Because we’re being played off against food stamps by Republican congressmen:
We’re only asking for a 5 percent decrease [in SNAP] in a time of budgetary crisis, where this is being put up against funding the NIH for basic medical research, this is against putting money into defense.
But this is stupid, since it assumes the federal government can run out of money. It can’t, since it’s a currency issuer. Let’s work through a couple of thought experiments. First, the Mars rover (boldface added):
It’s a completely false tradeoff, and one scientists have to face all the time. To put it simply, our dollars are not “precious” because we have a fiat currency; we can spend the money. Being a currency issuer is very different than being a currency user. There is no reason to choose between Mars landing or fixing all our other problems if money is the only limiting ‘resource.’ Hell, we could afford to put a whole goddamn showroom of ATOMIC SPACE SCIENCE TANKS! WITH JETPACKS! on Mars.
Actually, that last part might not be true. Landing ATOMIC SPACE SCIENCE TANKS! WITH JETPACKS! seems to be a very intensive undertaking. We might not have enough mohawk-coiffed rocket scientists. Might need to rustle up a few more. We could run into resource limitations–maybe we want some of our engineers, computer whizzes, and mohawk-coiffed rocket scientists to do something else worthwhile (
figure out how to download porn faster!). Maybe making a bunch of ATOMIC SPACE SCIENCE TANKS! WITH JETPACKS! would cause shortages in making other fancy gizmos (dunno). It might cause inflation in the ‘send stuff into outer space’ sector. Or maybe we simply don’t want that many ATOMIC SPACE SCIENCE TANKS! WITH JETPACKS! But money is never a limiting resource when you have a fiat currency.
Let’s move on to the NIH (boldface added):
As I’ve noted before, this has ramifications for science funding too. If we wanted to, we could double NIH funding. Arguably, if we don’t change how and what the NIH fund, we could wind up right back where we are today, with too many investigators chasing too few dollars, just at a larger scale. So maybe we shouldn’t increase funding that much until we figure out how to do it better–but that’s a completely separate policy debate. Operationally, as long as we have enough scientists and scientific materiel, there’s no reason why we couldn’t double NIH funding (remember: could and should are different).
So let’s stop worrying about deficits and start worrying about real problems (here’s one you can worry about). Unemployment, underemployment, and stagnating wages, along with a decaying infrastructure, that’s what we should be worrying about, not federal deficits denominated in currency the U.S. government controls.
If scientists don’t start understanding that money by itself can not be a limiting resource, we’re going to end up being pitted against other worthwhile things–and what’s the point of improving human health through better medical interventions if we simultaneously weaken it by making children hungry? We can’t let conservatives divide and conquer based on some simplistic misunderstandings.
This economics stuff matters.
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Our understanding of the science behind sovereign money requires a base in the thinking of the monetary scientists.
In discussing the ‘science’ of sovereign money within its relation to budgets and the rules of government finance, it is important to differentiate between a fiat monetary system function and funding sources for government administration of the public good.
Depending on the legal systems and structures of the monetary system in place, it is quite possible that one has nothing to do with the other.
The fact that a sovereign government cannot by definition run out of its own currency, is far distant from the question of whether the present government – meaning the Treasury of the United States as payer for governmental services – can at any time run out of revenue from whatever sources, and thus lead to the impoverished struggle between food stamps and mental health services, for instance.
That struggle is the norm and very possible in a sovereign fiat money system where the government has delegated by implication of the law governing the money and banking system, the power over that national money system.
Today, in this sovereign nation, all the money the government needs is created as a debt by private bankers. Under the Peterson-Koch capture of our political economy, that money is getting in shorter supply to those who need it to pay their bills.
MMT’s effort to declare that the legal status of the sovereign fiat money system is the only tool needed to assure its use to provide for the plenty of public good, must therefore overcome the REALITY that under the present system, the only way for government to acquire revenues needed to pay its bills is through either taxation or borrowing from the private bankers who create the money and rent it to The Restofus.
Achieving our public purpose money system requires reforms to overcome our past mistakes of turning the national money system over to the private bankers.
