The (Semantic) Problem with MMT: An Exercise in Framing

By J.D. Alt

54 Responses

  1. Yes it is natural to get very angry when you realize that your country is run by a criminal banking cartel and your currency is simply an electronic ponzi scheme.

    I appreciate Warren Mosler in getting the word out, educating people on how fiat currency and currency issuers is simply old fashioned debt slavery practiced for thousands of years by European Kings and Queens.

    I wonder if we will have another Victor Hugo and Awaking on the masses to how there is no democracy in bank run capitalism.

    1. @alexander,

      The statement that “fiat currency and currency issuers is simply old fashioned debt slavery…” is not correct – at least in the following sense.

      The vast bulk of money in circulation originates with private banks: that is, they “lend money into existence” as the saying goes. Thus for virtually every dollar in circulation, there is a dollar of debt.

      In contrast, there is no debt in any real sense of the word associated with central bank money, or “monetary base”. But monetary base is still fiat.

      I.e. if there is any “debt slavery” going on, it is attributable to private bank created money, that is, fractional reserve, not to fiat money as such.

      There are those who think the total amount of debt would be much reduced if we banned fractional reserve and went for full reserve banking. Personally I don’t think that conversion would make much difference to the total amount of debt.

      1. @Ralph Musgrave,

        So get rid of fractional reserve banking? Oddly enough, this is what the Austrians have been saying all along. Now that would be a paradoxical coalition! Not sure if human nature is such that it can go without the “high” attained via leverage. It may be part of our manic depressive impulse.

      2. @Ed Rombach,

        Not all austrians favour full reserve banking. I’m also very sceptic on the real capacity to limit leverage in human civilizations as long as there is capacity to produce surplus goods.

        Humans will always find ways around to create shadow money even if it involves convoluted payment systems. But it may be worth a try and at least try to limit it.

      3. @Ed Rombach,

        ?? The concept of Fractional reserve banking has no relevance in a fiat currency system.

        Fiat currency uses dimensionless units to denominate the constantly growing will of the issuing population.

        How do you fractionate fiat? Since a fiat currency is, in effect, backed by public initiative & public will, FR logically reduces to fractional public will. Very ironic, but still no longer applicable, except as the obvious, trivially wrong method to stop shooting our own foot with.

      4. @Ed Rombach,

        Fractional reserve banking has already been dropped

        Most do not know what FRB is / was. It was only ever a way to RESTRICT bank lending (based on the amount of base money held)

      5. @Ed Rombach,

        Trying to take in all the replies. Once upon a time I worked for a bank where the asset / liability gap management was always a concern because most banks fund short and lend long. There would be a trade off if hedging interest rate risk on the A/L gap eliminated upside potential for fatter net interest margins in the event of a bear steepening sell off in bonds. However, most rising interest rate environments tended to be of a bear flattening nature as the Fed would be in the driver’s seat in rate hike mode, as per Warren’s comment about “price not quantity”.

        Against this backdrop, the concept of full reserve banking was very foreign to me when I first became aware of it, and still not sure I grasp how it would work. My intuitive hunch is that some degree of leverage will probably always be with us because players get a high from the turbo charged effect, but I can’t say definitively if this serves any useful public purpose. Presumably, with full reserve banking asset / liability maturities would be matched leaving banks to earn a credit spread differential rather than trying to also profit from the slope of the yield curve.

        Roger Erickson, I don’t understand your comment “The concept of fractional reserve banking has no relevance in a fiat currency system.” I was thinking that fractional reserve banking would be more relevant to fiat than to a hard money system, but maybe I’m conflating bank reserve requirements with the typical A/L mismatch in a positive yield curve?

      6. @Ed Rombach,

        > maybe I’m conflating bank reserve requirements with
        > the typical A/L mismatch in a positive yield curve?

        I think so. In a fiat system, banks basically act as Credit Evaluators. All the currency they supposedly “lend out” actually comes from the public, via their gov, through the Fed accounting system. Banks just have to be partially responsible for the credit ratings they guarantee, by putting some of their own capital at risk if the credit extended goes bad?

        I HAVEN’T worked in a bank, but would like to be certain about what happens in account clearing.

        If the Fed didn’t “require” banking-reserve requirements of any banks, and gave all banks access to the Fed window, then there wouldn’t be even a vestige of FR thinking to confuse people?

        Isn’t that close to what Canada (& some other countries) do?

