I broke this down over at Pragcap over the last week and wanted to post each piece here. I know some people learn more easily by reading in small chunks. Also, a huge thanks to JKH, Brett Fiebiger, PhD, Mike Sankowski and Carlos Mucha for piecing this all together. MR has become much bigger than I envisioned and the guys have all put in a huge effort. I can’t even begin to take credit for what it’s developed into. JKH and Brett in particular dove deep into some of the details and have provided some incredibly unique insights that make us all smarter and better informed. So thanks to everyone and I hope this series provides a better learning platform for understand the monetary system in which we reside.
Part 2 – The Basic operations of a fiat monetary system
Part 3 – The lead role of the private sector
Parts 4 & 5 – Understanding the true constraint for an autonomous currency issuer
Part 6 – Sectoral balance economics and S = I+ (S-I)
looking forward to finding time to read this.
I briefly skimmed the first two entries Cullen, and I didn’t notice any mention of the following: The Treasury can issue paper money, and not simply on behalf of the Fed. The SCOTUS ruled as much in 1862:
http://en.wikipedia.org/wiki/Legal_Tender_Cases
Subsequent to this ruling, for over a 100 years (until 1971) the Treasury issued paper currency, otherwise known as United States Notes:
http://en.wikipedia.org/wiki/United_States_Note
The reason they stopped seems to be twofold:
1. Redundancy. “United States notes serve no function that is not already adequately served by Federal Reserve notes. As a result, the Treasury Department stopped issuing United States notes, and none have been placed into circulation since January 21, 1971.”
http://www.treasury.gov/resource-center/faqs/Currency/Pages/legal-tender.aspx
2. Limitation on the quantity:
” The amount of United States currency notes outstanding and in circulation—
(1) may not be more than $300,000,000;”
http://www.law.cornell.edu/uscode/text/31/5115
I don’t know why we don’t update that limitation by adding five zeros (the limit would become 30 trillion).
As an aside, a few things:
1. I’m glad to see you guys getting away from that nonsense MMT perpetuates about taxes “destroying” money and Federal government spending “creating” money. The latter is of course partially true when the Federal government has in fact created money to spend, but taxes do not by their very nature destroy money, and spending does not by its very nature create money… The fact is, the Federal government, in addition to being a currency issuer, is also a currency recycler, i.e. they print, spend, tax or borrow, and respend. Round and round the money goes. They can destroy and create, but that isn’t always the case.
2. It appears you may have incorporated my thesis on open market operations having the ability to create non-government sector net financial assets (for example, QE renders the primary dealers flush with reserves/money which then the Treasury borrows by legal right, which upon spending creates NFAs). I’ll let you answer whether my judgment on you incorporating this thesis is accurate or not. I’m not looking for credit, only glad to see, assuming my brief skimming serves my eyes correctly, it has been incorporated since it’s clearly true as a matter of basic arithmetic.
Hi Robert,
1. We do mention that notes are issued as a form of outside money.
2. Any overlap here is due to Brett and JKH’s influence. I should be very clear that this paper is no longer by me alone. Brett actually wrote much of it and JKH has contributed huge pieces to it, but neither wanted direct credit for differing reasons. They both insisted that I cite them in the references rather than as a co-author. I think they’re both being modest. Excessively so given the value of the material.
3. Someone sent me a comment by you over at Mosler’s the other week where you were none too friendly in our direction. Something to the extent that the creation of MR was not going to pan out well for us and that not having letters behind us as backing would hurt us. You also praised the MMT agenda extensively in the same comments, but here you are calling one of their key understandings “nonsense”. First, Brett is a PhD and one of our most important contributors. JKH is a CFA and a banking expert whose experience is more vast than 99.9% of the people commenting on these matters. So if you want to call me an amateur then please do so. But don’t infer that upon my colleagues. They’re anything but amateurs or lacking in the approval of their peers through various commendations. I always appreciate and respect your comments which is why I was surprised when these comments were emailed to me and I noticed that a long time Pragcap reader was taking a dig at us. It happens and I am a big boy whose feelings don’t get hurt by words on the internet, but I am surprised that you’re then coming here to praise the work and rip a key MMT tenet calling it “nonsense”. I am sure you can see how this is strange. Maybe it was a different Robert Rice, but I doubt it. If so, apologies. I appreciate the comments regardless of what else has been said, but many of these disagreements and heated exchanges (petty at times) are due to facts like the one you call “nonsense”. MR evolved out of desire to eliminate this “nonsense” and get the facts right. That’s all. I don’t think we deserve to be attacked and misrepresented endlessly by MMTers just because they got some “nonsense” wrong and we are making an effort to get it right (though I understand 100% how/why MMters might be upset with us). But that appears to be what’s happening over and over again at various websites. I understand that MMT is largely a policy agenda, but you won’t advance that agenda by trying to downplay the credentials of your critics or attacking them personally.
