Monetary Realism

Understanding The Modern Monetary System…

Breakfast Links 3-9-2012

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42 Responses

  1. JK says

    I’d also like to reiterate the point:

    When everyone can respectfully disagree and debate the “facts” as they understand them, it is very valuable reading. My impression is that both sides of the major disagreements have come off as pretentious at times. Honestly, neither side in the MMT vs MMR disagreements is innocent.

    All that any single individual can do is try your best to take the high road and let the readers decide who they’ll continue to read. If you think the other side is acting like a child, there no is need to have a hissy fit in response. Just do your best to stick to the facts and I believe over time you will garner MUCH more respect as a result.

  2. Dan Kervick says

    You are just trying to give a new meaning to the money multiplier story but the whole thing is wrong.

    Sorry, Ramanan, but that is simply not true. There is no suggestion in anything I wrote, or in the car analogy, that the existence of a reserve requirement somehow acts as a multiplier of credit or of the money supply. Nothing. I have indicated over and over that I accept – along with everyone in both the MMT and MMR camps as far as I know – the view that the private sector demand for credit drives the creation of loans, which in turn drives increases in in reserve balances.

    I fail to see how the fact that some countries do not have reserve requirements is relevant to describing the monetary systems of countries that do. But it is also the case that whether or not there is a CB reserve requirement is independent of whether the government of that country has a currency monopoly. Even if banks are left to manage the size of their central bank settlement accounts on their own, and and even if there is no formal requirement that the account hold any particular quantity of reserves, so long as the credit issued by commercial banks is legally a liability for the base money of which the government is the sole legal issuer, then the country has a government currency monopoly of the kind I described above.

    • Cullen Roche says

      The banks create new loans/deposits independent of the govt. That’s the same as building a new car, giving it to the driver, deciding the price of the car independent of GM and then destroying the car when it’s returned. I don’t see how you could possibly describe this as a monopoly. It’s very clearly not a monopoly since the dealer controls both price and quantity. There’s nothing monopolistic about it at all.

      If you guys want to say that the govt has a monopoly on certain forms of money then fine. But being the monopoly supplier of types of money does not give you the right to argue that the entire spectrum of money is a govt monopoly that requires price setting that validates certain govt spending programs which are proposed as a “price anchor” when in reality they don’t even serve much of a price anchoring purpose.

      • SS says

        Cullen –

        Your monopolist point has to be put into context. The government theoretically could become the monopolist on all forms of money. But it is not. For instance, the Fed has a monopoly on reserves, but it is not the monopolist on the yield curve even though it could be. We have a system arranged where interest on bonds floats within some range that the private market sets. There is no government monpolist at the 30 year bond for instance. The government could set the rate in theory, but they don’t. I think you need to emphasize this more in these discussions. MMT is talking about a world that could be. Not a world that is.

        • Cullen Roche says

          That’s a tricky one. The Fed virtually controls the yield curve through the FFR. But I don’t think you can extrapolate that sort of an argument out to something like wages for instance. Either way it doesn’t really matter because the govt isn’t the money monopolist as the system is arranged. The term monopolist doesn’t even apply to something like “money”. No one has a monopoly on money.

    • Ramanan says

      While I understand you do not believe in the money multiplier story, there is simply no analogy with the GM dealer.

      The GM dealer is an intermediary in the full sense and a bank is not really an intermediary in the full sense. It is just intermediating the demand for currency notes.

      I understand that the central bank is the monopoly issuer of settlement balances and currency *notes* but I do not agree with your way of presenting the monopoly argument.

  3. Dan Kervick says

    Cullen, I really don’t want to get into any of the interpersonal background and politics. I’m just trying present my own analysis of the way things work, to the best of my understanding, and my own grasp of MMT positions on important questions, to the best of my understanding of those positions.

    I’ve been learning MMT on the fly and by stages for two or three years now. (I can’t remember when I first learned about it.) Over the years I have written hundreds of blog comments, and I’m sure if I went back and looked at them I would finds dozens of ignorant statements I have made that are inconsistent with things I’m saying now.

    Other folks are more experienced and so the learning curve probably isn’t as steep and degree of internal inconsistency shouldn’t be so high. But to understand people’s positions you have to put all of their statements together and disregard careless expressions that might have been used in this or that context. One thing I think is clear: MMTers have for years been saying that the government is the monopoly issuer of something or other. At the same time, they have been very critical of a succession of monetarist views that say that the central bank can target the broad monetary aggregates such as M2, which includes commercial bank demand deposits. So since a monopoly producer controls the supply of whatever it is they produce, I think the most charitable interpretation of what MMT authors are saying is that the government monopoly does not extend to a monopoly over bank demand deposits, or monopoly supply of bank demand deposits.

    Wray has a paper from March 2011 called “Keynes after 75 Years: Rethinking Money as a Public Monopoly.” So you are right. Some of the MMTers say there is a public monopoly over money. But if you read the paper, you find this more precise explanation of what Wray means by the description in his title:

    In the United States, the dollar is our state money of account and high-powered money (HPM or coins, green paper money, and bank reserves) is our state monopolized currency. We can make that just a bit broader because US treasuries (bills and bonds) are essentially HPM that pays interest (indeed, treasuries are really reserve deposits at the Fed that pay higher interest than regular reserves), so we will include HPM plus treasuries as the government currency monopoly. One must deliver these in payment of federal taxes, which destroys currency. If government emits more in its payments than it redeems in taxes, currency is accumulated by the nongovernment sector as financial wealth.

    We need not go into all the reasons (rational, irrational, productive, fetishistic) that one would want to hoard currency, except to note that a lot of the nonsovereign dollar-denominated liabilities are made convertible (on demand or under specified circumstances) to US currency. Hence, it is handy for many economic units to keep currency close at hand to convert their liabilities to currency. Obviously, banks are the best example because demand deposits are convertible on demand.

