My understanding of MMT - Please point out any errors

[doodle]

#1 - If governments create money by printing bonds which they exchange for federal reserve notes, then basic accounting means that every dollar of public debt is also a dollar of private asset on the other side of the ledger. In other words, one entity's liability is another entity's asset. In our modern fiat monetary system where the dollar is not backed by any commodity, every dollar in existence must be created by the government as debt. Because of this, there can be no money at all in the system until the government spends it into existence as debt. If the government were to have zero debt, the private sector would have zero money.

#2 - If #1 is true, then "public debt" is really just another way of saying "national money supply". So when you say that the United States has 15 trillion dollars of debt, what you are really saying is that the United States has a 15 trillion dollar national money supply which it chooses (out of convention) to pay interest on by having a system where it creates money by issuing bonds. It could just as easily eliminate the step of printing bonds all together and simply print the money interest free. If this were the case we wouldn't have a national debt at all.

#3 - Through the power they are given to create loans based on the base money created by the government, private commercial banks dictate the ultimate size of the money supply in the economy. In other words, when lots of loans are being made, the money supply in the economy increases and there is plenty of money to go around and unemployment is low. When banks stop making loans, money gets tight in the economy and unemployment rises. Thus, private banks play a central role in controlling the business cycle and unemployment by how much money they choose to loan into existence. When there is too much money and unemployment starts to drop too low, then the possibility of inflation increases as our ability to increase production is limited. When there is too little money and unemployment starts to rise then we waste a lot of productive ability by having millions of capable people sitting at home instead of doing something productive. This is where Keynes came in with the idea that the government could smooth out the peaks of economic expansion and the depths of economic contraction by spending when the private sector was contracting and taxing more or raising interest rates when the private sector was overheating thereby smoothing out the business cycle.

What is happening today is that we have had an enormous contraction in the economy and trillions of dollars of money has evaporated as the value of people’s homes and retirement portfolios collapsed. This is very similar to what happened in the 1930's. Presently, government spending is the only backstop there is to falling into a depression.

[Gumby]

#1 - If governments create money by printing bonds which they exchange for federal reserve notes

I don't believe Federal Reserve (paper) notes are ever used, or even could be used. Warren Mosler points out that "the funds to pay taxes and buy government securities come from government spending." Remember, the Treasury is also printing money into existence every time it prints up a bond.

Treasury Bonds are typically purchased with the money from previous government spending. This is important, and necessary, since the Fed itself is not allowed to purchase Treasuries directly from the Treasury (unlike Japan's BOJ, which is allowed to purchase directly from its Treasury).

The Fed must purchase all assets, including Treasuries, from Primary Dealers. And the Primary Dealers must acquire Treasuries on their own — either from reserves that have accumulated from previous government spending (or from short term loans from the Fed if the reserves don't already exist for some reason). The key point is that the money to buy Treasuries usually comes from the Treasury itself. Due to the mandatory Fed/Primary Dealer relationship, the Fed does not even have the ability to monetize the debt (as Japan's BOJ already does).

#2 - If #1 is true, then "public debt" is really just another way of saying "national money supply". So when you say that the United States has 15 trillion dollars of debt, what you are really saying is that the United States has a 15 trillion dollar national money supply which it chooses (out of convention) to pay interest on by having a system where it creates money by issuing bonds. It could just as easily eliminate the step of printing bonds all together and simply print the money interest free. If this were the case we wouldn't have a national debt at all.

Correct. Though, it's more accurate to say that the nation has $15 trillion in savings. Technically the money supply is just a medium to help us exchange those savings for goods and services.

When banks stop making loans, money gets tight in the economy and unemployment rises.

It's actually the slowing of the economy that makes it impossible for people to pay back their loans in time. And this actually causes less loans to be sought out and/or doled out. When money isn't being exchanged in the economy fast enough, it becomes more and more difficult to pay off loans in time.