1. Great. I didn’t see any of what I wrote elucidated, but as I noted, I skimmed/read quickly.
2. When I was espousing my thesis here, JKH seemed to indicate he was hearing it from me first. Again, I don’t really care about credit, but for the record. You can check the comment section of the previous articles wherein I was elucidating my thesis to verify this. I’m fairly certain I can hunt it down if anyone is that interested. I believe I still have the e-mails I received from the site once a post in made, so it’ll be pretty hard to deny this is the case.
I would add, it was pretty clear you were hearing it from me first, too, since you originally disputed it. Anyhow, I wasn’t coming here for an argument over who did what when. I don’t care about hero worship, recognition or any of that useless crap, I care about getting the truth out so we can fix the economy. I thought it interesting it had been incorporated. In my mind, that’s noteworthy progress.
3. You should read my comments at Mosler’s site a little more carefully. Post them here if it’s that important to you. Someone else going by “Save America” had called you an arrogant prick. I wrote in response I had no interest in placing a value judgment on you because I don’t know you well enough (not sure how that’s an insult), but added that whatever ego problems you allegedly may have had (which Save America was alleging), have likely been tempered over the split. I think it’s fairly obvious it hasn’t gone well, yet. Time will tell, and hey, if you have the truth on your side, I’m all for your (its) success. You know that. Ultimately without Phds (which apparently you’ve now rounded up), a public voice is hard to come by, and that was my point and why I gave you the advice I did originally and why people were listening to begin with (they didn’t see you as just some guy on the internet rambling on about economics; there’s lots of those). That is hardly an insult to you or anyone else here, it was merely a statement of fact, an observation about the world we live in.
I do find it amusing someone apparently tattled on me. If you 9or they) have a problem with something I’ve written, you (or they) are more than welcome to address me personally by e-mail, or publicly for that matter as you have.
And my support of MMT has largely been about the beliefs, not about them. My goal is a thriving economy, not their personal success, their hero-worship, or any self-centered, childish interests they may have. I’ve been pretty supportive of them for the sole purpose of getting true propositions out to the public, but the more I’m around them, the more I really don’t care for them personally (although Warren seems like a good guy), and the more I understand why they seem to have difficulty espousing their message to a wider audience. So in hindsight, I can’t say I blame you for leaving, even if we don’t necessarily agree on the theoretical reason over the split.
What you call MMT’s key “understanding” is nonsense (not your description, but their claims). The underlying theory is insightful (taxes destroy non-government sector NFAs, spending creates it, but that is not the same thing as saying money is destroyed and created), however the description is garbage. I’ve been making this distinction the entire time and certainly argued as much at Warren and Randy’s site. It’s why I ended up on the babysitting list at Randy’s site (all of my comments require moderator approval now… I’m pretty much done with them).
By the way, I shared my concern with Warren over their description, and he thanked me for it. If you doubt that, I’ll go hunt it down and provide you with the screen shot.
The point is, I don’t have to share the beliefs of everyone else before I can see the big picture value of uniting around some fundamental principles which need to be fought for and implemented so we can save the economy. Civilization depends on a healthy economy. We have to get this right. That’s my trophy. The rest of the crap over me or others being admired is a waste of my time. I’m fairly certain we all can agree it would be useful for the government to increase consumer incomes via some kind of means (I like the idea of printing money, but there are other less direct ways to achieve the same). The implementation can be debated, but ultimately that’s what we need. So why not rally around the fundamentals and get what needs to get done, done? That’s the reason for supporting them, nothing more. They seemed to me to be in the best position to achieve that end, so over recent months I’ve been trying to encourage them to use the outstanding opportunity right now to do so. Frankly, I’m getting the sense they are incompetent when it comes to spreading the gospel. They’ve been riding your coattails, which the aforementioned tattle tail should’ve sent you too, since I wrote that on Randy’s site a week or so ago.
Anyhow, the endless drama is pretty old. This isn’t a soap opera, this is actually real world stuff effecting real people. We don’t have time for this nonsense.
