Open Discussion on MMT III

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57 Responses to Open Discussion on MMT III

  1. bsalau93 says:

    Just a few questions I hope someone could help me out with:

    1) If bank reserves are not required to create loans, what is their purpose? As I understand it, they are required for collateral against bad loans and bank runs, giving enough time for the central bank to react. Is this correct?

    To further this if a bank doesn’t have reserves sufficient for their needs, are their options either to borrow money from other banks, or borrow from the central bank? If so, how do banks decided which to do?

    2) When banks charge interest on loans repayments, does that result in a net decrease in the money supply, seeing as the debtor must repay more than they are able to spend?

    3) If debt monetisation (selling bonds for cash) is not necessary to finance the deficit, how is it accounted for? Or is it better to think of the deficit as the net injection of money into the economy (the diagram of the vertical and horizontal ways money can move comes to mind here) so essentially all that the government has done by spending more than it taxes is increase the supply and thus potential size of the economy provided output increases to match the increase in the money supply?

    I will probably come up with some more questions at some point…

    Many thanks.


  2. Tom Hickey says:

    “1) If bank reserves are not required to create loans, what is their purpose? ”

    Banks reserves include settlement balances in the banks’ reserve accounts (deposit accounts) at the central bank and vault cash for settlement with customers requesting cash at the window. Banks obtain vault cash by exchanging settlement balances for notes and coin at the central bank.

    “As I understand it, they are required for collateral against bad loans and bank runs, giving enough time for the central bank to react. Is this correct?”

    Not correct. Banks are required to hold capital in reserve to default by customers. Bank runs are obviated buy government deposit insurance and the central bank acting as lender of last resort.

    “To further this if a bank doesn’t have reserves sufficient for their needs, are their options either to borrow money from other banks, or borrow from the central bank? If so, how do banks decided which to do?”

    Banks need reserve balances, which are more properly called settlement balances to settle accounts with other banks after interbank netting. Banks have asset & liability management (ALM) departments to handle this. The ALM department obtains needed settlement balances in the most cost-effective way consistent with the individual bank’s policy. Banks have the option of borrowing from the central bank at a penalty rate. That is the least desirable option but it ensures that the banking system always has enough settlement balances to clear.


  3. Tom Hickey says:

    “2) When banks charge interest on loans repayments, does that result in a net decrease in the money supply, seeing as the debtor must repay more than they are able to spend?”

    Those interest payments don’t disappear down a black hole. They are bank revenue that banks use (spend) to cover salaries and expenses, invest in expansion, and pay dividends.


  4. Tom Hickey says:

    “3) If debt monetisation (selling bonds for cash) is not necessary to finance the deficit, how is it accounted for?”

    The central bank credits the seller’s of the bonds bank’s deposit accounts at the cb in the amount of the sale and debits its asset account. The banks then credit sellers’ deposit accounts if the sellers are non-banks.

    There are three sets of books involves — the central bank, the banks, and the non-bank sellers of the bonds. In the end all accounts balance as a result of the respective credits and debits.

    Bonds are actually time deposits held at the central bank. So what happens is that time deposits at the central bank are decreased and deposit accounts there are increased. The end result is that liquidity is increased, that is, the monetary base increases.

    “Or is it better to think of the deficit as the net injection of money into the economy (the diagram of the vertical and horizontal ways money can move comes to mind here) so essentially all that the government has done by spending more than it taxes is increase the supply and thus potential size of the economy provided output increases to match the increase in the money supply?”

    When government spends, banks’ reserve accounts are credited with settlement balances and the banks make appropriate entries on their books by crediting customer accounts as directed. When government taxes, banks’ reserve accounts are debited settlement balances and banks mark down tax payers’ deposit accounts as appropriate.