[brick-house]

doodle wrote

#1 - If governments create money by printing bonds which they exchange for federal reserve notes, then basic accounting means that every dollar of public debt is also a dollar of private asset on the other side of the ledger. In other words, one entity's liability is another entity's asset. In our modern fiat monetary system where the dollar is not backed by any commodity, every dollar in existence must be created by the government as debt. Because of this, there can be no money at all in the system until the government spends it into existence as debt. If the government were to have zero debt, the private sector would have zero money. 

So the money supply is determined by government spending.  How is government spending determined? 

Thank goodness for my 25% gold allocation...

[Gumby]

How is government spending determined?

It's determined by Congress's budget — as it should be. And We the People elect Congress to decide those matters. So, in a sense, we as a country decide on spending. Unfortunately, Congress doesn't always do things properly. Lobbyists corrupt Congress. And sometimes Congress spends to much and sometimes it spends to little. The confusion and misinformation over debt doesn't help matters.

[doodle]

Gumby,

I don't believe Federal Reserve (paper) notes are ever used, or even could be used. Warren Mosler points out that "the funds to pay taxes and buy government securities come from government spending." Remember, the Treasury is also printing money into existence every time it prints up a bond.

Treasury Bonds are typically purchased with the money from previous government spending. This is important, and necessary, since the Fed itself is not allowed to purchase Treasuries directly from the Treasury (unlike Japan's BOJ, which is allowed to purchase directly from its Treasury).

The Fed must purchase all assets, including Treasuries, from Primary Dealers. And the Primary Dealers must acquire Treasuries on their own — either from reserves that have accumulated from previous government spending (or from short term loans from the Fed if the reserves don't already exist for some reason). The key point is that the money to buy Treasuries usually comes from the Treasury itself. Due to the mandatory Fed/Primary Dealer relationship, the Fed does not even have the ability to monetize the debt (as Japan's BOJ already does).

Where does the money come from that the Fed uses to undertake Quantitative Easing? Isn't this just money printed out of thin air and exchanged for government bonds? If you say they are buying them from the primary dealers then where did the primary dealers (banks) get the money for the bonds unless their accounts were credited with reserves by the Fed by the purchase of all those nasty "assets" that they had on their books. Somewhere along the line it seems that money must be created to finance the purchase of bonds. How can you expand base money within a closed loop system?

[Gumby]

Gumby,

I don't believe Federal Reserve (paper) notes are ever used, or even could be used. Warren Mosler points out that "the funds to pay taxes and buy government securities come from government spending." Remember, the Treasury is also printing money into existence every time it prints up a bond.

Treasury Bonds are typically purchased with the money from previous government spending. This is important, and necessary, since the Fed itself is not allowed to purchase Treasuries directly from the Treasury (unlike Japan's BOJ, which is allowed to purchase directly from its Treasury).

The Fed must purchase all assets, including Treasuries, from Primary Dealers. And the Primary Dealers must acquire Treasuries on their own — either from reserves that have accumulated from previous government spending (or from short term loans from the Fed if the reserves don't already exist for some reason). The key point is that the money to buy Treasuries usually comes from the Treasury itself. Due to the mandatory Fed/Primary Dealer relationship, the Fed does not even have the ability to monetize the debt (as Japan's BOJ already does).

Where does the money come from that the Fed uses to undertake Quantitative Easing? Isn't this just money printed out of thin air and exchanged for government bonds?

Yes. That's correct. But the point is that the Primary Dealers typically use money from Treasury spending to buy the bonds first. In some situations the Fed can loan the Primary Dealers money to buy bonds from the Treasury, but the Promary Dealers need to pay back those loans with private sector money. The point is that the private sector is ultimately responsible for purchasing Treasuries. And the only way that can happen is with money from government spending via the Treasury.

