2012)).”
“irredeemable government-issued money represents equity in the commonwealth rather than debt.”
“The reason is that fiat money is not redeemable, in that holders of money cannot claim repayment in something other than money.”
Holders of Treasury bonds can’t claim repayment in something other than money either. Is a Treasury bond equity in the US government?
The FASB definition is not even internally consistent.
But as I have mentioned, fiat money is redeemable for something. It can be used to extinguish a tax liability, which is not some intangible thing if the IRS is outside your house with pitchforks and torches.
Treasury bond is not money, it’s a govt debt which is repaid in money.
Why is the FASB definition not internally consistent?
Fiat money can be used to pay taxes, but this doesn’t make it into any kind of govt debt.
treasury bonds are dollar deposits at the fed
reserves are dollar deposits at the fed
Here’s another one:
“money and debt are two different things, that’s why we have different words for them. We pay our debts with money.”
“Money’s essence (apart from whatever is used to signify it) is an abstract social power, embodied in law, as an unconditional means of payment.”
“Treasury bond is not money, it’s a govt debt which is repaid in money.”
To be pedantic about it, the FASB blurb argued that money is not a debt because it cannot be repaid in something other than money. Well, Treasury bonds cannot be repaid in something other than money either. This does not mean that Treasury bonds are money (although I believe they are), but it means that they are not debts.
“Fiat money can be used to pay taxes, but this doesn’t make it into any kind of govt debt.”
I think it does. If it wasn’t for the government having these outstanding debts, i.e. dollars, it would be able to tax away your worldly possessions. Instead, you can just give them little green pieces of paper and keep your house and your car for yourself.
““money and debt are two different things, that’s why we have different words for them. We pay our debts with money.””
Not all debts are paid with money.
““Money’s essence (apart from whatever is used to signify it) is an abstract social power, embodied in law, as an unconditional means of payment.””
This is the “legal tender” definition of money. It is completely wrong. Having a legal tender law is neither a necessary nor a sufficient condition for making something effective and useful as money.
“it means that they are not debts”
How does that work? How can a Treasury bond not be a debt?
“it would be able to tax away your worldly possessions”
It could do that anyway. This is not a good enough reason for describing govt-issued money as a govt debt.
“This is the “legal tender” definition of money. It is completely wrong”
Not quite, the definition takes into account the fact that money can be used to pay taxes, whilst avoiding describing money as govt debt.
dollar deposits at the fed are govt liabilities, aka ‘debt’ by some.
“treasury bonds are dollar deposits at the fed
reserves are dollar deposits at the fed”
Treasury bonds are govt debts which are paid in money/reserves. Reserves are simply money.
As you say there is no fundamental ‘operational’ constraint on the Fed’s ability to convert one into the other, but they are still different things.
you are layering on definition to the accounting facts. that doesn’t change anything apart from the rhetoric
functionally a tsy sec is a dollar deposit at the fed called a securities account. you can call it a debt if you want.
and reserves are dollar deposits at the fed. you can call them ‘money’ if you want.
at maturity the fed debits securities accounts and credit reserve accounts.
again, you are free to rename these, doesn’t matter to me
“How does that work? How can a Treasury bond not be a debt?”
Of course a Treasury bond is debt. I was simply pointing out that by following the FASB’s argument (the flaw in which is a faulty axiom) you can logically conclude that a Treasury bond is not debt. My argument is a proof by contradiction that their argument is flawed.
Now, if they had said something like “a debt cannot be an instrument that is redeemable only in units of itself” then that would have been an axiom that would make a distinction between a Treasury bond and a dollar bill. A distinction without a difference, in my opinion, but at least their argument wouldn’t have been obviously wrong.
“you are layering on definition to the accounting facts”
My original point was that government-issued money is not a govt debt, as opposed to what S. Kelton and ESM were saying.
try just sticking to the descriptions themselves.
govt spends by entering tax credits to reserve accounts.
“I was simply pointing out that by following the FASB’s argument (the flaw in which is a faulty axiom) you can logically conclude that a Treasury bond is not debt.”
(I think you mean Kumhof’s argument – the FASB just describe treasury coins as equity not debt).
