Book free on Amazon for 48 hours! (Kindle)

Hello everyone- I am making a Kindle version of 1000 Castaways: Fundamentals of Economics FREE on Amazon for reviewers for a short time – but anyone here can take advantage of this and get their free copy.
It is free for the next 48 hours  (all day Sunday & Monday, Pacific time USA). You guys can help out immensely by posting a review on Amazon – good or bad!! – if you feel it merits it. Thanks! (on the reviews, you will be considered a “verified purchaser” even though the price was “0” 🙂
Even if you don’t usually read ebooks, you can read/review this by using Amazons easy free kindle reader for desktops/laptops.
(This is how I am doing the ARC [Advance Reader Copy] for the forthcoming paperback rather than try to mail/print galley copies around the world etc.)

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Bitcoin Delusions

Bitcoin collectors and crypto-token creators suffer from a number of unsupported beliefs destined to come back and haunt them. The key ones:


That Quantitative Easing was the same as “printing money”.  It wasn’t.


That printing money causes hyperinflations.  It doesn’t.


That a 21 million limit means anything.  It doesn’t.


That blockchain is the future of finance/law/business.  It isn’t.


That if blockchain were to become more widespread it would be based on cryptocurrencies as we know them.  It wouldn’t.


That blockchain eliminates the need for intermediaries and rules in markets and transactions/contracts.  It doesn’t.


That the cryptocurrency/blockchain bubble is like the bubble.  It’s not.


That network effects are enough to sustain the value of a currency.  They aren’t.


That a low barrier to entry and endless replicability does not reduce the value of cryptocurrencies to zero.  It does.


The true value of cryptocurrencies is zero, as many are soon enough going to painfully find out. Some more discussion on why here – Of Bitcoins and Balance Sheets: The Real Lesson From Bitcoin




Of Bitcoins and Balance Sheets: The Real Lesson From Bitcoin

The monetary systems of nations operate on two types of balance sheet expansion:

  1. National, where the government spends into the economy expanding a national balance sheet
  2. (The sum of) banks’ balance sheet expansions, where bank loans create deposits

The asset side of both of the above are traded around as “money”.

The national government creates the numeraire for the system (the “Dollar” in the US, the “Pound” in the UK etc.) and in addition to spending directly in to the economy in that numeraire, the government allows a public/private system (publicly regulated private banking system) to operate with the same numeraire. This creates a single system for the public but in fact arises from two separate but linked balance sheet expansions.

But why do the tokens from either of these balance sheet expansions have and maintain value?

The government maintains the value of its balance sheet tokens by demanding that some of its tokens, once a year, must be paid back to the government. This guarantees that everyone in that nation will accept and value the tokens from the national balance-sheet expansion.

The tokens that arise from the public/private bank balance-sheet expansion maintain their value analogously – by the obligation to repay bank loans.

Together, the obligation to pay taxes and the obligation to repay bank loans maintain the value of a currency. Note that both of these rest on the government/legal system of a nation.

An organized, effective government with a sound legal system that does not use foreign currencies can always maintain the value of its currency. (Hyperinflations are always the result of governments and their legal systems becoming corrupted or destroyed in some way, and never the result of runaway money creation).

What does this mean for Bitcoin and other cryptocurrencies?

Bitcoin is not the result of a balance sheet expansion. There is no inherent obligation for repayment of bitcoin to any government (taxes) or to extinguish private debt (banking system). There is no in-built demand for bitcoin (or any cryptocurrency).

Bitcoin is worth zero dollars (or Yen or Pounds etc).

National currencies will always do two things 1) extinguish tax obligations and 2) extinguish private debt obligations. Even if you have neither, there are always enough people with tax and bank debts that you can be sure that your money will be voraciously sought after by merchants of all types. Unless we are in Mad Max territory, they will give you a loaf of bread for it.

Bitcoin is not part of a balance sheet. It does not inherently extinguish debt of any kind – neither a tax obligation nor a bank debt. Nor do other cryptocurrencies. Once the fad for them subsides, the realization that you can’t pay taxes or repay a debt with them will become evident and their true value of 0 will become evident.

Because they don’t understand money or balance sheets, bitcoin collectors and cryptocurrency creators don’t understand why their tokens are inherently worthless. They won’t understand why, when the fad passes, no one will be willing to take their play tokens for real goods.

The only benefit from the bitcoin fad may be a better understanding of the balance-sheet nature of national economies, and the relationship of this to the real resources of a nation. This will prove to be the real lesson from bitcoin. The sooner it is learned the sooner nations can get on with the real work of using their national balance sheets and good legal environments to improve the real economy.


P.S.  A common refrain is that yes, Bitcoin and cryptocurrencies are worthless, but Blockchain is really a big deal.

Well, not so much…

The blockchain paradox: Why distributed ledger technologies may do little to transform the economy

Ten years in, nobody has come up with a use for blockchain

As I have said before – blockchain is going to turn out to be the Wankel engine of the finance world. Interesting concept but not that useful in real life, never quite filling a real need.

Check out my new book “1000 Castaways: Fundamentals of Economics,” Aetiology Press. 

A renegade band of Modern Monetary Theorists has overturned mainstream economics in part by emphasizing that there is not one, but two systems of modern money, the “vertical” and the “horizontal.” They conclusively demonstrate how unifying our understanding of these is crucial for grasping modern economics.

“the key to understanding Modern Monetary Theory is this vertical-horizontal relationship”

(Warren Mosler)

1000 Castaways develops Mosler’s statement into a concise, book-length treatment that is accessible to all readers, starting from first principles and, step-by-step, leading the reader up to the complexities of the real world.

