Monetary Realism

Understanding The Modern Monetary System…

S&P notices reality, agrees with MR

Interesting news from yesterday: S&P has finally understood pushing reserves into the system does not cause inflation or more lending.

The title of this paper is straight forward enough everyone can understand:

Repeat After Me: Banks Cannot And Do Not “Lend Out” Reserves

Why is this important? Lots of people think hyperinflation is right around the corner. These people are wrong.

Not wrong in the sense of a “valid counter argument” wrong, but rather, they are wrong in the “not understanding the logic flow of the operating system” wrong. They are wrong like the guys in business suits telling the programmers the program will crash the computer because “the program is too fast, so slow it down” wrong. They don’t understand the basics of how computers work, so the problems identified and solutions proposed seem hilarious to people who really understand the nuts and bolts of programming.

Unfortunately, the real world consequences of these misunderstandings are gigantic. We are all at least 5% poorer than we should be because of these huge errors.

Cullen has pounded the table on the exact topic of reserves for several years, so it’s nice to have some mainstream recognition of the basic facts of how our monetary system works. It’s remarkable, but this paper reads as though Cullen Roche and JKH were the ghost writers.

Looking at the table of contents, its a point by point agreement with what Monetary Realism and many other bloggers in a loose confederation of truth tellers (like Edward Harrison, Steve Waldman, Ramanan Iver, Steve Roth, and Frances Coppola) have been writing about since the first round of QE started.

Additionally, he name checks MMT, Godley, Lavioe, and Wray in footnote 4.

Really, looking at this more closely, it seems like he might be reading Monetary Realism.

Look at the table of Contents:

Table Of Contents
The Money Multiplier View Of Credit Creation
What Determines The Level Of Central Bank Reserves
How Banks Create Loans
Where Deposits Come From
Interest-Rate-Targeting Central Banks Supply Whatever Reserves Are
How Things Change Under QE
Why Understanding The Balance-Sheet Mechanics Of QE Is Important
The Bottom Line
Related Research

And then look at this post by JKH: Loans Create Deposits in Context. Additionally footnote 10 reads like it was written by JKH himself:

“Another way to conceptualize QE is as a debt management operation of the consolidated government (the government plus the central bank). When a central bank does QE by buying long-term government debt or government-guaranteed assets, the consolidated government retires long-term debt or guarantees on long-term debt and issues central bank debt (reserves) instead. This shortens the duration and debt servicing costs of the consolidated government’s outstanding debt, particularly when the central bank does not pay interest on excess reserves. This debt management operation effect is the flip side of the portfolio rebalance effect visited on the private sector’s aggregate portfolio”

Also, for some reason, the chief economist of S&P felt compelled to dispel the money multiplier myth, because so many people think there is a money multiplier. He does us a favor by collecting a large number of quotes from influential economists who apparently believe in the money multiplier view of credit creation. Noah Smith, read footnote 2 and weep with us. This view is everywhere.

(Update:  I’ve had time to read Paul’s note more carefully. This note will become the primer on understanding banking reserves and how they impact credit creation. Paul’s note on the Platinum Coin is also excellent. His understanding of the system is very deep. )



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161 Responses

  1. Greg says

    Cullen Roche
    Only if you’ll pass the olive oil. Take care!

    Hey guys, now that this is over can we get back to bashing the real idiots………..
    ……… the monetarists!

    Dunbar, Im just an interested observer who expresses his opinion more than he should but have no problem at all with getting snarky or a little ugly at times. I am definitely a few rungs below most here when it comes to politeness at times.

  2. stone says

    it’s most certainly personal for people who’s reputations you are damaging while simultaneously claiming with wide open eyes that you’re just being civil and you have no idea why they are getting frustrated. The guy who sticks the knife in doesn’t have to hate the person he knifed – usually the hate goes the other way, and with good reason. So i’m not sure whether you see yourself as a polite person engaging in genuinely constructive discourse or a predator playing with your food and simply concealing that fact until you get called out on it like I just did to you.

    This squabbling about squabbling seems such a waste to me. Ideas are there to be tested and bounced around. The internet is supposed to be about wide open debate. “Stealing your ideas” should be taken as a complement. If something seems muddled then just explain how it is muddled. Don’t get drawn into personal tiffs about manners – surely life is too short for that?

  3. stone says

    This also seems to be a realistic view of QE etc from a finance guy (the second part of this two part pdf):

    “. As an aside (to me, at least), one of the oddities in the process of quantitative easing is that it is
    “quantitative” rather than price-based. Presumably, the Fed and its brethren think they can do more than simply lower
    rates by using the “quantitative” approach. I’m just not sure what. To me, a combination of a price/yield target for
    treasuries and a quantitative easing policy for other assets (such as MBS) would be the easiest and most logical way
    to move beyond the zero bound on short rates. A price target is certainly easier to exit as you simply raise the yield
    target to your new desired level. ”

    “As with Wicksell’s original statements about real capital (above), all is good and well in a single-commodity example.
    However, when one generalizes, things begin to go awry. Heterogeneous capital goods can’t be aggregated in physical
    (semi-conductors and spades don’t share a common unit of account in physical terms). Hence they are required
    to be valued in some terms; generally this is done with reference to the present value of output they are capable of
    producing (i.e., some form of discounted cash flow analysis). This, of course, involves an interest rate, and here
    the whole thing collapses into circularity – you can’t get a rate of interest without knowing the value of capital
    and you can’t know the value of capital without an interest rate. As Sraffa10 (1962) put it, “What is the good of
    a quantity of capital… which, since it depends on the rate of interest, cannot be used for its traditional purpose… to
    determine the rate of interest.”11
    Sadly, although the Cambridge UK team won the battle as even Samuelson admitted the three neo-classical parables
    “cannot be universally valid,” the Cambridge USA team won the war12 given the aggregate production function and
    the loanable funds theory are still drummed into unsuspecting students’ heads without any discussion of the issues
    raised by the Cambridge Capital Controversies.”

  4. stone says

    Cullen Roche
    MMT is not going to be accepted in the USA. Not as it is. We can baby step PK and guys like Noah Smith into PKE. I really think that’s realistic. So let’s do it. Let’s have those discussions. But we’re wasting our time entertaining all this MMT stuff. And it’s actually hurting the progress of PKE ideas because it’s taken PKE so far beyond PKE. That’s my view anyhow.

    I agree with you and I don’t like much of what MMT demands. BUT I also think we need always remember first and foremost that Wynne Godley’s crowd WERE mainstream up until the late 1970s and then were deposed from that position by neoliberalism. If you simply want to reinstate that system them you will come up against the objection that you are proposing going back to an ever worsening spiral of stagflation, industrial unrest etc. MMT claims that their embellishments would solve that. I don’t agree with MMT and I think a different tack is needed to deal with the issues that caused 1970s stagflation and all the problems that came from subsequent neoliberal policies. I’m sorry to admit that the only fixes I can see (such as replacing current taxes with an asset tax) are probably just as politically repugnant to most people as the MMT stuff is :( .

    Didn’t Volcker admit that the theory of monetarism was nonsense but provided a much needed cover story for doing what was needed to stomp out labor power and induce inward capital flows?

    • Winterspeak says

      Never seen volker say anything of the sort.

      • stone says

        Never seen volker say anything of the sort.

        Your doubt prompted me to quickly googled this. The first thing I came to was;

        ” But, if you can become a practical monetarist as a technical expedient to achieve your short-run objective, you can drop the intellectual baggage just as easily when being a monetarist no longer seems to be all that practical:

        Then in October [1982], or whenever it was, the money supply (by some measures) was increasing again rather rapidly. We had a tough explanation to make, but I thought we had come to the point that we were getting boxed in by money supply data that was, in any event, strongly distorted by regulatory changes and bank behavior. We came to the conclusion that it was not very reliable to put so much weight on the money supply any more, so we backed off that approach [p. 183].

        It really wasn’t a matter of choosing sides in the debates between academic economists about how to bring inflation down.”

        It is much less starkly put than how I wrote (sorry -unless I find another Volcker quote that is more direct) BUT it does go along with Volcker NOT buying in to monetarism as a description of how things work and instead simply seeing monetarism as conveniently providing a pretext for doing what he considered needing doing???

        • winterspeak says

          I think Volker was just trying to be pragmatic and not get too tied with the academic dogma of the time. I think we all know that that’s a bad idea anyway. This is very different from the light you painted him in.

        • stone says

          Winterspeak, Thatcher’s government in the UK was very much at the vanguard of the monetarism movement and to some extent neoliberalism was like mini-me (the UK) inspiring Dr Evil (the USA). There is a great pdf with loads of first hand recollections about the 1981 UK budget and what motivated it.
          That really puts to the fore how much it was all about class conflict rather than understanding of the monetary system. It leaves me thinking that Wynn Godley was failing to grasp what he was dealing with when he criticized monetarism in terms of it being a realistic model of the economy. The proponents of monetarism simply liked the effects it produced when waging their class war. They couldn’t care less whether it was a sound model of the economy.

          I had a go writing a post about how and why those policies were implemented and how they “worked”:

        • Nick Edmonds says

          Nice link to the document on the 1981 budget.

        • stone says

          I thought Nigel Lawson’s recollections from page 10 were especially illuminating:

          “I’m looking at it very much from a political point of view, but you have to, in the conduct of economic policy, it’s just as much politics as it is economics….”

          “The power of the trade unions had meant that a lot of managements just gave up, or at least the only enterprises which they thought would pay off would be trying to get subventions from the Government. And so there was a great boom in lobbying Ministers and lobbying civil servants and lobbying in Whitehall in those days, but there was very little attention to managing their own businesses efficiently, because they felt that a combination of a Government which was imposing all sorts of restrictions, and controls, and trade unions, which made their lives intolerable, meant it wasn’t worth the candle. British industry and British management were extremely inefficient. British industry was extremely inefficient. And, of course, there grew up too, which was a problem we had to face when we came in in 1979, a problem of massive over-manning, as a result. A part of that inefficiency was seen in the huge over-manning which was most prominent in the nationalised industries. But it wasn’t confined to the nationalised industries. There was considerable over-manning in the private sector as well.”

        • winterspeak says

          it’s completely fair to say that the Thatcher Govt in the UK was looking to break union strength. She had some broad political support to do this as well because of how the unions overplayed their hand in the 70s. And Monetarism was becoming the economic fashion then as well.

          but trying to claim that somehow Monetarism is a tool to break unions because of this does not follow.

        • stone says

          Winterspeak, the strong currency and high interest rates were a defining feature of the shift in economic policy. They reset the economy away from being dependent on a manufacturing labour force. The manufacturing labour force was then unable to call the shots. I think it was all inextricably tied together as a political reset. In that link, Nigel Lawson it entirely candid about the political motivations behind the monetary policy. Note he is not talking about union busting laws such as not allowing secondary picketing or whatever; he is talking about using monetary policy as a way to cure “overmanning” and excessive union power.

        • winterspeak says

          Stone, that is an interesting paper — thanks for sharing! I also think that your blog post highlights some important stuff, particularly how UK prosperity has become so dependent on the finance industry and rich Arabs and Russians buying real estate in London.

          I’m not sure if I buy your causality though. I think that the UK implemented high interest rates primarily to break inflation, which is standard monetary policy. At the same time, UK industry was in a terrible state, unions played a major role in this, and they were the avowed political foes of Thatcher.

          I’m no expert, but weren’t the big labor strikes under the Labour Government, and weren’t the primarily driven by public sector trade unions protesting against wage caps? It was a high-inflation time, and they had CPI adjusted wages, until the caps were put in I believe.

          Public disgust at the unions swept Maggie into power, and she did the popular thing by breaking the Unions, and set interest rates high to curb inflation (standard monetary cook book recipe we still follow today).

