An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
To Tom or anyone here, I want to bring up some comments I've been noticing from people as a result of more people starting to catch onto MMT and learning about it. Some people have been concerned about the blur between MMT as a tool and ideology. Those concerns have been about how in their eyes, some people have been trying to turn MMT into a creationist free lunch utopia ideology and making it more than what it actually was meant to be. I heard this criticism from an actual MMTer online and we were having a discussion about this yesterday. It reminded me of Matt's point over MMT not getting anywhere because the proponents want to stay focused on the "neoliberal conspiracy."
He disputed the notion that "taxes don't fund spending" (which I could see being viewed as a rote statement) and mathematically tried to prove this to be false technically with this scenario: $2.7 trillion in taxes were collected in 2016 and if this weren't collected, the "deficit!" would have been around 4x larger, taxes do fund the gov (in that sense), value the currency and prevent inflation. People just felt that some of the newer MMTers were deviating away from real MMT and their version of it was taking on a life of its own.
The person I talked to was also critical of Mike and the idea of "fiscal flows" though, and I wanted to get your POV on all of this.
Fix all ideology was another term he referred to what's been happening. He appreciates that people are spreading the word, but he feels it's been coming at a cost.
"He disputed the notion that "taxes don't fund spending""
That's because they can't see past the numbers and see the real situation. Taxation has *nothing* to do with how government buys things. It is a very poorly targeted tool to free up real resources for the use of the state.
Once the government has bought something it settles in the state currency and that causes the matching taxation and saving via the standard geometric progression.
Once you realise that taxation has nothing to do with spending and is a space making mechanism you suddenly see there are better space making mechanism. For example you can stop banks lending money other than for house purchases and real corporate expansion (not share buybacks). That immediately creates space for government purchasing, which will then generate taxation and increased private saving.
Similarly if government puts out a tender to buy all the construction workers in the UK at 90% of the current market price, then they will only get the workers if nobody else wants them. And since nobody else wanted them, there can't be inflation. In fact there will be deflation since they are only getting 90% of the rate.
These people can't get their head around the idea that taxation comes after the fact and it has nothing to do with funding, but is a way of sizing the multiplier effect.
Plus if you believe in New Keynesianism then the multiplier is always 1 because the central bank reaction function will make the space for you - whether you tax or not.
So they are stuffed either way. The framing is as it is so that corporations and private enterprise has a free rein over all the nation's resources without anybody stopping them. That is the true purpose of the narrative - to reinforce private good, public bad.
Matt, you left out the "Big League" moron in the WH who was upset "bigly" a couple of months when the media didn't bother to report that the national debt has dropped since his inauguration :(
Donald J. Trump @realDonaldTrump The media has not reported that the National Debt in my first month went down by $12 billion vs a $200 billion increase in Obama first mo. 8:19 AM - 25 Feb 2017
To Tom or anyone here, I want to bring up some comments I've been noticing from people as a result of more people starting to catch onto MMT and learning about it. Some people have been concerned about the blur between MMT as a tool and ideology. Those concerns have been about how in their eyes, some people have been trying to turn MMT into a creationist free lunch utopia ideology and making it more than what it actually was meant to be. I heard this criticism from an actual MMTer online and we were having a discussion about this yesterday. It reminded me of Matt's point over MMT not getting anywhere because the proponents want to stay focused on the "neoliberal conspiracy."
There is truth to that because as soon as one goes beyond the descriptive aspect of MMT, then one is venturing into economic theory. Macro theory is used as a basis for policy formulation and policy is always "ideological" in that it involves choice of objectives and that is based on values as well as outcomes. There are now a good number of MMT newbies coming on board that are not up on the details of MMT.
The descriptive aspect of MMT can be used to ground any type of policy from right to left. The basic takeaway from descriptive analysis is that modern money is created by keystroking accounts either by government spending or bank lending. Money creation by a currency issuer sovereign in the currency is limited amount only by the appropriation process and the funds created are risk-free. Bank lending is limited by ability to repay and collateral, as well as banking regulations, and it creates risk in the private sector. This means that in countries that are currency sovereigns the relevant constraint is the availability of real resources, including the capacity of the supply (production) to expand to meet increasing demand (consumption) created by money creation.
