Help on MMT related dialogue

[This is a VERY rough draft of a dialogue/narrated animation aimed at regular folks highlighting important misconceptions about the economy. I have to travel for a bit and rather than going back and researching every term and point made, I am throwing it on the web for help. (I imagine the folks at will have some pointed comments here or there).

Please be nice. Some MMTers will disagree on certain points, and I am happy to have those debates elsewhere. What I am mainly looking for now is to get the terms right (on bond and treasury operations etc), any gaps in the flow of the discussion, and a clear exposition of the points I am trying to make even if some points are different from any particular MMTers view.

 PART 2 will deal with some further issues regarding private credit money and the crash of 2008, and address some of the points MMTers may disagree with.] 


A.  [An Average American, although this discussion applies to any sovereign country that, asserting its sovereignty, has a free-floating non-convertible fiat currency. Note that Eurozone nations such as Greece have voluntarily ceded this sovereign ability].

A. “There do not seem to be clear explanations for the 2008 crash, and thus no fixes to the economy since then. All I hear on TV is that we are in trouble because of the national debt. I’ve heard MMT has a different take. What is different and why is it important?”

B. Well, the media focuses largely on the so called “national debt” and presents it as somehow the problem. Yet the crash of 2007/8 was largely due to problems with private debt. So to start with, they are dealing with the wrong kind of debt. This is partly because they wrongly portray the nation as like a household – a household in deep debt is clearly in trouble (as the crash of 2008 showed). But a nation with what they call a “national debt” is not in trouble at all. This is the household analogy, and it is false.

A. Why?

B. Because a Sovereign government is not like a household.

A. Why not?

B. Because it creates its own money. It can always create more to buy what it wants and pay any debts denominated in its currency. The debt held by foreign governments is not a problem. It is held in Dollars. [transaction thing with the fed here, as Mosler describes it]

A. Is it really so simple?

B. It looks complicated, but actually sovereign governments fund themselves by printing bonds. To simplify for a moment, just think of those bonds as money, which at times they directly have been, such as with Greenbacks. There is no need to have bonds run through the Federal Reserve to “make” money. We can come back to this, but for the moment, just think of Treasury Bonds as money.

A. Ok. So let’s imagine US money just as bonds printed by the government. Now what?

B. Well, first, that foreign debt. If China wants to “cash in” on their bonds, as the News channels try to worry us about, the US just credits their account with that many dollars. Done. They can then continue to sit on it, or buy things wherever dollars are accepted, including, of course, in the US. They own about 1.3 Trillion dollars in bonds. If they want to go on a trillion dollar international shopping spree, good for them. It would be harmless, even good for many who would prefer to have those dollars rather than their current assets.[Note Ralph Musgrave’s useful comment here]. Trust me, in the global economy, a trillion dollars is doing no one any harm. The same holds with the other big holders of US bonds (Japan, Brazil, Europe, Russia). If they want to go on a shopping spree, like the Japanese were feared for doing in the 1980s, fine. When the Japanese bought Rockefeller center, they didn’t cart it back to Japan. They just managed it like any other owner would.

A. OK, so there is no problem “paying” even the largest international holders of US debt. And if they did cash in, they would just be changing bonds to dollars and spending into the international or national economy. How does this all work IN the United States though?

B. The government also prints money into existence through bonds. It can fund anything we think is good for the public. Health care, roads, bridges, the military, the coast guard, NASA, pure research.

A. Weimar! Zimbabwe! Crowding out!

B. Are you ok? Sounds like you are having an attack of some kind.

A. Those are the terrible things that will happen if the government prints all the money it wants. Gold Standard! Hyperinflation! National Debt!

B. There you go again!

A. But it will! We will have hyperinflation! We should have sound money, the gold standard! And the government will “crowd out” the private sector!

B. Slow down there. Let’s look at these things one by one.

B. First let’s look at the so called “national debt”. Now, as we saw, the government prints bond money out of thin air. So it is not “owed” in the conventional sense of the word to anyone. Now here is a curious fact – all that “debt” you always hear about is mirrored exactly by the private sector – you, me, Joe Sixpack, small and large companies, as private “net financial assets”. That money printed out of thin air is what allows all of us in the private sector to accumulate assets and save money without the economy stopping. It could better be called the numerator for “net private assets”. Sounds a lot better, doesn’t it?

A. So if the government did not have this “national debt” or “national private assets” we could not all accumulate wealth at the same time?

B. Exactly. This can be shown historically. EVERY SINGLE DEPRESSION in US history was marked by a falling “national debt”. A low national debt has always meant greater, not less poverty for the private sector. The private sector needs and wants a huge so called national “debt”.