    So it is very clear that Wray’s position is that the government monopoly is over HPM: physical currency and bank reserves. Commercial bank demand deposits are instead a non-sovereign, dollar-denominated liability that are legally convertible into the stuff of which the the government is the monopoly supplier, but are not part of that stuff itself.

    • Cullen Roche says

      All Wray did was explain the hierarchy, which in MMT all goes back to “taxes drive money” and “bringing the state back to center stage” so you all can justify your price setting and JG ideas. It all goes back to NFA’s being of primary importance in MMT leading to questionable policies. There’s nothing new there that I haven’t already discussed, but you seem to be backpedaling on many past statements now so what’s the point really? We both know Dan Kervick isn’t going to make any different argument than the one in the MMT playbook….

      The personal stuff has only become personal because you all keep making it personal. It got personal when Scott called me an ideologue, I tried to calm the waters and then Tom Hickey came back calling me an ideologue a week later. At that point I started standing up for myself and pointing out that it was the MMTers that were being the true ideologues with what was a blatant and extreme left political position. But despite throwing the first punch and the second you all have felt justified in accusing me of making this personal. That’s total and utter nonsense. Most of you have no idea how this all played out over the years, but I see most of you on other sites continually trashing me. That’s fine, but don’t tell me MMTers aren’t interested in making this personal because that’s all you guys have done since day one. You are the ones with the awful reputation all over internet circles because you attack people in the same vicious way. I’m not the first one to acknowledge that. Krugman says it. Thoma banned you all. Waldman has cited it. And Lavoie said it in a paper! Talk about a bad reputation. And then when people defend themselves you attack them for standing up for themselves. Personally, I am tired of this tactic and you all need to start treating other people with a bit more respect if you’re going to start gaining any real credibility. You all started this. If you want to keep elevating the rhetoric as I see the founders and commentators doing then fine. But don’t pull the “woe is me” card when I fire back with a nuke at some point.

      • Cullen Roche says

        And just to set the record straight here. This is exactly how this little tiff played out in real-time. I said in a comment to Scott in early December that I didn’t think the JG was a rational policy to go “all in” on. I didn’t even reject trying the JG:

        “I’d be interested in seeing a jobs guarantee implemented in place of unemployment benefits or something similar on a smaller scale. Perhaps we scale it up if it proves workable. But there are too many moving parts here for anyone to definitively conclude that a JG is a good thing. And no economic model is going to prove otherwise. I’m open minded, but this is not the sort of program that I would advise leaders to dive into. The downside risks over the long-term are potentially enormous.”

        Scott fired back in an emotional rant calling my position 100% ideology.

        I responded very calmly that he was being unfair and that I was only judging the risks in an unproven program. He later admitted he was wrong and even told me point blank that he agreed with my position on the JG. He later came back and trashed me again despite this….

        The debate went quiet over the Xmas holiday and then heated up again after the New Year. I tried to hash out the descriptive vs prescriptive debate citing comments by Fullwiler and MItchell that said there was a clear divide. That all changed when Mitchell drew his line in the sand and I began to question whether I was MMT or not. Trust me, this was not a comfortable moment for me as I felt like I was being thrown out of MMT. I tried desperately to get Warren to side with me since I had always been under the impression that the JG was an “option” as he states in SCE. I was not trying to create a divide, but find common ground. Many founding MMTers told me they were “disappointed” that Bill had drawn a line in the sand. At that point I posted a discussion between Warren and I again trying to calm the waters and express that Warren and I agreed on much. And the MMTers attacked my position.

        Neil Wilson accused me of playing politics as he has done repeatedly. He’s misconstrued my position worse than any of you have.

        Some of you MMTers have even said my position was worthy of bodily harm as a reader said I deserved to be “laid out” for disagreeing with Mitchell on the JG.

        And then Tom Hickey called me an ideologue. So, after being stabbed in the back by a mentor, having my politics entirely misconstrued, being threatened with bodily harm and again being called names I FINALLY started fighting back and said Tom was the one being ideological. How unreasonable of me, right? Or “snide” as some of you would put it.

        It would be helpful for people to go back and read how this all actually played out because MMTers have once again miscontrued the facts to portray me as some sort of evil person. Throughout this debate I have tried to remain calm and keep things focused on the facts. You won’t find a single insult or demeaning comment in my actual posts (unlike many MMT posts, some by the founders themselves). Read this discussion and see how many times I try to keep people on point and focused on the discussion at hand.

        I was accused in that discussion of “hijacking” MMT or trying to create a divide. I very clearly said I was not doing either and that I wanted to work with the founders on developing our ideas:

        “I realize I am not MMT and it was never my intention to hijack the term. Personally,I look forward to working with the founders and others on the evolution….this is NOT an intellectual battle among Mmters. Its a battle for a better world and I hope to contribute positively. Happy NY to all!”

        A few days later when I followed up on that piece you guys once again went into attack mode. You all repeatedly tried to pit me against the founders and I tried to calm the waters:

        “I really don’t like how people are trying to pit me against other people. We are on the same team. We just disagree how the team should be run.”

        I even warned my own defenders repeatedly to stop raising the rhetoric:

        “LVG, you need to stop making this so personal. It’s not personal. Let’s stick to the facts of the discussion. Thanks.”

        And then Scott once again piled on in an emotional comment calling me names and saying he doesn’t care what I think:

        “Sorry. You’re wrong. Numerous studies both empirical and theoretical. You’re being ideological because you just don’t like the JG. Why don’t you just say it?”

        “I really don’t care much if you’re sold anymore. I don’t think any evidence would work. Sorry. One good thing to come of this, though, is I have a better idea where to go next with research on this issue, so thank you for that.”

