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Bill Mitchell on the Austerity War

letsgetitdone's picture

A number of people including myself have been furiously blogging for many months now on the world-wide austerity war that most Governments are fighting against the well-being of their citizens. The position we're blogging is that there is no deficit problem requiring fiscal austerity for those Governments including the United States that issue their own non-convertible currencies with floating exchange rates, and have no external debt in currencies not their own; and also that there is no fiscal sustainability problem for these Governments because they cannot run out of money, and therefore the level of their deficits, national debts, and debt-to-GDP ratios are just irrelevant from a real fiscal sustainability viewpoint. I've offered a number of posts supporting this argument including here, here, here, and here. Others, including Bill Mitchell, Warren Mosler, Randy Wray, Stephanie Kelton, Pavlina Tcherneva, Jamie Galbraith, Marshall Auerback, Mike Norman, Matt Franko, Tom Hickey, and Scott Fullwiler have filed numerous posts and articles on the subject.

It's been very hard to get our “deficit owl” views aired beyond the blogosphere, and into the publications of the progressive establishment. These publications publish pieces that reflect a “deficit dove” point of view, advocating spending now during the recession, but a long-term fiscally responsible” plan to solve “the deficit problem” and reach “fiscal sustainability,” by making the tax system much more progressive than it is today, and cutting corporate welfare. Implicit in the deficit dove view, in agreement with “the deficit hawk” view that is at the heart of the austerity propaganda machine, is the idea that the United States must raise money by taxing or borrowing to fund its spending, and also that surpluses, in the abstract, are a good thing, and that deficits are undesirable, and unsustainable, in the long term.

Today was a good day in the fight against austerity. One of the leading “deficit owls,” and a leading figure in the Modern Monetary Theory (MMT) School of Economics, Professor Bill Mitchell of the University of Newcastle, Australia published an article in The Nation entitled “Beyond Austerity.” Jamie Galbraith publishes there occasionally, but has pulled his punches in expressing the MMT point of view. This article, on the other hand, is an admirable summary of many of the main points of MMT as they apply to the issues of austerity and fiscal sustainability. It touches every base in the MMT argument, at least in outline.

Read it if you care about what progressives can do to bring back a prosperous America, where everyone can work, get the health care they need, and where the level of inequality is reduced enough to remove the threat to democracy from the rich that we're experiencing today.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

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letsgetitdone's picture
Submitted by letsgetitdone on

Most of Bill's blog posts are much heavier than the Nation article. But his blog is an astonishingly complete source of knowledge about MMT. Bill is just stunningly prolific and also brilliant.

rapier's picture
Submitted by rapier on

The mechanisms of funding US Treasury obligations and the mechanisms of creating money because of law and tradition do not permit the Federal Government simply issue dollars to pay its bills. Now such a system is perfectly possible to design but it isn't the one we have.

Instead we have the Federal Reserve central bank which can issue new money only in exchange for debt instruments from banks. To wit it buys Treasury notes from banks and the banks customers with the banks acting as agents. The thing is the Treasury has nothing to do with it. The Fed is precluded by law from issuing money to buy Treasury notes and bonds from the Treasury itself. And furthermore neither the Fed nor the Treasury can just 'print' money to pay the governments bills.

No central bank or government of any modern developed nation has a system which allows the government to 'print' money to pay it's bills. This is not a neoliberal or conservative plot but goes to the very heart of what money is. Money simply 'printed' is likely to be seen as having no value in a purely fiat system where the money is not made of valued metals or currency backed by gold or silver. So in perhaps an ad hoc manner, totally bank centric mind you, a system evolved that money was only created to buy something of value, ie. debt, ie. the debt of national Treasuries (mostly).

