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"Money is a spreadsheet"

James Galbraith, in a forward to Warren Mosler's forthcoming Seven Deadly Innocent Frauds, on how money really works. (Clue stick: Not in the way that the banksters, most financial [cough] journalists, the legacy parties, or the career "progressives," are telling you.*)

The common thread tying these themes together is simplicity itself. It's that modern money is a spreadsheet! It works by computer! When government spends or lends, it does so by adding numbers to private bank accounts. When it taxes, it marks those same accounts down. When it borrows, it shifts funds from a demand deposit (called a reserve account) to savings (called a securities account). And that for practical purposes is all there is. The money government spends doesn't come from anywhere, and it doesn't cost anything to produce. The government therefore cannot run out.

In the jargon, when a government is sovereign in its own currency, spending is not operationally constrained by revenues (unlike, say, households, US states, and Greece). The government can't run out of money any more than a bowling alley can run out of points. And how is money created?

Money is created by government spending (or by bank loans, which create deposits). Taxes serve to make us want that money – we need it in order to pay the taxes. And they help regulate total spending, so that we don't have more total spending than we have goods available at current prices – something that would force up prices and cause inflation. But taxes aren't needed in advance of spending -- and could hardly be, since before the government spends there is no money to tax.

A government borrowing in its own currency need never default on its debts; paying them is simply a matter of adding the interest to the bank accounts of the bond holders. A government can only decide to default – an act of financial suicide – or (in the case of a government borrowing in a currency it doesn't control) be forced to default by its bankers. But a US bank will always cash a check issued by the US Government, whatever happens.

Nor is the public debt a burden on the future. How could it be? Everything produced in the future will be consumed in the future. How much will be produced depends on how productive the economy is at that time. This has nothing to do with the public debt today; a higher public debt today does not reduce future production -- and if it motivates wise use of resources today, it may increase the productivity of the economy in the future.

Public deficits increase financial private savings -- as a matter of accounting, dollar for dollar. Imports are a benefit, exports a cost. We do not borrow from China to finance our consumption: the borrowing that finances an import from China is done by a US consumer at a US bank. Social Security privatization would just reshuffle the ownership of stocks and bonds in the economy – transferring risky assets to seniors and safer ones to the wealthy – without having any other economic effects. The Federal Reserve sets interest rates where it wants.

All these are among the simple principles set out in this small book.

Remember the "always wrong about everything" meme? As it turns out, that doesn't apply only to Republicans; it applies to Versailles generally. Quelle surprise.

NOTE * Career "progressives" seem to think that rational policy outcomes can be achieved by reasoning from faulty principles; about money, among other things. Me, I say, GIGO. As the election of 2008, and the subsequent heartbreak among the "Obama worshippers"-- (hat tip, Digby; we racists welcome you! -- amply shows.

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tjfxh's picture
Submitted by tjfxh on

The world has entered the stage of electronic money, which gives unprecedented control in the engineering sense. However, neither the professional nor the popular mindset has caught up, and the debate still centers for the most part around myth and superstition.

Conventional thinking generally lags the outer edge of the envelope for a long while and even the current state of affairs significantly. Warren's book is accessible to anyone who has a checking account and understands keeping track of things with numbers. Those who do their banking online will, of course, feel right at home in the world of money as marking up spreadsheets, once it is explained to them.

Congratulations to Warren for bringing this viewpoint to notice, and thanks to Professor Galbraith for having both the prescience and courage to get ahead of the curve. Kudos to the rest of the MMT'ers and other who are on board with this, as well as to the organizers and bloggers who are getting the word out.

Hopefully, realization will come in time to avert an otherwise inevitable disaster and possibly a catastrophe of epic proportion. But, given the current universe of discourse and political mindset, I remains pessimistic. Warren's book is a promising light, however, and I hope it ignites a fire of interest.

quixote's picture
Submitted by quixote on

I don't get the MMT ideas. Could you, in your clear, pleasure-to-read, writing explain the disconnect in, oh, 25 words or less? :). Just kidding. Take two whole paragraphs if you want. My eyes just glaze over trying to read any of the sources.