If you say they are buying them from the primary dealers then where did the primary dealers (banks) get the money for the bonds unless their accounts were credited with reserves by the Fed by the purchase of all those nasty "assets" that they had on their books. Somewhere along the line it seems that money must be created to finance the purchase of bonds. How can you expand base money within a closed loop system?

The Fed doesn't have the ability to increase net financial assets in the private sector. The only thing the Fed can do is change the composition of those net financial assets. In other words the Fed does monetary policy and the Treasury does fiscal policy.

I am writing from my phone, so it's difficult to elaborate right now. But if you're curious about how the Fed and Treasury coordinate to keep the presses running, read this:

http://pragcap.com/mmt-and-the-operatio ... ary-system

Scott Fullwiler is a leading expert on Treasury/Fed operations. He's testified before Congress on such matters.

[doodle]

Thanks for article, Gumby. I will read it today.

The Fed doesn't have the ability to increase net financial assets in the private sector. The only thing the Fed can do is change the composition of those net financial assets. In other words the Fed does monetary policy and the Treasury does fiscal policy.

But the Fed's member banks can increase net financial assets by loaning money into existence or choosing not to through the fractional reserve banking system. So although the banks (headed by the Fed) don't have control over base money (M0) they do have control over the M1 -M3 numbers. Because the Fed controls interest rates they also control the propensity of their member banks to make loans...so in a circuitous way, they (the Fed) do control the money supply to some degree.

[brick-house]

gumby wrote:

It's determined by Congress's budget — as it should be. And We the People elect Congress to decide those matters. So, in a sense, we as a country decide on spending. Unfortunately, Congress doesn't always do things properly. Lobbyists corrupt Congress. And sometimes Congress spends to much and sometimes it spends to little. The confusion and misinformation over debt doesn't help matters.

Totally confused by MMT.  I understand Ancient Alien Astronaut Theory better.  Some questions:

What is the proper amount of spending? 
How is that determined? 
How is that corrupted by lobbyists?
What are the consequences of spending the incorrect amount every year? 
So is the current deficit, the 15 trillion in debt, plus the unfunded liabilities of social security and medicare - a problem or nothing to worry about?

[stone]

brick-house, all of your concerns are very valid. MMT is mostly just a description of what is being done to us as we speak. I suppose it is a case of don't shoot the messenger. Government spending is corrupted by lobbyists if we let that happen. Government spending directs what resources get taken to do what. Spending incorrect amounts causes resources (including human resources) to either get used for the wrong things or to be left unused and go to waste. Spending on things to the extent that supply gets swamped (rather than increasing to meet demand) will push up the price.

[melveyr]

Thanks for article, Gumby. I will read it today.

The Fed doesn't have the ability to increase net financial assets in the private sector. The only thing the Fed can do is change the composition of those net financial assets. In other words the Fed does monetary policy and the Treasury does fiscal policy.

But the Fed's member banks can increase net financial assets by loaning money into existence or choosing not to through the fractional reserve banking system. So although the banks (headed by the Fed) don't have control over base money (M0) they do have control over the M1 -M3 numbers. Because the Fed controls interest rates they also control the propensity of their member banks to make loans...so in a circuitous way, they (the Fed) do control the money supply to some degree.

Hi Doodle,

Focus on the "net" part. Bank's actually don't create "net" financial assets. No one in the private sector can because no one in the private sector has the right to print money.

When a bank makes a $1,000,000 loan, they have created an asset AND a liability. So when you net these out (thinking about the aggregate private sector), you get 0. Think about calculating your net worth; you take the value of your assets and subtract out your liabilities.

Net financial assets is basically just the "net worth" of the private sector denominated in dollars.

[Gumby]

But the Fed's member banks can increase net financial assets by loaning money into existence or choosing not to through the fractional reserve banking system.

Ah, but banks don't increase net financial assets in the private sector. Every loan in the private sector nets to zero when the loan is paid off.

So although the banks (headed by the Fed) don't have control over base money (M0) they do have control over the M1 -M3 numbers. Because the Fed controls interest rates they also control the propensity of their member banks to make loans...so in a circuitous way, they (the Fed) do control the money supply to some degree.