        • stone says

          Winterspeak, I agree with all of that except I’m still clinging on to the causality :) . I think unemployment was a (the major) causative channel through which the transformation occurred. In later decades, high levels of household indebtedness enabled monetary policy to control inflation by controlling how much households could buy on credit. In 1980 in the UK (and also in the USA I think) there was very little household indebtedness and so monetary policy had little traction by that route. Unemployment and above all the fear of unemployment was the stick by which interest rates (and a strong currency) beat down wage demands and so inflation.

  5. Winterspeak says

    Our of curiosity, Cullen, why did you see the s&p paper as MMT and not pk?

    • Cullen Roche says

      Hey WS,

      1) I know for a fact that Sheard is using MMT because I know some of the guys at Nomura who worked with him back when he was their Chief Economist. They said they used MMT with him in their analysis.

      2) In the paper he says “Governments also create deposits when they run budget deficits because they are putting more money into the public’s bank accounts than they are taking out”. That’s straight up “government spending creates money, taxes destroy money”.

      So I think Sheard is definitely using MMT and not just PKE ideas.

      • Winterspeak says

        Ok, so from a content perspective, it’s just deficit spending creating deposits. But isn’t that true in PK as well?

        • Cullen Roche says

          Did you see the footnotes?

          “Although the “money multiplier” view of central banking and credit creation is the dominant one, largely I would
          posit because its pedagogical attractiveness makes it a “dominant meme,” other schools of thought have long existed
          in economics and have come to the fore more recently in the guise of “modern monetary theory (MMT).” See, for
          instance, Wynne Godley and Marc Lavoie, 2007: Monetary Economics: An Integrated Approach to Credit, Money,
          Income, Production and Wealth (Palgrave Macmillan); L. Randall Wray, 1998: Understanding Modern Money: The
          Key to Full Employment and Price Stability (Edgar Elgar); L. Randall Wray, 2012: Modern Monetary Theory: A Primer
          on Macroeconomics for Sovereign Monetary Systems (Palgrave Macmillan).”

        • Winterspeak says

          Ok. So who are pk authors?

          Don’t mean to be a pain, but content wise (where I don’t see any major pk/MMT sticking point) I’m not seeing a problem.

        • Cullen Roche says

          The point I’ve made in other comments here is that plain vanilla PKE is in fact different from MMT. MMT is PKE plus the Job Guarantee, Functional Finance and the descriptive concept of the “money monopolist” whereby taxes simply “destroy money”. This renders MMT something more than plain vanilla PKE. In my opinion, the MMTers are like the Rothbards of the PKE school. They’re the extreme left wing arm of PKE. Sheard is using their framework, but is remaining mostly consistent with PKE with regards to explaining this particular concept (because it’s a concept with substantial overlap). But you have to be careful because MMT uses its money monopolist concept to describe how bank money is indeed endogenous, but mere IOUs of the real money, or base money. Said differently, MMT actually uses an alternative version of the money multiplier where horizontal money is a mere IOU that gives users access to vertical money. This is mostly new stuff that has origins with Mosler and not plain vanilla PKE (in addition to other key concepts that make MMT different from PKE).

          Now, you claim you’re MMT, but don’t want the JG which makes you something in the middle since you seem to accept Mosler’s additions. I am pretty sure you’re just plain vanilla PKE like the MR guys, but haven’t arrived at that conclusion yet, but I could be totally wrong – just being presumptuous based on what I’ve read of yours. Which is no problem for me at all. :-)

        • Tom Hickey says

          ” MMT is PKE plus the Job Guarantee.”

          JG is from Minsky. While Minsky was ambivalent about labeling, he did write, “The Essential Characteristics of Post-Keynesian Economics”

          See Lord Keynes, “Was Hyman Minsky a Post Keynesian?” (No)

          I asked about this an was told that even though the MMT economists sponsor the PKE conference in the US at UMKC, they have never self-identified as PKE, and that anyone that attended Trieste would realize that there is huge disagreement in PKE. They agree with some PKE economists and disagree with others, just like just about everyone else.

          What is plain vanilla PKE? Who is the spokesperson from PKE?

        • A H says

          God, that Paul Davidson quote is ridiculous. Minsky uses ISLM? has he read any of Minsky’s work?

          Davidson actually reminds me a lot of some MMT guys with his insistence that his is the one true and good interpretation of Keynes, and everyone else can be damned.

          Marc Lavoie’s “big tent” PKE seems to me to be the best way to think of the term.

        • Tom Hickey says

          I should clarify when I said that the MMT economists don’t self-identify as PKE, that they consider themselves a subset of PKE and assume much previous work that is considered PKE, but not all. Like others associated with PKE, they don’t agree with everyone else who is categorized as PKE. PKE is not homogenous any more than other major schools are.

          What is the defining characteristic of “plain vanilla PKE,” and who established it? Still not clear on this.

        • beowulf says

          I see JG as being a policy recommendation (and I see the logic, but reject based on concern over second order effects) and therefore outside of MMT since it is not an element of “theory”

          Winterspeak, that is EXACTLY the point Cullen was making when he was told most emphatically that he was wrong. If what you were saying were true then we’d all be MMTers. But the sticking point is the Job Guarantee, that’s the red line that determines if you’re on the bus or you’re not on the bus. You seem to think you are, but you’re not.

          Riddle me this, don’t you find it curious that Jamie Galbraith (who is smart as hell, probably sharper than Krugman) doesn’t identify himself as an MMTer even though the first 9 paragraphs of the Washington Post’s MMT profile are actually about Galbraith?

          The answer to this riddle can be solved by this equation:
          (MMT – JG) + Medicare = MMT

          Ha, I’m such an idiot. JG is a pun, it can mean either Job Guarantee OR Jamie Galbraith…. I just noticed that and I wrote it!

        • Greg says

          Not butting in at all, everyone was invited to respond!

          “Is the gov/fed-complex a monopoly issuer of the currency?
          Does government spending redistribute deposits or create new ones?
          Do taxes destroy money ?
          Do delta’s in gov spending equal delta’s in NFA ?
          Interpretaion on S=I + (S-I) ?”

          I was listing the places where there isnt much if any disagreement, trying to focus on where we are in fact alike. I think the bones of contention you bring up have been discussed and to some extent will remain because its more a matter of how one wishes to make a point. I have no problem personally with telling certain people “Think of govt spending as simply redistributing existing bank deposits”
          while going down the hall and telling another guy. “Think of govt spending as creating new money, that ends up in some non govt persons checking account, thats why when “they” are in deficit “we” are in surplus, in dollar balances”

          I think its not unlike when I have helped some people with their golf swing. With some guys who have an over active right side (RH golfers) I might say “At the top of your backswing try to wait a little bit and start down by pulling with your left side” I might even have them make a left arm only swing or two.

          With others you look and see they need to drive their right side much harder.

          There is more than one approach to getting right ideas across.

          Ultimately I dont think the goal of MR or MMT should be to get everyone to recite some operational reality per se it should be to get people to understand that
          1) banking is not like putting money in a piggy bank and then loaning some of that money to someone else. It is a complex business of risk analysis that hopes to make a profit off productive activities which it helps to facilitate by providing credit. We arent limited to lending only what we have previously saved.
          2) deficits are not evil. We arent missing something. They arent something unpaid that will eventually need to be repaid. Ditto with public debts
          3) inflations relationship to some quantity of measurement M1 or M2 or whatever is tenuous and production is a huge factor in keeping prices under control
          4) unemployment, at a time like now, is mostly a demand side problem not a structural problem
          5) expanding private credit WILL boost activity and is needed but it needs to occur along with expanding incomes and more people seeking credit. Not just people reshuffling the housing stock around.
          6) public spending WILL boost activity too and is needed but it should occur along with targeting to projects which can increase our real stock of future wealth

          Any more?

        • bubbleRefuge says

          Anything else?

          Sorry to butt in. Seems there are interesting points to flesh out between MR/MMT:
          Is the gov/fed-complex a monopoly issuer of the currency?
          Does government spending redistribute deposits or create new ones?
          Do taxes destroy money ?
          Do delta’s in gov spending equal delta’s in NFA ?
          Interpretaion on S=I + (S-I) ?

        • Greg says

          I know this thread has gone further down the MMT vs MR road than ever intended by Cullen or any one else but I do feel an urge to add one comment summing MY feelings on this. (BTW its great to see Winterspeak here commenting….. he introduced me to this stuff -sniff sniff *wipes tear from eye*)

          So mostly where we have arrived is that;

          MR and some MMT guys dont really like the concept of defining full employment as 0% involuntary unemployment,

          We all accept FF at least when comparing it to “sound finance” (hope this doesnt sound like “Mosler is better than Krugman I guess” : ) )

          Jamie Galbraith is fricken awesome

          Banks rule the roost and monetarists picture a porcelain piggy when they hear bank not a third party payment settle/risk manager with a huge stake in the outcome of a transaction (and a cost added)

          Taxes are a significant part of modern monetary systems, without which true sovereignty is questioned.

          Anything else?

          Lets go kick some monetarist ass!

        • beowulf says

          Hadn’t heard that story about his Friedman speech, that’s kind of funny.
          Galbraith’s statement to the Bowles-Simpson Commission is hilarious, just an amazing explanation of public finance mixed with some Real Talk (“A Commission serving public purpose cannot accept funds or other help from a private party with a strong interest in the outcome of that Commission’s work. Your having done so is a disgrace.”).
          A guy with balls like that will need a doctor’s note to get past metal detectors.

        • winterspeak says

          well beowulf, you might just be an MMTer yet.

          I don’t know of any MMT purity test either, but I know what the word “theory” means. Just as you can buy Ricardo on Comparative Advantage but reject free trade, you can buy MMT and reject JG. JG is policy recommendation, not a theory. Period.

          CULLEN: Yes if you want to get to zero involuntary unemployment a JG will get you there, but you can decide that’s a good idea without buying into FF, or understanding bank operations, or any of the other stuff, and do that anyway. Isn’t that sort of what the national job banks were in the depression?

          Personally, I think that the concept of “public purpose” and “public good” is broader than just targeting that one measure, you need to consider many other factors as well, and I think that’s inline with functional finance. Remember, the “functional” in “functional finance” is to stand in contrast to the “sound” in “sound finance”. “Sound finance” makes sense for households, but not for sovereigns. If someone’s saying “don’t shoot yourself in the foot” it doesn’t mean that they are saying “shoot yourself in the head”.

        • Tom Hickey says

          Not sure that is actually the case with Galbraith. When asked what economic school of thought he belongs to, he has said “Galbraithian.” He is probably “Post Keyensian” like Hyman Minksy was “Post Keynesian.”

          Galbraithian economics is considered Institutionalist. MMT integrates PKE and Institutionalism, and at one MMT economist has said that he identifies more with the later than the former.

          As I’ve said before, PKE is not something homogenous, and there is no purity test that I am aware of.

        • Cullen Roche says

          Yeah, I think that’s the right view. Galbraith is his own brand. He doesn’t need to round up a pack of dogs to go hunting with. He just goes outside and hunts down monetarists when he’s hungry. His Friedman speech is still my favorite econ speech ever. To walk into a Milton Friedman event and tell everyone that you come not to praise Milton, but to bury him is about as awesome as it gets.

        • Cullen Roche says

          Hmmm. Well, that might be worth a post then because I certainly think there are some core pieces of PKE and defining those components will go a long way to help people better understand what PKE actually is. Some basic building blocks might be working not with what we reject, but what we stand for. Such as:

          1) Effective demand
          2) Fundamental uncertainty
          3) Operational reality

          I think that’s a good place to start and build out from.

        • Tom Hickey says

          Yes, directed at Winterspeak. It is possible that he is not aware of this in rejecting the JG.

        • Tom Hickey says

          MMT economists emphasized that the fundamental issue is choice between a buffer stock of employed or unemployed that expand and contracts cyclically.