        So this all started because I was skeptical about the JG and said that it wasn’t the slam dunk MMTers seem to think. That was a totally reasonable position (one which I now find out has been verified by Fullwiler’s simulation – no wonder he agreed with me initially!!!). But you guys kept pushing back with the insults and hightened rhetoric trying to push me out of MMT because I didn’t support the JG. I tried desperately to find common ground. At one point even spending 3 hours on the phone with Warren thinking we had actually agreed on much….. I tried to find a common ground with Warren and others, but the academics and commentators kept hightening the insults and rhetoric. And yet you’ve felt justified in claiming that I’ve been the one being “snide”. You’ve done what MMTers always do and you’ve attacked the people behind an argument in your typical fashion. And then you’ve played the “woe is me” card in an attempt to obscure the way things really went down. MMTers are 100% to blame for the way things have played out. I tried at many points to calm the waters, but you all wouldn’t have it. Have some accountability. Learn to discuss things with people in a rational and mature fashion. Otherwise, you’re just shooting yourselves in the foot.

        • Dan Kervick says

          This is too much for me, Cullen. In this thread I tried to stick completely to economics and leave all the drama out of it, and I have no interest in being on the receiving end of another temper tantrum. If you’ve still got some personal axes to grind you’ll have to take it up with the parties directly involved.

        • Cullen Roche says


          If these sorts of details are “too much” for you then you need to stop jumping to conclusions about things you don’t know, like how this all came to pass and why the MMR debates are happening in the first place. I’ve disagreed with MMTers on key points in MMT for years. It didn’t just spring out of the JG debates. But you all have tried to marginalize my position by claiming that I have taken a political stance here just recently because I dislike the JG. That’s totally wrong. I’ve disagreed on the “taxes drive money” aspect of MMT for years. That has nothing to do with politics. My primer has always differed from MMT on this.

          So the only reason I am providing the actual info about how this all played out is because you have clearly jumped to some false conclusions based on a lack of understanding. Now you know that MMR didn’t just spring out of the JG debates and was based on something that had long been in discussion. You also know that the current feud didn’t spiral out of control until MMTers went ape sh*t in the comments. It’s not about getting personal with you. I have zero desire to get personal with you. But readers deserve to know how this all unfolded because I can see that some people are using a revisionist history to put a spin on this in order to make MMTers appear innocent….

        • Dan Kervick says

          I’m just tired of the constant insults and attacks on my integrity, independence and honesty, and being addressed as “you guys” and having my comments used as excuses for tirades and proxies for a war you have with other people. I have publicly discussed both here and at PragCap some views I have that differ from some views defended by several MMT authors – including the part here about disagreeing with important parts of Innes whom several MMTers endorse more unreservedly . I am defending views that I think are true and also giving my interpretation of other people’s views that I think have been distorted and are worth defending. There is no “playbook”.

          I disagree with you and your colleagues on a number of things. But I have come here to debate those disagreements when others haven’t. I participated very actively in the gigantic megathread early on and had constructive back-and-forths, I thought, with a bunch of other people. Yes, I have argued and disagreed with several of the views you and your colleagues have been defending, but it’s no different with disagreements I have had with many of the same people on a variety of other blogs. In return, I was accused by you of trolling and had my comments put on moderation.

          Can’t we debate these disagreements without launching into a scene from “Who’s Afraid of Virginia Wolfe?” every time, and without all of this meta stuff and invidious characterizations?

        • Cullen Roche says


          Please go back and review the links I provided where I began debating the JG with MMTers. I have been very patient with MMTers, but you all have pulled the same thing you’ve pulled in conversations with everyone over the years. You guys don’t have the reputation you have for no reason. People don’t “debate” anything with MMTers. Hell, Scott Sumner and Mark Thoma don’t even bother debating you guys anymore because it’s like debating with a pre-recorded message. MMTers state their position and if they get push back then the conversation devolves into name calling or nonsense. Look at how reasonable and measured my conversation with Scott was in the beginning. I was only saying that there were risks in the JG and he lashed out at me like I had stomped the MMT bible. His reaction and the others including physical harm and various insults were beyond ridiculous. You guys have your pre-set doctrine laid out by the “founders”. If anyone breaks ranks they get trampled by the MMT wrecking crew. If you want to continue to comment here then that’s fine, but we both know where it’s headed – exactly nowhere. Nothing constructive will come of this. You guys have made up your minds that MMT is near perfect. That’s great, but don’t come here pretending to debate in good faith. We both know you’re just repeating the various MMT verses from the MMT bible. And that’s fine, but what’s the point of wasting so much time on it? You made up your mind a long time ago. So run with it. But why waste time here repeating points we’re all familiar with?


        • SS says

          Cullen – I’m glad you wrote this all out. I have some advice. In the future stick to engaging MMTers on the facts as you did when this all started. You’ve stooped to their level by responding at times with your own immature comments and it’s weakened your own position. You have established a sound position on both the Job Guarantee and how MMTers were the cause of this ruckus. Just kindly point to those links in the future to avoid the petty fights. But more importantly, stick to the facts at hand.

          Thanks for all you do. I really truly believe MMR is a breakthrough (or more of a breakaway from the politics of MMT) and I hope you guys go far with it.

  4. FDO15 says

    Hey dudes,

    I saw this comment over at Naked Capitalism. Looks like your message is spreading. I liked how succinct this was. Maybe you can use it in the future when dispelling the MMT myths:

    “More MMT nonsense. Let’s get a few things straight. Money is credit according to MMT. Credit is issued by banks. MMT says a monopolist controls price. But the government doesn’t control the price of credit. They set a target rate. That’s why it’s called the Fed Funds TARGET rate. So do the math chief. Money = credit. Monopolist = controlling price. The price of credit isn’t controlled by the government. Therefore, no monopoly on money. “

    • Dan Kervick says

      Monopolists don’t automatically fully control the price of their product in secondary markets. And they certainly don’t fully control the price of IOU’s for their product sold in secondary markets. The government is the monopoly issuer of bank reserves and currency – the monetary base – and therefore controls the price at which reserves and currency are sold to banks.