While it is all well and good to say the government can 'print' money to pay its bills there is no mechanism nor proposed mechanism to do so at the current time. So it's time to get to work and propose the new laws and mechanisms which would supersede or exist alongside the current system.

letsgetitdone's picture
Submitted by letsgetitdone on

When the claim is made that the Government is unlimited in its currency issuing capability, that is meant to include the Congress. So, while it is true that Congress constrains the Executive in various ways: 1) the requirement for Treasury to float debt instruments when it wants to deficit spend; 2) the Treasury's inability to run a negative balance in its Federal Reserve Account; 3) the debt limit imposed on the Executive which constrains spending even when Congress has already appropriated money; and 4) the Constitutional Requirement Congress must appropriate spending before it occurs; it is also true that since Congress is part of the Government it follows that a Government sovereign in its own currency isn't constrained in its ability to spend except by those constraints it imposes on itself and that are political in nature.

I've written a huge amount on this, as have other MMT writers. Here are some recent pieces of mine that deal with self-imposed limits:

and the series it summarizes.

and the very extensive discussion (244 comments) at Warren Mosler's site here:

Apart from the general point you make about inability for the Government to spend what it likes, which these posts show is not correct. I'll comment on some specific points:

Instead we have the Federal Reserve central bank which can issue new money only in exchange for debt instruments from banks. To wit it buys Treasury notes from banks and the banks customers with the banks acting as agents. . . .

The Federal Reserve can increase the money supply by issuing new reserves to banks. Nor is it limited in its ability to do so by a requirement that it buy only debt instruments. It can also buy any other assets it decides it should buy in exchange for its new money. The Fed did this recently to ease the banking crisis following the crash of 2008.

. . . The thing is the Treasury has nothing to do with it. The Fed is precluded by law from issuing money to buy Treasury notes and bonds from the Treasury itself. . . .

That's right but: a) the Fed (the Board of Governors and its staff, and the FOMOC are part of the Government); and b) the Fed can at its option swap money it creates for Treasury notes and bonds held by banks and others. It can even nudge those swaps along by raising the requirements for cash reserves held by the banks, this forcing them to trade bonds for cash. So, the Fed can clear old bonds and notes out of the market, clearing the way for new debt issuance, even if it cannot directly buy notes and bonds just issued from the Treasury.

And furthermore neither the Fed nor the Treasury can just 'print' money to pay the governments bills.

Well, strictly speaking, Governments don't "print" much money anymore. They electronically credit private sector accounts instead. Furthermore, the term "printing money" is a hangover for the days when money was backed by gold or other commodities. "Just printing money" referred to making it without first acquiring the gold or silver or other commodities needed to back it. So, there was a contrast between old money, which was backed, and the merely printed money which was not.

To use the same expression now, as you do in your objection above is highly misleading, and while strictly true does not highlight the fact that the only reason why the Government can't create money up to the level of Congressional authority to spend is because of constraints the Government places on itself. So, two points:

First, these days all Government money is fiat money. There is no distinction between old money and newly created money in this sense, it is all fiat money and the new money created is worth no more and no less than the old money in the absence of inflation.

Second, assuming the Government did create money without debt issuance (the closest thing you can get to the old "printing money") to pay its bills, would the effect be bad or intolerable, or would it be good? In the present circumstances, I think it would be good. Read my pieces linked above on stopping debt issuance. In addition, read:





This last post shows that whether debt is issued or not, Government deficit spending adds to net financial assets in the non-Government sector. The net financial assets added are not money but debt instruments. But 1) debt instruments and money are very similar, see:

and 2) the Federal Reserve periodically converts debt instruments to cash reserves through its QE swaps.

Sorry for this long response, and for taking the opportunity to provide a bunch of links that people may want to use to become more cognizant of the issues here. The bottom line here though, is that there is no Governmental austerity problem.