The relationship between our public advancement and our system of money is well discussed in Soddy’s Lectures in Cartesian Economics – Titled : The Bearing of Physical Science Upon State Stewardship.
I would like to think that the discussion of money is rising to its proper role at the foundation of both political and socio-economic science, that will necessarily support progressive change.
That is the problem with relying on private credit to fuel economic growth. No net financial assets get added to the system and everyone ends up in hock to private bankers to pay the bills. If you look at the accounting, private bank lending is just wealth transfer to banks once the interest has been paid. If NFA are not injected into economy targeted at the poor schmucks who borrow from the banks then all the money ends up with the bankers.
Totally agree that the private-money system we have today is designed to move both the income and wealth being created to the issuers of our financial-asset based money supply.
If you could invest the time in discerning the proof of such a statement, please have a view of the only English-language lecture of Dr. Bernd Senf, professor Emeritus at The Berlin School of Economics on The Deeper Roots of the World Financial Crisis here:
As part of the bankers-school theory of money, MMT finds that new NFAs are added whenever the government issues new interest-bearing bonds.
To my thinking, what needs to be added to the economy to advance our well being is not NFAs which are a tool of the investing class, but purchasing power for The Restofus, which can best be done through the monetary-fiscal nexus of direct money creation and issuance by the state.
I’m not sure that NFA refers exclusively to bond issuance, merely to net high powred money creation. Deficit spending in the absence of bond issuance also adds net $ to the economy. In a sense, all fiat spending is “direct money creation”. Deficit spending adds purchasing power, assuming no other demand leakages, whether or not bonds are issued. I agree (as does Warren Mosler and other MMT thinkers), that bond issuance is not necessary, and that interest on federal debt instruments is just a subsidy to savers. Particularly now that the Fed pays interest on reserves, bonds are not even needed to control short term interest rates. Another thing often minimized in MMT discourse is targeting of spending. Distributional concerns are very important in the outcome of public spending. Furthermore, redistributing existing money from the top down would serve much the same purpose as targeting new net spending at the bottom, but that’s not something for polite discussion.
This is no time to worry about polite discussion topics, and ‘how wealth concentration is caused by the debt-based money system’ was the topic of my talk at the AMI monetary reform conference last month. But, let’s remain polite.
Sorry. To me on these pages, NFA means net financial assets – in the more real sense of financial assets, like a bank issuing money into existence creates new NFAs because the (loan) asset created adds to the bank’s balance sheet ( as well as the money supply).
But we have much larger misunderstandings here, if I may.
Deficit spending never adds money to the economy. It is always, and must be, accompanied by debt issue under the government budgeting constraint(GBC) where expenses must equal income – something not ignored by MMT, only referred to as a self-imposed constraint BECAUSE it is the law. Randy and Warren both say that is true.
So to your point – there never has been and never is “Deficit spending in the absence of bond issuance”. (Exception Greenbacks and coins) There SHOULD BE, but there isn’t. The only way to have that is through reform to the system of issuing the nation’s money – which is exactly what I propose we do. (More Greenbacks, digital in nature)
I am glad to engage your thoughts on “In a sense, all fiat spending is “direct money creation””.
Not in any real sense at all. By taking the debt-issuance out of the equation – which SOME MMTers do and some do not – it can be claimed that – ABSENT THE G.B.C. – deficit spending COULD add purchasing power to the economy.
But, again, until reform to the system of issuing money and debt becomes the law, we will never come close to adding purchasing power through spending. It cannot and will not ever happen. We both want it to happen, and you think maybe it does happen now(?), but in reality, only reform can bring that about.
I spent a year and a half arguing with Randy and Warren against their notion that we need GUV debt (OMOs) to manage interest rates now that WE THE PEOPLE pay interest on reserves. Glad to see it surfacing here but not sure about its context in our discussion.