    If spending exceeds taxation, then the total amount of reserve balances increase in that amount. In order for the central bank to target a policy rate, the excess reserves created (injected) by deficit spending are drained into securities removing them from the monetary base. The total amount of aggregate non-government net financial assets remains the same. What was previously held as entries in customers’ deposit accounts and settlement balances in banks’ reserve accounts decreases and the amount held at the central banks in time accounts increases.

    The stimulus to the economy comes from government spending. It’s the top line spending that initiates the flow. Taxation withdraws some of this along the path of the flow, and bond issuance drains settlement balances from the monetary base to facilitate central bank monetary operations. Bond issuance provides nongovernment with interest bearing default-free assets (“save assets”) which reduces systemic risk, since at least some of those funds would likely have been saved in riskier assets.


  5. stanislaus says:

    Tom, I am still dubious about your claim that Treasury only sells securities to cover the national debt. Looking at the growth of tsys sold in any year, it seems to grow much faster than accounted for by the federal budget’s deficit. The annual deficits run on the order of $500 B but the annual
    amount of securities sold is much higher, so much as to be even higher
    than interest borrowing using securities would account for. In other words,
    about 85% of the national debt is to investors and not banks, and investors dollars are sequestered somewhere to be returned plus interest to their holders. The investors’ treasuries are like bank CD’s–time deposits.


  6. stanislaus says:

    Can correspondent banks exchange reserve balance dollars for private bank dollars? They often engage in foreign exchange, so why not with reserve balances exchanged for private bank dollars?


  7. stanislaus says:

    I was thinking that reserve balance dollars could remain constant over the
    entire banking system, if exchanges of private bank dollars for reserve balance dollars was conducted by correspondent banks. Once within the arena of federal funds, the same reserve balance dollars would just circulate around within the banking system, but never into circulation. When in deficit spending the Fed takes reserve balance dollars from Treasury it draws those dollars out of a reserve balance account of the Treasury. Then the correspondent bank of the vendors whose goods and services are bought by the Federal government is credited with those reserve balance dollars. The
    private bank’s vendor account is then credited while the correspondent account is debted accordingly. In other words the private bank creates the dollars to match the amount credited to vendor in its reserve accounts. No reserve balances pass through into circulation from the private bank. Once
    the private bank dollars are made, the reserve balance dollars can be used again elsewhere in the banking system.

    Does this make sense?


    • Goldy Kresch says:

      I’m relatively new to MMT so please correct me if I’m wrong, but the way I understand it is that what is referred to as our “debt” is simply the number of bonds purchased. When the government deficit spends, they are using the revenue from those bonds.


      • Iain Dooley says:

        When the government deficit spends, all it’s doing is reating new high powered money, which in turn creates deposits for the end recipient in their private banking institution.

        This paper explains how “revenue” cannot finance government spending:

        When the government sells bonds, it actually reduces the amount of reserves in the banking system, so selling bonds doesn’t create any money for the government to spend, but in a sense it does create “room” in the reserve system that the government can spend into … it’s in no sense a way for the government to fund it’s operations though.

        Bonds are just a liability swap, like a term deposit. I discuss this here:


  8. Iain Dooley says:

    Hi there, we’re starting a political party with MMT as the core economic framework and the main policy platform being a job guarantee.

    We’re doing a YouTube channel/podcast as well as a Facebook group to get the word out:

    Would love to get your opinions on the content!