Within this framework all kinds of economic policy is possible, and choice is political. Historically, there never a question of being able to afford "defense spending" and there has been a lot of political arguing against increased spending for welfare based on "lack of affordability." I would say that the idealogical arguments have been mostly from the side of the war party. Proponents of a welfare state over a market state are just waking up to the correct understanding of "affordability" not being an issue for sovereign currency issuers.
He disputed the notion that "taxes don't fund spending" (which I could see being viewed as a rote statement) and mathematically tried to prove this to be false technically with this scenario: $2.7 trillion in taxes were collected in 2016 and if this weren't collected, the "deficit!" would have been around 4x larger, taxes do fund the gov (in that sense), value the currency and prevent inflation. People just felt that some of the newer MMTers were deviating away from real MMT and their version of it was taking on a life of its own.
Of course, taxes "fund" spending and securities issuance fund deficits as a matter of accounting, as the sources and uses statements show. "Fund" is being used here in terms of accounting. However, "fund" has another meaning involving having to the funding to pay for spending. This is true for currency users but not the currency issuer. Many MMT proponents don't understand this analogous use of terms. "Fund" does apply univocally in the accounting sense, but not univocally in the later owing to the difference between the issuer and users. This is key to understanding MMT correctly.
The person I talked to was also critical of Mike and the idea of "fiscal flows" though, and I wanted to get your POV on all of this.
The person obviously doesn't understand ex ante and ex post, and that saving is an ex post accounting residual. It's the spending that results in changes in demand (flow). The deficit is an ex post record of changes in saving (flow) and is key in MMT macro theory wrt to effects of changing liquidity preference on effective demand.
"Of course, taxes "fund" spending and securities issuance fund deficits as a matter of accounting, as the sources and uses statements show. "Fund" is being used here in terms of accounting. However, "fund" has another meaning involving having to the funding to pay for spending. This is true for currency users but not the currency issuer. Many MMT proponents don't understand this analogous use of terms. "Fund" does apply univocally in the accounting sense, but not univocally in the later owing to the difference between the issuer and users. This is key to understanding MMT correctly."
That explains a lot then. I've been noticing rifts between the academic MMTers, the activist MMT people, and then the ones on YouTube who use MMT for trading purposes. I saw people from two of these camps argue with each other on YouTube accusing each other of either libel or being a "free luncher." Little did I know that they could both be correct, but in different ways on the same point. I told both of them arguing over semantics like this is silly and there needed to be much more consistency if people are going to really talk about any of this stuff and not confuse the living hell out of others.
Full conversation for further context. You can obviously tell which account is me. ;)
I don't hold any animosity towards the people in the comments here. I was just so perplexed by the infighting and divisions going on in the MMT community that I didn't quite understand it.
Also you can see a lot of the fear is that the Peter Schiff/Schiffbot mentality is seeping into MMT and turning it into something else beyond recognition.
Taxes not funding the federal government is just a simple matter of logic. The federal government only accepts US dollars for payment of taxes. But you can't pay your taxes in dollars until the government first creates the dollars. Can't pay with something that doesn't exist yet. It's as simple as that.
Lest you be called a dangerous advocate for hyperinflation you immediately must follow up with the response that while taxes don't fund govt, they do in fact have a purpose (controlling inflation, choices on how to use real resources, value to currency etc.)
Taxes "fund" government spending on the government's books in the same way that deposit creation "funds" bank loans on the banks' books.
MMT doesn't deny this.
In accounting, finance, and economics a "fund" is a sum of money.
Uses of funds like spending must have a corresponding source of funds like revenue in accounting statements as an accounting convention. These conventions are set by legally established institutions and must be adhered to by record keepers and accountants.
This has no bearing other than the accounting relationship of the identity of the LHS and RHS totals, which is always an identity, i.e., the books are always in balance after every transaction.