Yes, but they don't have any way to increase net financial assets in the private sector. But they can increase the number of financial assets that do net to zero — which is hardly inflationary. But, keep in mind that you don't buy Treasuries with M1, M2 or M3. Treasuries are only paid for with base money that's held by your bank's reserve account at the Fed. In other words, the money supply level that the Treasury creates is the same money that is used to pay for its bonds or pay taxes with. The Treasury doesn't want the money it deletes from the private sector to be comprised bank loans — that wouldn't make any sense and would be dangerous.

Here's an operational example from Warren Mosler:

Assume the US government bought a foreign vehicle for $50,000. The government has the car, and a non resident has a bank account with $50,000 in it, mirroring the $50,000 his bank has in its account at the Fed that it received for the sale of the car. The non resident now decides that instead of the non interest bearing demand deposit, he’d rather have a $50,000 Treasury security, which he buys from the government.

Bottom line- the US government gets the car, the non resident holds the government security. Now what exactly does the government owe? When the $50,000 security matures, all the government has ‘promised’ is to replace the security held at the Fed with a $50,000 (plus interest) credit to a member bank reserve account at the Fed. One financial asset is exchanged for another. The Fed exchanges an interest bearing financial asset (the security) with a non interest bearing asset. That is the ENTIRE obligation of the government regarding its securities. That’s why debt outstanding in a government’s currency of issue is never a solvency issue.

[Gumby]

Some questions:

What is the proper amount of spending?

The proper amount of spending has to do with avoiding inflation. The idea is to make sure people don't have too much disposable income that can't be absorbed by hiring more workers. Watch this video for a 9-minute explanation:

http://modernmoney.wordpress.com/2011/1 ... is-simple/

How is that determined?

See above.

How is that corrupted by lobbyists?

Lobbyists essentially bribe Congress for handouts (via tax loopholes or spending) whether those handouts are warranted or not. And Congressmen actually extort the top 1% for money so that they can finance their re-election campaigns. So, the top 1% tend to decide policy much more than they should. Ideally the spending should not be wasteful and should be targeted to maximize employment and output. In other words, spending on education and scholarships is probably a better use of fiat money than building bombs and bailing out big banks. But, if unemployment is low, a government shouldn't be pumping more money into the private sector — lest it would cause inflation. high I'm oversimplifying, but hopefully you get the idea.

What are the consequences of spending the incorrect amount every year?

Inflation or deflation. It's much easier to see how these happen when you understand MMT.

So is the current deficit, the 15 trillion in debt, plus the unfunded liabilities of social security and medicare - a problem or nothing to worry about?

There's nothing to worry about from a solvency standpoint. The government isn't going to run out of money to pay its bills. That would be like worrying that a scorekeeper is going to run out of points at a football game. The scorekeeper doesn't need to borrow or collect points to create more points. The only thing we need to worry about is inflation or deflation — which spending or taxing can help control.

The best example of MMT I can give you is the following analogy (which I didn't write):

"MMT (Modern Monetary Theory) focuses on the way monetary systems such as ours operate and the implications from this knowledge.

Is MMT advocating a free lunch? Is it saying that we can simply spend our way to prosperity? No! It instead identifies the real as opposed to imaginary constraints on economic growth.

Think about our economy as of a car that needs to get from where we're now to its destination – Prosperity! MMT recognizes that the car has a gas pedal and a brake pedal and a steering wheel that if used right can get us to our destination. Think of the gas pedal as injection of money into the economy (also known as "spending"), the brake as removal of money from the economy (also known as "taxation") The driver is the government and it can steer the car in various directions. Other countries have their own economies, so, think of other cars sharing the roads with yours.