  9. Rob Holmes says:

    Paul Keating and the “Banana Republic”
    The economic issues outlined by PJK himself in discussions with Kerry O’Brian in the book “Keating” make an interesting MMT case study. Earlier when first in his job as treasurer he had been accused by his colleagues of being a captive of Treasury – remarking that “Treasury has got it right”. He had said that “… (Wills) would have supported and expansionary budget with the effect of crowding out private investment.” Then going on “… You couldn’t bring the Australian economy back to growth off the back of public investment and public employment.”
    With that understanding of economics in PJK’s arsenal, the way he intended to deal with the 1986 “Banana Republic” issues now sound insane to any student of MMT – the result being a the “Recession we had to have” caused by PJK himself and made considerably worse by the ’87 crash that followed soon after. Subsequent to the float of the dollar and “freeing up the economy” a perceived crisis arose, that neither PJK or his advisors in Treasury/RB knew how to deal with – the worsening of the terms of trade and the declining value of the Au$. Cheap imports were seen to be feeding inflation – foreign countries were seen to be paying for our lifestyle that was out of control. On reading this stuff my reaction is WTF is going on here? Housing mortgage rates were pushing the then prescribed limit of 13.5% and were predicted to get a lot worse by PJK himself when he deregulated the rates.
    PJK then outlines how via the Expenditure Review Committee he and his ministerial colleagues spent long hours and months of work cutting expenditure on a “line-by-line” review of the budgets of every department – cutting billions off the deficit – eventually arriving at a surplus. The reward came as “the dollar surged back to six-month high of 67cents US (Hooray!). We now hear of the Reserve Bank’s efforts to do everything it can, but failing, to keep the dollar as low as possible.
    I hope someone can explain the thinking at the time – how a drastic cutting of government expenditure was seen to be the way to fix the matter of a negative current account balance. At the time rising interest rates were seen to be the remedy for inflationary pressures – which weren’t having any effect on inflation itself. It seems that neither Keating, the Cabinet (cowed by PJK himself) nor Treasury or the RB knew what they were doing.


  10. Giorgio Plaz says:

    I am missing statements about the role of private commercial banks in MMT speeches. Two questions:

    When a government spends money for the private sector, how does this process include private commercial banks and what degrees of freedom do private commercial banks have?

    Is the following generally correct (for OECD countries):
    The government and private commercial banks are the clients of the national bank. Private companies and people are clients of the private commercial banks.


  11. Senexx says:

    In a very generalised view you are correct. The government (Treasury) has an account at the central bank of a nation. Private Banks have accounts at the central bank. The general public have accounts at the private banks. That is the answer to your second question.

    When the government spends money for the private sector, they ask the central bank to mark up the private bank accounts at the central bank. The private banks then mark up the general public individuals accounts held in the private banks.


  12. David Chester says:

    Since banks can create money out of fresh air, why did they need “bailing out” in 2008?


    • Tom Hickey says:

      While banks create money “out of thin air” by extending credit that entails marking up customer deposit accounts offsetting the loan obligation created, banks are regulated and limited by ratios like the capital ratio and the leverage ratio. These ratios are set by international agreement among central banks at the Bank of International Settlement and also domestically by central banks.

      The dodgy loans resulting from the crisis meant that these ratios were breached, in which case the bank would have to be put into resolution, shut down or sold/merged with another bank, as happened with Bear Stearns and Lehman.

      These failures in the lead up to the crisis brought the realization that the whole financial system could collapse owing to systemic risk unless they were supported by the central bank with liquidity and the Congress in regard to solvency. This resulted in the various emergency measures and establishment of emergency facilities.

      Another issue was the account. The banks would probably have failed under the mark assets to market accounting rule, so the rule was changed to mark to model.


      • Giorgio Plaz says:

        Dear Mr. Hickey, I have two follow up questions to your reply:
        First: Shadow bank sector:
        Money dealers like AIG also had to be saved.
        Could this be improved by not excluding CDS from bank balances or other regulations?

        I’ve read, that in the rescue process, the FED had to lend money to other central banks, like the ECB. What were the reasons for this?

        Reference: Economics of Money and Banking, Perry Mehrling

        I’m interested in simple schematic answers, if possible. I don’t have economic or financial education.


      • Tom Hickey says:

        1. Only commercial banks have access to central bank’s liabilities directly. They are the link between the central bank and nongovernment. This delegation of power means that commercial banks are public/private partnerships of a sort. In fact, in the US the member banks own the regional Federal reserve banks. But the profits after operations go to the US Treasury.