Our one thousand castaways develop, before our eyes, a “perfect” economy, and demonstrate how the horizontal and vertical systems of money naturally emerge from even more fundamental organizational needs of a large society.

1000 Castaways then contrasts the Island’s “economics” with real-world “economics,” in an enlightening illustration of the last few steps in our common economic understanding that we must take in order to run our modern economies in a way that maximizes wellbeing.

Paperback $9.99 Kindle $2.99 Hardback $21.99 Also available as Barnes and Noble Nook, Kobo etc.

OMFG, MMT & Positive Money Get Along



{OMFG = Overt Monetary Financing of Government}




Economies run on tokens from two balance sheet expansions:

  1. (The sum of) Banks’ balance sheet expansions, where bank loans create deposits (also called “horizontal” money)
  2. National, where the government spends into the economy expanding the national balance sheet (aka “vertical” money)

Two observations:

1) It is desirable, especially evident after 2008, to more carefully regulate the horizontal sector, which would also reduce its overall size significantly.

2) In the current economic climate it is desirable to expand the vertical balance sheet, both to maintain/increase aggregate demand and to foster activities that the public desires that increase the public’s well-being (infrastructure, education, healthcare etc.).

Note that although more carefully regulating the horizontal side would decrease aggregate demand (especially given the overheated credit impulse/acceleration Steve Keen has so usefully highlighted) this would be balanced by increasing the vertical side.

What do MMT economists and Positive Money propose regarding these two systems?

Both agree that the vertical side should be larger and the horizontal side more regulated with the resulting smaller horizontal component made up for by expanding the vertical side.


On The Vertical Side

The crucial fact about the vertical side is that the fact that a nation is not like a household is evident regardless of the operational details. Positive Money is wrong in their belief the current system must be changed to achieve the type of government spending they want.

However, this does not mean that Positive Money is flat out wrong. Key MMT people would be perfectly happy to spend vertically in the way Positive Money wants, which is just PQE/OMF by another name. This is especially so given that OMF procedures would be transparent and thus politically advantageous.

MMT scholars just do not believe it is remotely as urgent as Positive Money because they realize the current system is already capable of spending into the economy in the same way that PM wants to (Wray 2001, Fullwiler 2011 ). Also, many have rejected PM more or less out of hand because of Positive Money views or perceived views on the horizontal system [which we turn to below].

At any rate, regarding the vertical system – The crucial thing is to get the vertical system to do what is good for the economy – functional finance – regardless of the operational details.

From a political point of view it is better to have a clearer more straightforward system [PQE/OMF]. This is a substantially less fundamental problem, however, than what Positive Money thinks it is doing; in saying that, however, the practical and strategic importance of making the changes to a straightforward system perhaps should not be underestimated.

Scott Fullwiler himself has noted the fundamental agreement on vertical money issues:

“interestingly, understanding how DFM [Debt Free Money] works also illustrates the MMT view of government spending and government bond issuance. Logically we should expect that DFM supporters could join MMT in rejecting otherwise widespread concerns about government solvency, China refusing to purchase US national debt, the financial sustainability of entitlement programs, and so forth.” (Fullwiler 2014)

(relatedly and importantly, both Positive Money and many MMT economists propose ZIRP; another post for that though)

On The Horizontal Side 

As noted, MMT rejects Positive Money mainly because of PM views on the horizontal side – in the past PM stated they wanted to eliminate the horizontal altogether and essentially create a loanable funds system. Contrast this to MMT, for which overall pre-2007 regulating the horizontal side was not a primary focus (not to ignore the Minsky-Wray connection and other pre 2007 work of course, but banking regulation was/is not the overarching focus of MMT). [Update: please see Scott Fullwiler’s comments on pre-2007 bank regulation/MMT)

However, both sides have moved closer together on horizontal money, to the point where in practice the horizontal systems they advocate would be similar.

MMT increased the emphasis on limiting the horizontal after 2007 (Mosler 2009, Mitchell 2009, Mitchell  2010, Wilson 2017).   Crucially, the Mosler/Mitchell/Wilson proposals would be far more significant and profound in their effects than they are given credit for. Easily enforced common sense rules (that did not exist in 2008) to force banks to hold the loans they make, operate on a single balance sheet, and not accept financial collateral already clears up most of the problems with banking and would leave a drastically shrunk but drastically more healthy horizontal money and funding system in place.

Simply put, this puts MMT closer to the goals of PM on horizontal money than is generally recognized.

Conversely – Positive Money has moved to allow what is in effect horizontal money creation (whether “nationalized” or not makes little difference if regulated in the proposed ways). This pushes PM substantially towards the same horizontal system that would result were the Mosler/Mitchell/Wilson proposals to be put into practice.

(The similarity in views on this are evident in these quotes by MMT scholars and Positive Money:

“Right now, we have far more finance than we need. Exactly how much of it we could eliminate as unnecessary is up for debate. I wouldn’t be surprised if our economy would actually run better if finance was downsized by 90%”
L. Randall Wray 2014

“The correct approach, as highlighted by the MMT view, is to reduce bank lending by banning its use for anything that isn’t constructive. Bill Mitchell regularly suggests that 97% of financial transactions should be illegal.”
Neil Wilson 2014

“The central bank would be willing to create additional money, on demand, in response to banks that are able to lend that money to non-FIRE sector businesses. This protects the level of lending to businesses.”
Positive Money 2015)



There are two monetary systems, vertical and horizontal. Both MMT and Positive Money want to see the vertical increased in size to maintain aggregate demand and increase the general welfare; both MMT and Positive Money would like to see a more straightforward (PQE/OMF operations) vertical money system that would allow mainstream economists and the public to understand that a nation is not like a household (Positive Money makes the mistake of not realising that the current vertical system can already do what PM wants; MMT could perhaps make even clearer than they already do that the current system can do this without structural change).