The "deficit-hawks" believe that big deficits are always bad. Deficit is the difference between spending and taxation. So, their position is similar to a belief that too much pressing on gas (without counterbalancing by braking) causes crashes. While it is true that if you go too fast you are more likely to crash, pressing on gas and going too fast are two separate things. For example, when the car is going uphill or stalling, you really need to step on the gas to get it moving. So, deficit hawks in their myopia ignore the road conditions. They concentrate on numbers that are meaningless without a context. Additionally, their fear of spending prevents the economy from realizing its potential. Either they'd have you press on the gas very gently (spend less) or brake too often (tax more), without realizing that they might be causing the car to move too slowly and by the time you'd get to the destination Prosperity – if you got there – the rest of the world was there long ago and left to even further destinations.

The deficit hawks don't know how the car really works. They don't even understand that the deficit should be automatically adjusted to road conditions. Imagine if somebody told you you should never press on gas continuously without braking for more than, say, 1 mile. You'd laugh and say: this depends on where you drive and a myriad of other things!

What MMT is saying, is that you should not be shy to press on the gas when needed, to press on the brakes when needed and to steer the wheel as needed. MMT allows you to take the full potential of the car, without imposing arbitrary constraints (such as "pressing on the gas is bad" or "pressing on the brakes is bad"). Is there a fool-proof way to get to the destination? No, there is always an risk and sometimes the driver will make a mistake and sometimes crashes can even occur because of other driver's actions. But have you ever seen a fool-proof system?"

Much like a US State or local government, Eurozone nations owe debt in a currency they can't print more of, so they can't take part in these MMT rules of a true fiat currency. In other words, States, local governments, and Eurozone nations have to be careful, because they can all run out of money.

[MachineGhost]

I read all 117 pages of Mosler's Introduction to MMT plus the Wikipedia entry.  Here are my objections:

Fraud 1: Tax revenues are always constant as percentage of GDP, so what actual economic data is there that manipulating taxes regulates aggregate demand ("spending power")?

Fraud 2: Why should Congress have influence over the distribution of real goods and services, by decree, instead of hundreds of millions of individuals in the free market?

Fraud 5: The more we import, the more the foreigners will use their U.S. savings to purchase and own U.S. real assets until one day our children will wakeup homeless on the lands of their forefathers.  Why is this not a crisis?

Fraud 6: What actual economic data is there that raising taxes cools down a booming economy ("capacity constraints") as opposed to monetary policy?

General: How will MMT address the future problem of simultaneous increased aggregate demand for real goods & services and decreased aggregate demand for money?

Other than those, a) I don't believe that money is something only the state can create which is a key requirement for MMT; b) MMT is just a more pure form of Keynesianism than the other Keynesianism schools, i.e. it is still all about the demand side and ignores the supply side; c) I suspect MMT believes in the Philips Curve (which only exists under a gold standard) but it is hard to deduce.

All that being said, the reality is this is the money system that we currently have, so we might as well use it to society's advantage instead of fighting for anarchronisms that just perpetuate the same inequities.  

MG

[BearBones]

When a bank makes a $1,000,000 loan, they have created an asset AND a liability. So when you net these out (thinking about the aggregate private sector), you get 0. Think about calculating your net worth; you take the value of your assets and subtract out your liabilities.

Sheepishly venturing into this discussion with about a 80 economics IQ (IQ for other things is about 90, as you can see from my other posts)... For example, when I hear of M1-M3, I think you all are talking about rifles or BMWs or something!

In order to make a loan in a fractional reserve system, a bank holds only holds the fraction in the fractional reserve, right? So If I deposit $100 in my bank account in a 10% FR system, the bank can make a loan of $90 to someone else. If the second person deposits some or all of the $90 in the bank, then more loans can be made. If this process continues, $900 can be created by my original $100 deposit, not including interest obligations.

So here is what I don't get:
Where does this money come from?
What if we enter a deep recession and lots of people default on their loans, how is the money recaptured so that "when you net these out, you get 0."
What if we enter a deep recession  and lots of people want their money from the banks, where does the money come from so that so that "when you net these out, you get 0."