A. I can’t wrap my head around this. So – when the government creates more of this national debt, better called national private savings, then everyone in the private sector is able to accumulate more assets and money? That sort of makes sense.

B. You got it. The smaller the so called “national debt”, the less assets and money the private sector – you and me – can hold. We want and need the “national debt” – it is a good thing. Which is why it should be thought of as net national private assets.

A. Ok, that seems logical. But wait – don’t we run the risk of becoming Weimar or Zimbabwe? If the government prints more and more money, its money will become devalued and eventually worthless.

B. Good question. First of all, situations like Weimar Germany and modern Zimbabwe were cases of massively failed states in special situations. Their whole society was destroyed, and Weimar was not even truly sovereign monetarily. The failure of their money was because of the collapse of the capacity of their government to govern. Think about it – I would happily accept Swiss Francs or Norwegian Krone for payment, because they have strong effective governments that I trust will back their money, and well organized productive societies that I trust will be able to back up their Krone and Swiss Francs with real economic productivity. I would not make the same bet with Somalian money, or Liberian money. Not because it is paper money, but because their governments are not effective, and their economies are not productive and well organized.

A. But still, it is simple supply and demand. If you keep on printing money, even US dollars, then there will be inflation.

B. Well, first I wanted to deal with hyperinflation. Hyperinflation just does not happen in non war-torn countries or countries not dominated by corruption or ruled by crazy people. But yes, you should of course be worried about normal inflation.

A. So…?

B. Normal inflation is controlled by reducing spending and/or taking enough dollars back out of circulation to keep things in equilibrium. This is done in modern economies by fiscal policy and taxation.

A. But taxes are levied so we can pay for government, not to control inflation!

B. No. Remember – the government can issue all the Treasury money it wants to spend on anything it wants. If it is the effective government of a productive society its money will be accepted. It taxes not to pay for things, but to drain any money that might lead to inflation back out of the economy. It can easily do this at just the right rate to keep inflation at any level it wants. Including zero.

A. This is crazy! This is not what the textbooks say!

B. It is simply the way the system works in practice. The textbooks are wrong.

A. Ok, let’s assume for a minute you are right. The government can create and spend any money it wants as long as it balances it in a way to avoid inflation. Why don’t we spend less and have less taxes?

B. We can. That is a political choice. How many good roads and bridges, good research programs like NASA and medical research, good public healthcare and how strong a military do you want?

A. So we can have zero inflation and choose to have whatever level and quality of public goods we want?

B. Yes. With one more qualifier – it has to be within the bounds of the real economy.

A. What do you mean by “real economy”?

B. Well, every country has an upper limit on how much they can actually produce at any given time based on the overall quality of organization and technology. That is a real limit, not an abstract numerical limit. The US probably came close to that limit in the Second World War. The thing to notice, though, is that that limit was vastly, incredibly greater than what anyone would have guessed in the 1930s during the Great Depression.

A. So we need a war?

B. No. Not at all. We could mobilize in much the same way, but instead of modifying Detroit auto lines to make tanks, we could mobilize to fix our infrastructure, provide universal Medicare, fund NASA and pure research more, pay teachers more, and make sure our military and coast guard maintain their quality. Oh, and take much much better care of our veterans, disabled, and elderly. For example.

A. And all this new spending wouldn’t be inflationary?

B. Not in our present state. We are like the US was in the 1930s. The US is performing far below its true productive capacity. We could get much closer to the real capabilities of the economy, which incidentally would lead to something close to full employment as well. No nation is truly performing at its optimal real productivity when there are loads of idle but willing workers.

A. So why don’t we do this?

B. Mainly because people, including most prominent economists and virtually all politicians, believe that a government is like a household. They don’t understand that the way money works in a sovereign nation is not at all like a household. And they believe that the so called “national debt” is a problem. They don’t understand that that number actually reflects the net private assets of the people, and that it is a good thing.

A. But wait – this is mathematically impossible. What about all those interest payments on our debt? I know about compound interest – it will quickly become unsustainable.

B. Remember, we don’t have to sell bonds to make money – the bonds themselves can be money. And we don’t have to pay interest on bonds. We choose to.

A. What?! Loans always carry an interest burden. Impossible!.

B. This is the household analogy again. Bonds released by a sovereign government are special. People want them because they pay taxes in them. They can be circulated just as Treasury notes, with no interest at all. And thus our national “debt” need not pay any interest at all.