        Other lenders have to lend on savings, since they cannot just credit accounts in the currency, having no direct access to the central bank.

        See Eric Tymoigne’s course on money & banking from the MMT POV. I highly recommend reading it and if seriously interested in this subject, studying it carefully.

        As far as dealing with financial technology like CDS goes, it is a matter of regulation of systemic risk. There are various views of how to do this, each with advantages and disadvantages. Tradeoffs involve winners and loses, so this becomes a political question. MMT economists are generally supportive limiting fintech to that which is productive and socially contributive in addition to profitable. On the other hand banks and other financial institutions are interest chiefly in profitability. So there are different sides to the debate over how to address systemic risk.

        2. Central banks lend to other central banks or do currency swaps owing to balance of payments issues in their domestic banking systems. For example if a country’s banks have obligation in a foreign currency they can borrow those funds from their central bank. Since the foreign central banks only issues its own currency as its own liabilities, it has to obtain the foreign currency as liabilities of that central banks. Unless a central bank has foreign reserves that are sufficient, it may need to borrow them from another central bank or do a currency swap, which is just a change in denomination of assets.


      • Giorgio Plaz says:

        Ok. Thanks for the information and the link.
        Your answer for (2) is plausible for me.


  13. David Chester says:

    So the permission to create the money has to be given first before the banks can act. This means that in practice the money is not originated by the banks who only are allowed to print or otherwise issue it after agreement by what you call The Bank Of International Settlement, presumably The Fed. Then the stupid claim, about banks creating money, which is a part of the MMT presentation, is simply not true!


    • Giorgio Plaz says:

      Dear Mr. Chester
      I assume, you have to take into account the interbank market. (which was almost stopped in 2008)


    • Tom Hickey says:

      MMT explains how banks a delegated to “create money” by crediting accounts for their customers that take out loans. Banks don’t issue the currency, but rather only credit accounts in the domestic unit of account, which increases M1 money supply.

      Banks are not issuers of currency, which is solely a liability of the central bank as the government’s bank. Banks need to obtain the central bank liabilities for final settlement.

      Banks are delegated the right to hold accounts at the central bank, which manages the payments system. This gives bank direct access to the currency (central bank liabilities) though their ability to borrow in the payments system from other members, or else directly from the central bank under certain conditions, such as putting up collateral in the form of government securities or paying a penalty rate.

      So banks are delegated the power to add to the M1 money supply by creating credit, and they also serve to distribute physical currency that they obtain from the central bank in exchange for reserve balances in their accounts at the central bank. But banks are not issuers of the currency, which is solely the power delegated to the central bank as the government’s bank.

      So currency-issuing governments are monopoly issuers of the currency with banks begin delegated the power to increase the money supply through creating credits to deposit accounts “from thin air,” that is, without needing reserve balances in advance of lending, lending on existing customer deposits, or lending their own capital. But this power comes with limitations imposed by government, such as regulation and oversight.


  14. David Chester says:

    Is this also part of MMT?


    • Senexx says:

      Yes. Bank credit leverages government currency.


    • Tom Hickey says:

      The basis of MMT is double entry accounting, money & banking, and finance in order to understand a modern monetary production economy operationally. Economic theory that is not based on a correct operational understanding of a modern monetary production economy, as well as the operational similarities and differences of different national economies, will not be properly founded, and this will lead to errors.


  15. David Chester says:

    Double entry accounting, banking practices, etc., preceded MMT. If indeed it is the basis for MMT then where is there anything new?


    • Senexx says:

      What’s NEW in MMT?

      This is a list we could never do justice.  We could always add something.