If someone cares to reply, can you word it so that someone with an 80-90 IQ can understand it? Surely I am not the only one out there clueless about economics and monetary policy.

[brick-house]

gumby quoted some other quote:

What MMT is saying, is that you should not be shy to press on the gas when needed, to press on the brakes when needed and to steer the wheel as needed. MMT allows you to take the full potential of the car, without imposing arbitrary constraints (such as "pressing on the gas is bad" or "pressing on the brakes is bad"). Is there a fool-proof way to get to the destination? No, there is always an risk and sometimes the driver will make a mistake and sometimes crashes can even occur because of other driver's actions. But have you ever seen a fool-proof system?"

When do politicians corrupted by lobbyists ever press on the brakes?  Especially, if there is a convenient theory that states solvency is not an issue?  

Don't these cars have to be traded in once in a while (1944, 1971) for a new model?  

gumby wrote:

There's nothing to worry about from a solvency standpoint. The government isn't going to run out of money to pay its bills. That would be like worrying that a scorekeeper is going to run out of points at a football game. The scorekeeper doesn't need to borrow or collect points to create more points. The only thing we need to worry about is inflation or deflation — which spending or taxing can help control.

So don't worry, be happy.  If no worries, then let's have more guns and butter, plus another trip to the moon.  

I just can't shake the feeling that we are in Economic Jurassic Park and the puddle just started shaking...    

[MachineGhost]

In order to make a loan in a fractional reserve system, a bank holds only holds the fraction in the fractional reserve, right? So If I deposit $100 in my bank account in a 10% FR system, the bank can make a loan of $90 to someone else. If the second person deposits some or all of the $90 in the bank, then more loans can be made. If this process continues, $900 can be created by my original $100 deposit, not including interest obligations.

I can answer this!  MMT doesn't believe in "fractional reserve banking" which I believe was an original tenant of Keynes with his money multiplier.  In other words, "fractional reserve banking" is a hypothesis or theory that MMT says does not really exist.

MG

[MachineGhost]

So don't worry, be happy.   I just can't shake the feeling that we are in Economic Jurassic Park and the puddle just started shaking...    

I can't shake the feeling this is exactly what the bankers wanted when they set up the Federal Reserve back under a gold standard.

Even if not, it seems logical to me that MMT is the next evolutionary step of money.  After all, money is an epheremal concept so its not that far-fetched to be using tokens for a medium of exchange.  Value is always and everywhere subjective.

It doesn't mean I approve of statism but my utopia is a long ways off from existing so reforming and optimizing the current system we have doesn't seem all that bad.

MG

[BearBones]

The best example of MMT I can give you is the following analogy (which I didn't write):

"MMT (Modern Monetary Theory) focuses on the way monetary systems such as ours operate and the implications from this knowledge.

Is MMT advocating a free lunch? Is it saying that we can simply spend our way to prosperity? No! It instead identifies the real as opposed to imaginary constraints on economic growth.

Think about our economy as of a car that needs to get from where we're now to its destination – Prosperity! MMT recognizes that the car has a gas pedal and a brake pedal and a steering wheel that if used right can get us to our destination. Think of the gas pedal as injection of money into the economy (also known as "spending"), the brake as removal of money from the economy (also known as "taxation") The driver is the government and it can steer the car in various directions. Other countries have their own economies, so, think of other cars sharing the roads with yours.

The "deficit-hawks" believe that big deficits are always bad. Deficit is the difference between spending and taxation. So, their position is similar to a belief that too much pressing on gas (without counterbalancing by braking) causes crashes. While it is true that if you go too fast you are more likely to crash, pressing on gas and going too fast are two separate things. For example, when the car is going uphill or stalling, you really need to step on the gas to get it moving. So, deficit hawks in their myopia ignore the road conditions. They concentrate on numbers that are meaningless without a context. Additionally, their fear of spending prevents the economy from realizing its potential. Either they'd have you press on the gas very gently (spend less) or brake too often (tax more), without realizing that they might be causing the car to move too slowly and by the time you'd get to the destination Prosperity – if you got there – the rest of the world was there long ago and left to even further destinations.