The problem is this: money ultimately measures goods. Governments who print money without any regard to that fact, like late Tsarist Russia or current Zimbabwe, wind up with worthless currencies. How does that square with MMT? That's the part I don't get, since they seem to be saying, in essence, that governments who print their own money (are "sovereign in their own currency") can do so without limits. Like so many things economists come up with (markets based on rational expectations comes to mind) that doesn't seem to be reality-based. What am I missing?

letsgetitdone's picture
Submitted by letsgetitdone on

The problem is this: money ultimately measures goods. Governments who print money without any regard to that fact, like late Tsarist Russia or current Zimbabwe, wind up with worthless currencies. How does that square with MMT?

Money doesn't measure goods in this country. Commodity-money systems must maintain a relationship between money and a fixed quantity of the commodity backing the money. But the US is a fiat currency system, and the value of its money is ultimately based on its level of economic activity and its productive capacity, and not on the value of goods that is measured by the quantity of money in circulation.

On your examples neither country, unlike the United States was sovereign in its own currency. Russia was on the gold standard, owed money in other currencies, and its currency was subject to pressures from the market.

Zimbabwe, owed debts in foreign currencies, and also created money way in excess of its productive capacities.

That's the part I don't get, since they seem to be saying, in essence, that governments who print their own money (are "sovereign in their own currency") can do so without limits. Like so many things economists come up with (markets based on rational expectations comes to mind) that doesn't seem to be reality-based. What am I missing?

What MMT is saying is that a Government sovereign in its own currency can fulfill its debt obligations and its public purposes without budgetary constraints because it has the authority to create money at will and it owes no debts in external currencies. But MMT does not say that it can create as much money as it pleases with consequences. In fact, if it continues the same level of Government spending after full employment is reached, MMT predicts that inflation is likely and that either taxes will have to raised or Government spending cut, in order to cool the economy.

A very big point in MMT is made in Jamie Galbraith's foreword in a part of it not quoted by lambert. It says:

Warren's heroes, among economists and apart from my father, are Wynne Godley and Abba Lerner. Godley – a wonderful man who just passed away – prefigured much of this work with his stock-flow consistent macroeconomic models, which have proved to be among the best forecasting tools in the business. Lerner championed "functional finance" – meaning that public policy should be judged by its results in the real world – employment, productivity and price stability – and not by whatever may be happening to budget and debt numbers. . . .

I think that last is the key point. The austerity school of fiscal responsibility and sustainability says that deficit, debt, and public debt-to-GDP ratio numbers are so important that particular levels of each signal extreme solvency or inflation danger and must be met with austerity in Government spending. But Lerner and MMT say that you have to judge Government spending by its impact on outcomes like employment, productivity, and price stability, and that fiscal responsibility means getting good results in these areas, whatever the debt numbers show. To suggest that "high deficits," national debts, and debt-to-GDP ratios over 90% are bad for a national economy is a theory, and it is one that is not supported by empirical data. MMT is saying don't do austerity based on a theory that is constantly refuted in the real world, but do use Government spending to try to end this recession, and watch the outcomes. If we see inflation, then that's the time to do austerity; but until we do we have no reason to back off our full employment, productivity, and other public purposes.

I hope your eyes didn't glaze over too much.

Submitted by hipparchia on

ok, so it's more like 100+ words:

Lerner and MMT say that you have to judge Government spending by its impact on outcomes like employment, productivity, and price stability, and that fiscal responsibility means getting good results in these areas, whatever the debt numbers show. To suggest that "high deficits," national debts, and debt-to-GDP ratios over 90% are bad for a national economy is a theory, and it is one that is not supported by empirical data. MMT is saying don't do austerity based on a theory that is constantly refuted in the real world, but do use Government spending to try to end this recession, and watch the outcomes. If we see inflation, then that's the time to do austerity; but until we do we have no reason to back off our full employment, productivity, and other public purposes.

quixote's picture
Submitted by quixote on

I think I get it now. I'm using the term "goods" loosely to mean "anything of actual value." Productivity, etc., certainly falls into that class. I don't mean specific piles of given commodities, which would be an artificial limit, just as it was when the only pile that counted was the gold one.