Please take this in the polite spirit in which it is offered. Keep google-ing online until you find the free .pdf of Dr, Frederick Soddy’s book on “The Role of Money”. In that short, clear book, Dr. Soddy explains that the true role of the national money system is to distribute the wealth that is created through the efforts of the citizenry. He advocates for true public (sovereign fiat) money creation without debt. And he closes the Preface to the book with this warning:
“To allow it to become a source of revenue to private issuers is to create, first, a secret and illicit arm of the government and, last, a rival power strong enough ultimately to overthrow all other forms of government.”
Do the Koch Bro’s come to mind?
As noted MMTer Bill Mitchell says on his Pressure Drop album: “The rich get richer, and the poor get the picture”.
It’s past time for reform. We’re waiting, MMT.
I’m constantly learning so I appreciate and thank you for the discussion. I was being flippant about polite conversation, because talking about wealth redistribution gets a person labeled so many nasty things.
A few questions. Sorry if I used the term NFA imprecisely. I was thinking that as cash is an asset net cash creation could also be classified as creation of NFA, no? So if G deficit spends without issuing debt we get NFA in the form of cash equal to the deficit, whereas currently we get NFA in the form of bonds.
As for money creation, deficit spending without debt issuance is totally from thin air, while deficit spending with debt issuance requires, if all the bonds get purchased (and they always have so far…), that there must already be $’s available equal to the amount of debt issued. These $’s get swapped for bonds but are still a form of savings. So deficit spending with concomitant $ for $ public debt issuance adds to savings but not to cash. I agree. What about the effect on demand or wealth distribution?
If I make a model of a three party economy G, SB1, and Joe, SB1 starts out with $100 cash, Joe $1000 cash. (These lucky sods have no private banking system.) G pays SB1 $100 to read about economics online, taxes him 50, and sells him $50 in bonds. Now SB1 has $100 cash and $50 in bonds. SB1’s assets have increased but he has no more cash to spend than he started out with and he really wants a $150 bicycle so he can ride to his job surfing the internet for G. He can sell bonds to Joe and have more money to spend, but then Joe has less money. But Joe started out with $1000. So, swapping bonds for cash might matter less to Joe’s spending than SB1’s. SB1 sells Joe all his bonds, and now has $150 to spend on his bicycle (sold by Joe coincidentally). As an economy, our case here started out with $1100 cash and no bonds, and ends with 1100 cash and $50 in bonds. Net assets went up, but cash did not. Some scenarios could result in net cash increases for some parties and decreases for others, as did this one.
So, it seems to me that the influence on demand from deficit spending with concomitant public debt issuance depends on whether the entity who ends up holding the bonds would have saved the money otherwise or spent it, right? This is why distribution is important. I agree that G does not NEED to issue those bonds, and in our final case here they end up as a subsidy to Joe via interest (not discussed). The same effect on SB1’s cash could be achieved by selling the bonds directly to Joe (Sb1 would probably have faced some transaction costs), or by taking 50 from Joe and giving it to SB1, but then Joe has $50 less and maybe he makes fewer bicycles. In the real world, the largest holders of government bonds are large companies, sovereign wealth funds, pension funds, banks, wealthy individuals, and other entities looking for safe places to stash extra $ (and get paid interest). A relatively low percentage of bonds is owned by individuals with a high marginal propensity to consume. So as long as the original spending is well-targeted, deficit spending with public debt issuance should add to aggregate demand even though it does not increase total available cash. In fact, poorly targeted spending will not be good at increasing demand, or decreasing wealth disparities, with or without public debt issuance, even with an increase in cash in the economy.
Assuming spending is targeted identically, the only downside I see from issuing public debt is that it usually subsidizes entities with a lot of wealth already. I’d prefer not to do that, but I don’t see it as an absolute deal-breaker, and as we both agree, bonds are not really needed to regulate short term interest rates when G pays interest on reserves. I think the way the private banking system we are basically forced to use and that by design transfers wealth to itself is a bigger problem than public debt issuance, but I’m willing to be convinced otherwise. Now, perhaps ending the practice of issuing public debt would help substantively as we would not have “national debts” to hyperventilate over and we could just focus on targeting G spending to national priorities. But, on the direct merits I’d first try for spending and taxation policies that support full employment and reduced inequality, then I’d tackle the banking system (good luck), then worry about public debt.