Both MMT and Positive Money would like to shrink the horizontal system through reducing it to funding only real production. The two schools of thought come from utterly opposite directions on horizontal money; however in practice both of their suggested horizontal systems would be for all practical purposes the same – limiting banking to a completely safe payments system and to an investment-side that is regulated to only expand enough to fund productive investment but not to allow asset bubbles via a non productive FIRE sector. Whether the horizontal side is “nationalized” or not is merely a distraction – banks under the Mosler/Mitchell/Wilson rules providing for capital development based on solid credit analysis would operate the same regardless of their formal status vis-Ă -vis government. Positive Money is wrong to think this can be done in a loanable funds system (future post), but plain vanilla 1960s banking works fine.


March 28, 2019  UPDATE: The Intro to Economics textbook is finished! Live on Amazon here –

1000 Castaways: Fundamentals of Economics







MMT & Positive Money Are Converging. That’s a Good Thing

Many common views on macroeconomics are of little use and even harmful because they do not recognize basic facts about the economy. That limits useful macroeconomics to the minority who recognize that loans create deposits, that there is no money multiplier, that the household analogy is false, money is not just a veil over barter etc., and the profound implications of these facts.

Because it is, unfortunately, a minority that understands meaningful macroeconomics, and because of the enormity of the welfare issues that are at stake, it is of the utmost importance that the lucid minority support each other and sort out their differences in order to find the strength in numbers needed to implement sane macroeconomic policies that have the potential to greatly increase the public well being.

Perhaps the two greatest current macroeconomic problems are

  1. a failure to optimally use resources (including people)
  2. the design and/or manipulation of the financial system to divert real resources from producers to a financial class

The logical approaches to these problems are functional finance in the first case and changes in and/or enforcement of regulation of the financial system in the second case.

Two groups that have gained visibility (academic, policy, and/or popular) on these issues are Modern Monetary Theory and Positive Money.

MMT scholars largely focused on the first problem, how functional finance can increase the public’s well being. Positive Money’s main worry has been the second and suggestions for changes that might make resource diversion more difficult.

However, the simple point I want to make is this: in recent years the two groups have moved towards each other’s positions and interests to a significant extent, probably much more than either group or the heterodox community recognizes.

Positive money originally wanted to eliminate bank credit-money creation altogether. Crucially, however, they have modified their plan to allow for a tightly regulated system of credit money creation for individuals and businesses. (see Would a Sovereign Money System Be Flexible Enough?  also Would There Be Enough Credit in a Sovereign Money System? )

MMT, as mentioned, traditionally focused on functional finance solutions to the first problem above. However, after the 2007 financial crisis especially, they addressed the second problem above (which caused the crash) and subsequently Warren Mosler, Bill Mitchell and Neil Wilson all proposed far reaching (and similar) changes to the banking sector (here: Mosler, Mitchell, Mitchell, Wilson )

Crucially, there is now very little difference between the banking system that MMT (or at least Warren Mosler, Bill Mitchell and Neil Wilson) propose and the banking system that Positive Money now propose.

Additionally, Positive Money has always been a proponent of the state spending for the public welfare; indeed, they had to be as this would be the only way money would be introduced into the economy under their proposals. As Positive Money has matured they have continued to develop their ideas on how the government would spend into the economy for the public good – in other words, functional finance perfectly in line with traditional MMT views.

So in short, Positive Money is fighting for functional finance and a banking system like the Mosler/Mitchell/Wilson proposals. MMT is proposing (or at least Warren Mosler, Bill Mitchell and Neil Wilson) a banking system like the one PM has evolved towards (tightly regulated credit-system) and MMT has of course long supported the state spending directly into the economy for the public purpose just as PM has.

Both groups have achieved significant political and popular support as well as media attention. This attention has often been in different places. Combining their message is a win-win and an important step in educating the business, political and internet community and thus eventually winning votes and changing real policies.


March 28, 2019  UPDATE: The Intro to Economics textbook is finished! Live on Amazon here –

1000 Castaways: Fundamentals of Economics

The Banking System We Need

As the crisis of 2007 demonstrated, the banking system in its current form does not optimally serve the public interest. To make the system work in the best interest of the nation as a whole, I would make the following changes:


  • Banks that are allowed to grant loans that create deposits would operate under the Mosler/Mitchell/Wilson proposals including:
  • Be allowed direct access to government funds  (details below)
  • All bank levies, liquidity ratios, and reserve requirements would be eliminated.
  • Banks must operate on a single balance sheet, and with no subsidiaries of any kind.
  • Banks should not be allowed to engage in profit making ventures beyond basic lending; banks should profit through high quality credit analysis.
  • Banks would be allowed to lend only directly to borrowers, and only for capital development purposes (i.e. business credit lines and household loans)
  • Loans must be kept on their books until cleared.
  • Banks cannot accept collateral.
  • Banks cannot buy (or sell) credit default insurance.
  • There would be a narrow banking option.