      • Buffer stocks to control inflation.
      • Employment Guarantees using buffer stocks.
      • The consolidation of the central bank and treasury with an emphasis on banking arrangements.
      • Making the dynamics of fiscal deficits and debts clear.
      • The importance of semantics as it applies to ideology and macroeconomics

      Further Reading
      What’s new in MMT Part 1
      What’s new in MMT Part 2
      Full Employment and Price Stability
      What’s new in MMT Video


      • David Chester says:

        Senexx seems to think that everything new can be included in a theory of MM. This is not of what a scientific or any other theory consists and it is most necessary, if these new items are indeed of a theoretical nature (which I doubt), to call them something outside of MMT. They might fall lay within the general subject of macroeconomics and within that a theory of how the various agents behave with regard to each other, but this is not definitely about only the money side of MMT.

        I am still waiting to see a more precise explanation of what MMT really is and don;t give me that “never do justice” line again!.


      • Senexx says:

        You asked what was new. You got the current answer. MMT like any good product is always developing.

        You’ve been around MMT related sites for quite a while now. You should have picked up the essence. As Tom says below, it takes many things and puts them into a coherent body of thought.

        One that makes a lot more sense than the vast majority of other explanations.

        MMT is macroeconomics. (All squares are rectangles)
        Not all macroeconomics is MMT. (Not all rectangles are squares)

        I would also remind you to have civil discussion as requested in the post above.


  16. Tom Hickey says:

    According to MMT economics, they have made no new discoveries but rather are drawing on things known in the past but forgotten or ignored by conventional economists. The originality of MMT lies largely in the way the knowledge of the past is assembled. The MMT economists added some upgrades and tweaks, but just about all the key tings were already known, sometime for hundreds if not thousands of years. No one had put the pieces together previously into as a coherent account, from tools to operational understanding to economic theory that takes money & banking and finance into account, and policy formulation that show how to achieve the holy grail of growth, full employment, and price stability.


  17. David Chester says:

    So by implication MMT is simply a new catch-word or letters, that covers the various money matters of the past as described by previous economists, many of whom got it wrong or have become outdated, and as I suspect, we don’t REALLY have a good and consistent modern theory of money at all!

    What I do see is an attempt to make the subject appear to be so complicated that anybody who wants to make a name for him/her-self can “discover” something new about it without being capable of being challenged about its truth!


  18. Giorgio Plaz says:

    My feeling as a complete layperson is, that MMT (and MCT) can and hopefully will have a big impact. One example: Yesterday, my sister asked me, how she should vote (in a public vote in Switzerland) Instead of telling her, how she should vote, I explained her, what I knew from MMT so far, in keywords: (Mosler et all, and Keen)
    – Loans create deposits (and reserves)
    – vertical and horizontal money (exogenous and endogenous) i.e:
    – money creation by private banks and government, where: Net financial assets from private banks are always zero, therefore:
    – government deficit = private sector surplus
    – a government deficit means additional money circulating in private sector, which can be seen as a chance for the future.
    which she understood, although she doesn’t have an education in this area as well.

    When I started to look at MMT one year ago, my motivation for trying to understand the monetary system was triggered by short lessons like this one, from Mr. John T. Harvey, a snippet from the series about Modern Money & Public Purpose:

    Questions about Inflation are described in this video too, very short, but enough for me to get some clues. Short: I like this POV.

    So the overall goal for me is to look at money in finance and banking as a tool for public purpose, which is full employment, price stability and growth at the same time.

    If some of the economists here have some time, I have a question, based on 3 FRED diagrams, for Switzerland. Consider:
    1. Total Credit to Private Non-Financial Sector:
    2. Total Credit to Households
    3. Central government debt

    Now, both (1) and (2) are increasing since 2008, where (2) is a part of (1). If I subtract (2) from (1) I get the credit for the private firms without mortgages, which is increasing as well.

    But the central government debt is constant, because there is a self imposed constraint of the politics (which is called “debt-brake”) in Switzerland.

    In my opininion, this means, that the politics completely fails in understanding the monetary system. Additionally according to Steve Keen, a potential debt deflation in the future could have a severe impact, unless they get rid of this self imposed constraint.