          The economic argument for a buffer stock of employed rather than unemployed is based on efficiency. A buffer stock of unemployed result in a permanent state of idle resources, which is wasteful and results in economic drag due to the social issues it creates that require social services unless the unemployed are hung out to dry.

          The present policy is to use a buffer stock of unemployed as a tool to target price stability using monetary policy based on a natural rate of interest and a natural rate of unemployment, which are definitional rather than observed. What is observed is the economic and social costs.

          The MMT JG mops up residual UE to get to what MMT economists define as true full employment (excluding transitional).

          The MMT may not be the only way to mop up residual UE, but it is doubtful that fiscal measures that do not guarantee a job for anyone willing and able to work will have the same scope as the JG and also do all the things the JG does in addition. The MMT economists have written at length on these matters and meet most obvious objections.

          There may be a more persuasive argument for dealing with this externality to the market that becomes a social cost. For example, some market-oriented people think that Morgan Warstler’s auction solution is preferable to a JG.

        • Cullen Roche says

          I presume that comment is not for me and is instead for your colleague here who thinks he’s MMT, but still hasn’t figured out that he’s not. :-)

        • winterspeak says

          You can absolutely accept FF and reject JG, as JG is just one way for the Govt to use its capacity as a money issuer to provide for full employment. There are lots of others, such as tax holidays, checks to the states, bridges to nowhere etc. Pick your poison according to your politics.

        • Cullen Roche says

          Nope. Those policies won’t get you to zero involuntary unemployment, which is the MMT definition of full employment. So, you basically only have one choice to hit the MMT definition of full employment as that definition would pertain to its view of functional finance – the JG. So, reject the JG and you’re not “in paradigm” with the MMT view of Functional Finance.

          See what I mean?

        • winterspeak says

          Yes please, definitely worth a post.

          From my perspective,
          1) I see JG as being a policy recommendation (and I see the logic, but reject based on concern over second order effects) and therefore outside of MMT since it is not an element of “theory”
          2) broadly agree with functional finance (at least what the wikipedia entry characterizes as functional finance) but acknowledge that implementation is difficult and something as complicated as an economy can have other causes, such as oil shocks, etc.
          3) agree that a fiat sovereign is a “money monopolist” with the provisos that the type of money such a sovereign can generate is specific (and I would argue centrally important in some situations but not others) and statements like “taxes destroy money” is more for rhetoric effect in trying to communicate a concept than literally true.

        • Cullen Roche says

          Hmmmm. I don’t think you can reject the JG and accept FF. I think the MMT dudes would say that’s a big no no since Functional Finance states that the govt should use its capacity as a money issuer to provide for full employment. In other words, the two go hand in hand and the full employment component is a key piece of the functional finance approach. If you accept FF then you accept the JG. In fact, I presume MMTers would argue that the key component of FF is the JG!

          It sounds to me like you’re a PKer who buys bits of MMT, but not the whole thing. In other words, you’re waste deep and hesitant to take the plunge!

        • Tom Hickey says

          Ok, I’ll wait for your post.

        • Cullen Roche says

          I’d argue that PKE has some core components that differentiate it from the New Keynesians in particular. That includes:

          1) The focus on stylized fact and the understanding of money, accounting, banking, institutional design and operational reality to determine economic variables.

          2) Rejecting equilibrium economic theory.

          3) Rejecting money neutrality.

          4) Rejecting the ergodic economic view.

          To me, these are the cornerstones of PKE thought. I presume there are more (perhaps some people would like to add to the list?), but those are the core “plain vanilla” PKE cornerstones.

          What MMT does is work from that foundation to build a view of their own that is quite different. That’s why there’s so much pushback from within the PKE crowd against MMT. They actually take the PKE foundation and rework it into their own “paradigm”. The three core differences being 1) Minsky’s ELR; 2) Functional Finance; 3) The Moslerian Reserve System view. So MMT is actually PKE plus a bunch more stuff.

          I think you basically agree. And I believe you embrace the MMT view, right?

        • Tom Hickey says

          Wikipedia/List of Post-Keynesian economists

          Not definitive, of course.

  6. Nick Edmonds says

    Cullen, surely there needs to be an exploration of ideas and points of contention need to be thrashed out? Otherwise this site would just slump into being an echo chamber. Personally I really value Tom Hickey’s inputs to the comments on here and I think I get a lot more benefit from the efforts you and the others put into this site thanks to there often being an enlightening debate in the comments.

    I agree with this – particularly with valuing Tom’s input.

  7. Fed Up says

    Let’s say I save $100,000 in demand deposits. Someone else wants to start a new bank. They sell me $100,000 in bank stock (bank capital) and then buy $100,000 in treasuries. The reserve requirement is 0%, and the total capital requirement is 10%. I believe that means the capital requirement is 5% for mortgages and is 10% for ordinary loans. This example will be all mortgages.

    Assets = Liabilities plus Equity

    Assets new bank = $100,000 in treasuries
    Liabilities new bank = $0
    Equity new bank = $100,000 of bank stock

    The bank now makes 20 mortgages for $100,000 each. The 20 people use the demand deposits to buy 20 homes for $100,000 each from 1 home builder.

    Assets new bank = $100,000 in tresuries plus $2,000,000 in loans
    Liabilities new bank = $2,000,000 in demand deposits
    Equity new bank = $100,000 of bank stock

    $100,000 / ($2,000,000 * .5) = .10

    The home builder sets up a checking account at the new bank. So 20 checking accounts at the new bank were marked up and then marked down by $100,000 each, while the home builder’s checking account was marked up by the $2,000,000.

    The home builder allocates as follows:

    $1,500,000 in a savings account and $500,000 in a 7 year CD. Bank is funded for now, and the reserve requirement for savings accounts and CD’s is zero so that takes care of a positive reserve requirement.

    Overall, I saved $100,000 in demand deposits, and the 20 borrowers dissaved $2,000,000 in demand deposits. Demand deposits are both medium of account (MOA) and medium of exchange (MOE). $1,900,000 of MOA and MOE were created. No monetary base was involved. Banks and bank-like entities are not just financial intermediaries.

    Is all that correct? Thanks!

  8. beowulf says

    “Are interest rates determined by the supply and demand of loanable funds, or are they determined by the tradeoff between liquidity and return?”, the correct answer is “Yes” — it’s a simultaneous system.
    Similarly, if we ask, “Is the volume of bank lending determined by the amount the public chooses to deposit in banks, or is the amount deposited in banks determined by the amount banks choose to lend?”, the answer is once again “Yes”; financial prices adjust to make those choices consistent

    Wouldn’t the correct answer for both be neither since the Fed sets short term rates and the world adjusts itself around that? As Warren Mosler has often noted, the Fed can control quantity of money or price of money, it can’t control both simultaneously. The price of money, again, is the Fed Funds rate set by the Fed; the quantity of money (the volume of bank lending, if you will) follows that.

  9. stone says
    I’m trying to get my head around this Krugman post. He says “Now, think about what happens when the Fed makes an open-market purchase of securities from banks. This unbalances the banks’ portfolio — they’re holding fewer securities and more reserve — and they will proceed to try to rebalance, buying more securities, and in the process will induce the public to hold both more currency and more deposits. That’s all that I mean when I say that the banks lend out the newly created reserves; you may consider this shorthand way of describing the process misleading, but I at least am not confused about the nature of the adjustment.”

    It seems convoluted to me. First he says that there is a chicken and egg story regarding whether deposits enable bank lending / bank lending creates deposits. He then makes the leap to connect that to QE increasing bank deposits (as also pointed out by JKH) being one and the same thing as QE supposedly causing banks to lend out reserves. BUT QE increases bank deposits in a way distinct from bank lending. You can’t construe a non-bank selling treasury bonds to a bank in exchange for bank deposits as “bank lending” can you?

    Bank lending can create bank deposits but it does not follow that extra deposits resulting from non-banks selling securities (via banks) to the fed are due to bank lending.

    He would be correct if he said QE increased bank deposits. He is wrong saying QE increases bank lending.

    Am I in a muddle on this?

    • Nick Edmonds says


      If the securities purchased in QE operations ultimately come from the holdings of the non-bank private sector, then those holdings will be replaced by deposits in the hands of investors. This does not involve any additional bank-lending. In fact, if anything there will a secondary reflux effect whereby some of the deposit money will be used to reduce debt, particularly that of leveraged investors.

      Paul Krugman can call this lending reserves if he likes, but it really isn’t lending in any useful sense of the word.

    • Adam1 says

      Paul Krugman’s problem is that like most economists he’s lazy. I say that not because I dislike the man, but because he is in the position to befriend people who can EMPIRICALLY work through the operations. I am a reformed economist who work’s for a bank. For me to wrap my mind around MMT/MCT/MR I had to sit down with people operationally responsible for how the banks balance sheet worked. When I did that I realized that textbook economics that I had been taught was god awful wrong. Paul’s unfortunately too big of a man to lower himself to the level of finding someone who actually understand the operations and ask them how it works. Yet he’s also of a stature where if he did ask he’d be guaranteed someone’s time.

    • Cullen Roche says

      I still don’t think he is getting the point I was making.

      You can tell he’s not thinking about this correctly. He’s asking the wrong questions:

      “Is the volume of bank lending determined by the amount the public chooses to deposit in banks, or is the amount deposited in banks determined by the amount banks choose to lend?”

      The answer is primarily “neither”, not “yes”. Banks lend when creditworthy customers have demand for loans. It’s not a matter of deposit accumulation or supply side issues. He’s still using a loanable funds model so he’s not getting the point behind endogenous money. I don’t know how to respond to him. I don’t want to insult him, but he also has this point wrong and should really get it right. Any tips for communicating the point to him are appreciated.

      • Tom Hickey says

        How about starting with something, “I don’t think that is quite accurate. The way I see it working is…..” instead of saying flat out, “That’s wrong.”

        The way to help Krugman make a turn toward PKE is to point out that his own Krugman cross is a better model now than his beloved ISLM. which assumes exogenous money and loanable funds, and which Hicks himself disowned.

        • beowulf says

          “The way to help Krugman make a turn toward PKE is to point out that his own Krugman cross is a better model now than his beloved ISLM. which assumes exogenous money and loanable funds, and which Hicks himself disowned…”

          Tom, you’re a credit to the Navy. That’s a wonderful angle of attack– PKE stands for Paul Krugman Economics. :o)

        • Tom Hickey says

          Yeah, if he made this simple switch, which he could do unobtrusively, it would be a huge advance. How to do that in a way that he gets it and thinks it is his own idea?

        • beowulf says

          Here’s some backfill on the Krugman Cross, what some economists call the Cullen Cross (OK, that’s not actually true). :o)

        • Cullen Roche says

          So, you mean I shouldn’t do this?

          Thanks Tom, but I need public relations advice from MMTers like a need a hole in my face. :-)

        • Tom Hickey says

          First, that was in an email comment.

          Secondly, I doubt that Warren gives a hoot about what Krugman thinks about what he says anyway, even though they are neighbors in St. Croix.. Warren has pretty well pilloried many Very Serious People in published writings. On the other hand, Warren is one of the most diplomatic and genuinely polite people I’ve encountered. But he doesn’t shy away from what he sees as the truth, either.

          You asked for advice on how to handle it gently, and I said what I do under such circumstances. No charge.

      • Ramanan says

        Yeah loans are reserve constrained as per Krugman:

        “… And currency is in limited supply — with the limit set by Fed decisions. So there is in fact no automatic process by which an increase in bank loans produces a sufficient rise in deposits to back those loans, and a key limiting factor in the size of bank balance sheets is the amount of monetary base the Fed creates — even if banks hold no reserves.”

        You should directly or indirectly tell him he is hiding behind wonkishness and quote his errors from his writings.

    • Tom Hickey says

      Mosler’s response — “wrong.”

      • Cullen Roche says

        Btw, this comment from PK:

        “I’m actually kind of reluctant to even get into this, because any discussion of these issue brings out the people who believe that they have discovered the hidden secrets of the monetary universe, somehow missed by generations of economists. But here goes anyway.”