Treasury & Federal Reserve

All Federal Reserve functions would be absorbed by the Treasury. No public purpose is served by the Federal Reserve that cannot not be more democratically, efficiently, and transparently carried out by the Treasury.

Converting U.S. Government securities into federal reserves via open market operations serves no public purpose. The Treasury would fund the monetary system and public expenditure by spending zero interest perpetual bonds directly into the economy (electronically in the same manner currently used for transferring demand deposits and federal reserve accounts).

The same effect as above could be achieved by having the Federal Reserve keep the discount rate and fed funds rate target at zero and allow zero rate overdrafts by the Treasury on its deposit account. However, maintaining and allowing a Federal Reserve/Primary Dealer(s) middleman to do this serves no public purpose.

Having the Treasury spend zero interest perpetual bonds directly into the economy allows for funding full resource utilization (including mobilization/training for all idle labor). The public purpose is hindered by obfuscation from complex and needless Open Market/Primary Dealer operations. The national government maintains productivity and stable price levels through fiscal spending and taxation respectively and this should be done both directly and openly.

The fundamental structure/goals of the current FOMC will be maintained within the Treasury, with a primary mandate to maintain full productivity and a stable price level. As now, appointments to the body will outlast/overlap political and administrative terms of office, allowing the price stability mandate to remain apolitical in the manner of the current FOMC.

The role of banks and credit

The role of banks is to provide for a payments system and to fund loans based on credit analysis.

The payments system will be an open clearing system created by the state available to all on an open license. The public purpose is best served by a single public payment system.

A primary area of concern with a non-endogenous monetary system based on treasuries is that if banks are only allowed to loan funds they actually possess (in the way building societies/credit unions traditionally functioned) lending will not be sufficiently responsive to the needs of the economy. Credit is thought to be overly restricted and bank balance sheet expansion/contraction not able to nimbly adapt to prevailing economic conditions.

Crucially, the above concern over restricted credit demonstrates a failure to follow through with the full implications of a direct treasury funded system. Zero interest perpetual bonds, unlike current bank credit, will not be extinguished by loans being repaid. This is not trivial. Under this system the incentives and availability of funds for building society/S& L/credit union type institutions is vastly greater than the current system due to the way in which repayment does not extinguish money in the way it does in the current system.

The current system relies on distracting Federal Reserve/ Primary Dealer operations that maintains the destructive public belief in the “household analogy.” This is also perpetuated by the demand deposit money system. Neither of these processes serve the public and are easily bypassed.

“Endogenous” bank balance sheet expansion
In addition to building society/credit union type institutions, special banks will be allowed to grant loans that create treasury deposits, with the loaned treasuries extinguished on repayment.

These public/private partnerships are licensed to create and extinguish (as loans are repaid) zero interest perpetual Treasury bonds. They serve as intermediaries between the Treasury and businesses/individuals who are willing to take on what is in effect a special tax burden for a special privilege (treasury funding).

This process is the same as the current private endogenous demand deposit creation process which is able to nimbly expand and contract to meet changing economic conditions. However, crucially, it beneficially keeps the process on one national balance sheet. The creation of private demand-deposit money serves no public purpose that cannot be duplicated with direct-issued treasury money.

These transactions are carried out in the same way as bank credit money is created now, with the asset restrictions outlined in the “banks” section above (the Mosler/Mitchell/Wilson rules).

These special funding/taxation agreements are one more policy choice for spending into the economy, along with fiscal, tax reduction, and citizen dividend options. Crucially, the amount of spending via this channel can, unlike the current system, be easily made highly countercyclical via changes to capital requirements, loan quality assessment, and interest rates and is a policy decision like any other.

Summary: Stability, Equity, Innovation 

A monetary system is made by creating and expanding a balance sheet and the public operating within the asset side of it.
Taxes (or the bank equivalent, loans) represent a debt. This debt obligation is traded around as currency. This is why taxes (or bank debt repayment) give value to a currency.

  • It can be national, with government spending creating deposits and taxes destroying deposits. That is, the public swaps the government’s deposits (treasuries) around as money.
  • It can be endogenous, with bank loans creating deposits and repayment destroying deposits. The public swaps banks’ demand deposits around as money.
  • In the latter case when businesses/individuals choose to take out a loan beyond what the building society/credit union/mutual funds banks might provide, they in effect choose to take on greater spending and in return take on an additional tax burden (thus helping to maintain the value of the currency; taxes give value to a currency). For the good of the public and for innovation, individuals voluntarily asume a possible gain and asume a liability.
  • Both systems can exist at same time with same denomination, as in modern economies.
  • Both their combined total size and the balance between them is important…

Optimal total size and optimal balance 

  • Optimal level of total money creation = enough to keep the economy at full productivity, through both fiscal policy and through individuals having money created for them (loans) for spending on productive purposes.
  • Optimum balance is enough national spending to create public goods that otherwise wouldn’t be done – i.e., infrastructure, education, full use of idle resources including idle labor, military, and health care.
  • Additional spending into the economy for innovative, productive economic activity is by the special banks (endogenous) sector. This private borrowing/repaying allows private venture-type investment by individuals who agree to what is in effect voluntary taxation. This is also equitable because, unlike normal taxation, individuals ask for the additional opportunity (and accept voluntary “taxation” in return).  If credit analysis is administered in the right way, this means goods created by individuals who are willing to take on rewards but also take on an additional tax.
  • Both systems net to zero. This is crucial to emphasize in both systems, albeit for different reasons. In the government balance sheet expansion monetary system, it is important to realize that as a whole the system is debt free (assets and liabilities net to zero) as this highlights the fact that the government can expand the balance sheet as much as they want in order to bring all idle resources into productive use. Being clear on the equity, debt free nature of the national balance sheet crucially highlights the fact that the nation is not a household and is key to getting the public to realize that the government balance-sheet monetary system does not remotely function like a household.
  • On the endogenous side, although the private endogenous system nets to zero the total size of its balance sheet relative to the monetary system matters. If the endogenous balance sheet expands greatly due to unproductive debt creation for the FIRE sector (as now), although it nets to zero it nevertheless unfairly allows real claims on real resources.
  • The system balanced so that there is easy availability of the “endogenous” system to those who want to borrow/repay, but it is far more stable than the current system.
  • One national balance sheet reflects the reality of our intertwined monetary-financial system and allows easier optimization of public spending and productive investment.