        Part that puzzles me is why banks receive ownership of the original asset when any loan goes bad. They certainly don’t put up all the capital? Cleanest event in a loan-gone-bad would be an auction to take over the original loan terms between borrower and public (lender)? Banks should NOT be allowed to have a vested interest in ownership of the assets they advise buyers/sellers on.

        When the original seller cashes a check or gets an account credited, that bank doesn’t give up it’s own capital, it only notifies the Fed of the credit assigned?

      7. @Ed Rombach,

        John Carney of CNBC had another article yesterday (May 31) “Time Bomb: Banks Pressured to Buy Government Debt”, which has seems quite relevant to this discussion and which has also garnered some visceral response from commenting bloggers. For example…..

        Jay070 | May 31, 2012 03:21 PM  ET
        “The banks, though, are caught in a “great repression” trap from which they cannot escape.”

        This article almost has the tone of “poor banks having to accommodate governments.”

        That is dishonest. Who profits from every dollar of debt created? Is it not the bankers? Furthermore government spending usually benefits the banking class too – their wars, their tax loopholes, their contracts.

        If America wasn’t run by crooks, the money would be created by the government and SPENT into circulation debt-free. There would be NO national debt and tribute paid to bankers who deserve to collect none of it.

        Jay070 | May 31, 2012 03:26 PM  ET
        There is a “debt crisis” because ALL our money is debt – thanks to the moneychangers in charge of things.

        Leverage, accounting, fractional reserve, finance – all words to hide the stealing of wealth through dishonest bookkeeping that the banking class engages in.

        You attempt to work for a living, they use laws, accounting, and “investing” to steal.

      8. @Ralph Musgrave,

        Full reserve banking is impossible nonsense. It would mean the banks could not lend money

        I think what the promoters mean is 50% FRB. But try and get a full RB banking supporter to explain how it would work and they are very quiet

      9. @RJ,

        Full reserve works by centralising the money expansion mechanism into the hands of the central bank.

        Which means you likely get all the disadvantages of a centralised structure – lack of flexibility to respond to demand. The same problem that always causes quantity management to fail.

        The only system that works is an ‘on-demand’ reserve facility at the discount window. And that is exactly equivalent operationally to the current insured fractional system.

        If you close the discount window then you are back to 1980s monetarism – trying to control the quantity again – and that didn’t work the first time around.

        So Full reserve banking, with a closed discount window, is really another attempt at classic monetarism by the back door.

        With an open discount window, its just a bureaucratic change that will make the dynamic expansion of money very clear in the statistics.

      10. @RJ,
        Commercial banks can perfectly well lend under full reserve: it’s just that if they want to lend $X, they have to have someone who has deposited $X with them first. That is, they cannot lend money they haven’t got: they can’t create money out of thin air.

      11. @RJ,

        RJ: Full reserve banking is impossible nonsense. It would mean the banks could not lend money

        Another senseless claim about bank operations. But I see that others have addressed it already.

      12. @RJ,

        Neil: Full reserve works by centralising the money expansion mechanism into the hands of the central bank.

        Not really. It just gives the central bank a driving hand. Remember it is all about price and capital by definition can not be “full-reserved”. So make a loan, create a deposit and transform this deposit into capital one way or the other. So a loan was created, balance sheet size increased, deposit transformed into capital and no FRB rule was broken.

      13. @WARREN MOSLER,


        I agree that full reserve involves a “lack of flexibility to respond to demand” – demand for loans that is. But then look at the result of giving commercial banks this flexibility: NINJA mortgages, a credit crunch, etc.

        Re the discount window, I don’t think funds should be available “on demand” at the discount window. That comes to the same thing as fractional reserve: i.e. banks being able to obtain any quantity of money they want anytime. I’d like to see the discount window abolished, except in the sense in which Walter Bagehot advocated it: a last resort for banks in trouble – a source of funds obtainable only in exchange for first class collateral, and at penalty rates.

        Re your point about controlling the quantity of money not having worked too well, that’s a good point. I can’t answer it because I’m not sure how the quantity was controlled: was it via interest rates? Any good articles on this subject anywhere?