      Banks sell bank credit, which legally speaking consists in IOUs for base money. The fact that the government is the monopoly producer of the monetary base and controls the price of that base does not mean that it has more than indirect control over the price of bank credit.

      The idea that all money is credit could be called “full spectrum Innes.” But this view is only defended by some MMTers. in Mosler and Forstater’s “A General Analytical Framework for the Analysis of Currencies and Other Commodities”, the authors do not apply a credit model to tax-driven, fiat money, but a commodity model, in which expansion of the vertical component does not net to zero. Basically, money is treated as a product of the government, not a credit relation creating assets and liabilities netting to zero.

      Fed accounting practices preserve the gold standard convertibility illusion of ye olden tymes by accounting for issued currency as a “liability” of the Fed, just like when currency was just another bank credit. But in the post-convertibility days of true fiat money, that accounting practice is nothing but a hoary convention with no real basis in economic reality. There is no meaningful sense in which the currency and reserves issued by the Fed represent claims on something that the Fed still owes the bearer of the currency. Nor is there an economically meaningful sense in which a negative equity position at the Fed represents a state of bankruptcy, as it would if issued currency were a true liability.

      Credit instruments can be liabilities for other credit instruments. And it would be possible to have a system in which every credit instrument is a liability for some other credit instrument, so that no matter how many payments are made, claims and liabilities always remain. But in our system of credit instruments, there is a foundation. One can discharge debts by payment in units of the monetary base. And once all such payments have been made, nobody owes anybody anything.

      How important is this really? The fact that the government operates a monopoly over the currency does not mean that the government somehow runs the whole economy or drives all of the processes of growth and production.

      • Dan M. says

        Cullen, I agree, but put a bit differently, this has to be taken into a bit of context, too. Any contract built on a product of initial value could be used as “money.” So because the gov’t could completely starve the system of base money, one could say they could have a final clinch on price. I think it’s ok to acknowledge this, because it really gets us to the next two tie ins:

        1) The gov’t, being the ONLY entity with nukes and a military, could probably crush any market it wanted to before socity started to revolt. BUT, Does it do us ANY good to use the term “Monopoly” to describe influence the gov’t COULD have if it really tried, and would lose as soon as our society caught a whiff of what it is doing.

        My answer: No.

        2) The government simply has built the system from the ground up towards accomodating private-sector banking. Of course it COULD raise taxes to 100%, collapse the world economy, etc, but it doesn’t do us any good to imagine the US government as a Monopolist of Utter Economic Stupidity and Nuking Everything. The gov’t has an entire framework built for its currency to interact and be expanded by private sector banking, the public by and large demands private sector banking (and is skeptical of gov’t-run banking), and it does us no good imagining the gov’t f*king us with the l0ng dick of its monopoly on base money, just because it could get away with it for a few weeks before somebody hit Geithner over the head and took over the reigns.

        The government would likely screw up if it got too involved with private-sector credit… issuing loans to the wrong people/businesses and mis-pricing risk. This would represent a monopoly on both pieces, but isn’t too hard to imagine in a hypothetical world. However, it’s not the world we live in, and it would take HUGE shifts for it to be.

        The government could also starve the horizontal sector and let the whole system lock up, exercizing its control that way. This is even harder to imagine, even in a horizontal-esque society. So we simply observe them as they tend to supply our demand for NFA’s at any given time, and the private sector operates as such. So even when the gov’t allows NFA’s to drop for 11 straight years in our domestic economy (1997-2008), our economy doesn’t respond to them until 2008, when we were really responding more to the crisis of un-stable private money, and the lack of vertical money simply served to exacerbate the fundamental problem.

        The MMTers could have looked at that period and kept waiting and waiting and waiting for deflation and a crushing recession to happen but not really see it until a LONG time. If it takes 11 years for the leakage of NFA’s to finally have its impact, I think MMT is much, much too quickly trying to brush the horizontal sector onto the back burner simply because they see it as being steered by the vertical. I think it’s more like a rudder on the titanic than the steering wheel on an indy car.

        • AK says

          There’s plenty of MMT literature out there pointing to the build-up of of credit as a private sector response to the decrease in NFAs.

        • Ramanan says

          I believe it is completely incorrect of MMT to have implied that way. I once took Bill Mitchell to task on this and he came back saying “we never said”. But all along they have been saying that.

          Take the US or other industrial nations which have seen credit-led booms. The credit boom was *coincident* with a downgrading of fiscal policy. The private sector didn’t rush to borrow because the fiscal policy was generally tight. And then fiscal policy was relaxed after the small recession but the private sector went into deficit again!

          Take for example the Clinton surplus. This was a result of higher credit driven by private expenditure and it reached its peak – as in surplus – due to huge taxes on capital gains.

        • AK says

          The causation is never simple to decouple. There are a number of possibilities. It is possible that a credit boom (caused, for example, by a lowering of lending standards) could lead to a budget surplus via the operation of automatic stabilisers. It is also possible that a conscious effort by a federal government to move towards surplus can cause the private sector to turn to credit, thus causing a credit boom.

          Discussing one of the above possibilities, does not mean that I deny the existence of the other.

          Lastly I’d like to echo some of the comments made by Dan Kervick: in an interent environment of quick posting and zero review, I’m sure we have all posted things that are at times inaccurately phrased and do not actually reflect the substance of the complex issues we are trying to discuss. If we constantly sit around nit-picking each others words and phrases, without viewing the body of literature as a whole, we miss the wider substance of what one is trying to communicate.