[I am traveling at the moment & this is a rough draft that needs editing – comments greatly appreciated]


March 28, 2019  UPDATE: The Intro to Economics textbook is finished! Live on Amazon here –

1000 Castaways: Fundamentals of Economics

Endogenous money, MMT, Positive Money, & financial reform

Among the Post-Keynesian groups concerned with understanding and fixing problems that lead to the 2007/8 Global Financial Crisis (GFC) and other ongoing economic problems there are different areas of focus by circuit theorists, Modern Monetary Theory (MMT), Steve Keen’s approach to private debt, and other Post-Keynesians. (MMT, while often with a focus on other aspects of the economy [as L. Randall Wray writes, leading from neo-Chartalist and functional finance insights to fiscal policy] is nevertheless firmly grounded in endogenous money theory). Despite these various approaches having important disagreements and areas of interest all are grounded in reality & therefore their discussions on policy options are coherent and useful, unlike orthodox policy discussions.

There is another perhaps small but dedicated and often visible group of reformers that focus on the monetary system. Broadly these are the various groups that want to change the monetary system such as The American Monetary Institute (AMI), Positive Money (PM), economists associated with the New Chicago Plan and others. Their relation with the Post-Keynesian groups mentioned above is somewhat complicated, and the key reason involves endogenous money. Before continuing, it helps to divide these diverse money reforming groups into two broad categories:

I. A significant number of monetary reformers focus on a money multiplier (and often on fractional reserves). They are still stuck in a loanable funds world, probably because orthodox economics has been so successful in teaching their delusion that we live in a loanable funds world, so these reformers, despite being heterodox in their goals, learn their economics from orthodox sources. Of course, we are not in a loanable funds world, so there is no money multiplier (and here). This means this significant section of monetary reformers is (rightfully) dismissed by those who understand how banking works. 

II. There is another group of monetary reformers that do understand that we are in an endogenous money – not a loanable funds – world. Their proposals do not focus on a (non-existent) money multiplier. Their proposals are aimed at actually making the current endogenous money system into a true loanable funds system. This would be a “no reserves” system. (Positive Money and related proposals are examples of this group).

For the second group above, this leads to a somewhat difficult intellectual position. Post-Keynesian economists have been trying to get orthodox economists to understand the way the economy actually works (with endogenous money) in the real world for decades, and have looked on in dismay as orthodox economists have spent whole careers writing about a non-existent loanable funds system and in turn giving terrible, indeed dangerous, policy advice. Thus it is natural to view holders of the loanable funds view as enemies who do real harm to the economy and the public. But it is different to be frighteningly delusional about reality (as orthodox economists are about loanable funds) than to understand that the current system is an endogenous money system and want to make it a loanable funds system (as PM-type proposals do. There are other main reasons many Post-Keynesians reject PM-type proposals. At times, though, it seems mere association with the muddled orthodox view of banking does influence how/whether some Post-Keynesians really weigh the details of PM-type proposals).

I think several points follow from making the above distinctions into two groups. Primarily they concern the possibility for PM type money reformers to strongly support some key MMT proposals for financial reform, and in turn good reasons for Post-Keynesians to be in dialogue with both types of monetary reformers, rather than seeing them as some misguided offshoot of the loanable funds mainstream.

On the AMI, PM, monetary reform side –

  1. Realize the danger of being thought “not to get” endogenous money (or of actually not getting it for those in group I above). Educate those who still talk about “full/fractional reserves” and a money multiplier that these are just not the issue. Irrelevant terms such as full/100%/fractional reserves immediately suggest that the banking system is simply not understood. The loanable funds system PM and others propose is a “no reserves” system, not a full reserve system. PM type proposals are about changing the endogenous money banking system to a (no reserves) loanable funds system.
  2. Strongly support MMT proposals that get part of the way to your goals, even if you ultimately want further changes. Warren Mosler’s proposals go a significant way towards reducing negative aspects of the current endogenous money system and are in accordance with PM type views; two in particular:

“Banks should only be allowed to lend directly to borrowers and then service and keep those loans on their own balance sheets.”

“Banks should not be allowed to accept financial assets as collateral for loans.” (Mosler)

Both of these would significantly alter and restrict the current endogenous money system in ways that move the system towards PM and similar plans’ goals. Indeed, PM itself lays out what their ultimate goals (brief version here) are and separately shorter-term goals that in part are similar to what many MMT and similar proposals for bank reform want.

Also – some MMT (and other Post-Keynesian) proponents are in favor of nationalizing banks, and/or of creating an additional system of narrow banking for those who want it. PM recognizes this as an important step towards their ultimate goals. Creating postal banks or any other narrow banking system as at least an option for the public is a logical and do-able goal that many sides could unite behind.