The deficit hawks don't know how the car really works. They don't even understand that the deficit should be automatically adjusted to road conditions. Imagine if somebody told you you should never press on gas continuously without braking for more than, say, 1 mile. You'd laugh and say: this depends on where you drive and a myriad of other things!

What MMT is saying, is that you should not be shy to press on the gas when needed, to press on the brakes when needed and to steer the wheel as needed. MMT allows you to take the full potential of the car, without imposing arbitrary constraints (such as "pressing on the gas is bad" or "pressing on the brakes is bad"). Is there a fool-proof way to get to the destination? No, there is always an risk and sometimes the driver will make a mistake and sometimes crashes can even occur because of other driver's actions. But have you ever seen a fool-proof system?"

Much like a US State or local government, Eurozone nations owe debt in a currency they can't print more of, so they can't take part in these MMT rules of a true fiat currency. In other words, States, local governments, and Eurozone nations have to be careful, because they can all run out of money.

OK, getting more brave, despite my low economics IQ. For example, when I hear of MMT, I think you are talking about Medium Medium Tex (kind of like north north west).

With the car analogy, what if stepping on the gas more and more generates less and less net effect (due to wind resistance, etc.), and you eventually run out of gas before the destination? In the case of spending and debt, can't an economy spend so much and accumulate so much debt that the interest on the debt becomes too large a percentage of spending, dragging down the whole system?

[moda0306]

brick-house,

The main two worries are 1) inflation, and 2) misallocation of real resources.  These are both very real concerns.  MMT is very much NOT Keynesianism, purified.  MMT does not believe, like PK does, that we could "fix our economy" by preparing for an Alien attack.  

Gold standards don't prevent these.  False ideas about how are money works don't, either.  Massive wars and horrible atrocities were engaged in under gold standards.  The government "puts the breaks on" when it allows surpluses to develop when an economy is otherwise trying to grow, but can't because their net financial balance sheets are not able to sustain moderate economic shocks (like the tech bubble).

Keep in mind, many MMT'ers think a decent part of the equation is lowering taxes.... not simply spending more all the time, and they fully acknowledge that money can be spent in very unproductive ways.  MMT says that government shouldn't spend unless there's some good being accomplished by it.  Digging ditches and filling them back in is very unappealing to MMT.

What they don't allow is letting false beliefs of paper limitations that we don't have skew our beliefs towards taxation and spending.  If Social Security has a problem, it's "will we have enough productive and motivated (under a payroll tax) workers to provide all the goods and services that our retirees need," not whether some imaginary trust fund has run out.  

[brick-house]

Moda0306 wrote: 

Keep in mind, many MMT'ers think a decent part of the equation is lowering taxes.... not simply spending more all the time, and they fully acknowledge that money can be spent in very unproductive ways.  MMT says that government shouldn't spend unless there's some good being accomplished by it.  Digging ditches and filling them back in is very unappealing to MMT.

Do congressman corrupted by lobbyists and chicken hawks ever think that spending does not accomplish good. 

Moda0306 wrote:

What they don't allow is letting false beliefs of paper limitations that we don't have skew our beliefs towards taxation and spending.  If Social Security has a problem, it's "will we have enough productive and motivated (under a payroll tax) workers to provide all the goods and services that our retirees need," not whether some imaginary trust fund has run out. 

We have this problem.  We have an upside down demographic pyramid.  Baby Boomers want their SS and Medicare...

What does false beliefs of paper limitations mean? 

[Gumby]

I can answer this!   MMT doesn't believe in "fractional reserve banking" which I believe was an original tenant of Keynes with his money multiplier.  In other words, "fractional reserve banking" is a hypothesis or theory that MMT says does not really exist.