        That’s the result of years of berating and insults slung his way from his MMT/MCT commenters who don’t just attack Paul’s ideas and use immature and churlish approaches to attacking not just the man, but his intelligence. It’s the result of MMT hijacking the PKE name and then claiming to have created a whole new paradigm around the state theory of money and the nonsense about how “taxes don’t fund spending”. You guys and your churlish attitudes all over the internet are hurting the overall progression of PKE ideas!!!!!! Even Krugman is hesitant to respond to ideas that are now viewed as “MMT concepts” because it’s becoming associated with people who behave very poorly all over the internet. I think it’s time for MMT to be clear that MMT is PKE plus a whole bunch of other stuff that you guys added on. MMT is not pure PKE and it’s intellectually dishonest to hijack the name and pawn the work of Godley and Robinson and Lavoie as “MMT”!

        • Tom Hickey says

          Better edit the Wikipedia entry on PKI then. 😮

          PKE is hardly homogenous. There are different factions in PKE. MMT builds on some PKE but it is not purely PKE either. For example, Minsky, like his teacher Joseph Schumpeter, resisted labeling and never claimed to be PKE,. In fact, in some ways he was not PKE since he took pains to conform to a conventional approach rather than taking a confrontational one as PKE economists often have. The MMT economists are complete aware of this and acknowledge it in including Minsky as a primary influence, for example.

          BTW, Keynes cites the Chartalist position in A Treatise on Money: “the Age of Chartalist or State Money was reached when the State claimed the right to declare what thing should answer as money to the current money-of-account – when it claims the right not only to enforce the dictionary but also to write the dictionary” (Keynes, 1930: p. 5), in Pavlina Tcherneva, “Chartalism and the tax-driven approach to money”

        • bubbleRefuge says

          You may be on to something regarding how Krugman feels about MMT literati b/c he never mentions Mosler or Wray by name, though he does call you out by name, (nothing personal, you are a relative newbie) !

          PKE != loans create deposits.
          PKE != Monopoly issuer ( government is prices setter, government is self funding)
          PKE != Exports are a benefit imports are a cost.

          MMT is not pure PKE and it’s intellectually dishonest to hijack the name and pawn the work of Godley and Robinson and Lavoie as “MMT”!

          Sorry , but what the heck are you talking about ? Is this some kind of accusation of plagiarism. All of their academic papers and many of the blog posts are cited.

        • Cullen Roche says

          You sound confused. MMTers are the ones who said “exports are a benefit”. Godley didn’t even agree with that position. And no PKer said the govt was the monopoly issuer of money. Again, that’s an MMT position. You have confused traditional PKE position with MMT. MMT is PKE plus the ideas of the JG, monopoly issuer, taxes destroy money, the exports are a benefit nonsense, etc. MMT takes PKE and goes way beyond the traditional thinking.

          And no, I never said anything about plagiarism. I said MMT is PKE plus a bunch of other add-ons. Which is entirely accurate. It’s not just vanilla flavoured PKE. There’s no need to jump from fact to a declaration of “plagiarism”….Sheesh.

        • Tom Hickey says

          ALL economists say that imports are a benefit in real terms of trade and exports are a cost in real terms of trade. That is different from saying “imports are a benefit and exports are a cost.” Warren says the former, not the later, which would be a mistake. Imports cost jobs by import foreign embedded labor and exports benefit domestic employment but domestic workers are working for foreign nationals. That’s obvious on the face of it.

          Of course, there may be more to it that real terms of trade and employment, I don’t think anyone holds that large persistent CAD’s are permanently sustainable. Warren’s view is enjoy it while you can. My view is that international cooperation is more desirable in the process of globalization so that there is maximum development and minimal dislocation by viewing the global economy as a closed system.

        • beowulf says

          My view is that international cooperation is more desirable in the process of globalization so that there is maximum development and minimal dislocation by viewing the global economy as a closed system.
          In theory, the President could submit the Havana Charter for Senate ratification tomorrow (well, Monday let’s say).

          As I’ve mentioned before, there’s a little paradox at the heart of macroeconomics: The idea of a full employment equilibrium assumes balanced trade; and the idea that “imports are a benefit in real terms of trade and exports are a cost in real terms of trade” assumes full employment.

          That’s some catch, that Catch-22. Its a supertanker of an issue, one that affects the lives and fate of millions of Americans and thousands of towns and cities and yet it is absolutely invisible to nearly every public figure (Donald Trump excepted, of course). If Mitt Romney had campaigned to tackle it head-on (close CAD with tariffs, say, and use revenue to cut payroll taxes) he’d be president.

          “If Romney was going to move working-class votes in Ohio, he was going to have to embrace a concrete version of at least one of these policies. Still, it could easily have worked for him had he gone that route. As the labor official told me, “I don’t know what we would have done if he’d supported the [Senate China] bill.” It would have been an instance of Romney genuinely outflanking Obama…”

        • Cullen Roche says

          You can stop lecturing me on MMT’s positions. I’m really not that interested and I’d appreciate it if you stopped using this website to pump your agenda.

        • stone says

          Cullen, surely there needs to be an exploration of ideas and points of contention need to be thrashed out? Otherwise this site would just slump into being an echo chamber. Personally I really value Tom Hickey’s inputs to the comments on here and I think I get a lot more benefit from the efforts you and the others put into this site thanks to there often being an enlightening debate in the comments.

        • Cullen Roche says

          MMT has been explored by tons of smart people and it’s been rejected. It lost. No mainstream economist takes it seriously. Sorry to be blunt, but the idea that MMT has solved the problem of what Tom refers to as “equilibrium with optimal output” is absurd. MMT is an interesting thought experiment that will never make a material difference on public policy. That’s the reality here.

          You know what I’d love to see? I’d love to see PKE thoughts become more mainstream. But that requires baby steps. I have Paul Krugman by the ear on banking and look at his comment section. It’s filled with foaming at the mouth rabid MMTers who can’t behave like adults. I’ve lost his attention because he associates endogenous money with lunatics. That’s not helping the cause. It’s hurting it. And this is happening everywhere. Mark Thoma won’t even publish MMT comments. Noah Smith calls them lunatics. Paul Krugman thinks they’re arrogant and churlish. MMT has hijacked PKE ideas and taken them so far to the left that even the left can’t handle them. Personally, I wish we could temper the discussions a bit and get the very basics of PKE through to people who are sympathetic. That’s the important debate here. And it’s not happening because now most people on the internet assume that MMT = PKE. And we’re all worse off for it.

          So yeah, let’s start the debate. But we don’t need MMT’s extremist ideas to push that debate forward. In fact, they’ve proven that they can’t push the debate forward. Their ideas have been rejected. So yes, I am tired of seeing their churlish behavior everywhere. It’s not only gotten old, but it’s hurting the causes they actually embrace. We need to be realistic and step back and take baby steps forward. The world isn’t ready for MMT’s extremist positions. That’s become crystal clear. So let’s go back to the drawing board and work on plain vanilla PKE.

        • stone says

          Cullen, but Wynne Godley also “lost” in terms of getting to the helm of mainstream economics and he certainly had every possible advantage. He had a background in the Treasury, he had an eminent position in one of the world’s top five universities etc etc.
          You almost seem to be saying that Godley was sidelined by the mainstream because of MMT internet trolls. He was already sidelined by the 1980s because PKE didn’t effectively deal with the political realities of the labour/capital conflict and didn’t effectively deal with the phenomenon of capital flows between countries. Neoliberalism ruled the roost because it was a way to exploit capital flows between countries by enticing them in by favoring capital over labour.

        • Cullen Roche says

          I know this is a brutally honest assessment and I am being pretty tough here, but as Kelton said, this is “Tough Love. Freight Train Style.”

          The world is not even close to being ready for MMT. I am sorry, but the ideas of the govt just being able to self fund and print its own money to create some supposed “optimal output” at “equilirbium” are ideas that 75% of the public scoffs at. The JG? Don’t even get me started on how unrealistic that idea is. It won’t happen in our lifetimes. Functional finance? Yeah, cute sounding, but you want money for public purpose when a banking oligopoly controls its creation? Ha. Get real.

          So what do you have left when you kick out the self funding money monopolist, the functional finance and the JG? In other words, what happens when you remove the three components of MMT that make it different from PKE? Well, the math is pretty simple. You get plain vanilla PKE. Now, if we could all focus on that and try to promote those ideas on the internet and use lour megaphones to get those ideas across then I think we can win. Wynne Godley’s ideas? People love it. Look how receptive people are to the sectoral balances? MMTers love using it. We can get people like Paul Krugman to understand endogenous money and the SFB. That’s going to be easy. But the reason why it’s becoming so difficult is because these guys think endogenous money = MMT = lunatics.

          MMT is not going to be accepted in the USA. Not as it is. We can baby step PK and guys like Noah Smith into PKE. I really think that’s realistic. So let’s do it. Let’s have those discussions. But we’re wasting our time entertaining all this MMT stuff. And it’s actually hurting the progress of PKE ideas because it’s taken PKE so far beyond PKE. That’s my view anyhow.

        • Tom Hickey says

          I generally don’t bring up MMT over here unless in response to someone who has, usually you.

        • Tom Hickey says

          Peter Cooper and I agree that MMT is probably the best alternative that could be achieved practically in the present political environment, but both of us agree that MMT is very far from the solutions we would like to see as the situation develops and other solutions become feasible. We are agreed that “capitalism” is the problem in the it favors “capital,” with all that implies socially, politically and economic as the dominant factor socially, politically and economically. Capital is simply a replace of feudal lords with another ownership class.

          The basic is issue is the working out of the Enlightenment ideals of freedom, egality, and community, and the first stage of the that was replacing feudalism. The next stage will involve replacing capitalism as the substitute for feudalism that still leaves the majority of the population in a new version of the master-slave relationship. History has a liberal basis and negative freedom has been achieved in the developed world, although not yet in the underdeveloped world. Nowhere is there anything like universal positive freedom.

          Contemporary economics other than Marxism and vision economics takes any of this into account. Peter is quite expert in economics and also Marxian economics (he has an econ PhD in econ), while my knowledge of Marxism is limited. I am more interested in the newly emerging spiritual economics, which is actually ancient in its origin. This approach focuses on consciousness and unfolding its inherent potential individually and in society.

          Glad to hear that you visit Peter’s site at least occasionally. What I write there is much more my core thinking (see than on other econ blogs. This is being lived by a lot people worldwide in the alternative community, but the world is not yet ready for it generally. So I also participate in current social, political, and economic debate, even though I regard it as reflective of human adolescence at best.

        • Cullen Roche says

          Don’t bull shit me Tom. I’ve put up with a lot of nonsense from MMTers over the years. It’s no secret that you guys are instigators. If you don’t see that then you’re blind to your own movement. I’ve had to ban dozens of MMTers from Pragcap because they can’t control themselves. I never even write about MMT, but MMTers bring the fight to MR and PC almost daily. The idea that I instigate all the MMT/MR interactions is ridiculous. Just look at this thread. Mike cites MMT in the post, I confirm that Sheard is an MMTer, PeterP trolls my comment, Zanon goes off on some absurdly inappropriate tangent and then you start lecturing everyone about the history of economics as though you’re some sort of guru who knows what “optimal output” is.

          Frankly, I don’t even know why we’re having these discussions here or why you and the MMT people feel the need to continue trying to spread the MMT gospel. You’ve had 20 years to spread this message. It has failed. It’s been rejected by Krugman, Thoma, Noah Smith and others. If they won’t get it then you don’t have a prayer. MMTers had a golden opportunity to promote their views and spread them during the financial crisis. But the message failed to get out. In large part because it’s spread in an ideological, condescending and insulting manner. But we should be clear – that message failed to get out and now guys like Krugman just think you’re trying to recreate the wheel and basically wasting a lot of people’s time. He’s afraid to even mention anything remotely MMT related because he knows it will bring the hate to his blog. You failed in message delivery. Sorry, but that’s the reality here. I’ve tried to warn you all about this a million times over the years, but no one listens. And now look who Krugman is responding to? The guy who actually treats him with respect and doesn’t insult him at every opportunity. What a surprise!