Furthermore, given the extent to which pension funds in the US rely upon bonds, going cold turkey on public debt issuance could be quite bad. In Europe, with its relatively more generous state pension systems perhaps this would be less of a problem, but I’m not sure. I’d love to continue the conversation and I’m sorry for hogging so much comment space.
moved over there
“Today, in this sovereign nation, all the money the government needs is created as a debt by private bankers. Under the Peterson-Koch capture of our political economy, that money is getting in shorter supply to those who need it to pay their bills.”
Thank you. THAT is the “money shot” never addressed adequately by all of these preaching-to-the-choir MMT cheerleaders over at NEP.
Last things first .
“Understanding the Fiat Currency System….” is going to take a lot of comment space before we’re funding food stamps AND public health without conflict.
I need to apologize for what I’m saying here, but to me NFA are not a planning criteria nor a significant factor affecting anything in a functioning fiat money system where, unlike today, the government IS the monopoly issuer of the currency.
Often people get concerned about ‘liquidity’ being a crisis and turn to the need for MORE FINANCIAL ASSETS to save the day. Sorry, but BS. A financial asset is an asset to the holder, and a debt to whom it is counter-partied. We do not need more NFA, we need more money, without debt, without a counter-party, without liability. But once you accept the errant MMT tenet that money IS debt, then you are captured within what Dr. Bernd Senf calls “The Fog Around the Money”.
“Cash” in a debt money system is indeed a ‘financial asset’ because before additional cash can enter circulation, it must be collateralized into existence. So, even cash is debt today.
And today G can NOT deficit spend without issuing debt, so it’s hard to answer your question. Suffice to say that under reform to the money system, G could deficit spend and spend ‘Treasury Credit” new money into existence without issuing debt, so that the commons ends up with an equal amount of equity in the national economy.
Point of clarification – money is an abstract but legal social construct. As such, by definition, all additions to the money supply MUST come from ex-nihilo (thin air) creation by somebody – the choice being the bankers or the government.
If deficits are debt-funded, then we use the bankers’ money to fund them. If they are equity funded, then we use the public’s money to fund them.
I can’t answer all the econ questions, but I want to address the wealth distribution issue.
We create wealth by using all common resources like labor, natural, production, technology and money. If the money input is a debt, then, FROM THE WEALTH created goes a payment stream to the rich and powerful, the already comfortable who create and issue the monetary assets that serve as money.
If the money input is debt-free, made available by the ‘commons’ nature of public money, then there is available for distribution the whole of the wealth produced.
The top echelon of the wealthy are the producers of the debt-money stock. The next is the most credit-worthy who don’t need it but can make the highest return to the top echelon, receiving access to all the money they want money at the lowest cost. From there is a continual stream of stakeholders with the lowest and last being those not creditworthy, those who MUST spend all their income on NEEDS yet borrow to make ends meet. They are the trickled-upon, never earn two bits by using the money system, get it last and pay the most for its use.
Once you understand that, the need for social and economic justice commands reform to the money system.
I have read, think I understand and have no issue with your tri-partite economic postulations. But I’m afraid your focus remains on the financial-economic aspect of how things work, and they need to be on the monetary-economic aspect if we are ever to shake this Status Quo.
Then, this statement:
“”I think the way the private banking system we are basically forced to use and that by design transfers wealth to itself is a bigger problem than public debt issuance, but I’m willing to be convinced otherwise.””
Of course it is. But public debt is a part and parcel necessity with the banker’s debt-based money system. So, there has to be a solution that addresses both.
Please have a read of the Kucinich Bill here, when the GUV is open for business again.
In the meantime, try having a read of this source on sovereign money.
As to your logical and progressive priority list for reform, sad to say I had a similar one and argued for a decade with my Dad, who ultimately, after great debate, convinced me of the truth.
Whoever controls the money system controls the economy.
If you (we) don’t fix the money system, we will NEVER fix the sub-structure of the economy and achieve either full employment or a liveable wage.