For example, on the balance sheet, assets are "funded" by liabilities and equity. The financial ratio is the ratio of assets to equity, which shows the percentage of liabilities, too. The greater the percentage of equity funding assets the less financial risk, and the greater the percentage of liabilities the greater the risk.
Obviously, where the various funds come from is different when considering an issuer and users of funds. The currency issuer doesn't fund itself from a existing fund, since the issuer can add to the fund at will, which is what "fiat" means.
Users have to obtain funding from an existing fund as a source of funds.
Currency users need to obtain revenue, for example, or else borrow, and their both limits their ability to operate and affects risk.
The currency issuer follows the same accounting conventions but is not limited by revenue since it issues the source of revenue and it is not limited in borrowing since it issues the that which is a borrowed and can therefore always meet it obligation simply by issuing more currency.
Banks can extend credit by issuing loans, firms can issue debt, etc., but they have to obtain currency from the currency issuer for final settlement that requires the currency.
Banks don't need a pre-exisng fund to extend credit, firms don't need a pre-existing fund to issue debt and government don't need a pre-existing fund to issue either currency or term securities. In all cases, liabilities are used to fund assets. Deposits fund loans, corporate bonds fund money borrowed, which becomes a fund for investment, and Fed and Treasury liabilities fund the currency and government securities.
This is a matter of semantics, but if MMT proponents don't understand how technical terms are used operationally and in accounting, they are not going to convince people that do, or be taken seriously. I ran into this problem until the use of "fund" was kindly explained to me by a financial professional. Early on, I was also told by an economist that I was not using terms the way economists use them and if I wanted to communicate with economists that I should take the weekend and read an introductory book on economics.
The key MMT point is the distinction between the currency issuer and currency users. The currency issuer can always fund itself by issuing more liabilities. When spending exceeds revenue, then the Treasury issues liabilities of its own.
Users, being limited in what they can borrow, on one hand, and the amount of credit that they can extend based on risk, on th other, are revenue-dependent over time as obligations come due.
" I was also told by an economist that I was not using terms the way economists use them and if I wanted to communicate with economists that I should take the weekend and read an introductory book on economics."
My response is "I don't think I'll bother". Ultimately economists are going to have to be ring fenced and treated as the opposing political party that they are.
"Currency users need to obtain revenue, for example, or else borrow, and their both limits their ability to operate and affects risk. "
They don't.
Currency users can buy and spend and much as they like - until they come up against some entity with the ability to stop that buying and spending and the power to enforce it.
The key is not funding, or accounting. It is locating the entity and the person with the ability to say 'no'. That is the essence of what makes a control function a control function rather than a facade.
Can you go a little more into what you mean here? What do you mean by they can buy and spend as they like until they come up against some entity.
Blogger Neil Wilson said...
"Currency users need to obtain revenue, for example, or else borrow, and their both limits their ability to operate and affects risk. "
They don't.
Currency users can buy and spend and much as they like - until they come up against some entity with the ability to stop that buying and spending and the power to enforce it.
The key is not funding, or accounting. It is locating the entity and the person with the ability to say 'no'. That is the essence of what makes a control function a control function rather than a facade.
25 comments:
Moronism is bipartisan.
To Tom or anyone here, I want to bring up some comments I've been noticing from people as a result of more people starting to catch onto MMT and learning about it. Some people have been concerned about the blur between MMT as a tool and ideology. Those concerns have been about how in their eyes, some people have been trying to turn MMT into a creationist free lunch utopia ideology and making it more than what it actually was meant to be. I heard this criticism from an actual MMTer online and we were having a discussion about this yesterday. It reminded me of Matt's point over MMT not getting anywhere because the proponents want to stay focused on the "neoliberal conspiracy."
He disputed the notion that "taxes don't fund spending" (which I could see being viewed as a rote statement) and mathematically tried to prove this to be false technically with this scenario: $2.7 trillion in taxes were collected in 2016 and if this weren't collected, the "deficit!" would have been around 4x larger, taxes do fund the gov (in that sense), value the currency and prevent inflation. People just felt that some of the newer MMTers were deviating away from real MMT and their version of it was taking on a life of its own.