Robert,
Thanks again for clarifying. As I said, this was sent to me by a third party. I try not to even go on MMT websites if I can avoid it, but somehow I keep getting sucked back into the blackhole of petty arguments and childish back and forths that seem to persist around all things related to MMT. Like you, I am tired of it. MMT seems to operate under the idea that their best mode of spreading their message is through viciously attacking everyone they disagree with. I’ve been on the wrong end of that and I’ve certainly reacted poorly to it at times. As Carlos likes to say, I “jumped in the mud with the pigs” too many times. Frankly, I should have never teamed up with MMT to begin with because they operate in a way that is very different from me (I’ve gone out of my way to avoid personal confrontation on Pragcap over the years and it wasn’t until the MMTers attacked me over the JG that I started aggressively defending myself at times – now I know why Mark Thoma banned MMTers and why Lavoie actually mentions this in an academic paper – they’re just vicious people). And ultimately as more and more people have reached out to me (like JKH and Brett) I’ve realized that MMT’s modus operandi is not only wrong, but the details on their description of the monetary system are also wrong. So I’ve certainly made mistakes along the way, but my goal has always been to offer readers an accurate description of the monetary system so they can become better informed.
Anyhow, it’s all very petty and stupid, which is why I was surprised to see the comments by you stating that we were somehow being discredited by our reaction to the MMT split. Personally, I think we’ve increased our credibility enormously by separating ourselves from what I believe is a highly destructive mode of interaction and political ideology. And we might not have an entire school of professors backing our ideas, but we do have letters and we do have some serious mental firepower on our sides. Underestimate JKH, Brett, Carlos and Mike at your own peril. Call me stupid all you want.
Cullen
I should add – I disagree that their approach is the most likely to alter economic policy. In fact, it has the potential to vastly undermine the Keynesian position since they get the operational details wrong. You MUST start with a sound understanding of how all this works. I agree that the idea of NFA’s and govt solvency are super important. They’re MMT’s best insights. But they’re grounded in a myth. MR offers all the valuable MMT insights without the nonsense. So we give the reader an accurate understanding of how the system works. From there the policy options are unlimited. We don’t embed policy in our work, but lets’ get the first part right and then we can consider options down the road. Get the description wrong and your prescriptions are pointless. This is why MMT will go nowhere on the policy front. Their operational stuff is wrong.
That’s been my approach and I think it’s why I had a great deal more success spreading MMT than many others. I focused on the verifiable. Not the myths about why a job guarantee may or may not work. The world needs to understand the monetary system before it can build a policy understanding. MR takes that first step and I believe lays the foundation for policy options to come.
When I reached out to MMT over the last couple months, my correspondence was motivated in part to try and help them by alerting them to the giant-sized hurdle they’ve placed in their own path by having some descriptions mistaken, such as taxes don’t fund spending because the money is “destroyed,” “deleted,” or however you want to word it. That belief is false. Now, given I thought they’d be the best torch bearers for the message the world is in dyer need to hear (they have degrees and associations with other well known economists which would help them get on TV, etc.), I thought I would try and bring that to their attention. Well… it earned me a spot on their babysitting list. All my comments require moderation, and they never even so much as addressed me with their concerns before doing so. Not a decent way to treat a supporter.
I’ve called the Treasury more than once to talk to someone about whether tax moneys are destroyed or not, and on both occasions they rejected MMTer claims as nonsense. As a matter of fact, the last time I called them (which was within the last couple, three months), I called the TT&L “office” and talked to a gentleman for 30 or so minutes (who noted their program had been suspended, but nevertheless spent time talking to me about general operations), and he was perfectly clear; the money does not just vanish. It is not deleted. Even Kelton’s paper from I believe ’99 has a description of the operations that would preclude such a view, despite her conclusions at the end. And their own position would be inconsistent with such a conclusion, i.e. how can you settle a tax liability if the money is destroyed at the time of withdrawal, i.e. before it is deposited into a Treasury account? You cannot believe taxes are required to create monetary value (which creates a liability on those being taxed) and at the same time believe the money that is used to settle that liability is destroyed before the government receives it… Obviously the money transfers to the government to settle the liability. It is withdrawn and then deposited into one of their accounts. So then what, does the Treasury delete the money after receiving it? That would be totally goofy. Anyhow, the fact is, the money is transferred and then re-spent, i.e., the money is recycled.
I don’t know why we don’t adopt this currency recycling lingo, as it fits the bill well IMO. The Federal government is both a currency issuer and currency recycler.
The bottom line is this: I didn’t want to jump to any conclusions about MMTers or you for that matter because I haven’t been privy to all the details to make an informed judgment about who’s in the wrong in terms of their personal conduct. I don’t frankly care that much, although out of fairness to whomever has been wronged, I would like to try and recognize that. Having spent the last couple of months or so on their sites to try and get a sense of things for myself, the really telling thing to me has been; none of them addressed my concerns about their description, except Kervick, who lost that argument. At which point, I ended up on their babysitting list with all my posts requiring moderation before being posted. And they never even talked to me about this. Lame, lame, lame. That’s how you treat people who are supporting you and would like to see you succeed for the good of the world? I even encouraged Randy in comments to go on The Daily Show (do the rounds in the media) with the release of his new book and the perfect timing given the economic climate. Not a good way to treat people who care and are encouraging you.