          MMT is a nice thought experiment. It’s an interesting alternative option to the current monetary system. But you’re wasting your time if you really think that it will become a serious influence in US policy in the coming 30 years. But what do I care. If you want to waste your time thinking that all this internet trolling is making a difference then have at it. Just respect the MR websites while you’re at it and stop getting in the way of what the rest of the PKers are trying to achieve. That’s all I ask.

        • Tom Hickey says

          You are confusing my personal views with MMT. I am not an economist and what I say should not be taken as necessarily representative “MMT.” My understanding of MMT as whole is cursory and superficial. What I say about MMT represents the understanding of an amateur that is chiefly familiar with MMT through blog posts. I have read relatively few papers by MMT economists and fewer by other economists that are id’ed as PKE. As far as my other views, you can call it “musings of a madman,” if you like.

        • Cullen Roche says

          “Of course your views don’t represent the entire MMT spectrum, but I think it’s safe to say that MMTers cover the left wing spectrum to varying degrees with some (like Peter C, yourself and Bill Mitchell) being WAY out there on the left hand scale. ”

          I am fairly certain you don’t actually read my comments….

        • Tom Hickey says

          My position? As I’ve said here and elsewhere, I am to the left of communism. Yes, I firmly believe that an ideal society is possible but not without significant human development in the direction of “Love is all you need,” which is the sum and substance of perennial wisdom. This has to be owned, it cannot be forced. The level of collective consciousness would need to rise to make that possible, and I am confident that as history unfolds it will, but cyclically rather than linearly.

          But we have to deal with the here and now, with humanity still in its adolescence. The question is, what’s the best we can do with what we’ve got, looking at the global economy as closed system driven by the overarching cultural and institutional factors of the day, which are themselves reflective of the present level of collective consciousness.

          I have heard only one potential solution that reconciles the major objectives of macro as political economy These are:

          1. Growth. Social-economic progress as distributed prosperity, which requires economic growth and innovation. Productivity increases should translate into increased distributed leisure, as Josef Pieper observed in Leisure, The Basis of Culture (1948), and which Bucky Fuller observed would result not only in recreation but also increased contribution from knowledge.

          2. Employment. As long as humans remain under the collective illusion that employment is necessary for sustenance, then in a modern monetary economy in which survival depends on having an income, a good society has a social obligation of providing sufficient income through work. If the private sector is unable or unwilling to do this, then the public sector must. They is also true of vital necessities like health care. I regard this as minimal, however, not optimal.

          3. Modern economies are monetary so monetary stability is also a major issue wrt economic calculation. The monetary authority therefore has an obligation to ensure relative stability of the monetary system and the value of money. As long as monetary exchange predominates economically, price stability will be a concern. With development of AI, market distribution with all its inefficiencies can be reduced and eventually eliminated. Markets are not “natural” as claimed. Most of human history transpired without markets during the period of the communal societies of primitive tribes and then the mostly command economies that developed after surpluses were achieved in the Agricultural Age. Markets are a recent blip on the screen and an innovation that involved tradeoffs. Admittedly the plusses were greater than the minuses, but the end of history NOT. But markets developed within command economies and the cultures in which they were embedded rather than in spite of them, so that the goal is to reduce the role of government to remove market imperfections.

          Most approaches to economics regard growth, employment and price stability as a trilemma in which only two can be achieved simultaneously. The present macro approach to policy is to set growth and price stability as targets and to use employment as tool through a permanent buffer stock of unemployed. This is inefficient, wasteful and costly if it can be avoided by overcoming the trilemma.

          MMT is the only solution I know of that could realistically be implemented without huge political changes, making other potential solutions impractical. In addition, it can be implemented incrementally. It is not necessary to introduce the JG immediately, for example. A lot would be gained by introducing the sectoral balance approach and functional finance without it. As Warren Mosler says, it wouldn’t mop up residual unemployment in excess of transitional and ti would make inflation more difficult to control. But the situation would be a great improvement over what we have now.

          I hardly think that MMT is THE answer, and I doubt MMT economists think that either. We all understand that economics is just one factor among many and that economics itself is much larger than any person or group can get their head around. But it is piece of the puzzle at this time.

          Moreover, the breadth of MMT as a new economic perspective is poorly understood. It is much broader than most realize. It is built on certain aspects of PKE but it includes a lot more influences. There are also significant new developments that extend beyond monetary economics and macro, such as Scott’s incorporation of Social Fabric Matrix (SFM) and complex systems, Randy’s current focus on innovation.

          In summary, my interest is in unfolding inherent potential by attempting to discern and live the good life in a good society, which is now is global. Economic has a place in that historically and wrt future development.

        • Cullen Roche says

          Well that’s certainly thorough. Thanks. I think that solidifies my belief that MMT is akin to a Rothbardian wing of the PKE school. It’s left of left wing. Which is fine, but I think more MMTers need to be upfront about this when presenting the school to people. Of course your views don’t represent the entire MMT spectrum, but I think it’s safe to say that MMTers cover the left wing spectrum to varying degrees with some (like Peter C, yourself and Bill Mitchell) being WAY out there on the left hand scale. As I said, that’s fine, but a big part of the problem with the MMT presentation is that they tend to present it as PKE or even something that’s compatible with Austrian economics in some cases (which is, quite frankly, beyond absurd). The reality is that MMT is PKE (which has liberal tendencies) taken further to the left. As I said, that’s fine, but a lot of the infighting would end if more MMTers would be as honest as you are with their views and just begin stating that MMT is really an ecomomics school that is left wing for left wing.

        • beowulf says

          I wouldn’t really call Tom an MMTer. He’s a professional philosopher who I can imagine playing devil’s advocate even at a wake (“Come on, your mother wasn’t that nice a person”); he can seem as contrary-minded on MMT sites as you think him here.
          Perhaps Tom secretly agrees with you on some issues but feels he’d be doing you a disservice if he told you. Its like Edmund Burke said, “He that wrestles with us strengthens our nerves and sharpens our skill. Our antagonist is our helper.”

        • Cullen Roche says

          Perhaps I’ve misinterpreted Tom’s position. But I think Tom is a full bore supporter of the JG, Functional Finance and Warren’s description of the reserve system. In my book, that qualifies as MMT. After all, those are the three key components of MMT that differentiate it from PKE. But hey, if Tom says otherwise then I am certainly willing to admit having been wrong.

        • bubbleRefuge says

          Was trying to point out differences between MMT and PKE .
          PKE does not believe Loans Create Deposits
          ( I think I was wrong on this as Goodly + others I’ve seen at has recognized this. But not Krugman who I though was a PKE )
          PKE does not recognize Monopoly issuer ( government is prices setter, government is self funding)
          PKE does not say Exports are a benefit imports are a cost.

          Using the work “hijack” sounds like you are saying MMT took something without citation which is akin to plagiarism.

        • Cullen Roche says

          Well, the fact is, MMTers very loosely align themselves with PKE and too often imply that MMT = PKE. See Tom’s comments for instance. He basically aligns MMT with PKE, but that’s nonsense. The reality is that MMT is a strand of PKE that really takes things way beyond what the traditional PKers thought and adds on a bunch of stuff that is actually fairly socialist. Lerner was a market socialist and Minksy was a member of the socialist party for much of his life. The influences are fairly Marxist and if the three legs of MMT are Functional Finance, Minsky’s ELR and SFB then you could easily argue that MMT is more market socialist than PKE. Which is fine, but I think MMTers distance themselves from that reality intentionally because they know it would kill MMT. MMTers think MRists are obsessed with Mosler and MMT, but we don’t even write about you guys and we don’t even comment on your sites. You’re the ones coming here and to Pragcap ranting and attacking and obsessing. Hell, some of you have even created websites that are purely dedicated to attacking me and my former MMT views….It’s a little creepy.

          And personally, I think the MMT add-ons are mostly wrong, misleading or inapplicable. I don’t really want to get into it because I don’t care that much, but you should be aware of it before reading things from MMTers where they declare that they’re PKE. They’re not just PKE. They’re PKE plus a bunch of other stuff. And in my opinion, it’s the other stuff that is problematic. In other words, it would be better if some of the plain vanilla PKers started to come out and correct the record on this because MMT is not helping the overall cause. In fact, I am becoming convinced that MMT is detracting from some of the core lessons within PKE that are extremely valuable. And that’s a real shame. I mean, guys like Krugman, Thoma and Noah Smith should be embracing PKE and screaming it from the roof tops. Instead, they think MMT = PKE and they think the MMTers are out of their friggin minds because their interactions with them have been extremely negative. All this ranting on the internet by you guys is really biting you in the ass. Sorry to be so blunt, but I am dead serious – if MMTers want to be anything other than a distant memory then the internet relationships need to get cleaned up. The MMT reputation is in the toilet right now and you have no one to blame but yourselves….take that as constructive or smear me. I don’t really care either way. But it’s my honest opinion of how this all seems to be playing out for you guys. It ain’t headed in the right direction….

        • bubbleRefuge says

          Ok some MMT’ers are aggressive, if not vicious. I don’t condone it, but I don’t read them b/c I’m looking for politeness, or somebody to stroke me. My focus is trying to expand my knowledge of economics by having to read the least amount of words. That is why I like Mosler. Also, I do appreciate you taking the time to reply to my posts. You are one heck of a hard working cat. My philosophy is to ask questions and challenge in forums with an eye towards learning something new or learning how to defend a POV from different angles and dimensions.

          My take on the MMT~socialism meme is why not have a bigger social safety net if ‘funding’ it is not an issue. Seems to me that our political system is already ‘socialist’ in the sense that you have this ‘pay for play’ system with way to much of the federal deposits flowing to corporate boondoggles than to areas that benefit the public more such as ELR, single payer health-care, etc.

        • beowulf says

          “You [Cullen] may be on to something regarding how Krugman feels about MMT literati b/c he never mentions Mosler or Wray by name, though he does call you out by name, (nothing personal, you are a relative newbie) !”

          For no reason I can fathom, I’m suddenly reminded of something Churchill said:
          “Dogs look up to us, cats look down on us, but pigs… look us in the eye as equals.”
          Hmm, maybe Krugman likes Cullen because he looks him in the eye as equals. :o)

        • Ramanan says

          Not my blog, so I am not admin here but please have the decency of not using in your name.

        • bubbleRefuge says

          Seriously ? WTF? Why can’t I promote Moslers site ?

        • Ramanan says

          Because you are not him.

        • bubbleRefuge says

          Are you the URL police ?

        • Ramanan says

          No I am not the URL police but the fact that you use someone else’s website as if it was yours says something about your character.

        • bubbleRefuge says

          S=I + (S -I) , I meant.

        • Ramanan says

          No, I won’t apologize. The reason is that it misleads others about your identity.

          Yes it is not illegal but there are some unwritten things. Here many would recognise you as not Warren Mosler (although can’t say the same for non-regular commenters) but imagine you go and comment on Scott Sumner’s blog. He or other commenters may think you are Mosler writing under the pen name BubbleRefuge.

          Again it is not my blog so feel free to do whatever unless the blog owners complain. Or better if Mosler allows you even better! Anyway done for now.

        • bubbleRefuge says

          Geez ! Fine! Uncle! Promise never to do it again! + you were right about the PKE = Loans create deposits.

        • Ramanan says

          Generally nobody does that. When you comment – it asks you for *your* website not someone else’s.

          Replace that with and think. Someone reading may think you are from Goldman Sachs and that you are representing the view of the company. People in fact write a disclaimer that my views are not that of my company’s for example when they blog or Tweet.