The person I talked to was also critical of Mike and the idea of "fiscal flows" though, and I wanted to get your POV on all of this.
Fix all ideology was another term he referred to what's been happening. He appreciates that people are spreading the word, but he feels it's been coming at a cost.
LOL they haven't gotten anywhere in over 20 years ...
Peng, maybe ask him if he thinks that if he stops eating he thinks he still would shit every day ...
"He disputed the notion that "taxes don't fund spending""
That's because they can't see past the numbers and see the real situation. Taxation has *nothing* to do with how government buys things. It is a very poorly targeted tool to free up real resources for the use of the state.
Once the government has bought something it settles in the state currency and that causes the matching taxation and saving via the standard geometric progression.
Once you realise that taxation has nothing to do with spending and is a space making mechanism you suddenly see there are better space making mechanism. For example you can stop banks lending money other than for house purchases and real corporate expansion (not share buybacks). That immediately creates space for government purchasing, which will then generate taxation and increased private saving.
Similarly if government puts out a tender to buy all the construction workers in the UK at 90% of the current market price, then they will only get the workers if nobody else wants them. And since nobody else wanted them, there can't be inflation. In fact there will be deflation since they are only getting 90% of the rate.
These people can't get their head around the idea that taxation comes after the fact and it has nothing to do with funding, but is a way of sizing the multiplier effect.
Plus if you believe in New Keynesianism then the multiplier is always 1 because the central bank reaction function will make the space for you - whether you tax or not.
So they are stuffed either way. The framing is as it is so that corporations and private enterprise has a free rein over all the nation's resources without anybody stopping them. That is the true purpose of the narrative - to reinforce private good, public bad.
"$2.7 trillion in taxes were collected in 2016 and if this weren't collected, the "deficit!" would have been around 4x larger,"
So? Why would savings being 4x larger be a problem? Savings are just voluntary taxation.
See Japan for details.
"So?"
EXACTLY Neil! Lol..
Peng see Bill's blog today he is starting to get to some of your concerns here...
Matt, you left out the "Big League" moron in the WH who was upset "bigly" a couple of months when the media didn't bother to report that the national debt has dropped since his inauguration :(
Donald J. Trump @realDonaldTrump
The media has not reported that the National Debt in my first month went down by $12 billion vs a $200 billion increase in Obama first mo.
8:19 AM - 25 Feb 2017
To Tom or anyone here, I want to bring up some comments I've been noticing from people as a result of more people starting to catch onto MMT and learning about it. Some people have been concerned about the blur between MMT as a tool and ideology. Those concerns have been about how in their eyes, some people have been trying to turn MMT into a creationist free lunch utopia ideology and making it more than what it actually was meant to be. I heard this criticism from an actual MMTer online and we were having a discussion about this yesterday. It reminded me of Matt's point over MMT not getting anywhere because the proponents want to stay focused on the "neoliberal conspiracy."
There is truth to that because as soon as one goes beyond the descriptive aspect of MMT, then one is venturing into economic theory. Macro theory is used as a basis for policy formulation and policy is always "ideological" in that it involves choice of objectives and that is based on values as well as outcomes. There are now a good number of MMT newbies coming on board that are not up on the details of MMT.
The descriptive aspect of MMT can be used to ground any type of policy from right to left. The basic takeaway from descriptive analysis is that modern money is created by keystroking accounts either by government spending or bank lending. Money creation by a currency issuer sovereign in the currency is limited amount only by the appropriation process and the funds created are risk-free. Bank lending is limited by ability to repay and collateral, as well as banking regulations, and it creates risk in the private sector. This means that in countries that are currency sovereigns the relevant constraint is the availability of real resources, including the capacity of the supply (production) to expand to meet increasing demand (consumption) created by money creation.