Bonds are repayed in money. Money can’t be repaid in anything other than money.
bonds are dollar balances in securities accounts at the fed
isn’t that enough?
the way i say it is the dollar is a tax credit.
it is a liability for the govt as the govt has obligated itself to accept it for payment of taxes
Equity sits on the liabilities side of a balance sheet but has particular and specific characteristics that differentiate it. The dollar is called an ‘obligation’ (a term which can be applied to equity too) rather than a ‘liability’ of the government. What it isn’t is a ‘debt’.
Accounting-wise equity is treated as a liability. It is not, however, by any reasonable definition of liability.
I’ve been down this road before in another context, but equity represents fractional ownership in a tangible resource, whether it is a building, a car, or a value-creating enterprise. I have previously tried to define equity as something that is actually currency neutral. It retains its value regardless of the currency in which it is denominated, or whether that currency has any value at all.
I’m not asking you to accept my definition, but I am pointing out that there is a difference between a share of stock and a liability, even though bean-counters have decided (unfortunately, in my opinion) to confuse the two in order to make their double-entry bookkeeping simple enough for an 8th grader to understand.
When it comes to influencing public policy, the root issue is what the bulk of the public understands “debt” and “tax credit” to mean.
Both terms have multiple semantic definitions to different people in different sub-contexts, so it absolutely would help if there was a statement of what “debt” and “tax credit” imply when it comes to fiscal policy … and voting preferences.
In the end, it simply doesn’t help to succinctly describe a process … using terms having ambiguous meanings for diverse audiences. Best to always accurately define the terms prior to the succinct statement. That’s how to manage response variance, and achieve a common take home message.
@ESM,You mention the point of ” the more creditworthy the issuer …. etc”, but don’t we all agree that the currency issuer is always creditworthy when it comes to normal debt in the currency it issues itself?
In the case of government issued fiat currency, the answer is yes. I was addressing the more general definition of money.
For example, a gift certificate to Borders bookstore is not worth very much, but a gift certificate to iTunes trades for about 90 cents on the dollar on ebay. A bank deposit at a failing bank is worth less than a bank deposit at a solid bank, even if it is FDIC insured (because there are inevitable delays and hassle involved in getting reimbursed).
It is often hard to distinguish between creditworthiness and too much supply, and I’m not sure it’s even worth trying to make that distinction. If an airline has too many frequent flier miles outstanding, so that it is very difficult to pay for a flight using your miles, is the diminished value of those miles (aka money) due to too much supply or poor creditworthiness?
Likewise in the case of a US government which has issued too many dollars, the dollar will decline in value. From a reasonable perspective, the diminished value is due to the US government’s perceived inability to perform on its obligation to grant credits against taxes in exchange for dollars. If it can’t or won’t impose a heavy enough tax burden on the private sector, then it can’t really grant enough credits to make the dollar hold its value. In a way, that’s a measure of creditworthiness.
best to avoid the use of the word ‘money’
@ESM,I think if you get such a question “what is money” you immediately need to narrow it down to fiat money. If we want to keep it succinct and clear, like you stated, we need to stick to “money is a tax credit”, i.e. you can decrease your tax debts with it.
This highlights that the government is the monopoly supplier of money.
Regarding quantity it enables us to stick to “Net Financial Assets (NFA)”, with the emphasis on “Net”. All the IOUs created between currency users such as bank loans, iTunes cards, air miles etc. that you mentioned then get eliminated automatically because they net to zero.
I assume the more general definition of money that you refer to is based on the functions it is supposed to fulfill.
You mentioned 2 above, but as far as I know normally 3 functions and required conditions are seen as critical.
1. medium of exchange – this normally requires that it should be valuable
2. store of value – this requires it should be durable
3. unit of account (calculation) – this requires divisibility
Historically gold was seen as the good that best fulfilled these 3 functions and met the required conditions. It was scarce and of practical use, it did not deteriorate over time and you could divide it from big bullion into thin leaves if needed. Problem was however to a certain extent the transferability of the gold.
It looks to me that all kind of gift certificates and subway tokens you mentioned do not pass the test.
In today’s digital era with fiat money the whole picture has changed. We transfer via wires. The value comes from primarily from taxation. In the spreadsheets where we administrate we can calculate to any size we wish. What remains disputable is the store of value. Some claim that fiat money has performed poorly in this respect considering the inflation since 1971. As far as I understand Warren blames this mainly on the Saudis’ price setting for oil.