      14. full reserve doesn’t change that ‘flexibility’ with floating fx policy.
        loans create deposits and reserve requirements, and in the first instance that requirement is an overdraft at the fed

      15. @Ralph Musgrave,
        Let’s not throw the baby out with the bath water. Fractional Reserve Banking (FRB) has really helped grow the world economy. Remember the accounting identity that Savings = Investment. Savings is also an income/demand leakage from the economy while Investment is an income/demand injection. FRB allows the causality to be investment driving the income to allow for savings. If you take away FRB and force deposits (savings) to occur before lending (investing) then you create a constant deflationary bias because you create a demand leakage that precedes an investment injection.

        What needs to be prevented is speculative and ponzi lending by FRBs.

      16. @Adam1, To my mind it’s a hallmark of MMT that it evinces no concern about the deleterious social and economic effects of endowing private banks with the power to create money, as loans.

        If interest is charged on money which the lender thereupon loses the utility of (all to start-with, diminishing to none of it at the end of the term), that is a fair exchange. That would be full-reserve, and it’s not what we have now.

        Instead, what we have now is that the banker charges interest on money he never possessed: it only sprang into existence when he keyed-in the numbers. To my mind that’s akin to charging interest on money he’s just counterfeited.

        And whereas the principal is cancelled again as it’s repaid and so disappears back again into the void out of which it was conjured, the interest accrues to the bank as its net, very concrete, gain. This is a tax, on all borrowers, extorted exclusively by banks by virtue of their unique privilege – money-creation. I think this is a heinous abuse. And I’m not an Austrian.

        MMT cares not a rap about it. For a school which founds its existence on the pursuit of “public purpose”, this strikes me as an ambivalent moral position, to say the least.

  2. When the truth about Santa Claus is revealed, some kids make a quick assessment and start working on mom and dad and continue to grow; others however, get stuck in a permanent temper tantrum forever blaming and fearful of any authority.

  3. Hey Warren, random question…

    If US government debt boomed since 2008, yet demand is low still because of the recession, does that mean when the recession comes to an end or fades off, the economy should come back much, much stronger because of all the new money now in existence?

    All of that debt equals our savings, right? So at some point when things look brighter for the private sector, shouldnt it go on a spending binge?

    1. @Tom,

      Paying off debt is the same as saving except that you go from a negative balance to a less negative balance while paying down debt and a positive balance to a more positive balance while “saving”. The effect is the same though. Most of that savings has been used to deleverage, that is pay down debt. Thus the only way it’s going to be spent again is if once the economies improve companies re-leverage by borrowing again.

      1. @Brian,

        “Thus the only way it’s going to be spent again is if once the economies improve companies re-leverage by borrowing again.”

        Or via liquidation by way of Chapter 11, default and debt moratorium.

    2. @Tom, “…because of all the new money now in existence?”

      The only “new” money is the government created or vertical money. You need to account for what is occurring with the horizontal or bank created money with deleveraging (when debts are paid back money is destroyed). You need to net the new vertical money being created with the horizontal money being destroyed.

      1. @Adam1,

        Ah ok. So unless the vertical component is outpacing the destruction of horizontal money, there shouldnt really be a boost?

      2. @Tom, How much fiat currency stock is in existence at any one time is not our dominant metric.

        The WHOLE POINT of a fiat currency system is added agility in adjusting fiscal spending to match public initiative.

        Our biggest impediment is our outmoded approach to using our fiat currency tool. Now that we have unlimited ability to adjust currency supply, we’re constraining our own ability to leverage our own fiat – by over-taxing & under-funding large swaths of our population.

        That’s the exact opposite of aggregate agility. Like issuing everyone new running shoes, then putting them in shackles?

    3. yes, in that the private sector’s balance sheets are restored to the point they could support a strong private sector credit expansion, if they ‘wanted to’
      but no sign of that yet.

      1. @WARREN MOSLER,

        The private sector does not believe that balance sheet has been restored or even anything close to that.

        The problem with private sector balance sheets is not the debt side, but the other side where assets are perceived to be valued too high. Or put another way, assets can no longer be counted on to appreciate. And that makes a huge potential loss of present and future wealth seem very real.

        There is still a long long way to go before those perceptions change.

  4. Someone conjures up the concept of non convertible fiat currency and lo and behold everyone is out to place limits and constraints on how it should operate or be described ..

    1. @walid M, Bingo, all for want of practice at exploring all the new options it exposes.

      Rather like a guy who invents an automobile & then still worries about keeping it on the horse path. This really isn’t like us, as Americans.