Krugman's been doing a great job lately of demolishing the austerity addicts with logic about total wealth. Not that anyone's listening to him any more than they are to the Mighty Corrente. Sad, really.

(Sorry I got back so late, that you'll probably never see this. :( )

CMike's picture
Submitted by CMike on

You are absolutely right, money is worth what it will buy. The wealth of a nation is determined by what it can produce going forward. Therefore, the excitement the MMT folks seem to have when they tell you that our money is produced by entries on a spread sheet is a little hard to understand.

When people are in early grade school, about the time they start wondering where money really comes from before mom or dad get it, by happy coincidence they hear about the Bureau of Printing and Engraving which leads them right back to what they had been thinking, "I thought as much, it's like money really does grow on trees." Then about a year before they go off to college they start hearing about the Federal Reserve and how it is controlled by a bunch of bankers who can order up themselves a pile of Federal Reserve notes anytime they want. Now the MMT'ers come along like they're letting the cat out of the bag by revealing it's not about the notes -- its about changing numbers on a spread sheet by the stroke of the finger on a computer keyboard!

Come on. Money has three qualities, until it doesn't and isn't money any longer: 1) It is a medium of exchange. Nearly all societies of a few thousand people have some sort of medium of exchange whether there's a taxing authority or not, 2) It is a store of value - it doesn't spoil and months or years later it will still be useful as a medium of exchange and 3) It provides a reliable measure of value - it tells you the value of particular goods and services and thereby the relative value of different goods and services. It is a little surprising when you first learn about the mechanism of fractional banking but the more you learn you come to understand there are no free lunches, there are all sorts of de facto restraints that keep fractional banking from being a magic money tree.

I don't have time to go through all this at the moment so, for now, let me take up two issues. According to the quote above, Jamie Galbraith says:

The Federal Reserve sets interest rates where it wants.

If "setting rates" is a meaningful term, that is false. In this context, "setting rates" would mean that the Fed can determine a narrow range at which a Treasury security would be bought or sold in the open market. Now it is true the Fed can always buy some or all of the Treasuries the public is holding, driving their cost up and their yield down.* The problem would come in if the Fed, or the United States Treasury itself, wanted to sell a Treasury bond. Neither of those entities have any way of forcing the public to buy a Treasury at a low interest rate. If the public believed the inflation rate would reduce the real interest rate return on that security below the returns on other investments after factoring their default risks then the public will not buy medium and long term securities at the rate the Fed might want--assuming the Fed would ever want to help the Treasury control its debt burden without raising the economy's inflation rate and the private sector's interest rates.

Again, the longer out the bond's redemption date is, the less control over its trading price the Fed has. Sure, the Fed can drive up the price for a Treasury issue by buying them and it can drive down the price by selling them but it cannot set a interest rate of return lower than some premium over the expected inflation rate.

To get around that, the Treasury sells Treasury Inflation Protected Securities (TIPS). That's the Treasury promising make adjustable interest rate payments at intervals in the future to the bond holder which is the sum of a constant rate of interest plus the unknown future inflation rate. Inflation has a way of spiraling from time to time.

Here's what's really bothering me:

Nor is the public debt a burden on the future. How could it be? Everything produced in the future will be consumed in the future.

You answer the "how could it be...a burden" question by posing the "for whom in particular might it be a burden" question. When we say the debt burden will be held by the public, by the public we mean: not the federal government. Is China's central bank not the federal government? Check. Are the Emir Hamad bin Khalifa al-Thani's** children not the federal government? Check. Is Sen. Jay Rockefeller's oldest son, John D. Rockefeller V (Jaimie), not the federal government? Check. Is JPMorgan Chase Bank not the federal government? Check. Is the niece of Apple Annie, of the New York City Apple Annies, not the federal government? Check -- I'll grant you that one.