Within this framework all kinds of economic policy is possible, and choice is political. Historically, there never a question of being able to afford "defense spending" and there has been a lot of political arguing against increased spending for welfare based on "lack of affordability." I would say that the idealogical arguments have been mostly from the side of the war party. Proponents of a welfare state over a market state are just waking up to the correct understanding of "affordability" not being an issue for sovereign currency issuers.
continued
continuation
He disputed the notion that "taxes don't fund spending" (which I could see being viewed as a rote statement) and mathematically tried to prove this to be false technically with this scenario: $2.7 trillion in taxes were collected in 2016 and if this weren't collected, the "deficit!" would have been around 4x larger, taxes do fund the gov (in that sense), value the currency and prevent inflation. People just felt that some of the newer MMTers were deviating away from real MMT and their version of it was taking on a life of its own.
Of course, taxes "fund" spending and securities issuance fund deficits as a matter of accounting, as the sources and uses statements show. "Fund" is being used here in terms of accounting. However, "fund" has another meaning involving having to the funding to pay for spending. This is true for currency users but not the currency issuer. Many MMT proponents don't understand this analogous use of terms. "Fund" does apply univocally in the accounting sense, but not univocally in the later owing to the difference between the issuer and users. This is key to understanding MMT correctly.
The person I talked to was also critical of Mike and the idea of "fiscal flows" though, and I wanted to get your POV on all of this.
The person obviously doesn't understand ex ante and ex post, and that saving is an ex post accounting residual. It's the spending that results in changes in demand (flow). The deficit is an ex post record of changes in saving (flow) and is key in MMT macro theory wrt to effects of changing liquidity preference on effective demand.
end
LOL they haven't gotten anywhere in over 20 years ...
Getting an MMT economist as a Senate budget committee chief economist and presidential candidate's chief economist is "nothing"?
Greek, he is not working in a soup kitchen though....
Bill Mitchell just answered the above in today's post, which I just put up. Here is the link.
Bill Mitchell – billy blog
MMT is what is, not what might be
"Of course, taxes "fund" spending and securities issuance fund deficits as a matter of accounting, as the sources and uses statements show. "Fund" is being used here in terms of accounting. However, "fund" has another meaning involving having to the funding to pay for spending. This is true for currency users but not the currency issuer. Many MMT proponents don't understand this analogous use of terms. "Fund" does apply univocally in the accounting sense, but not univocally in the later owing to the difference between the issuer and users. This is key to understanding MMT correctly."
That explains a lot then. I've been noticing rifts between the academic MMTers, the activist MMT people, and then the ones on YouTube who use MMT for trading purposes. I saw people from two of these camps argue with each other on YouTube accusing each other of either libel or being a "free luncher." Little did I know that they could both be correct, but in different ways on the same point. I told both of them arguing over semantics like this is silly and there needed to be much more consistency if people are going to really talk about any of this stuff and not confuse the living hell out of others.
Full conversation for further context. You can obviously tell which account is me. ;)
https://plus.google.com/b/107612060531266575188/104567813050759426420/posts/BRk6geZxDQb?fscid=z120dxoxhpfmspety22lddbqbpu5jz55h04.1492636623925809
I don't hold any animosity towards the people in the comments here. I was just so perplexed by the infighting and divisions going on in the MMT community that I didn't quite understand it.
Also you can see a lot of the fear is that the Peter Schiff/Schiffbot mentality is seeping into MMT and turning it into something else beyond recognition.
Taxes not funding the federal government is just a simple matter of logic. The federal government only accepts US dollars for payment of taxes. But you can't pay your taxes in dollars until the government first creates the dollars. Can't pay with something that doesn't exist yet. It's as simple as that.
Lest you be called a dangerous advocate for hyperinflation you immediately must follow up with the response that while taxes don't fund govt, they do in fact have a purpose (controlling inflation, choices on how to use real resources, value to currency etc.)
Greek, he is not working in a soup kitchen though....
http://portside.org/2016-11-10/inside-sacrifice-zone
;)
Greek, get me one where he is wearing the white apron...