          Hence why we now find ourselves arguing about things like reserve requirements and horizontal credit expansion which we always agreed on in the first place!

        • Cullen Roche says

          Good stuff Dan M. Good to be precise here. Govt COULD control the price of all credit. But they choose not to. As Warren says, its a political choice and a pretty crucial one when understanding how the system works.

        • Dan M. says

          That, and the evidence is all in how the entire system is designed from the ground up for the gov’t to accomidate private sector banking. We probably should focus on how a gov’t system is designed to work naturally, rather than trying to dream up powers that COULD result IF a lot of people were to feasibly vastly abuse their power over what they have shown to do in the past.

          We might as well say that the EPA has a monopoly on U.S. auto production, or that the Department of Education has a monopoly on schooling in the country. No.. we don’t look at what they could do in some infathomable fantasy land… we look how they were set up and how they’ve interacted with the real world, with one eye always towards “what if,” but without ever giving it too much weight because then in the long run, we’re all confused.

        • AK says

          If we’re going to use car analogies to describe monopolies:

          Imagine for a moment that GM was the only manufacturer of cars in the U.S. As occurs now, GM produces cars and then sells them to private dealers. Dealers can do a number of things, including (i) taking orders for cars from customers (ii) selling cars between dealers (iii) borrowing cars for an urgent sale from a fellow dealer, with a promise to give them another car from another dealer or when GM delivers (iii) taking order from customers on credit terms, including “trade-ins”, etc.

          But why must we jump up and down if someone were to look at the above example and say that “GM has a monopoly on automobiles in the U.S”? MMR agrees on the operational description, but then seems to think it suddenly makes some enormous difference if it continually points out that, actually, private dealers are responsible for selling 95% of cars to the end user, so the “monopoly” label is incorrect because it “downplays” the dealership role in the car-supplying process, and attempts to “overemphasise” GM’s role in the car market.

          None of those semantic opinions (that is ultimately all they are) alter the fact that MMT has always described the supply-chain hierarchy accurately. It does not “weaken” MMT at all, nor does it add any observation, save for the observation that the English language is not perfect and cannot satisfy everyone at once. Unfortunately, MMT can’t solve that problem for us.

        • Cullen Roche says

          It’s funny to see an MMTer prove their point by saying banks lend reserves. No, loans create deposits, which is like the dealership building and selling a new car. Hence, no monopoly by GM.

        • AK says

          Where, in the above example, have I said banks lend reserves?

          GM creates the cars (reserves) and dealers create obligations to deliver cars (deposits). Dealers can freely create more orders than there are cars in production, and even trade these orders amongst themselves; but they can never produce cars.

          MMT looks at such a system and says that GM has a monopoly on the car market. Perhaps it would make some people happier if MMT said “GM has a monopoly on the car manufacturing market”, but that wouldn’t change absolutely anything that MMT describes or prescribes – i.e. it’s just a word .

        • Cullen Roche says

          Your analogy doesn’t work. The dealership builds a new car, gives it to the driver and then destroys the car when the driver gives it back. It’s more like a lease where the dealership actually creates its own vehicles independent of GM. There is no monopoly by GM. Loans create deposits. This process is independent of the govt.

          You keep saying GM creates the reserves and then dealers create obligations to deliver cars, but that’s not how it works in real life. Banks make loans and then find reserves if even necessary. They create their own cars. Go get a loan tomorrow and see if the banker checks his reserve status or calls the federal government first. They don’t do that. They create the new car on the spot for you and give it to you.

          Your monopolist theory is a myth. End of story.

        • Ramanan says


          “But he also keeps a certain quantity of the cars in his section of a large central lot. In fact, as a GM dealer, he is required to do this by GM.”

          In some nations banks have a zero reserve requirement. You are just trying to give a new meaning to the money multiplier story but the whole thing is wrong.
          Your story of this dealer etc is as if the bank gets the reserves from the central bank and lends it out etc.

          It’s a hangover even if you know that the money multiplier doesn’t work.

          Banks already existed before central banks came into existence. It’s just that they settle among themselves in the central bank’s liabilities.

          There is absolutely no analogy with a car dealer because money is not a commodity.

        • Cullen Roche says

          Right. MMTers know there are no reserve requirements in many nations so it’s funny to see them twist words to prove a point….

        • Dan Kervick says

          Cullen, even though banks create the loans and demand deposits first, and then get the reserves later if necessarily, I think AK’s analogy is still fairly apt. The dealer issues IOUs, which are promises of delivery of cars on demand, and sells them for various things. The dealer then orders up some additions to his reserve supply of cars from GM, the monopoly supplier of cars. GM produces the additional cars and delivers them to him at that time, not earlier. He asks that some of the cars be delivered to his own lot to have on hand for customers who come in with an IOU for redemption. But he also keeps a certain quantity of the cars in his section of a large central lot. In fact, as a GM dealer, he is required to do this by GM.

          The dealer knows that many people simply exchange these IOUs for other things, and never redeem them on his lot or anybody else’s lot, so his on-hand reserve supply of cars doesn’t have to be that great. But sometimes his IOUs are exchanged by a customer with other GM dealers for their own IOUs. When this happens, the second dealer sends a direction to the central lot to have some of the first dealer’s reserve supply of cars moved over to the second dealer’s portion of the central lot.

      • Cullen Roche says


        With the deepest respect, you’re conflating terms here. Currency is the medium of exchange. You can’t say the govt has a monopoly on the medium of exchange. They do not. The govt has a monopoly on very specific forms of money. Banks reserves, govt bonds, etc. The govt does not control credit. Now, if you want to claim that credit is not money then that’s one thing. Anyone who buys a home or uses a credit card will tell you you’re wrong. The govt does not control the price of credit. Nor the supply. To argue otherwise is just flat out wrong. The govt controls the price of certain forms of money. But that doesn’t mean they have a monopoly on the entire spectrum of money.