Now then, who is it that's not going to be burdened by this debt in the future? And who is it that will be deriving unearned income from that debt burden in the future, which is to ask who will be using that unearned income to buy the things produced in the future when the federal government will be paying the interest on that debt? I'm saying all of the above, except for the niece.

At this point I imagine some MMT advocate, whether or not they're willing to go to the trouble of commenting here, is thinking that monetary policy has nothing to do with what the government chooses to spend its money on or whether or not the government has in place just tax policies. [Actually, I see Warren Mosler has posted a comment along these lines below. I won't rework this paragraph.]

Well, we'll just have to disagree. I see the whole thing as a package deal. The risk is not government default, it is our society becoming one based on debt peonage.
______________
*I'm sure everyone knows this but just to clarify: a bond that can be redeemed one year from today for $100 and is selling for $90.91 today would yield 10% to anyone who bought it today and held it to maturity. However, if that same bond were selling for a higher price today, say $95.24, it would yield to someone who bought it today a lower return at the end of the coming year, at this second price 5% if the buyer held it to maturity because 100 - 95.24 = 4.76 and 95.24 X .05 = 4.76. (Of course, it gets a little more complicated than that.)

** According to the Economist, "[t]he emir, now 58, ousted his father in 1995 in a coup. Since then he has consolidated his rule, spread his country’s vast wealth across the realm, and made his influence felt far afield, in Washington, London and beyond."

Submitted by lambert on

What hate? What the heck are you talking about, here, CMike? Since I assume the subject line of your comment is the subject of your comment?

Aeryl's picture
Submitted by Aeryl on

Is that the dollar is based upon the value of the US, not the worth.

Ie, we can print money, and if use that money creating things of value, like jobs, infrastructure, schools, we have no problem because these things increase the value of the US.

Printing money, and giving it to the banksters, does nothing to increase the value of the US, and is bad.

Like lambert says, money is a creation of the state, intended for the public good. If the money being created goes to the public good, there is little concern about lowering the value of the dollar. If the money being created, is concentrated in the hands of a few private citizens, to the detriment of the public good, the money is being devalued, increasing the risk that the money will become worthless.

warren mosler's picture
Submitted by warren mosler on

just to help 'sequence' things, the way I say it is that for a given size of govt, there is a level of taxation that coincides with desired levels of employment and price stability. (the details of govt spending and taxing also matter, but that's another story. for example, you can employ people building the likes of the panama canal, and lower costs and increase efficiencies. or you can employ people to destroy it and get the reverse.)

since the fed govt is not revenue constrained, and taxes don't 'raise revenue' per se, the 'right size' of govt is a political decision independent of the monetary aspects. so the political body has to decide the right size for the military, legal system, and other public infrastructure in the realm of govt, minding the trade off that resources employed by govt are not available to the private sector.

what i'm getting at, is that if the economy slows, and you already have the 'right size govt' the way to restore private sector output and employment is to adjust taxation downward, and not grow a govt. already at the 'right size' just to help the economy.

this is not to say current govt is at the 'right size.' and in many regards there are room for cuts and reasons to add. but, again, those are to be done in any case.

see my videos at

www.moslerforsenate.com

quixote's picture
Submitted by quixote on

Very illuminating replies. The part I was misunderstanding is that it sounded like a "just print money" argument. Whereas it's really "create as much wealth as possible and print money to match."

Which ought to be so obvious we shouldn't even have to have a theory for it. But since we need one, good on those who've given us one!

Aeryl's picture
Submitted by Aeryl on

I have policy debates with my intelligent college degreed boss, and her minor was economics.

I've been trying to discuss MMT with her, but it's hard for me to win arguments when her education tells her I'm wrong.

"Print money and create the wealth to match it" is the most succinct summation of MMT I've read, and I can't wait to use it in our next debate, so Thanks!