      Instead of voluntarily constraining our emerging options, why aren’t we exploring them at breakneck speed? Hoarding outmoded asset models bankrupts innovators, and in the process bankrupts the aggregate. This can only happen when we let policy become dominated by risk-mgrs instead of explorers & innovators. Too many lawyers in Congress & too few pioneers.

      We need some new frontiers for innovators to populate, and this time they have to be social frontiers, not geographic ones.

      1. @roger erickson, Simple solution would be to put mathematicians, engineers, biologists … or, say designers like Steve Jobs .. in charge of the Fed.

        ANYTHING except an orthodox banker or economist! Just like all other fields, the struggle is to put explorers/leaders, not Luddites, into top management positions. That way we can mimic Star Trek and “boldly explore options that no aggregate has explored before.”

        For example, where might we be if we’d made Nikola Tesla Fed Chairman in 1913?

  5. Tom and Leverage,
    Spending equals income. Income is taxed. Taxes function to regulate aggregate demand and control inflation. So increased private sector spending will result in increased taxes, not to mention lower govt spending on unemployment and other safety nets. Both will act to control inflation. I think your inflation fears are not well thought out.

    1. @markg,

      I dont have any inflationary fears….just curiosity if the larger debt would lead to a big spending boost by the private sector once the recession winds down.

    2. @markg,

      I don’t fear inflation. First, because all this ‘printed money’ is plugin the holes of collapsing credit. We still are in a deflationary environment. Taxes would increase relatively to all that new spent money, but the quantity of spent money would be bigger anyway, so unless taxes are risen (not going to happen) that would have some inflationary effect anyway.

      What I was trying to say, if that the economy came much more stronger inflation will trigger and act as a limitation to that strength with some delay (say, a quarter).

  6. ‘Fiscal space’ as the semantic solution in the article, is too vague. Sounds like ‘the bridge to the 21st century’.

    Instead, simply start talking about the ‘inflation tax’. The inflation tax is real AND intuitive. See Keynes’ famous quote about it.

    So, government spending equals actual tax revenues, plus the inflation tax, plus a possible free lunch from any existing output gap, plus another free lunch from foreign governments pursuing mercantilist policies.

    Is that acceptable to MMTers?

      1. @WARREN MOSLER, Especially if you reversed the order of the list.

        It’s still jarring semantics to call clawed-back taxes “revenue”. It’s cleaner logic to say “unspent & hence destroyed budget items”

  7. Well it is very fortune that IMF and World Bank employees like Christine Lagarde do not have to pay Federal taxes in order to protect them from becoming corrupt criminals.

  8. Re the comments.

    Wait, what? So they don’t just shred you’re tax money. 😉

    Having said that I do wish people would clearly state when they are telling ‘lies to children’. Otherwise it’s very hard to tell what’s actual fact and what’s a simplification to help explain a concept.

  9. @Warren

    “yes they can/do/would” (create money out of thin air)

    As a matter of interest, how “would” they? (We know that they both can and do, now – but we don’t have full-reserve banking now).

    If the intent were that no loan which created money (ie wasn’t backed by funds already owned) was to be legally permitted – given also that to take demand deposits onto banks’ balance-sheet were also prohibited – how would they then be able to create money?

    Or are you really just saying that they’d break the law?

    1. bank loans you the dollars via a credit to your checking account, in incurs a reserve requirement of the same amount

      that ‘overdraft’ at the fed is a loan from the fed.
      so the fed ‘automatically’ loans or otherwise provides the reserves it requires.

      or switches to some kind of fixed exchange rate policy

  10. Well, as an slightly off-beat way of looking at it, I think that the banks do not create money out of thin air, it is the customer that walks into the bank requesting the loan that creates the money out of thin air, by signing a contract to pay a certain amount of money over a certain amount of time, and he backs that contract with his labour.

    More here:

    and some more detail here:

    1. @Viorel Teodorescu,

      I’d argue further than that. You could say that it is the central bank licencing the commercial bank that creates the money out of thin air.

      A customer walking into a bank is just transferring that potential circulation to themselves when they sign the contract.

      And if the licence is ‘you have loan capacity relative to your capital’, then it is the increase in capital that creates the money out of thin air.

      So it’s all down to what you want to model – the stock of potential money in the system, the amount flowing around, or something in between.



    in longhand – after customer signs the loan agreement, the bank swaps a nominal contract for labour (the loan/loan agreement) for bearer contracts for labour (the government dollar bills) at parity, and then deposits the dollar bills in the customer deposit account.

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