        • Dan Kervick says

          Cullen, I might be mistaken, but it seems to me that you are not really disagreeing with the things I wrote in response to FDO15. Let me break down my understanding of our system into separate points, so we can see where, if anywhere, people might disagree with that understanding.

          1. The government has a monopoly over the issue of base money: physical currency and bank reserves.

          2. The government does not fully control the supply of credit. Although there are a variety of legal restrictions on issuing credit, for the most part, we are all relatively free to issue IOUs to each other. Credit can grow autonomously even if the government does not expand the monetary base.

          3. Bank credit, such as a credit to the demand deposit account of a customer, is a particular kind of IOU. These IOUs are very liquid and generally accepted as payment in exchange for goods and services. Thus they are conventionally classified as one form of money – “broad” money.

          4. Every IOU of any kind is an IOU for some specific kind of thing or things. The IOU has been discharged when the promised quantity of those things has been delivered.

          5. Bank credit consists of IOUs for base money: currency and reserves. I don’t think this should be seen as controversial – it’s just a legal fact. Anyone with a demand deposit can go to their bank and legally demand that the bank convert part of their demand deposit into physical currency. Similarly, if I exchange a payment order on my demand deposit with you for some good or service you give to me, then my bank has become your debtor. When you deposit my payment order with your bank, your bank exchanges its own IOU with you for the payment order, and my bank has then become the debtor of your bank. Your bank and my bank then settle and clear the payment through the Fed. My bank has not made good on its legal obligation and discharged its IOU until my bank’s reserve account has been debited and your bank’s reserve account has been credited.

          6. Thus bank credit consists of IOUs for things of which the government is the monopoly supplier.

          7. Base money – currency and reserves – does not consist in IOUs for anything. The only thing you can legally demand from the government in exchange for a quantity of government currency is an equal quantity of currency. And when you receive that currency you must relinquish the currency you have in return. This means that the possession of currency does not mean that the government owes you something else payment of which reduces its net stock of assets. Similarly, a bank’s possession of reserve balances does not entitle the bank to some payment of something else from the government. The government does not have an outstanding obligation yet to be discharged.

          8. The previous point describes the essence of a fiat currency. Fiat currency is a currency that possesses its status as currency without regard to any legal obligation to exchange the currency for something else. Thus physical US currency and reserve balances are fiat currency; commercial bank credit is not fiat currency, although it is a kind of currency.

          9. Although the government is not the monopoly supplier of credit, it is the monopoly supplier of net financial assets. That is because the issuance of bank credit, no matter how voluminous and liberal, does not add once cent to the net quantity of financial assets. It creates an asset and a liability at the same time. So the net financial assets in the system stay the same.

          10. The government’s fiat currency is not like this. When the government issues base money, unlike when a bank issues IOUs for base money, the government does not incur a obligation by virtue of the issuance which offsets the asset received by the recipient.

        • Cullen Roche says


          All you’ve done is describe the hierarchy of money. I don’t deny that there’s a hierarchy. I just reject the thinking that a hierarchy means there is a “monopoly”. The govt has a monopoly on govt money, which I would categorize as reserves, govt bonds and notes. No one is denying that. But most money in this world is credit. Warren says a monopolist controls price. We also know that credit is money. That’s just common sense in my opinion. You can buy anything if you have good enough credit. The govt doesn’t control the price of credit. Therefore, there is no monopoly on money. I don’t see how MMTers can reject that point. The hierarchy really has nothing to do with it. The fact is, the govt doesn’t control the price of credit therefore there’s no monopoly on money. It’s a point of logic.

          What you all seem to miss in this whole debate is the connection of the dots. Randy just laughed off the S=I+(S-I) in what amounted to little more than a long rant (which in my opinion made you guys look very bad). And the whole point of the message just flew right over his head in doing so. I guess he was too busy thinking of ways to mock us to actually try to digest a pretty crucial point. That point is that once you understand the fact that there’s no monopolist on money and that I is the backbone of private sector equity then you stop obsessing over net financial assets as the primary concern (though very important in a secondary sense). And once you connect the dots on this you come to dramatically different conclusions than things like “the bigger the trade deficit the bigger”, the private sector experiences a “loss” when I>S or job guarantees.

          These aren’t minor differences. They make us almost diametrically opposed in terms of our policy responses. You guys focus on net financial assets as the backbone of S through what I believe is a mistake in focusing on (S-I) as the pvt balance. We focus on I as the backbone of S through what I believe is a much more real-world and useful breakdown as S = I + (G-T) + (X-M). And the policy conclusions as a result are totally different. I’d argue that you guys put the cart before the horse, but then again most Keynesians probably do by focusing mainly on aggregate demand while neglecting that consumption and production are two sides of the same coin. We bring balance to the discussion….

        • Dan Kervick says

          Cullen, Randall Wray et al will have to speak for themselves. But this is what I took away from the whole S and I and currency monopoly debate:

          First, Warren Mosler was fairly specific in his seminal papers with Matthew Forstater in holding that the government is the monopoly issuer of the currency, not the monopoly supplier of money. In fact, he seems to dislike the term “money” and avoids it. I am personally happy to accept that bank credit is conventionally classified as part of M2 or broad money. But economists usually use “currency” to refer to only a part of the money supply, not as a synonym for “money.” We live in a fiat money system in which only the government is permitted to issue the currency.

          Mosler also specifically argues that as the currency monopolist the government controls the price of its currency when it exchanges it for goods and services, and sets the “own rate” – the interest rate – for its currency when it offers future currency for existing currency through central banking channels. He does not argue that the government’s monopoly over currency gives it the ability to set all interest rates for money or all money prices in the economy.