          Similarly someone who doesn’t know Mosler would think BubbleRefuge is Warren Mosler. Even if doesn’t your inaccurate views and attitude doesn’t reflect Mosler’s … so. You have the ignorance of thinking loans create deposits is some deep thing PKEists are were not aware of before MMT angels landed on the scene is obviously something Mosler doesn’t think.

        • bubbleRefuge says

          Didn’t think it was a hard and fast rule. You should apologize for questioning my character.

        • bubbleRefuge says

          Wasn’t my intention to pass it off as mine. Its basically my favorite website and I like to promote it. Your statements deeply offend me.

        • Cullen Roche says

          See, this is part of the problem with you guys. You hijack other people’s websites to “promote” you agenda. This isn’t even MMT website or a MMT article and look what’s happened to the comments. It’s been hijacked by a bunch of MMT people who don’t even seem to know what PKE is! No one can escape you all and your need to make everything about MMT because you constantly hijack other people’s websites! I don’t even write about you guys, but a day barely goes by where some MMT dude doesn’t stop in to explain to me how I am wrong and MMT is right. It’s incredibly annoying.

          You guys have your own websites to promote your agenda. I am sorry if they’re not very popular, but you really need to stop hijacking other people’s websites to promote your agenda. I pay a lot of money every year to host sites and I try my best to provide an educational and insightful forum. What’s not helpful is having a bunch of “promoters” of other ideas using the comments section to sell their agenda. I don’t know why MMT people can’t respect that?

        • bubbleRefuge says

          Promote in the sense that Google has a web crawler that will crawl this site, slurp up all the URL’s and keywords , burp them into their indexing/ranking algorithm, and produce an organic search score which heavily weight’s based on referenced URL’s. So freaking execute me for wanting to help a friend in that sense. I’m sorry.

          As far as your other comments on these forums, not sure what it is that you want ? Do you want an echo chamber consisting of the same 4 guys churning the same stuff ?

          My perspective was that I didn’t understand S= S + (S-I) . You explained it to with your examples etc. Ok fine and It is pleasure to hear it. Now, I still don’t agree with it your critique of MMT . You critique , IMHO , obfuscates that deficit spending creates deposits and the federal government has the power to do this ad infinitem which is a powerful and underutilized tool that can reshape our economy for the better. We disagree on that I suppose. The tenor of your comments suggests that you want me to leave your forums. If that is the case just say so I will oblige.

        • Cullen Roche says

          Well, I don’t want to get into the whole MR vs MMT thing. If you don’t agree with MR then fine. I am not here to convince people that it’s right. I am not “promoting” an agenda or an ideology. I try to explain things to people and if they don’t agree then whatever. I’m not going to go to their blog and start ranting at them in the comments section on a daily basis. I just don’t understand the thinking in the MMT mind. You guys seem to think that you’re going to garner attention and favor by incessantly attacking other people’s ideas in the comments.

          You know how I built an audience at Pragcap and got my monetary paper to #7 all-time on SSRN? I put a lot of time and effort into research and understanding and tried always to be extremely cordial, kind and educational with my readership. It’s not a difficult equation. I didn’t go around to other blogs screaming at people about how wrong they were and leaving insulting and obnoxious comments. And I certainly didn’t write insulting blog posts calling other researchers and professionals names as some of the MMT founders regularly do. That’s beyond churlish. It’s downright disgusting. If MMT can’t sell the merits of its theory based on the hard work the academics and founders have done then you’re certainly not helping by becoming professional internet trolls.

          That’s my view anyhow….Probably worth what it cost you. :-)

        • bubbleRefuge says

          Never said I was!

        • Ramanan says

          “PKE != loans create deposits.”

          Outright false. Go and read some papers.

          “PKE != Monopoly issuer ( government is prices setter, government is self funding)”

          Monopoly issuer is nonsense. self-funding partly true as per Wynne Godley but fails in open economies.

          “PKE != Exports are a benefit imports are a cost.”

          Which is trash.

        • Cullen Roche says

          Thank you! Geez. The MMT people have totally poisoned some people’s minds with this garbage.

        • zanon says

          Please do not blame krugman’s close mindedness on this topic because MMT people were mean and make him cry.

          ugly fact is that are “hidden secrets of the monetary universe somehow missed by generations of economists” but the secrets are not secret, nor are they hidden, and they are in plain site and well understood by generations of accountants.

          krugman is closed to this because his TRAINING, IDENTITY, and entire FACADE of academic macro closes him to this. Every MMT and PK could go to his house, genuflect to the great man, stroke his beard, and provide his physical services as per his request inspired by 50 shades of grey and it would not enable him to understand this concept nor, if he understood it, could he say it out loud. It is the knowledge that cannot speak its name.

          it is cheap to say “if MMT was nicer they would get more audience”, although it is absolutely true that behavior and body odor of MMT people is very offputting. Krugman resist parts of MMT where it overlap with PK 100%, he does not reject it because of JG or ELR. In fact, ELR is probably selling point as Krugman is community and policing thoughts and voting patterns of those idiots who live in central time is probably a pet PK PK scheme.

          You know whats. MMT has been batting zero on convincing any mainstream economist of note. So clear fail there. If PK, with its “you are correct btw. you are wrong” approach is more successful, I will fly white flag. But PK is as big a loser in this regard as MMT. So please stop trying to pin the problem and delivery and see that the rejection is fundamentally of content.

        • Cullen Roche says

          Of course it’s just my personal opinion. But I think MMTers have a terrible public persona due to the way most of you interact with people. I’ve tried very hard to be cordial and kind, but you guys push people’s buttons like I’ve never seen. I have very annoying Austrian commenters on Pragcap who are not even close to being as annoying and rude as the MMT people always are. And I see this all over the place. There are at least a handful of people who comment on PK’s site EVERY SINGLE DAY telling him how stupid he is and how MMT’s have everything right. And this is common most everywhere. I’ve been dealing with it at PC for the last 2 years even though I’ve written about 1 or 2 articles about MMT.

          It’s fine to think you have a superior theory of the way things work. But you don’t shove it in people’s faces continually making them feel like idiots. I mean, look at the laundry list of economists who think you guys are intolerable – PK, Sumner, Thoma. Even Lavoie called you all out for this behavior.

          Personally, I don’t care about the attacks. MMTers can smear me and attack me all they want. I’m not trying to prove anything to anyone. So have at it. Smear away. But those guys obviously care. And when you smear them they get pissed. And when they get pissed they want to distance themselves from you. And when they distance themselves from you they write stuff like ““I’m actually kind of reluctant to even get into this…”. And when they write stuff like that all your trolling and pestering ends up having defeated the whole cause.

          Try to get your message across without accusing people of hating Warren Mosler or “self congratulatory ejaculation”. You’ll get a lot further. And tell about 95% of your internet trolls to stand down. Some of those people shouldn’t be allowed to take a muzzle off of their mouths….MMT has successfully unseated Austrians for the crazy internet troll crown. And that’s not a good thing. Trust me.

  10. zanon says

    once again, another ejaculatory self-congratulating post by Sankowski forgetting #1 popularizer of this stuff — mosler! Why not just rename blog “anti-Mosler — exactly the same but slightly different” so everyone understands clearly?

    even cullen thinks paper is from mosler primarily. i have no idea, but my gods, if you are think people like SRW are MR or MMT you are bonkers.

    • Cullen Roche says

      Plus, why are you MMT dudes so paranoid about everyone being out to get you? We rarely even mention MMT on this site. I almost never write anything relating to MMT in Pragcap. But MMTers swarm down on these websites and turn every topic into an MMT topic. And then when we defend our position certain people throw a hissy fit and start claiming we’re out to get you all and that we’re obsessed. Wait, we write a post that doesn’t mention MMT, then MMTers fill the comments with their standard ranting and screaming, then we defend ourselves explaining how MMT positions are wrong, then you’re the victim of some hate crime?

      Besides, we’re moving PKE ideas forwards. You’d think that a group of people who claim to be PKE would be happy about that. Instead, you act all paranoid about everything and assume we’re bad mouthing Mosler by writing a post about endogenous money. You guys confuse the shit out of me.

      • zanon says

        your call of paranoia is projection. as far as I know mosler has no problem with you, and I also do not have problem. what I do have problem is how you flush mosler down memory hole and make crazy claim like SRW is MMT or PK.

        my question to you is, why are you so mosler-phobic? he is just rich guy sitting in bahamas with car company (trying to sell) and failed congressional big under belt, drinking margaritas and writing blog. not a threat.

        • Cullen Roche says

          I’ve never said a bad word about Mosler. I don’t agree with his theory of the way things work, but I think you’re just making things up. Other than that I don’t see how MMT is much of a threat to anything. After all, your own websites are so unpopular that the only way you can garner attention is by trolling everyone else’s sites. The ideas just aren’t catching on. Not even with people who should be somewhat sympathetic. Sorry, but that’s reality.

        • Dunbar says

          Trolling websites > trolling Twitter conversations – at least there is an explicit invitation for open comment here. Are you claiming innocence on that front as well?

          “better than Paul Krugman, I guess”

          Subtle snark is still an ad hominem. You can’t hide stick a digger quietly in the side and step back and turn up your hands and pretend innocence. You’re playing just as personal a game as they are, they are just explicit about it.

        • Cullen Roche says

          Not sure what you’re referring to, but I certainly don’t spend much, if any of my time reading MMT websites, commenting there (in fact, I never do that) or “trolling” MMTers on Twitter. In fact, the only time I respond to an MMTer is when someone comments on one of my sites or someone on Twitter informs me that they’re bashing me.

          But here we go again. Another MMTer has come here to take digs at me and accuse me of things and I am defending myself and you will then proceed to somehow claim “he started it”. Same old same old….It’s just a big waste of time.

        • Dunbar says

          Also nice work with simply ignoring my point about the “better than Krugman” dig. Was that personal or was that “just ideas”?

        • Cullen Roche says

          I don’t know what you’re referring to exactly. Did I say that? If you’re going to troll effectively you should give your target a link to read so they can read your reference before responding.

        • Dunbar says

          Literally right above this:

          ” He’s getting it from Mosler, etc. Which is better than getting it from Paul Krugman, I guess.”

          I ask again, was the second sentence personal, or just “ideas”?

        • Dunbar says

          “i guess” = the soft bigotry of low expectations”

        • Cullen Roche says

          Krugman is poor on banking. Is that an insult or a statement of fact? Also, I was complimenting Mosler saying his understanding is better than Krugman’s. Are you people ever pleased? Or am I insulting MMT even when I compliment Mosler? This is hopeless. We’re having an argument about who trolls who as you troll my website. Are you serious?

          Good bye.

        • Cullen Roche says

          Oh, I remember what you’re referring to now. I was saying that Krugman’s understanding of the reserve system is inferior to Warren’s. Shouldn’t that make you happy? Why are you mad about it? And is it really an insult to say that Krugman isn’t a reserve system expert? Isn’t that just obvious? It’s like saying that a shark can’t run fast. I am not insulting the shark. I am just pointing out what appears to be obvious to everyone who understands how running works. Krugman is a genius. He just doesn’t get banking all that well. Big deal. It’s not personal. I don’t see why everyone is so sensitive about this kind of stuff.

          I get torn to shreds by MMT people. You guys have threatened me with bodily harm, attacked my company, attacked me personally, etc. I should be raging mad at you all. I should be the one commenting on your websites every single day. I could have nuked MMT long ago by writing a post debunking MMT and just using Pragcap’s Google page rank status to squash it out. Better yet, the dudes at Zero Hedge wanted me to write something for them. Talk about a permanent link on “MMT” google searches to a post that would have set back MMT for years. Zero Hedge is so huge that the only thing that would have topped it would be the chartalism page on Wikipedia…But I didn’t do any of that. In fact, I barely even mention MMT on Pragcap. And I buried my MMT critique where almost no one can find it and I generally just mind my own business on my sites and your attack dogs just can’t stand down. Sheesh….You guys are just totally relentless. No matter how little I talk about MMT it seems that MMTers find new ways to instigate fights. What gives?