In other words, if PM type proposals want to move from “A” (today’s system) eventually to “D” (a loanable funds system), and Mosler-type proposals move the system to “B” (significant restrictions on the way endogenous money is currently created; the existence of a parallel narrow banking system for those who want it) then PM should be very much on board.

For Post-Keyenesians:

  1. Try (even) harder to teach monetary reformers that are erroneously still worried about a money multiplier (group I) that there simply is not one in the current system (I know – it seems they just won’t listen to good advice). If they understood endogenous money and that loans create deposits they would see that reforming a “money multiplier” is a waste of time. This might then lead them to see the logic of and support reform proposals such as Warren Mosler’s. Another possibility is that they would become part of group II above and at least understand the issues more clearly. This would make coherent discussions possible, and take one more group out of the spell of orthodox nonsense.
  2. Regarding group “II” above – Post-Keynesians should recognize that group II monetary reformers are different from orthodox economists in a crucial way – they get endogenous money – they just don’t believe it serves the public purpose. They truly believe that a real loanable funds model is possible to create and serves the public purpose better than the existing system. Recognize that real dialogue is possible with them unlike with the vast majority of orthodox economists. If a loanable funds model would not work or would be worse for the public, clearer statements of why could be made. I know there are essays by Post-Keynesians about some of these proposals; I think they could be better (more on this below). For example, usually one of the more conscientious writers of the MMT economists, Bill Mitchell, compares some of these proposals to the gold standard (although he seems to be considering some of the Austrian type proposals in part of the essay). Mitchell writes “There would be the equivalent of a gold standard imposed on private banking which could invoke harsh deflationary forces.” While under a true loanable funds system such as PM proposes endogenous private credit-money would not be created, it is obviously still a fiat system, and neo-Chartalist and functional finance insights hold: limitless (except by inflation) money could be pumped into the economy as needed through fiscal policy, tax decreases, and citizens dividends. The gold standard comparison simply does not make sense.* Ditto concerns about PM proposals being deflationary (not in the long run for the reasons mentioned, nor in the short run since the changeover would be portfolio neutral – I think the New Chicago Plan has a good explanation of this, page 49 ).

Although PM and similar proposals are not necessarily among the largest or most influential groups (compared to orthodox economists and their policy groups) they do have some visibility and any additional organized, visible support for much needed reforms, and any addition to coherent discussions of our endogenous money system should be welcome.

Rather than arguing among themselves, Post-Keynesians and PM-type groups should focus on the important overlaps of their bank/finance reform proposals. If those are achieved, then the further changes that PM type groups want can be discussed. And despite seeming to have radically different end goals (a fair, stable endogenous system versus a true loanable funds system) the most pressing immediate bank reforms are agreed on by most sides.

Both MMT and PM-type proposals are to use state money for public purpose. The real contention between MMT and PM lies in whether or not endogenous private credit-money creation also serves the public purpose.

The key issues:

Many of the concerns with the PM proposal I have seen brought up are actually discussed in some detail in the PM literature (and/or related points usefully discussed in the new Chicago Plan) and it often seems that critics of the plan simply do not closely read PM explanations of the details of the plan. However, of course there are serious concerns, perhaps the most consistent being:

Would the new system of exclusively state money be able to create a fair system for large business loans? How would that system differ from the current system?

Concerns with the current endogenous money system:

Does the fact that endogenously created private credit-money dwarfs state money restrict the ability of the government to act in the public purpose in the way MMT believes? (possibly through the inflation limitation – can the government really contain inflation while using state money for public purpose when such huge amounts of private credit-money are created?)  Does this render MMT ideas on the role of the state in the economy unworkable? (An example of these worries is Cullen Roche’s criticism of MMT here). 

Does the inherent instability and procyclical nature of endogenous money have too many social costs?

Does the endogenous money system stealthily but inexorably lead to regulatory capture? Relatedly – Does the endogenous money system have a systemic tendency to funnel wealth upwards & into the FIRE sector? Lead to unsustainable levels of private debt? To highly inequitable wealth distributions? [related post]

On these latter questions, Steve Keen’s work seems especially relevant, suggestive of the way in which in the current system of private credit-money seems to ratchet up private debt and credit-money and create crises and inflate the FIRE sector. (e.g., “Are We It Yet?“, “Deleveraging with a Twist” and others; also see important work towards reconciling MMT & Keen’s work).

There are plenty of critiques of MMT – most of which are completely misguided and due to fundamental misunderstandings of the economy due to orthodox economic blinders. I see the most important debate concerning the balance of state and private credit money in a state theory of money and what follows from a state theory of money. These are a few more discussions that touch on that area:

A debate on Endogenous Money and Effective Demand: Keen, Fiebiger, Lavoie and Palley

Modern Money Theory and New Currency Theory  (book length version: Modern Money and Sovereign Currency) (the historical discussion of why MMT and PM-type proposals differ on banking is very enlightening; I disagree with Huber on important aspects of the second part of the paper, especially where he still falls into the household analogy trap, and his unfortunate and confusing use of the term “fractional reserve system” when that is just not the issue. He clearly knows the difference between a no reserves system and “full reserves” although I think there are simpler ways of explaining it).

The Credit Money, State Money, And Endogenous Money Approaches: A Survey And Attempted Integration L. Randall Wray


[Postscript – A few bits I cut from above for readability]

*On Mitchell’s comparison of creating a loanable funds model to a gold standard – Ralph Musgrave makes similar points concerning Warren Mosler’s light dismissal of Martin Wolf’s article on banking reform. (But please Ralph – quit talking about “Full/Fractional reserve! : ) The PM loanable funds model will be a “no reserves” system!)