I agree that without taxes and credible tax collection a fiat currency has no value and/or loses its value.
To prevent misunderstandings with regards to ‘too many dollars’ I hope you agree that the fact that there are more dollars than tax liabilities in dollars does not automatically imply that the value of the dollar should go down. Apart from taxes there is a savings desire and there is a certain amount of dollars that we require in circulation to do transactions. The right amount of debt (read: quantity of issued dollars) will fluctuate over time in a natural way with things like population size etc.
I personally prefer to avoid somewhat soft and vague concepts like ‘perceived inability’ when explaining the cause of a decline in value. If it would come down to dealing with perceptions I get a bit the same kind of feeling as with the confidence fairy.
@WARREN MOSLER, Yes, with the wrong self imposed restrictions in place, those govt bonds are maybe not so risk free as some claim them to be.
risk free in that the govt always has the ability to pay- they are just balances on the gov’s account.
true the gov might decided not to pay, but that would not alter the interest rates the gov pays on those deposits.
I learned something new listening while on my jog at lunch.
Bank reserves and how they push down interest rates become much more clear.
The reason I posted the alternative link above is that when I first clicked on the link it was broken.
@Adam2, Oh. Harry Shearer is also on Stitcher and iTunes.
In the Columbia seminar video, Stephanie Kelton provides a very compelling symmetrical chart of sector financial balances from 1952 to 2010. I would like to replicate that chart using available data and my understanding of it is composed of only three sets of data: 1. Federal budget surplus/deficit taken as a percent of GDP 2. domestic private sector savings as a percent of GDP & 3. US Trade deficit as a percent of GDP. Is this correct or am I oversimplifying it?
Maybe this is just too obvious:
1 USD = one dollar of Federal Debt
One dollar of Federal Tax remitted = Our Federal Debt is reduced by one dollar.
Then why are coins issued by the Treasury described as equity, rather than debt?
@y, Because U.S. dollars are also a claim against our national productivity, hence a form of equity in economic output.
how can they be debt and equity at the same time?
not directly. you can only buy from willing sellers
If I have equity in a company, doesn’t that mean that the company has an obligation to me? Aren’t those obligations liabilities?
But, what Warren says seems correct to me. In a loose sense only, we can say that a coin or other money is a claim against out national output because people are usually willing to part with a share of that output for the coin. But there is no binding legal obligation entitling the bearer of the coin to that share of the output. The purchasing power of the coin derives from the fact that both the seller of the output and bearer of the coin agree that the coin has value. And that value derives at least in part from the fact that the government has obligated itself to accept it to diminish the bearer’s obligation to the government – an obligation that is denominated in the same units represented by the coin.
“If I have equity in a company, doesn’t that mean that the company has an obligation to me? Aren’t those obligations liabilities?”
No, and no. Equity is fractional ownership. It is not a credit-debtor contract. I had a back and forth with Warren about this a couple of months ago. Perhaps you can search for the thread with google.
@ESM. I erred in saying “liability” and should have stuck to “obligation”. But a corporation is a separate accounting entity from its owners, unlike, say, a partnership. So doesn’t that mean that the corporation has obligations to its owners? The owners have a claim on the portion of the company’s assets that are not owed to others.
“It is not a credit-debtor contract”
Neither is govt-issued money.
“But a corporation is a separate accounting entity from its owners, unlike, say, a partnership.”
Only for tax purposes. Partnerships, S corps, LLCs, etc., are separate entities for all other purposes as well.
The thread where this was discussed was in September, here.
“Neither is govt-issued money.”
Well, reasonable people can differ as to how they want to describe money, but I think where they can’t differ is on what imbues govt-issued fiat money with value. It does not come from a legal tender law, or a social compact, or a faith-based religious belief, or even a fundamental utility in providing food, shelter, or pleasure. The value comes from the ability to redeem it as a credit against a federal tax obligation.
“Money is a creature of the law” (Knapp)
Where does the government’s right to impose tax obligations come from? From the law.
“We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.
Article I, Section 8, Clause 1:
“The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;”
“Where does the government’s right to impose tax obligations come from? From the law.”