The Government is just choosing to practice austerity and to scare people into supporting its initiative. The real purpose of all this is to safeguard the value of the net financial assets of those who already have them. These powerful people and corporations believe that the issuance of more money and its distribution to people will lower the value of their holdings, and they trying very, very hard to protect them. They are believers in the Quantity Theory of Money, refuted by Keynes in the 30s, and they are also believers in plutocracy and not Democracy. They want all financial and real assets concentrated in very few hands. The austerity push is just another phase of the war of the rich against most of us.

rapier's picture
Submitted by rapier on

"The Federal Reserve can increase the money supply by issuing new reserves to banks." 'Issuing reserves' has me a bit stumped but the money supply that counts, out in the economy only creates economic activity if the banks lend it. Setting aside the deeper issues of if more credit is the answer and why do we have to depend upon the banks the fact is that banks don't want reserves they are piling their reserves into the Fed at breakneck speed. Now up to $1.3 trillion. Not lending to customers nor even the Treasury. It just sits at the Fed earning 2% I think.

In the 20's the Fed held few Treasuries, probably because there were not that many of them, and the gorged on Bankers Acceptances. Running their balance sheet up and down crazily which helped set the stage for the panic of 29. My point was and still is the Fed has to purchase a debt assets to create bank cash balances. That is why those quaint things in your wallet say Federal Reserve Note. All money in the system is 'backed' by debt.

So I say the limits or constraints upon money and money creation are artificial sure. Money is always artificial, an abstraction, even gold money. The modern debt based money is the only money extant in the world besides a few coins and besides the hard money fans no other money system has gotten beyond remote corners of the internet. That will continue to be the case unless or until the system dislocates for its power which serves the elites will not be defeated by political opposition. It will only lose power because of internal failure of the system. Well that is my contention anyway.

Waxing philosophical which is my wont, it little matters what money system is used for any system will have flaws and any system can and will be captured for the benefit of the few who will demand then that we serve the system.

I'm no fan or defender of the system nor the status quo. Evolution of the monetary system through democratic action isn't in the cards. At my age I don't look forward to revolution or hope for it but that is what it will take.


Money created from nothing by illegitimate and corrupt government is no fix. More money seems attractive if only it was in the right place some think but I believe that is magical thinking.

letsgetitdone's picture
Submitted by letsgetitdone on

There's not much more to say then, since I'm not ready to wax philosophical. Perhaps we can agree on the idea that the Fed cannot by itself create net financial assets since it is forbidden to deficit spend. On the other hand, the Treasury does deficit spend, and in doing so, as Stephanie Kelton and others have shown, it creates net financial assets in the private sector.

As to whether the Government can create money from nothing and do good with it. That depends on what its spending is for, and whether the demand created is injected into a slack or a full employment economy. There's plenty of empirical evidence that good things are done by Government deficit spending including the recent studies of the impact of the inadequate Recovery Act passed in 2009. So, your philosophical approach to this counter-factual and a historical. You can't blow off the facts as so many conservatives do. Deficit spending always works if it's big enough and if it's not so great that it exceeds the capacity of the economy to absorb.

Finally, coming back to the issue of deficit spending without debt issuance vs. deficit spending with debt issuance. Both involve the Federal Government, the Treasury, injecting money into the private sector, however, with debt issuance an equal amount of money goes back into the Government, leaving the debt instrument as the net financial asset created by deficit spending, whereas without debt issuance (i.e. just "printing money") additional reserves would be injected into the private sector through deficit spending, but nothing would come back to the Government.

Now, those who insist on debt issuance think that it's less inflationary than just "printing money." But to believe that you have to believe that cash injected into the economy is more inflationary than debt instruments injected into it. However, there's no reason to believe that, since debt instruments can be used as collateral for bank loans even if one doesn't have cash, and as you and I both know, when loans are made by banks that creates deposits, i.e. money, out of thin air. So whether it's cash or debt instruments Government deficit is likely to be equally inflationary, or not, depending on whether the Economy is in full employment.

beowulf's picture
Submitted by beowulf on

Money simply 'printed' is likely to be seen as having no value in a purely fiat system where the money is not made of valued metals

Like platinum? :o)

The Secretary of the Treasury has the legal authority to deposit at the Fd jumbo platinum coins of any denomination and in any quantity. That can be done without Congress doing anything, the ball's in the Secretary's court. If Congress wanted to do good and not evil, the simplest monetary reform (which frankly Dennis Kucinich should have introduced as a 1 page monetary reform bill instead of his rather longer actual bill) is delete subsection b of the US currency notes statute. Tsy could print (paper or electronically) money to fund "deficit spending" and since US Notes don't count towards the debt limit, that will no longer hang like the Sword of Damocles over the Dept of Tsy.

