Some time ago, I labeled the “debt-free money” campaign a non sequitur in search of a policy. (See here.) However, this non sequitur refuses to die. I went on to joke that if they want a debt-free money, they ought to propose that government issue bananas as currency.
I frequently am asked to do interviews and I almost always accept them. However, when I was asked last week to participate in a radio show devoted to debt-free money, I struggled mightily to get out of it. As you’ll see, the program’s producer took my idea of banana republics and ran with it. I thought readers might get a kick out of this exchange (the producer’s emails are in italics, my responses are in bold). After the exchange, I’ll summarize my objections to the notion of debt-free money....New Economic Perspectives
DEBT-FREE MONEY AND BANANA REPUBLICS
L. Randall Wray | Professor of Economics, Bard College
23 comments:
one of those cranks is here
https://youtu.be/oWEhKcsofQ4
I answered Randy Wray's points here:
http://ralphanomics.blogspot.co.uk/2015/12/prof-randall-wray-considers-debt-free.html
Basically I argue that the whole debt free money argument is complicated and that Randy has half right, not 100% right.
Ralph-
you didnt answer anything in your post. All you said is that "Govt IOUs are debt because you cant go to the central bank and receive anything in return for your Govt IOUs". Which is totally wrong. The Govt OWES you credit for your tax liability or Govt services for the Govt IOUs that you possess. That is what the Govt OWES you. That is the debt of the state. And there is no way to get around that. So you have certainly not answered anything that Wray points out.
that paraphrase quote should of course read : "GOvt IOUs are NOT debt....."
The other guy gets the Civil War history way wrong.... Lincoln didn't want to use greenbacks he preferred gold/silver...
Auburn,
Yes, but is that really a debt? It's something the government can always provide. It's like saying the earth owes us gravity.
I guess that depends on your definition of debt. Its definitely a liability.
Is a debt something that pays interest? Reserves receive interest now, so according to this. Reserves werent debt before 2009 but now they are.
Is a debt only something that you have to pay off with your assets? Well, that rules out TSY CDs as debt since they only deliver other Govt IOUs and no Govt Assets. But reserves would be debt because you receive passports (real goods) medicare coverage (real services), etc.
Just a couple examples. It is an interesting question to consider and to explore the mechanics .
If you define debt as a "promise to pay in dollars at a later date" then the concept as applied to government is meaningless - the government can always issue all the necessary dollars to pay.
In the case of a private entity however, it will have to get the dollars either by earning income or by drawing down on previous dollar savings or by selling assets for dollars. Only in this case is it meaningful to talk about "debt".
Jose-
Exactly. Basically all private debts are a promise to deliver assets at some point. And those assets are mainly in the form of bank debts (customer deposits) or Govt debts (cash\reserves).
But from the POV of Govt, its only ever delivering more of its own IOUs or Govt services or goods. Thats why it cant be said enough, all money is an IOU. So to understand any particular type of "money" you need to look at who owes you, what they owe, and when they owe it.
Unfortunately for some, this definition muddies the water between "debt" and "money" As it all becomes the same.
Auburn,
I'm baffled by your claim that "The Govt OWES you credit for your tax liability..". A tax liability is a debt owed by a person or firm to government, not the other way round!!!
You also say "But from the point of view of Govt, its only ever delivering more of its own IOUs." To which my response is: "Agreed". I.e. the only conceivable thing the state owes you in respect of a $100 bill is two $50 bills or something like that.
If I write out IOUs on the back of envelopes, but one of the conditions is that I owe nothing of any real value to anyone, except more IOUs on the back of envelopes, that doesn't sound to me like a debt owed by me to anyone in the normal sense of the word "debt".
Ralph-
"I'm baffled by your claim that "The Govt OWES you credit for your tax liability..". A tax liability is a debt owed by a person or firm to government, not the other way round!!!"
Whats baffling about chartalism? A tax credit is exactly what Govt currency is. Your refusal to acknowledge something fundamental about sovereign currency is irrelevant to the reality of sovereign currency ops.
". the only conceivable thing the state owes you in respect of a $100 bill is two $50 bills or something like that.
"
In the UK the Govt owes you service with the NHS etc. So there are many conceivable things the Govt owes you when you have some Govt IOUs. Just because you refuse or are unable to think about them is again irrelevant.
"If I write out IOUs on the back of envelopes, but one of the conditions is that I owe nothing of any real value to anyone, except more IOUs on the back of envelopes, that doesn't sound to me like a debt owed by me to anyone in the normal sense of the word "debt"."
Given what I've already said, this comment is irrelevant. The Govt owes you things of real value, which is of course why Govt currency is valuable. Its almost like you dont understand MMT basics.
Again: Dollars (currency and reserves) are on the right hand side of the Central Bank's balance sheet but they are not "debt" in the common meaning of the word.
People think "debts are bad" because they may be unable to pay them, bankrupting themselves and wrecking their lives in the process.
But governments can never go broke not matter how large the right hand side of their balance sheets may be. That side of the balance does not constitute a true "debt" for a government - quite unlike the case for the right hand side of an individual's or a company's balance sheet.
So when MMTers insist on calling dollars "debt" they are only shooting themselves in the foot - because they are thereby guaranteeing that their otherwise correct description of "money" will never be accepted by the public at large (the public abhors "debt").