An irrelevant insight reminiscent of one long ago given by Roger where he implied that one needed to understand atomic forces in order to use a chair. Depressingly, you didn’t even cite the most important part of the Constitution with respect to taxes, which is the 16th Amendment.
Actually, according to Dan’s Law (see below), I can now declare victory in this thread.
That’s a fun way of declaring victory.
I think what you’re actually going to do is call something which isn’t a ‘debt’ a ‘debt’, and say that the value of govt-issued fiat money doesn’t come from a social compact when that is precisely where it comes from.
“An irrelevant insight”
Not really. Without the legal foundation there is no government money.
Here’s a critique of Alfred Mitchell-Innes’ “Credit Theory of Money” by Stephen Zarlenga:
It’s worth a read.
“money is an abstract legal power, and thus the consequent necessary role of the government.”
“money… is an abstract institution of society based in law. For corroboration we offer the ubiquitous historical examples of the efforts of private bankers, central or otherwise, to be sure the LAW made their private notes acceptable for payments to government. We have seen what happened to their “money” when this privilege was revoked…
The moral element arises because a society depending on private bank credits in place of government created money, is operating in moral quicksand. For that society has established a special privilege of power and money for bankers, which cannot but harm the population as a whole.
When monetizing private credit is done by law, it necessarily confers special privileges on those privates issuing the credit. This is contrary to the spirit of the U.S. Constitution, and if one considers that this privilege amounts to the formation of an aristocracy then it is also contrary to the letter of the Constitution.”
the dollar is a tax credit
which I can’t create but banks can.
The US Treasury, as designated currency issuer, can create net tax credits per public will. Licensed banks in the USA can only issue debits/credits in roughly equal amounts (leaving some time window for them to balance), and hence cannot create NET tax credits?
Banks don’t create currency de novo, they only get a piece of the action from transactions that they act as trusted accountants for. When there’s fraud, distrust the specific bankers involved, not necessarily the overall currency system design.
I am claiming a Godwin’s law on the use of the word “constitution”.
You can tell a discussion has jumped the shark when someone brings up the point that it somehow goes against the constitution.
Not sure what you mean. Can you elaborate?
He’s claiming that for somebody to invoke the word “constitution” in a discussion is such a beyond-the-pale, fallacious appeal to emotion disguised as logic that it is similar to accusing the other side of sympathizing with Nazism and Hitler.
I think that this is a violation of a corollary to Godwin’s law in and of itself, but I can see how Dan might like to create a separate law to describe emotional appeals to the constitution.
Dan – Is ESM right or do you have a different take on it?
ESM pretty much nailed it.
This was my post at Dr Kelton’s site – hope you dont mind me posting it here (I have asked a question or two before), and I look forward to any replies – apologies for it being long:
Dr. Kelton – I really appreciated your interview but have several questions. I dont know if this is the forum or not perhaps you can take one or two. I also follow Dr. Mosler. As way of background, I am at best an armchair economist, probably more a very concerned citizen. A believer in free markets, though not naive about them, my wake up call on a fundamental level was when I heard “Too big to fail”. My quest for answers brought me to the Austrian school and keeping an open mind, the Monetarists. I have read Dr Mosler’s book (7 Deadly …) and just purchased his latest one. I feel I am intelligent but there are several things I just cant seem to get my head around as I read monetary theory. Like you allude to in this interview perhaps it is just so different from the cognitive schema that I (perhaps we) have developed. My belief is that many of us on the edge of understanding, on a quest over the last few years, have many of the same questions as we try to think critically about any theory. Here goes:
Inflation: I don’t find any good in depth explanations from Monetary Theory on the causes other than what you discuss in this interview which is purely from a supply side – capacity utilization. Is there no fear of too much of a monetary base chasing too few goods ? What would be the thresholds where you would worry? You seem to distrust the govt’s numbers on employment (rightly so I believe) so why do you trust their inflation numbers? Just putting people to work (giving them money to spend) can not be a good thing if they are not producing valuable goods (there money will also chase valuable goods) which brings me to my next issue…
Free Markets: There does seem to be a government knows best theme in your interview – even education and infrastructure – cant/shouldn’t free markets and entrepreneurs in the long run only pick the winners and losers? In education, does more money = better?