For the record, I did not say you were being discredited over the split. I wrote without degrees, it’s an upward battle to have a public voice, just as I said to you at the time of the split, and I added that if you had any arrogance problems (I don’t know, I don’t know you that well), the situation probably taught you a lesson. I’m sure you remember my concern, and I think it has proven somewhat accurate to date. To have a public voice, a relevant degree is very helpful, or certainly backing from a group who has one. Frankly, it really shouldn’t matter because the soundness of an argument and the truth value of a proposition do not depend on one’s education. Nevertheless, I understand to some degree why things are the way they are. Without the current arrangement, every knucklehead would have to be given a mic, and a lot of people are more interested in talking than in being informed before talking. They don’t understand they have a responsibility to become informed before participating in the public debate, which is something PhDs generally have done.
If the truth’s on your side, I hope you guys can get it out there en mass and soon before we drive off the fiscal cliff into the austerity abyss below. We need a pro-government spending President and Congress, or, unless something I’ve overlooked changes, things will get worse. I’d do it myself, but I lack the very thing I’ve been saying is needed–a relevant degree. I can have the best arguments in the world, but few if any are listening.
I totally agree Robert. I think you know from your history at Pragcap that I’ve always tried to maintain a very civil and fact oriented discourse. It wasn’t until the JG disagreement that Pragcap got overrun by MMTers insulting everyone. Unfortunately, I allowed myself to get dragged into the mud and I came out with it on my face. The saddest part is, I never even really disagreed with them. I simply stated that the evidence wasn’t in place to justify such an aggressive policy proposal such as the JG. Then the attacks started and they did to me what they do to everyone – which is rip their face off for disagreeing with them. It was only then that supporters began to contact me showing how many of the MMT ideas were wrong to begin with. You’ve touched on a big one. And we’ve rectified it in MR.
Ultimately, we need to get the operational stuff right. No one does this as far as I know. Not MMT. Not Krugman. Not Sumner. MR goes back to the drawing board. Starts fresh with the operational understandings. And we try our best to eliminate the politics and ideology from it all. I think you’ll find if you read the primer in detail and cover JKH’s contingent institutional approach, that we’ve done a pretty thorough job of that. But the policy debates can’t even begin until we have this first step fully understood by the people who matter. That could take years and I am a patient man. But what won’t win people over is this approach of attacking everyone, denigrating even those on your side and leaving petty comments all over the internet. That ruined Austrian econ and it’s ruining MMT. I’ve tried to tell them they need to stop this behavior, but it continues even at the highest levels. And so, as JKH said, “I’m done with MMT”.
Cullen
Indeed! The spirit of science. We all need to be open-minded and allow the facts lead us wherever they may. Unity through reason.
And you’re on the right path; identifying current operations is the foundation to economics (and hence why I shared the info above about the Treasury’s ability to print directly, although the 300 million limit is clearly problematic). It’s hard to recommend policy actions or changes if you don’t even so much as understand how the current system operates. Although I’m more optimistic the identification and elucidation of operations isn’t that far off. Personally, I think I understand those core operations, but of course am interested in anything I may have overlooked or misunderstood.
I would suggest though that we keep in mind the mere recognition of facts, while essential, is only half the battle. The objective is to implement policy which will benefit the individual and collective good. When we graduate from being economic theorists and empirical analysts, we move to economic engineering.
And I agree, unless people are being willfully obstinate–dogmatic, ideological, intellectually dishonest types–the conversation should stick to a strict evaluation of the arguments. Sometimes people need to be called out for their thickheaded dishonesty, but rarely does that go anywhere positive. It’s best just to stick to evaluating the arguments, assuming we are after the truth and not cult leader status.
I’ll read the series in more detail.
And by the way, thank you for being a gentleman during our chat.
You too Robert. It’s always been a pleasure to chat with you, which is why I raised the concern in the first place. I am glad my concerns were overstated.
Your conversation with tsy officials doesn’t surprise me. Many of them are accountants or accountant types so the idea of an account being credited and then not being debited at a later point is totally foreign to them. Of course, they know the money doesn’t disappear as MMT claims. The whole concept is misguided. MMT creates the illusion that govt is not a currency user when the reality is that they’re a very important currency user. You may have noticed me using the term recycling at Pragcap. Govt has powerful tools to keep the machine liquified. The power to spend is just one tool.
Anyhow, I hope you’ll offer some further feedback as you read the series. We don’t pretend to have all the answers and in fact rely on readers to help guide the way at times. We’re just here to try to offer a better understanding so any help is appreciated.
Best,
Cullen