PM-type proposals & MMT are in essential agreement that the state can and should just spend state money for public purpose, with inflation the limiting factor. This is sometimes unclear because of the operational peculiarities of various countries, not least of the US. Whether this is just through continued deficit spending, or a 60 trillion dollar coin or similar, circulating treasury notes (the same thing really), or whatever, ultimately makes little difference. PM-type proposals have long used the US Greenback – circulating (mostly digital) treasury notes, as a key example, and MMT economists have the same view.

A final note – sometimes in comments here and elsewhere a criticism is made that “there are more technical papers that do deal with ____, since you don’t have them here you don’t know what you are talking about!” and/or “this post only relies on other blog posts and simple sources, it is not useful/serious/informed! etc.” I do try to read more “official” and/or technical papers when relevant. Two points though – 1) If bits and pieces of answers to some of these points are buried in technical papers somewhere, that doesn’t help anyone too much – cite them specifically (& better yet – summarize them and why precisely they matter) and 2) I think when good economists like Keen, Wray, Fullwiler and Mitchell with technical work write their views in plain English those writings reflect – and quite often best reflect – what their technical work tells them is right.


MMT & Private Debt Dialogue PART II

[Part I here]

A. So, last time you discussed how understanding how money really works leads to insights that can help make the real economy perform better, and increase the real material well-being of a country. And all this talk about problems with a “national debt” is just non-sense. It seems only to serve the rich who would like to impose “austerity” on the rest of us. You focused on the national debt and how the household analogy is false, but still haven’t explained the crash of 2008. You said it was and still is about private debt.

B. Yes.

A. How?

B. Well, we talked about how all the so called “national debt” is mirrored exactly by the net financial assets of the private sector. So what is usually called the national debt should really be thought of as a good number that reflects the amount of assets the private sector holds. Government spending is what allows that accumulation in the private sector.

A.  Yes

B.  However, not all money is created through government bonds.

A. What do you mean?

B. The vast majority of money is created by banks out of thin air. When banks make loans, someone walks away with money, an asset, a plus in their account. Yet the bank also records that loan as an asset, a plus in their account. This increases the effective money supply (more or less what is known as M2 in the US), which in turn increases effective demand in the economy. This effect is large, with the vast majority of money actually being private bank-credit money, not money based on US bonds. [Note this has nothing to do with reserve requirements, which under the modern banking system are an anachronism, but with the ability of banks to make loans and get reserves later, which the central bank has to accommodate (bc it targets interest rates) and record the loans as pluses.]

This seems fine when the economy is doing well. But it means the effective money supply is largely based on private debt. The debt ratchets up until a point where the non-financial private sector is deeply indebted to the finance private sector and cannot easily take on new debt. Eventually, with some slight downturn in the economy, there is a loss of creditworthy borrowers, so the system collapses and with it a great portion of the effective money supply.  Thus exactly when the economy needs a boost in demand, it instead suffers a sharp contraction. And the banks are the ones holding either the money or the ownership of assets that are defaulted on. The non-finance private sector loses greatly to the benefit of the finance private sector.

A. So what can be done about this?

B. Well, mainstream economists do not even recognize the factors that matter in this scenario. So they literally have nothing useful to say about fixing the economy in this situation. With their bad theory they are like monkeys with razor blades in an operating room – worse than useless.  Just one example:  they don’t understand the process where private bank-credit money is created only due to the demand for loans by the private sector. So they thought that essentially giving money to the banks, “quantitative easing”, would stimulate the economy. But with no creditworthy borrowers, that money just sits there. To really understand what is at the heart of this finance-based depression, you have to look to economists who understand the interactions of finance factors & the economy in the first place.

Among them there is one view that if both 1) the MMT policies we discussed in Part 1 were followed and 2) better banking practices followed, the economy would not fall into the trap just mentioned. Aggregate demand would be provided through intelligent fiscal policy, not widespread private debt. And the banking sector would be regulated in a way so as not to allow bad assets to back loans and to limit the many financial shenanigans the wealthy created to game the system. So the system would be more stable. Warren Mosler presents perhaps the best clear statement of the needed bank reforms, and regardless of any other changes discussed here, they should be implemented ASAP to stop much of the current harmful or downright corrupt practices in the current system.

A. Would this work?

B. Maybe. The worry is that the effective money supply is still created largely through private bank lending. This provides a huge incentive for the banks, which under this system are likely to be rich and influential, to always, little by little, manipulate regulations in their favor. This is known as “regulatory capture” and in turn leads to an unstable buildup of private debt and the finance sector gaining at the expense of everyone else. Remember, the banks gain no matter what under the current system – either they earn directly from their loans and dubious investment vehicles in the good times, or in a downturn, they earn from claiming the assets that the private sector used as collateral and by being propped up by the government because they are “too big to fail”. Privatized (finance sector) gains and socialized losses. The headlines in recent years that the 1% has done well by the crash of 2008 are sadly true.

A. Is there an alternative?

B. Possibly. It is possible to simply not allow banks to create private bank-credit money. Rather than banks being able to credit borrowers’ accounts with money out of thin air, they would have to lend already existing money, either that they already own, or that they have pooled from investors seeking interest on money they actually hold. A loan would not show as a plus on their balance sheets, but as a minus on someone’s balance sheet – real money that they or their investors have transferred to a borrower. And they would not be allowed to sell their loans, but would have to keep them on their own books. This incidentally would give them a large incentive to raise their scrutiny of borrowers, and thus increase the quality of loans in the first place.