A. But then all those bond buyers in the private sector and abroad won’t buy dollars, so how will we get money?

B. First, they will hold enough to buy dollar denominated goods. But regardless – so what? The US does not need anyone to buy bonds to make dollars. Remember, a sovereign nation makes bonds out of thin air, and people want them so they can pay taxes, which then makes them acceptable to everyone else in an economy. People were just as desirous of a Treasury Note, a greenback, as for any other dollar. That is because dollars, like Krone and Swiss Francs, come from a clearly politically stable, effective government of a productive society. If Norway and Switzerland went to interest free Treasury notes tomorrow, I would gladly still accept a payment in Krone or Swiss Francs. The Norwegian and Swiss governments, like the US, are clearly able to maintain highly productive societies and effective governments, and as long as they do so, their money will be valued both in those countries and abroad.

A. OK, so this seems like a way for nations to become or stay wealthy, by maximizing the real economy, thus raising the material well-being of the country. Sounds like a good idea.

B. It is.



8 Thoughts.

  1. WOW!

    Outstanding Clint. I really like the way you worked in our willingness to accept Norway’s or Switzerland’s money not because of the interest it pays but because of the political stability of the country. Huge point I think.

  2. Thanks Greg! I wasn’t sure how this all came off to readers – I was watching some other youtube dialogue on economics at midnight one night, and it wasn’t very good, and I just banged this out in the middle of the night out of frustration with the quality of the other one.
    There are a few parts in it that might not seem clear why I mention them, but it is because I am trying to set some certain points up for Part II. At any rate, glad the first comment was positive.
    I am sure I need to revise some details here and there, I hope people here or on or elsewhere have some useful critiques. I want to put this in narrated animation form on youtube when it is done. Unfortunately, the most popular platform others have used, Xtranormal, is just recently defunct, so I will have to find some other way to get a simple movie made.

  3. Hi Clint,

    Herewith a couple of suggested alterations.

    You say “but for the moment, just think of Treasury Bonds as money.” You could put that more strongly and say that bonds and money merge into each other, or put another way, in the case of short term bonds paying a miserable rate of interest, there is little effective difference between bonds and money (monetary base to be exact). I.e. there is no difference between $1,000 and a promise by government to pay you $1,000 in two week’s time.

    On the subject of China you say “If they want to go on a trillion dollar international shopping spree, good for them. It would be harmless…”. I suggest our opponents (the few of them that have brains) will trip you up on that one. I.e. you need to come clean on the downside of China cashing in it’s bonds and spending the proceeds: which is that if China buys stuff from the US, that means US citizens working away in factories etc and shipping stuff of REAL VALUE to China. That means a standard of living hit for US citizens. That’s simply the reverse of the process that enabled China to build up its stock of dollars in the first place: shipping stuff of real value to the US and getting silly bits of paper in return.

    Alternatively if China spends it’s money elsewhere in the world, say Japan, then US dollars get exchanged for Yen, which hits the value of the dollar, which again means a standard of living hit for US citizens.

  4. A. But still, it is simple supply and demand. If you keep on printing money, even US dollars, then there will be inflation.


    I like to point out that this is the Quantity Theory of Money proposed by Irving Fisher in the 30s. Also that Fisher “debunked” his own theory by stating that it should never be applied to a REAL dynamic economy, in which increased economic demand results in increased outputs and supply, which reduces prices.

    When business is booming, few businesses stay static and refuse to expand output or hire more workers, and if they do, someone else will pick up the slack of that excess demand, unless competition is forbidden for some reason.

    I don’t think even the USSR constituted a kind of frozen fixed economy as the QTM proposes. But Fisher said, it was merely an exercise.

    (h/t to Steve Keen, flaws and misunderstandings all mine)

    This was before Fisher lost everything betting that the private-credit-driven Roaring 20s stock market would continue and no Great Depression would occur.

    Fisher’s equation was MV=PT (or I guess PY). With the ASSUMPTION that V and T remain static, then an increase in M (money) results in a parallel increase in P (prices). But this is an entry-level algebra “story problem”, not a description of how an economy works.

    That’s why fiscal “money printing” like World Wars and the Cold War led to booming factories and lots of work, even though unfortunately mass death globally and other ill effects were required to “justify” these long-term Stimulus programs, using the specter of “existential threat”.

    One might quip that the problem with the economy in America is the loss of scary enough enemy nations to fight. More the fact that experts today refuse to recognize that Keynes, albeit “military Keynesian” spending, played a big role in the rise of the American 20th Century, in which govt spending employed all available capacity.

  5. I would sugest one important equation spending=>earning. When i spend that is someone else’s income.
    When government spends, we earn.
    This is easier way to explain private earnings from government deficit.

    So it is also important to include Paradox of Thrift to show how savings can be damadging. Savings by state (national surplus) especialy since it can save only off of us, people.
    That is why every depression is caused by governments saving, we, people, have to go into deficit so that government can have savings (budget surplus).

Leave a Reply

Your email address will not be published. Required fields are marked *

Skip to toolbar