        • Dunbar says

          What was your intention with it? Nothing about my feelings hurt, this isn’t about me. Just wondering whether it’s “personal” or “just ideas”

        • Dunbar says

          “i guess”

          is that subtle personal snark or “just ideas”? If you had said “Reading Warren is better than reading Krugman” everything you said makes sense. “I guess” is, as Bush said, the “soft bigotry of low expectations”

          Which one of the MMT academics have threatened bodily harm or attacked your company, or are you simply associating them with every online commenter that uses the MMT logo?

        • Cullen Roche says

          I think this conversation is about to end. Sorry if I hurt your feelings when I said “I guess”. That wasn’t my intention.

        • Dunbar says

          No, you weren’t trolling an MMTer. You were trolling a conversation between an MMTer and Noah Smith and telling him he should come read MR instead.

          Basically interrupting the scheduled programming with your own unrequested advertisement.

          And you misinterpret my point about the websites. Didn’t say you troll MMT websites. I’m saying when you have open comments, you are inviting anyone, including MMTers to come here and comment. No one invited you into the twitter conversation.

        • Cullen Roche says

          Ah, the S-I discussion. Yes, I follow Noah on Twitter and his post that I responded to was an open question and I explained where the confusion came from. The post asked: “Do government deficits equal private surpluses?” I explained the confusion to him and where it probably came from. I wasn’t “trolling” anything. Then someone using the handle “LakeErieLiberal” started responding to us and then Stephanie Kelton and Scott Fullwiler started responding to this LakeErie person with several snide remarks about my past work. I saw that discussion because the LakeErie person linked to it. So you have this wrong, which isn’t surprising considering you’ve come here to troll this comments section in much the same way MMTers always do (by making baseless allegations about things they usually don’t understand).

          And no, when I pay for a website to be hosted somewhere I am not inviting the entire world to come spew nonsense on those pages. That’s not how the internet works. I own the website and I can regulate it however I please. Think Mosler with gun to a man’s head. I am supreme dictator of my websites and I can decide who speaks and who doesn’t. If you don’t abide by the rules then you are liable to get silenced. That’s how the internet works. If you want to pay for your own websites and dedicate them to hating on MR or me or whatever then the internet is yours to fill with whatever commentary you want. That’s how this works. Sorry to burst your bubble here.

        • Dunbar says

          1. I was referring to your comments on June 5

          2. Of course you have the right to moderate. But it is worse to butt into a direct twitter conversation than to leave a comment on a blog. As you say, one can be moderated.

        • Dunbar says

          See, i knew we are all friends under it all!

          I know exactly why you were doing it, and as i said, if you want to jump down into the ring and get dirty with the personality competitions (even if it is between a real person and JKH, who i’m convinced has to be an accounting cyborg ;-)), you’re more than free to do it provided you acknowledge you’re a player in the game and not a neutral observer. But i think you do your best work when you’re trying to be neutral, so hopefully (for me) you won’t go that route and will just try to pick up your game a bit.

          Now let’s get back to breaking bread. Salt, anyone?

        • Cullen Roche says

          Only if you’ll pass the olive oil. Take care!

        • Dunbar says

          If you want to say someone is totally wrong on a point, go for it. I’ll get a front seat on the action with some popcorn and coke. But the harm is not very indirect when you say “He’s reading Mosler, which is better than Krugman, I guess” or whatever you said. There isn’t any substance there. It’s pure personality politics masquerading as good-faith discussion.

          I’m sure you think you’re *only* helping people, and in many respects you absolutely are. But you’re also applying competitive, do-what-it-takes practices to a collaborative learning inquiry, and as such seem to be quite comfortable reverting to hypocrisy when you feel necessary to make sure you win.

          Luckily for me, I have no soul or children :-). I’m just trying to give you some helpful advice so next time you claim you never troll MMTers you can remember that you do sometimes, and next time you say you aren’t being personal you can remember you are sometimes, and next time you say this is only about economics and not politics you can remember that it isn’t.

          Think of me like your fairy memory-recall godfather :-)

        • Cullen Roche says

          You know, you’re right. There’s really no value add in a comment like that and it’s petty and stupid. I shouldn’t do it, but I didn’t mean it the way I think you’re taking it, but now that I see your point of view I totally understand how stupid it looks. I think Mosler’s a totally brilliant guy. I don’t agree with him on everything, but that’s really what I believe. Same for Krugman. My sniping at them is usually done with a high level of admiration (I can’t compete with those guys so I nip at their heels at times!). The snipe was to imply that there’s a better answer there though, like say, JKH! That’s the point. Kind of like saying, “well, that dude is super duper smart, but there’s that guy over there who you should really learn this from”. It’s not an insult to the super duper smart guy as much as it’s pointing out that super duper smart has some competition who’s super duper duper smart.

          PS – I have no soul or children either. Just an adorable dog who will cuddle you to death if you ever threaten me. :-)

        • Dunbar says


        • Dunbar says

          1. Well, wait. Which one is it. Are you someone with a massively popular website and large following who could manipulate google traffic and your ZeroHedge connections to attack them, to just a nobody?

          2. As a good Schumpetarian, i welcome your creative destructive tendencies. But if you are out to destroy topple the kings of non-Austrian heterodoxy on the web (long live the new king!), how is that not personal? Are you just bluffing when you pretend you aren’t attacking them personally and hoping that people won’t realize that adding “i guess” at the end of an otherwise complementary statement completely undermines it through the the soft bigotry of low expectations?

          3. When does MMT claim they aren’t political or that it’s not personal? I have no problem with any of the rhetorical tools in your toolbox except hypocrisy. Either it’s just about ideas, in which case you should aim for a higher standard than the MMTers, or it’s personal, in which case you’re down with unwashed like the rest of us.

          4. Hurt reputations by all means. But if you want to claim you’re above the politics, be polite and do it through substantive engagement not concealed snark. Or, do it through over snark like Wray, and own it like he does.

        • Cullen Roche says

          I am not out to topple people. I am just a curious guy who runs a consulting firm and wants to understand the world we live in. I see a world of money that is woefully wrong in my view. And I am trying to provide people with better answers. Lots of people will be hurt by my work indirectly. Most of them will be Wall Street guys whose views I think are dead wrong with regards to portfolio management. This econ stuff is just a sideshow for me. The real meat in the myths are in the finance side. I’m really trying to help people. Maybe you don’t see it that way. But I generally try to be nice to people. I try to avoid calling them names or saying things that will personally insult them. Unfortunately, it’s hard to claim someone is totally wrong about something without basically saying they’re an idiot. So, I don’t know what else to tell you. I am not some evil person looking to crush souls and steal children. I’m just another dude looking for answers and providing some to people who ask questions. They could be all wrong. I don’t know. In which case I’ll have my reputation buried one day. So be it. I fully expect some young punk to come up one day and call me an idiot and explain to me how I know nothing. The human race would be in bad shape if it peaked at Cullen Roche! :-)

        • Dunbar says

          Cullen – I enjoy snark as well (and i have thick skin), but it’s most certainly personal for people who’s reputations you are damaging while simultaneously claiming with wide open eyes that you’re just being civil and you have no idea why they are getting frustrated. The guy who sticks the knife in doesn’t have to hate the person he knifed – usually the hate goes the other way, and with good reason. So i’m not sure whether you see yourself as a polite person engaging in genuinely constructive discourse or a predator playing with your food and simply concealing that fact until you get called out on it like I just did to you.

          Beowulf – I agree with you in that I don’t think either are actually bad. But down in the minute gradations of mildly poor manners at the bottom of the web-etiquette handbook, i think “expressing your opinion in a comments section inviting comments” is more acceptable than “interrupting someone else’s conversation to advertise your own school of thought and pretending you don’t have an agenda while doing it”. So sure, pass the potatoes, but don’t sit down and start telling everyone how much better your cooking is than the chef, then pretending you’re just here for the meal like everyone else.

        • Cullen Roche says

          That’s a bit dramatic. I am not ruining people’s reputations. First of all, I am a nobody. If you think I have the power to “ruin” someone’s reputation then you’re way overestimating my power.

          Second, if someone has miscalculated how the monetary system works and has therefore built a view of the world that is wrong, then it is not my fault for correcting it. It is their fault for getting it wrong. Call it “creative destruction”. :-)

          Thirdly, MMTers make a job out of claiming that basically everyone aside from them understands this new “paradigm”. So, if MMT is right then almost all other economists are wrong and that means that MMT is “ruining” millions of reputations. I’ve rejected MMT so if MMT is right then I am wrong and they will ruin my reputation. But I won’t blame Warren Mosler for personally ruining my reputation. I will blame myself for miscalculating how things work. I am the idiot in that case and I am to blame.

          Unfortunately, if PKE is going to win some reputations are going to get hurt. That’s just a fact of life here. It’s not my intention to inflict personal harm on people. But again, I am a nobody who has a moderately popular website and a fair bit of common sense. That’s about it. But please don’t confuse my work for an attempt to inflict personal harm on people. That’s absolutely not what I am trying to do. In fact, through providing a better understanding and education my goal is the do the exact opposite.

        • beowulf says

          2. Of course you have the right to moderate. But it is worse to butt into a direct twitter conversation than to leave a comment on a blog. As you say, one can be moderated.

          Wait, what? Like James Dean said, that’s all I ever do. If you want a direct conversation. send an email. A twitter conversation is a bit less, well, private. its more like the dinner table at a boarding house. Its not butting in, its chiming in, and pass the potatoes.

        • Dunbar says

          Good to know you can recognize at least some of the snark you engage in :-)

        • Cullen Roche says

          Ha. Come on. The snark is half the fun. Just don’t confuse my snark with personal insults. It’s really never personal for me. But yeah, sometimes I play with my food. That doesn’t mean I hate everyone at the dinner table. :-)

        • Dunbar says

          Apology accepted :) Looking forward to you ceasing to use “I never” when describing trolling behavior in the future then.

        • Cullen Roche says

          Another epic internet victory for the MMT trolls! And the crowd goes wild! What a great day for MMT as they unseat the Rothbards for champions of internet trolling! Now go enjoy the spoils of victory and tell your wife and children what an epic internet hero you are and how you got Cullen Roche to admit that he interrupted a conversation ONCE over THREE MONTHS AGO. You surely deserve it.

          Now that was snark. :-)

        • Dunbar says

          No. That wasn’t on June 5. No Lake Erie in that conversation.

          Did you read when I said i wasn’t talking about the recent conversation?

        • Cullen Roche says

          Okay. I don’t know what you’re referring to. Maybe I barged in on a MMT conversation ONE TIME over THREE MONTHS AGO. If so, sorry….

        • Cullen Roche says

          Again, the convo on twitter was between Noah Smith and myself. Some guy named LakeErieLiberal barged in on that and then linked to Kelton and Fullwiler who were subtweeting my conversation with Noah. Kelton was insulting my work and trolling me without mentioning my name and I responded to her because the LakeErie guy linked to her. Get your facts right before throwing out baseless accusations.

    • Cullen Roche says

      Yeah, Sheard is using MMT. I know a lot of the guys who worked with him when he was a Nomura guy and confirmed it back in 2011. But MMT didn’t invent endogenous money so let’s not go all crazy and start “self congratulating” and “ejaculating” over concepts that MMT didn’t invent….

      And no, we’re renaming the blog the Carlos Mucha blog. We decided that yesterday.

  11. TheArmoTrader says

    Wait! What if Paul Sheard IS JKH???? I mean you guys said JKH can’t be named for professional reasons…..

    • Cullen Roche says

      JKH is Jan Hatzius. I thought we already went over that? :-)

      • beowulf says

        I don’t think everyone here has signed the NDA so maybe they didn’t know.