A. Why is this important?

B. This would mean that banks would no longer in effect create new money. They would only be intermediaries, uniting willing investors actually transferring their existing money to borrowers, nothing more. Crucially, this means that the money supply would not collapse in an economic downturn, what is known as a “cascading liquidity crisis”. Lenders might lose money if borrowers did not pay them back, but the total amount of money in existence would remain the same, and so would effective demand. Also, banks would not be earning money through creating money out of thin air. The system would thus both be much simpler and tremendously more transparent, and additionally the banks would be less powerful to change rules in their favor. A crash like 2008 would simply not be possible under this system.

A. So are there any drawbacks to this system?

B. Well, some think that under this system the less wealthy would actually suffer.

A. Why?

B. Because under the current system, even the less wealthy, at least when the economy is good, are sometimes able to get loans and financing for projects. Under the new system, the less wealthy would depend on existing holders of money to finance them, argued by some to mean putting economic power even further into the hands of “the haves”.  And some seem to think that having a private system that can create money in response to private demand is good, a dynamic system that responds to the needs of the economy naturally.

A. What do you think?

B. We must balance the true, full cost of the proven inbuilt instability of the current system with the possible good and bad of an alternative system. The true costs of instability in the current bank-credit money system are seldom weighed as a whole, nor presented in a way the general public can understand. What is the true and total cost to the public of the crises of 1907, 1929, 2008, the many smaller crises such as S & L, the Japanese asset price bubble, LCTM, banking crises in Finland, Sweden, Asia, Russia, Mexico, Argentina, Ecuador, Uruguay, and throughout Europe, the and housing bubbles, the bailouts of AIG, Northern Rock etc.? The true cost of the current system to the non-finance private sector are probably much much greater than is commonly thought, if proper accounting standards were used to measure it.

Also, there are other very real costs from the inherent instability and uncertainty of the current system. These costs arise from the uncountable suboptimal (due to high uncertainty regarding inflation, interest rates, and possible recessions and depressions) decisions on investment, insurance, and allocation of resources made by big business, government, and private households alike. The alternative system would be much more stable on every front, and there would be real gains in efficiency from this increased stability.

A. So that is the main downside some see to an alternative system where banks cannot create private credit money?

B. Yes, it seems the main concern by some seems to be that the little guys won’t easily be able to get loans and the system will not provide enough financing in general for the private sector.

But there seem to be good ways to finance worthy needs without banks creating money. There are lots of investors willing to risk their existing money to earn interest on loans. Additionally, there are many tried-and-true alternative finance options, such as tontine-type mutual funds, pari-mutuel mutual funds, and other banking arrangements that would provide plenty of access to funding for the private sector without allowing banks to create private bank-credit money.

Overall, the huge gain in stability would help everyone, from big business down to individual households.

A. So why isn’t the change tried?

B. The banks would fight it tooth and nail for a start.

Also, although directly using government bonds has worked well in the past, there has never been a pure system of this type – the banks always managed to force governments to allow them to create private bank-credit money.
Notable successful examples include US greenbacks, and the 700 years that the English/UK government used tally sticks. As we know, this period of British economic history was overall highly successful. But tally sticks and greenbacks were only part of their respective systems. The modern proposal for systemic change would essentially make the entire system run purely on what are in effect tally sticks or greenbacks.

A. So people would be afraid to try a system that has never been tried in full it seems.

B. Yes.

But there has never been a system like the current mostly bank credit-money one that has NOT suffered crashes like 2008. It may make sense to finally try something new.

At any rate, the take-home message is that the crash of 2008 was about private bank-credit money and private debt. Any full understanding of the real economy must take into account the long history of bank-credit money recessions and depressions and of ratcheting private debt causing real trouble in the real economy, and the close empirical correlations between changes in private debt, private credit money, effective demand, financial regulatory capture, and recessions/occasional massive depressions.

In Part 1 we discussed how MMT insights show ways to raise the productivity of the real economy to its natural limit, and thus the material well-being of a country. The theoretical debates concerning MMT have largely been worked out, and it is just a matter of time before the logic of it is accepted by the mainstream.

However, the debate on the full scope of the impact of the private credit-money system on the real economy has only begun to be worked on again in earnest.

Maybe implementing better fiscal policy and more logical banking regulations, as many MMTers propose, is enough to stop crashes like 2008 from occurring, and the ongoing regulatory capture of the finance system by the very rich.

But it may make sense to also change the finance system to a system where circulating Treasury notes alone forms the money supply, and banks can only serve as intermediaries of this money, and not create private bank-credit money through escalating private sector debt that alters effective demand, causes socialized losses and privatized gains (only for the finance sector), and ultimately leads to massive busts for the non-finance private sector.

A. Yes, that may make sense.

[PART I of this dialogue]

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.



Question for Mosler/Mitchell/MMT: Bank Reform, Assets or Liabilities?

Warren Mosler, in his excellent recommendations for bank reform (similar to Bill Mitchell’s proposals
and others )focuses on the asset side of banks, and writes:

“The hard lesson of banking history is that the liability side of banking is not the place for
market discipline.”

Mosler doesn’t discuss this history or reasoning any further though. Can anyone elaborate on this banking history? And how it shows that disciplining the liability side of banking is not a good idea?

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