Interest Rates: Is it your belief that the Fed can control the entire yield curve? While short term rates can be set and inferred, if all debt is investment on the other side of the equation – at some point – wont investors demand a higher yield and cant the monetary base get to a tipping point? Interest paid/demanded by the market increases the monetary base to a point of no return? What (negative) feedback mechanism would prevent this? Is there no limit on/to the monetary base? If so what should it be and how do we know if we get there or are approaching it – what signals do we look for?
Jobs: Should the 23 mm out of work be given any job? Digging ditches and filling them in? It sounds like you believe there is huge unused capacity right now in the United States. What evidence is there that this is true? As a consumer all I hear is nothing is made here anymore and when I buy something (other than GM) outside of the core “food and energy” – it rarely has a made in the USA sticker on it. The majority of people out of work right now dont want the very difficult hard job of building roads and bridges or have the skills for it or teaching.
The government is not a household. I love this analogy because it really opened my eyes somewhat – but my question is regarding turning this analogy on its head – what if it were? What if I could print money (Ok increase my reserves) and spend it on anything I wanted, would it be unlimited? It also seems like it is accurate in a vacuum. We are not the only ones valuing our money right? In globalization will the US always have the ability to print its own money and not be worried about its value to those who have no utility for it as an ability to pay a tax, especially when we will soon not be the biggest economy on the planet and people can take their business elsewhere?
Thank you for any thoughts.
Re: your last paragraph, there is no printing money without worry about its value. They keep talking about price stability as a major performance metric; that’s a worry about the money’s value, isn’t it?
‘inflation’ – the currency is a simple public monopoly, and any monopolist is ‘price setter’ and not ‘price taker’
‘free markets’- there are no free markets, just what I call competitive markets. and market forces are very real and can be directed towards promoting public purpose
yes, the govt of issue has total control of the entire curve of ‘risk free’ rates. again, it’s a case of the monopolist setting price
the states are a bit like households in that they need income prior to spending.
What does “risk free” rate mean?
the rate the CB pays on balances, including balances in what are called securities accounts we call tsy secs
Dr Mosler, thanks as always for your reply.
With so many variables – how does the govt set the price? Are they using the M1, M2, M3 stats of old that conventional press would have us believe are no longer used? How do they control the amount of our debt (money) bought or sold by other all holders – foreign and domestic?
Kind of along those lines – how does the Fed control the long end? With programs like the recent “twist”? Are their others? Is it possible the feds balance sheet is much much bigger than what we have been told?
Thx and best of luck tomorrow!
Fundamentally price is a function of prices paid by govt when it spends (and/or collateral demanded when it lends)
but the govt doesn’t know that, and thinks it has to and does pay ‘market prices’
what’s controlled is the amount of spending and taxing, with then net being the ‘deficit’ which adds to net financial assets of the non govt sectors.
Steve, re: your last paragraph, there is no printing money without worry about its value. They keep talking about price stability as a major performance metric; that’s a worry about the money’s value, isn’t it?
I agree, but how do you measure price stability? It seems like using a core CPI rate loses its validity after 1 complete cycle (yet that is what is happening) and all the adjustments to the CPI over the last several years has me suspicious. Anecdotally from my own experience over the last several years prices cant be just rising at a 3% rate (doubling every 24 years). Portions are smaller, “volatile food and energy” are excluded beyond just a quarter to quarter comparison, etc. Indicators for inflation are trailing anyway, right? How do we get a good measure of price stability? Any thoughts on the “shadow stats” site/work?
to anyone that can explain from a mmt/r perspective…
I’m just wondering as to what happened to Asia in the 1997-8 financial crisis. From what i can remember, the thai baht was “sold” massively which resulted in its devaluation and the govts having to ‘use their reserves’ to hold the currency value.
im finding it difficult to understand this from a MMT/R perspective or indeed, even simple supply and demand. why would it be necessary for the Asian govts then to use their USD reserves to prop up the currency? why dont they just issue say, Thai Govt Bonds (Baht) at a 10% interest rate to ‘soak up’ the selling pressure of the baht?
after all, they can always repay debt denominated in their own currency, so the interest rate on govt bonds doesnt really matter right?
the baht was pegged to the dollar, i.e. it was a fixed exchange rate regime.