OK, since we still have white space on that single page bill. State that neither Tsy shall issue debt nor the Fed pay Interest on excess Reserves at any rate of interest that exceeds the short term interest rate as of the date of the most recent Declaration of War by Act of Congress. That would be June 5, 1942, against Romania (I learned that today actually). As it happens, April 30, 1942 the Fed capped short term interest rates at 0.375%, where it remained until 1951. The short term rate is currently lower (0.25%) but historical examples are always instructive. Even at 0.375%, we would cut projected debt service payments by more than $4.5 trillion over the next decade.

31 USC 5115. United States currency notes

(a) The Secretary of the Treasury may issue United States currency notes. The notes—
(1) are payable to bearer; and
(2) shall be in a form and in denominations of at least one dollar that the Secretary prescribes.

(b) The amount of United States currency notes outstanding and in circulation—
(1) may not be more than $300,000,000; and
(2) may not be held or used for a reserve.

letsgetitdone's picture
Submitted by letsgetitdone on

as always, beowulf. That would be the simplest thing for Congress to do; and if Kucinich had his head on straight, then that is what he would have done.

In the meantime, it would be good to do what you proposed earlier, namely use coin seigniorage, explained in the FDL post you linked to above, also to be found here, which triggered the great discussion at Warren Mosler's site here.

beowulf's picture
Submitted by beowulf on

Yeah, Kucinich's 100% reserve banking isn't a bad idea per se, but it runs banks (including community banks and credit unions) out of business instead of focusing on the two big issues from a MMT standpoint: 1. There's no reason to constrain govt fiscal policy with a debt ceiling, 2. There's no reason for the US Government to pay interest (other than the nominal amount necessary to keep short term interest rates just above zero) to borrow its own money. As I've analogized to healthcare before. If Medicare for All can cost-effectively universal care while leaving private medical practices to run pretty much as they are now, why go a step further for a VA hospital for all that would eliminate (unnecessarily) private practices? No reason to get bankers or doctors any more riled up than is necessary.

Of course, though Kucinich doesn't seem aware of it, his monetary reform plan would simply bring back Milton Friedman's "money supply" targeting-- which Paul Volcker discovered is simply not a feasible way to operate a central bank. Since the early 1980s, the Fed has been more effectively managing monteary policy with interest rate targeting. This can be down by targeting a low interest rate (but not at a pure zero rate), thus the 0.375% cap. In fact, Friedman endorsed a monetary reform plan quite similar (though not as ambitious) as Kucinich's:

Step 1 is right, resume issuance of US Notes. Its Step 2 (move to 100% reserve banking) where things would fall apart. At one time (just after WWII), Friedman was basically a full-on Keynesian. Randy Wray discusses a 1945 proposal of Friedman's that is not too far out of paradigm with MMT (with Randy's trade deficit caveat included, supporting a "balanced budget at full employment" is not a bad way to market MMT to the politicians and the public):

The title of this note is drawn from Milton Friedman's 1948 article, "A Monetary and Fiscal Framework for Economic Stability", which I've always liked. (Friedman 1948) In that piece, he put forward what he thought was a new proposal according to which the government would run a balanced budget only at full employment, with deficits in recession and surpluses in economic booms. Nothing surprising there-that was incorporated in just about all post-war orthodox thought, until the Democrats decided to become fiscally responsible and advocate permanent budget surpluses come what may... Friedman had wanted a balanced budget at full employment, which is fine so long as a nation has balanced trade (and no desire to net save domestically-as we'll see). With a trade deficit, the budget has got to offset it to avoid a domestic private sector deficit. If full employment coincides with a trade deficit of 5% of GDP, then the appropriate budget stance is a deficit of 5% at full employment... Otherwise, full employment is unsustainable-for both flow and stock reasons.