          The “loss” that the private sector necessarily suffers if S is less than I is only a net loss of financial assets across the whole private sector.

          Could the wealth of the private sector be growing even if the sector’s net stock of financial assets is diminishing? Sure. Farmer Brown could be plantings his seeds to grow crops and harvesting his trees to build threshing houses even while the government is taxing away his monetary savings. His real wealth might be increasing as his financial wealth is eroded. And something like this could be true of the private sector as a whole. Is it sustainable? Not for long.

          Could the net financial assets of the household sector be growing while the net financial assets of the business sector are diminishing – again while the net financial assets of the sector as a whole are declining? Again sure. Firms could both run down their own savings and borrow from households to finance operations, including expanded production.

          But again, this is not a sustainable process. An economy that is not monetizing its new real wealth at roughly the same pace that it is producing it is experiencing price deflation. Deflation is bad, and will ultimately nip any economic growth in the bud. So if the private sector is growing as a trend, its net financial assets should be growing as well at approximately the same pace.

          So how should the government supply the additional net financial assets the private sector needs to accumulate to both grow and preserve price stability? There are two channels: the passive channel and the active channel. The passive or reactive channel is the system of Federal Reserve banks. Through that channel the government mainly reacts to the private sector demand for additional credit by supplying additional reserve balances and currency as required by the growth of credit, The government targets rates such as the discount rate, the interbank lending rate and the rate of interest on reserves. But beyond that, the private sector drives and the government is the passenger.

          As I think we all agree, and as Edward Harrison has pointed out once again yesterday, the government can’t “push” credit out into the real economy by boosting the supply of bank reserves. The base money supply has exploded and broad money has barely moved. There is no causal mechanism that guarantees that active injections of reserves will translate into a growth in spendable bank deposits. Instead, the private sector “pulls” reserve balances into bank reserve accounts by increasing its demand for credit. Banks supply credit in response to demand for it, since the supply of reserves it can obtain at whatever interest rate price prevails is effectively unlimited.

          The active channel for injections of NFAs, on the other hand, is the fiscal channel: the government can spend directly into the private economy. It can send people government checks, either in exchange for goods and services, or for free. Those checks are deposited in banks and thus automatically appear as spendable bank deposits. As a result bank reserve balances are also increased because those government checks are payment orders that, once conveyed by the original recipients to their banks, direct Treasury balances to be debited and the check-bank’s reserve account to be credited. These injections of cash will have a direct impact on aggregate demand for goods and services, which will in turn stimulate the growth in production. The expanded production will either boost the demand for credit, or cause businesses to draw down surpluses of hoarded savings.

          If the private sector is very healthy and churning along productively and at full capacity, primary reliance on the passive channel is fine as the channel for provision of net financial assets to the economy. But if the private sector is sick and stagnant, as it is now, it is advisable to use the active channel and steer increased financial assets directly into household and business bank accounts. This is not just MMT-talk, but is part of the whole post-Keynesian tradition that emphasizes the propensity of modern capitalist economies to stabilize for extended periods of time in a state of chronic underemployment and underperformance.

          Now here’s the thing: it is possible to agree about all of the above and still disagree on the viability or advisability of a job guarantee. My position from the beginning has been that while you and you colleagues have convinced yourself that your opposition to the MMT job guarantee line requires you to call into question a whole host of MMT positions on the currency monopoly, the interpretation of the sectoral balances equation, the understanding of private sector productive processes, the role of banks in the economy, etc., I think you have been needlessly throwing out all kinds of babies with the bathwater in the search for a new paradigm of some kind.

          But really, the core of the disputes about the job guarantee hinges, it appears to me, on much more localized and specific questions that do not call into question large parts of the MMT paradigm, and also normative questions about the kind of government and society we want that are, strictly speaking, independent of the MMT paradigm. One of Mosler’s favorite phrases is “for a given size government”. He is always at pains to emphasize that MMT doesn’t really say how big the government should be or what it should purchase. But it does say something about what the government’s budgetary stance should be given the size of government the public has chosen.

        • Cullen Roche says


          Lot to chew on. Words have specific meanings. I’ve noticed a tendency for MMTers to conflate terms. A currency is the medium of exchange. This is just a common understanding except it seems in MMT circles. But it doesn’t really matter because MMTers regularly refer to the govt as the “money monopolist”. This isn’t just a blog term. It’s all over the literature and official papers. In fact, it’s used in the monopolist paper Warren regularly references on his site. The word “money” is a demon for MMTers because they’re never very specific as to its meaning. Fullwiler is the only one I see who is very precise in this regard. He’s sharp as ever on these points. And I have a feeling if Scott and I sat down over a few beers we’d agree on 99% of what I am discussing. Regardless, there is no “money monopoly” so there’s no point debating it. The govt does not control the price of credit so unless MMT is willing to say credit is not money then the “money monopolist” position is wrong and the term should never be used or people like myself will call it out when it is used and MMT will appear wrong on its face. I am not going to say MMT made a colossal mistake in implying this, but it is what it is. Apparently I am the first one whose really critiqued MMT based on a real insider’s understanding and to me this sort of terminology obfuscation is quite problematic. It doesn’t render the theory flawed, but it certainly raises large questions….You all need to hash this out before you run into mainstream media disagreement because I’ll tell you one thing – the Scott Sumners and Krugmans of the world don’t come close to understanding MMT and when they do they’ll rip these parts to shreds to the point of discrediting it.