  12. Cullen Roche says

    Paul Sheard is actually using the MMT framework in this paper even if he gets the endogenous money stuff right. I think there’s a quote in there about the govt “destroying” bank deposits or something like that. He’s not getting his stuff from MR or even Lavoie. He’s getting it from Mosler, etc. Which is better than getting it from Paul Krugman, I guess.

    • PeterP says

      Yes, and better than getting them from MR.

      • Cullen Roche says


  13. JKH says

    Not bad from S&P.

    A few suggestions for the author, just in case he sees your post, Mike:

    The fact that banks don’t lend reserves and don’t need reserves to lend, etc. is important, but the way in which banks actually do make lending decisions is the positive complement to that observation. The explanation of that is actually far more complicated than the correct explanation of how the bank reserve system works. The blogosphere and mainstream economics has that to look forward to. Detailed capital and risk management criteria are central to that. That said, if mainstreamers such as those people included in the footnote are still ignorant of how the reserve system works, I can’t imagine how long it will take for them to wake up to how capital and risk management work in informing actual bank lending decisions.

    Next, those who do understand reserve operations and the basics of loans creating deposits do sometimes get carried away in the process. It needs to be emphasized that this all relates to the idea of original deposit creation. It does not relate to real world bank funding, where banks actively manage their deposit portfolios and do need to attract deposits in the context of maintaining a balance sheet that already has loans in place. That’s because deposits, once created, can be fickle with respect to which bank they will stay with, until they are destroyed. But I guess once again, like the relationship between reserve management and capital management, we have to walk before we run. Anyway, that was the objective in my writing this post (which you already linked to Mike, thanks):

    Finally, the S&P paper might have referred a little more to the importance of paying interest on reserves as a tool for potential monetary tightening. The idea of exiting from excess reserves is just getting back to a normal mix of consolidated government liabilities over time, but it in no way impedes the path to any tightening required by the Fed in the future.

    It is absolutely devastating how little the world of mainstream economics understands about the world of banking, and yet it is apparently interested in understanding how the financial crisis came about and how to prevent the next one. Something fundamental needs to change with this profession. Your post is a good reminder of that, Mike.

    • A H says

      I’m still not really sure what to think about QE exit and higher IOR. Here are some rambling thoughts on the matter. Some details are definitely wrong.

      Pre-financial crisis the Fed created an destroyed reserves in order to target some inter-bank interest rate, creating reserves by buying bonds to push down the rate and destroying reserves by selling bonds to push down the rate. So the amount of reserves was basically endogenous to money market conditions and the interest rate the fed is targeting. But still, only the Fed can create and destroy CB reserves, right?

      This changes after the financial crisis, because of the zero lower bound on interest rates. So then the fed targets the quantity of reserves instead of interest rates, hence Q.E.

      So part of my confusion is that after QE, what happened to the relation between reserves and interest rates. In “normal” times interest rates determine reserves, but after QE it seems that this relationship has broken down, but is this really true? If the Fed wanted to tighten and started selling bonds and destroying reserves, I think that we would quickly see rising interest rates, and I think very few people would take the other side of the bet. So why even bother to use a higher IOR in the first place?

      However this is a bit confusing, because theoretically, there should be some relation to the stock of bonds and reserves that sets the interest rate the fed is targeting, and QE should have put this relationship out of wack, so that the fed has to sell a certain amount of bonds before there is an effect on the interest rate. But I doubt that this would be true in reality, and even if the fed needs to sell a lot of bonds is this really a problem?.

      Also seems like it might be better to tighten by raising reserve requirement and lowering IOR, like they do in China, This is good because it directly increases bank liquidity and is an implicit tax on banks, while IOR is really just a subsidy given to banks to have them lend at higher rates.

      • Nick Edmonds says

        It’s useful to distinguish between long interest rates and short interest rates; the yield on long-dated Treasuries and the Fed Funds rate.

        Both pre and post QE, the Fed can and does set the Fed Funds rate. QE doesn’t change that. However, QE enables the Fed to exert an additional influence over long rates. By buying longer dated Treasuries, the Fed reduces the supply of Treasuries in the market, pushing up the price and reducing the yield. This is quite independent of what it does with the Fed funds rate. The increase in reserves is just the counterpart to the reduction in Treasuries and is in many ways the least interesting bit of what is going on.

        There is a further distinction to be made where the Fed buys private securities rather than Treasuries

        • Ramanan says

          Good points Nick.

          And you used it well in your posts on QE on this as this point is important in the analysis.

          Interesting PKE history here which you will probably know:

          It was Kaldor who promoted the idea of expectations for long term yields and wrote as if it is the only thing that matters. There is a nice essay by Joan Robinson in the 1950s where she takes him to task on this – although I don’t think Kaldor came back with any reply. Even though there is some logic to the expectations theory, people write in a manner implicitly assuming the future is already known and I frequently think of how to write about it but Robinson’s words are the best I think. I will probably write a post just quoting her sometime.

        • Nick Edmonds says

          Thank you.

          “Interesting PKE history here which you will probably know: ”

          You presume my knowledge of PKE history is better than it is. I’m afraid I’m very poorly read in this area even on those economists whose work I most admire.

        • Ramanan says


          If you are interested, commented here on QE on Dan Kervick’s blog on such matters:

        • A H says

          I think it’s good to separate out the different types of QE. “Twist” type QE of buying long maturity treasuries and the fed buying private securities are important, but what I was talk about above is about “pure” QE, which is the Fed buying short treasuries in essentially the same way as it does in open market operations, except with a quantity target. It’s not clear to me what the effects of “pure” QE are on the feds impact on interest rates.

        • Nick Edmonds says

          I find it hard to see what purchasing short-dated Treasuries for reserves would achieve beyond the normal control of the Fed funds rate. However, I’m afraid my main familiarity is with the UK, rather than the US, so maybe there’s something I’m unaware of in the way monetary policy is conducted there. In the UK, it would make little impact as bills can be easily used to obtain central bank reserves anyway.

        • A H says

          Well it’s supposed to work through a portfolio balance effect which makes sense to me. The money used in QE has to end up as deposits somewhere, especially since most treasuries bought in QE were not held by banks originally.

          My question is that if QE does have effects on the economy, then why is there talk about unconventional policies like raising IOR at all. To tighten all the fed has to do is unwind QE to the appropriate level. If it doesn’t have any effects, then unwinding it or not won’t matter.

    • Michael Sankowski says

      Seems that Cullen has a post up on this too. He will probably see that at least.

      Also, he’s been on this for a while. He’s written an article about the Platinum coin which is spot on too, back in January. Paul gets it.

      It’s tough with papers like this – he’s probably torn between getting completely wonky on one hand, but also make the case simply enough any economist can understand. The more detail added can become counter productive if he’s just making the case in a research note.

      I’ll have to read through the Coin piece carefully, but the first paragraphs are very encouraging.

      ” It does not relate to real world bank funding, where banks actively manage their deposit portfolios and do need to attract deposits in the context of maintaining a balance sheet that already has loans in place. That’s because deposits, once created, can be fickle with respect to which bank they will stay with, until they are destroyed”

      This is a good point – individual banks “need” deposits in a way, but the “need” for this is entirely different than the money multiplier story “need” for deposits to create loans.

      • JKH says

        Oh, I think its a pretty good piece. Was just offering a few suggestions in context.

    • Nick Edmonds says

      You’re right that the economics profession has currently got very little to say on how bank lending volumes and pricing are really determined. I’ve yet to see any kind of model that really rings true. Godley and Lavoie make a valiant stab at it, but I don’t think it really stacks up. It looks to me like they have taken Godley’s ideas about how industrial pricing works and tried to fit it to a bank model.

      Unfortunately though, I don’t think that it is ever going to be something that can be set out in a neat little conceptual form. For example, capital is a crucial element in bank lending and, in my view, it is impossible to understand what happened to the loan market before and after the crisis, without understanding how capital constraints shaped behaviour. But that whole relationship is intimately tied up in the development of capital sparing techniques (principally ABS and CDS) which just doesn’t lend itself to neat models.

      That’s not to say the profession can’t get to understand banking better – just that they might have to accept that models may be of limited use.

      • A H says

        This is all in Minsky. “Stabilizing an Unstable Economy” is an incredible and still underrated book. Most people only know the simplified version of his hedge – speculative – ponzi finance scheme. But the way he lays out the working of the financial system and how financial commitments over time are the key driver of modern capitalism is the best description of how the economy works that I have read.

        Godley and Minsky are a great PKE tandem. They share the same basic economic framework, but come at problems from a different angle and really complement each others weaknesses.

      • JKH says

        “But that whole relationship is intimately tied up in the development of capital sparing techniques (principally ABS and CDS) which just doesn’t lend itself to neat models.”

        Actually, banks are very precise in the way they model this – the model is embedded in the form of risk calculation mathematics, which is then used in capital allocation breakeven costs. One of the sources of the financial crisis, boiling it down in ultra-simple terms, was that they were plugging the wrong standard deviations (in effect) into the risk models. That’s partly because of physicists, who knew even less than economists about banking, being employed by aggressive trading desks, and those same trading desks getting out of control under the wrong corporate culture. That’s a problem. And its only one problem. (AIG combined that with total lack of regulatory scrutiny) But that’s a peripheral problem than can be solved relatively easily by comparison to the fundamental dilemma of an economics profession interfacing ineffectively with banking with respect to analysis that matters. But yeah, models are of limited use anyway in banking as well as economics. The best banks, the ones that survived the crisis, used models as just one input to judgement – not drivers of judgement.

        • Nick Edmonds says

          And, of course, these sorts of models are subject to a particular problem reminiscent of the Lucas critique. The models are developed based on observation of what has been done before, but once implemented, they simply create a framework which can be arbitraged. Bankers will always look for ways to arbitrage – it’s in their nature, it’s what they are paid to do. And one of the richest sources of arbitrage is the capital framework. There are several clear instances of this happening in the run up to the crisis, such as the way that banks exploited the structured finance models of the rating agencies, and (as I’ve written about in the banking book / trading book distinction.

        • JKH says

          Agree with that in general. I think traders will look to arbitrage where possible – not so sure about bankers in general. There is an adult/child distinction in the more prudent cultures – but there aren’t enough prudent cultures with good qualified judgment on risk taking flowing down from the top of the house. Dimon failed big time in the whale case there – over-delegation. Yes the risk math can be exploited. But that’s partly what I mean by judgment in the internal supervision of risk taking, particularly in setting limits and deciding what trading businesses to get into. Most of the measured outright credit risk is still usually in the banking book and measured trading book market/credit risk and capital allocation is usually small relative to credit risk in total. Hedge effectiveness rules also made it more challenging for banking book risk taking.

          What’s the relationship between the Lucas critique and ergodicity as it might apply here – if any?

        • Nick Edmonds says

          I don’t think I understand ergodicity enough to answer that question. I was just thinking of the way that bankers (traders?) respond to changes in the regulatory structure so that it never actually works as intended, and it reminded me of the Lucas critique. I was involved at one point in looking at how to incorporate capital weightings for structural risk in structured finance transactions and I concluded it was impossible, because everything you could think of would just mean the structurers would do it differently. The thing being modeled is not independent of the regulatory model itself.

          An interesting point you make about most measured credit risk being on the banking book. That is true, but it doesn’t necessarily reflect the full position partly because exposure to the underlying is treated as market risk in the trading book and the only measured credit risk is to the counterparty, which is often covered by collateral. As I mentioned in my post, the vast majority of bank losses in the crisis were in some form of traded credit (including positions which were transferred to the banking book when they became illiquid).

        • JKH says

          quite right

          I think of the AIG financial products problem as being a combination of the “wrong standard deviations” (simplified as above), plus poor internal supervision over risk limits, plus reckless regulatory ineffectiveness when it comes to non-banks especially. So losses exploded way over measured risk in the trading book.