As I see it, the issue is twofold.
They want:
1. No interest payments by government on currency it creates as monopoly issuer.
2. Book currency issued by the currency issuer as a asset instead of as a liability on the government's books.
What's funny is that everybody has got the wrong end of the stick.
Try a different point of view. Forget the central bank exists. Forget Treasury exists.
The power the government has is the ability to force commercial banks to lend to the government - at a rate and term of the government's choosing. When they do that the corresponding deposit is handed over to whoever the government wants to pay.
Taxation is the opposite - forcing the commercial banks to take away a deposit from somebody and clear one of the government loans.
So it is most certainly a debt relation *and always is*.
Currency is a debt. Again being British it's obvious that bank notes are simply a receipt for a debt - because on our bank notes it says "I promise to pay the bearer on demand the sum of X pounds". There is no clearer evidence that it is simply a promissory note - exactly like an open check.
What we discovered over time is that people paid each other by passing around the receipts so you never have to go to final settlement - so much so that final settlement vanished when Bretton Woods failed (and probably earlier than that really).
Final settlement is essentially the coccyx of the economic skeleton. A shrivelled up remnant that evolution has all but discarded.
you still need final settlement in the system for 'discipline' (Perry Mehrling puts it like this). So the whole banking system ultimately still comes down to final settlement in 'outside' money (state money), and taxation is the 'final settlement' of state money.
Auburn - of course you are right. Government debt is debt in the most ordinary sense, the universally understood sense, the common meaning of the word - which most certainly is NOT a "promise to pay in dollars at a later date". "Liability" is a synonym for "debt" - (perhaps a very slightly different connotation, which should be completely ignored at the prevailing level of confusion). People who think otherwise have had their minds fuddled and should look at a dictionary. It is they who are using "debt" in a strange and incoherent way, who are making baffling claims, who have not rid themselves of mainstream brainwashing.
The point is that "debt" is a purely moral concept and nothing else. The only quibble I have is that private debts (or public debts) are not fundamentally "promises to deliver assets". They are promises, period. The important, the real thing about them is not what will be delivered - which is always uncertain, but that they are relationships between a promissor and a promissee.
Booking currency as an asset instead of a liability is an extreme symptom of this debt derangement syndrome of making the correct word taboo. Completely bananas! You can change the word for "hungry" to "full", but that does not fill anybody's belly with bananas or anything else.
People thinks "debts are bad" because they are bad. Better to not have made unfulfilled promises. But societies, anything economic is not possible without them. To quote Abba Lerner, everything else equal, it is preferable that the National Debt be lower than higher. But of course e. e. is never e.
I'm with Jose on this one. Treasury bills and bonds are more like money than like (private) debt.
But this is a semantic issue, and a matter of taste.
"So when MMTers insist on calling dollars "debt" they are only shooting themselves in the foot"
Same as nominal Christians citing the Old Testament laws...
"So the whole banking system ultimately still comes down to final settlement in 'outside' money (state money), and taxation is the 'final settlement' of state money."
No. There is no final settlement in 'state money' as such. It's entirely an illusion. The state of play at the end of the day is private banks lending to each other and a zero balance at the central bank, which makes the central bank merely a clearing house in the grand scheme of things.
Central clearing is there to reduce liquidity requirements and cost. Ignore that and banks clear amongst themselves just as easily - just at a higher price *as long as private banks trust each other*.
There is never any 'final settlement' because there is no longer anything real (i.e. gold) to settle into. It's now all done nominally because we realised that the tokens operate in their own circuit.
Auburn,
How can base money be a tax credit for someone who doesn’t pay taxes (i.e. those on low incomes)? And if you want to argue that even the poorest pay taxes in that they pay indirect taxes, then my answer is that it would be perfectly possible to have an economy where there were no indirect taxes: i.e. just personal taxes. In such an economy, the poorest would not pay any tax at all.
I full agree with the “tennis umpire” analogy Warren Mosler suggested for base money creation. As Warren put it, a tennis umpire hands out points (produced from nowhere) to players. Those points are assets as viewed by players, but are not a liability as viewed by the umpire.
Re what’s baffling about chartalism, I’m not baffled by it at all: indeed I agree with it. Chartalism is the claim that the state’s money derives value wholly or partly from the fact that the state demands that money in payment of taxes. Quite right. But that’s perfectly compatible with saying that the state’s money is not a liability of the state.
Moreover, if by any chance base money CAN BE classifed as a liability of the state (thus making the state a debtor), then the state is a debtor in a very unusual sense of the word because it can simply grab any amount of money off its so called creditors any time it wants via taxation. In contrast, there’s absolutely no way a mortgagor can grab money off the bank that initially granted the mortgage.
The tax bill from HM Revenue and Customs gives Sterling value. Unless you give them Sterling, you go to jail.
That is enough to get some people in the UK to trade their labour and goods to obtain Sterling, and that *kick starts* the Sterling economy.
Of course if the government doesn't *spend* or *lend* any Sterling, then you will go to jail anyway because no matter what you do and what you produce you can't get any Sterling from anywhere else.
And that demonstrates that in a fiat economy, the currency issuer *must* spend currency *first* before anybody else can do anything.
Thus the notion of the currency issuer borrowing its own currency is a complete fabrication - left over from the gold standard era.
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