          We agree on the S, I conclusions for the most part. But I still think you’re missing our focus which is that NFA’s are secondary to real wealth creation and I is the backbone of S. MMT, like most Keynesians just say we can always fill the demand hole. And this is where Austrians have you guys nailed (which is rare). Austrians understand (though they don’t articulate it) that I is the backbone of pvt sector equity. The NFA’s are secondary. They facilitate the wealth creation process. But we agree that NFA’s are enormously important so this disagreement can be chalked up as largely semantic (though I would say precision is necessary).

          You seem to be thinking that this all started with the JG. But you’re very wrong. I see many of your colleagues saying the same thing. And they think I am just some poor blogger schmuck who is out to get MMT or the liberal political agenda. 2 years ago Warren and I had this discussion and he said he can hold a gun to a man’s head and make him accept his currency. I said he was wrong. This is not a new debate, but I never raised a stink about it because I naively thought I could change the MMT perspective given the time. But the founders wouldn’t have it. They didn’t like my influence and contributions and they made that clear. The JG debate was just the culmination of many years of animosity and small disagreements boiling over. Scott and Warren were always the only two open to my involvement. The others always made it very clear that I was a guy with a big megaphone who they wouldn’t shrug off, but also wouldn’t hug up to. It was always a tempest in a tea pot. But outsiders never knew it. So your assertion that this was just a JG debate boiling over is 100% wrong. I rejected the JG from day one on the premise that it was not a necessary component of the theory (which had been confirmed to me by both Scott and Warren) only to find out many years later that it was a necessary component (a point they still can’t seem to be precise about!). I don’t think I was lied to, but I think we’re seeing a recurring theme here where MMTers just don’t agree on terms, definitions and certain fundamental facts. I guess that comes with the territory of being a relatively new theory.

          Personally, I think you’re wrong that the theory doesn’t contain rather large holes in it. Then again, I don’t expect to change your minds. I can see that MMTers have dug their heels in and will refuse to consider my ideas at any cost. Hell, they went all in on the JG and Fullwiler’s simulation puts big big holes in the program. Not to mention, I know for a fact that top MMTers question the program behind closed doors and I know that certain Washington Post MMTers don’t even think the JG is a necessary part of MMT. But hey, according to your colleagues I am just some poor “blogger” so really cares what I think, right?

    • Michael Sankowski says

      I saw that we had some people hoisting the MMR flag over at NC! :) This is a spectacular quote.

      But we’re not fighting the MMT crowd on those terms – really! lol.

      No really, we’re trying to point out we have more in common than we have differences, but want to be clear about those differences.

  5. Jeremy Mills says

    MMT is spreading, but The Economist is still clueless. This is a painful read.

    Bond shelter
    America’s ability to issue debt is helped by a resemblance between Treasuries and money

    • Cullen Roche says

      You mean MMR, right? :-)

      • Michael Sankowski says

        It’s not MMT because there is no mention of the JG. It cannot be MMT without mentioning the JG as a core part of the system. 😉 TGIF!

  6. vimothy says


    The core insights of MMT and MMR are edging into the mainstream

    Are you sure that Gorton and Caballero have been reading your sites? Aren’t they just saying the same stuff that they’ve always said?

    • Michael Sankowski says


      “edging”! not “storming”! :)

      I didn’t go into this, but the key point is beckworth (not gorton and Caballero) is figuring out we can deficit spend and it doesn’t really do anything bad and does do something good. Gorton has a really good nuanced take on these things, but it always seems to me he’s got the government budget constraint stalking his mental space.

      If I read the quote by Godley about what I call Godley’s Theorem or the Godley/Christ Theorem and then this long paper by Caballero, the difference in clarity is striking.

      Godley said more clearly in one paragraph what Caballero said less clearly in 11 pages. I consider Caballero to be one of the good guys, and his paper is detailed and wonderful. But compare it to that quote by Godley and you’ll see he’s still not nearly clear enough on what needs to be done.

      Caballero thinks we need more financial assets now, but doesn’t associate it 100% 2×4 across the head with “we alwys must have more of these in order to grow ”

      And something else I’d say about that paper. Caballero makes a crucial omission – he omits the desire for low risk financial savings should go up as the wealth of the world increases.

      Go back to the coin flip experiment with the bet being all of your net worth against any odds you can imagine. You must bet all of your net worth to play, but the payout is any odds you choose.

      At some point of wealth, you’ll refuse to play. You’ll turn down 1,000,000,000 to 1 odds. I say this happens for societies too and we’re starting to reach a point in development where we might turn down bets with staggering odds to remain safe.

      But all of this wind is to try and obscure the fact Gorton and Caballero have in fact been saying this all along… hahaha!

      • vimothy says


        Thanks for that comment–it was really interesting.

        Why do think that demand for safe assets will increase as society’s wealth increases?

        Do you think that any fiat currency issuing govt can satisfy this demand if it chooses to or do you think there are limits?

        • Michael Sankowski says

          I because as people get wealthier, the real losses resulting from failed investment get higher, and holding on to absolute levels of real wealth get more important.

          Imagine doing the coin flip experiment with all of your real net worth, and you can move up the technology tree if you win.

          If the government insures against difficult to insure real risks, then as society gets wealthier, we’re going to demand more insurance against more esoteric risks. Think about moving up Maslow’s hierachy of needs, and how the government can “help” each one.


          It can’t help all of them of course, but there is a reason governments put in sewers right away. We’re finally into level II of the needs, and of course there are huge arguments on how to do all of this, but we don’t even consider having the government provide level III insurance.

          do I think the government can provide these assets? Yes, mostly. At some point, the meaning of safety comes into question.

          I think the government provides a very, very valuable service by providing principle guaranteed assets. This doesn’t prevent the risk of inflation at all. But it’s a simplification of risk – there is only risk in one dimension, that of inflation.

          It’s an overall much easier task to judge this risk alone. I think you can (ok might be able to) model the real rate of interest on default free treasuries as an Asian option on Inflation volatility with a skewed distribution curve.