Not quite. Fractional Reserve banking exists. However, the Federal Reserve says that the Money Multiplier doesn't really exist as we know it:

http://www.federalreserve.gov/pubs/feds ... 041pap.pdf

This isn't a key point of MMT. It's just the reality of our banking system.

If this process continues, $900 can be created by my original $100 deposit, not including interest obligations.

Right. A tabular example (using a slightly different reserve requirement and simplified by using a separate bank for each loan) might look something like this:

[align=center][/align]

Notice how small the subsequent loans become smaller and smaller. In reality, the multiplier rarely ever gets beyond 3 times.

So here is what I don't get:
Where does this money come from?

The starting money is known as the monetary base. Also known as "base money," "high powered money," or "M0". It's spent into existence by the government. You need base money to back bank loans.

What if we enter a deep recession and lots of people default on their loans, how is the money recaptured so that "when you net these out, you get 0."

Right. This is known as deleveraging. Often this creates a hole in the economy because loans need to be paid back with money that doesn't actually exist in the economy (since either new loans weren't created or money didn't circulate through the economy fast enough before the loans were due). In this case, if you want to prevent the private sector from defaulting itself into oblivion, you need to inject base money into the economy, via government spending.

What if we enter a deep recession  and lots of people want their money from the banks, where does the money come from so that so that "when you net these out, you get 0."

Well, a deep recession implies that money is tight and people don't actually have as much money in their accounts as they wished they had. The Fed has the ability to swap the private sector's financial assets (such as Treasuries) and convert them to dollar bills if more people are demanding cash from ATMs. This doesn't change the total financial assets in the private sector. It just changes the composition of those total assets.

[Gumby]

When do politicians corrupted by lobbyists ever press on the brakes?  Especially, if there is a convenient theory that states solvency is not an issue?

This is a concern for any economic framework. Every economic framework depends on politicians being smart.

So don't worry, be happy.  If no worries, then let's have more guns and butter, plus another trip to the moon.

If unemployment is low, then it would make sense for the government to use its fiat money to invest in education, technology, infrastructure and things that make our lives more efficient, productive and attract private investment within our borders.

It's about spending wisely. If a moon shot were to cause that kind of stimulative effect, so be it. Far better use of money than bailing out irresponsible banks.

[moda0306]

It means looking at imaginary trust funds to decide whether we are "bankrupt" or not.

If we have too few workers to produce the needs of retirees, we will by definition be at full capacity with very low unemployment.  Something we hardly have now.

[stone]

The bottom line is that money is just an administrative tool. It is a bit like how ants use pheromones to induce other ants to collect grass seeds or fight off scorpions or whatever. Our current monetary system has become very complicated and difficult to understand but the job it has to do (but in many ways fails at) is simply to ensure that the work that we all need to do to provide for each other gets done for mutual benefit.

I think many of the complicated aspects have actually developed BECAUSE they make everything hard to follow. If you want to game the system, make sure you twist it so that other people get more confused than you are. Basically the historical development of money has just been layering on of more such twists IMO.

To my understanding the most basic aspects of our money system such as exponential expansion are merely such twists purely there to cause bamboozlement and encript the system rather than for any practicle use.

[BearBones]

Right. A tabular example (using a slightly different reserve requirement and simplified by using a separate bank for each loan) might look something like this:

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The starting money is known as the monetary base. Also known as "base money," "high powered money," or "M0". It's spent into existence by the government. You need base money to back bank loans.

Thanks for the clear, simple explanations, Gumby! So, in your table, it looks like this $100 deposit turned into $457.04 (89.25 in reserves at banks, 357.05 loaned out, and 10.74 final deposit). And even if the multiplier were 3, the banks created the money didn't they, depending on how much was "loaned into existence?" Yet the M0 is "spent into existence" by government. How are these connected?