Maybe "MAGA" written on the front...
Taxes "fund" government spending on the government's books in the same way that deposit creation "funds" bank loans on the banks' books.
MMT doesn't deny this.
In accounting, finance, and economics a "fund" is a sum of money.
Uses of funds like spending must have a corresponding source of funds like revenue in accounting statements as an accounting convention. These conventions are set by legally established institutions and must be adhered to by record keepers and accountants.
This has no bearing other than the accounting relationship of the identity of the LHS and RHS totals, which is always an identity, i.e., the books are always in balance after every transaction.
For example, on the balance sheet, assets are "funded" by liabilities and equity. The financial ratio is the ratio of assets to equity, which shows the percentage of liabilities, too. The greater the percentage of equity funding assets the less financial risk, and the greater the percentage of liabilities the greater the risk.
Obviously, where the various funds come from is different when considering an issuer and users of funds. The currency issuer doesn't fund itself from a existing fund, since the issuer can add to the fund at will, which is what "fiat" means.
Users have to obtain funding from an existing fund as a source of funds.
Currency users need to obtain revenue, for example, or else borrow, and their both limits their ability to operate and affects risk.
The currency issuer follows the same accounting conventions but is not limited by revenue since it issues the source of revenue and it is not limited in borrowing since it issues the that which is a borrowed and can therefore always meet it obligation simply by issuing more currency.
Banks can extend credit by issuing loans, firms can issue debt, etc., but they have to obtain currency from the currency issuer for final settlement that requires the currency.
Banks don't need a pre-exisng fund to extend credit, firms don't need a pre-existing fund to issue debt and government don't need a pre-existing fund to issue either currency or term securities. In all cases, liabilities are used to fund assets. Deposits fund loans, corporate bonds fund money borrowed, which becomes a fund for investment, and Fed and Treasury liabilities fund the currency and government securities.
This is a matter of semantics, but if MMT proponents don't understand how technical terms are used operationally and in accounting, they are not going to convince people that do, or be taken seriously. I ran into this problem until the use of "fund" was kindly explained to me by a financial professional. Early on, I was also told by an economist that I was not using terms the way economists use them and if I wanted to communicate with economists that I should take the weekend and read an introductory book on economics.
The key MMT point is the distinction between the currency issuer and currency users. The currency issuer can always fund itself by issuing more liabilities. When spending exceeds revenue, then the Treasury issues liabilities of its own.
Users, being limited in what they can borrow, on one hand, and the amount of credit that they can extend based on risk, on th other, are revenue-dependent over time as obligations come due.
Greek, get me one where he is wearing the white apron...
I got one with him wearing a blue apron and another one where he's holding a red apron. As for him wearing a white apron, this is the best I can do:
https://cdn.drawception.com/images/panels/2016/10-3/W4SjPgLOOx-4.png
LOL!
" I was also told by an economist that I was not using terms the way economists use them and if I wanted to communicate with economists that I should take the weekend and read an introductory book on economics."
My response is "I don't think I'll bother". Ultimately economists are going to have to be ring fenced and treated as the opposing political party that they are.
"Currency users need to obtain revenue, for example, or else borrow, and their both limits their ability to operate and affects risk. "
They don't.
Currency users can buy and spend and much as they like - until they come up against some entity with the ability to stop that buying and spending and the power to enforce it.
The key is not funding, or accounting. It is locating the entity and the person with the ability to say 'no'. That is the essence of what makes a control function a control function rather than a facade.
Can you go a little more into what you mean here? What do you mean by they can buy and spend as they like until they come up against some entity.
Blogger Neil Wilson said...
"Currency users need to obtain revenue, for example, or else borrow, and their both limits their ability to operate and affects risk. "
They don't.
Currency users can buy and spend and much as they like - until they come up against some entity with the ability to stop that buying and spending and the power to enforce it.
The key is not funding, or accounting. It is locating the entity and the person with the ability to say 'no'. That is the essence of what makes a control function a control function rather than a facade.
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