    One solution for me could consist of:
    – get rid of “unproductive” debt.
    – create enough HPM government spending to obtain the above mentioned 3 goals.
    – a “peoples QE” as described by Steve Keen could help as well
    – job guarantee program (Tcherneva) or basic income maybe later

    What is your assessment of the situation in Switzerland and of my opinion?


  19. Tom Hickey says:

    I am not familiar enough with the Swiss situation to comment on that, but your understanding of the theory and operations is correct. A major problem facing the world today is not inflation but deflation as indicated by historically low interest rates. Central banks are using monetary policy to address deflation, whereas the problem is lagging effective demand, which can best be addressed with a looser fiscal stance and more stimulative fiscal policy. But the Swiss and Germans financially conservative traditionally and that is not good in a deflationary environment.


    • Giorgio Plaz says:

      Ok. Thank you for the answer.


    • Giorgio Plaz says:

      A short comment about the situation in Europe from my POV as Swiss citizen:
      Before I learned about MMT, I was following a german macroeconomist called Heiner Flassbeck (, who also identified the unsufficient aggregated demand and too small inflation as a problem already in 1999 when he was State Secretary in the German Federal Ministry of Finance (Social Democratic Party).
      He has a golden rule, which connects wages, productivity and inflation:
      Relative change of wages = relative change of productivity + relative change of inflation
      Using data, this can be seen as correlation for the last 50 years for Germany.
      Another of his simple statements, which I like, is:
      In a successfull economy, all citizens have to be included. All, which is produced in the economy, has to be bought by the citizens, which only is possible, if they also have the necessary money to buy it.

      (These all are arguments for a government deficit as well as increasing wages, the golden rule is an attack to monetarism)

      However, things changed around 1999. He had to leave and neoliberalism became the leading thought and also undermined the Social Democratic Party in Germany. They started to cut wages, which can be seen as internal devalulation: Germany departed from the 2 percent inflation target, which was the target for all countries in the Eurozone.
      Without the Euro, the currency of Germany would have appreciated, whereas other countries (like Italy, France..) could have devaluated their currency for stabilization. Once they all had the Euro, appreciation/devaluation was no longer possible, producing the known imbalances. Short: The big export surplus of Germany relative to the other countries in the Euro zone started to export unemployment to these other countries.
      The “crisis” in 2008 came in top of these already existing problems.
      And yes: Both current Ministers of Finance (in Germany and Switzerland) see the government as a household and try to balance its budget, unfortunately.

      Concerning Switzerland:
      Although we are not part of the EU and have our own sovereign currency, Germany is our biggest trading partner. Therefore a recession in the EU, especially in Germany, would hit us too.


  20. David Chester says:

    The implications of low interest rates are that the banks are having difficulty in lending as much money as they would like. If the demand for it was greater so would be its cost of borrowing, Also implied is that the people who want to borrow money, namely the capitalists, have not been very busy in investing in new companies and their associated durable capital goods, like buildings, machinery and even homes.

    This is because the demand for consumer goods and highly priced homes are both low and this is associated with a limited amount of money being earned and private investment being made. The power of monopolies to raise prices of both produced goods and houses (through land value speculation) has resulted in a general slow progress of the national economy, So the greed of the speculators is causing their own downfall as well as everybody else’s too!


  21. Tom Hickey says:

    “I am still waiting to see a more precise explanation of what MMT really is and don;t give me that “never do justice” line again!.”

    Here is some reading to answer your questions on MMT.

    L. Randall Wray, MMT Primer

    L. Randall Wray, From the State Theory of Money to Modern Money Theory: An Alternative to Economic Orthodoxy

    L. Randall Wray, Understanding Modern Money

    Éric Tymoigne and L. Randall Wray, Modern Money Theory 101: A Reply to Critics

    William Mitchell and L. Randall Wray, Modern Monetary Theory and Practice: An Introductory Text

    For a list of works on MMT, see:

    New Economic Perspectives, MMT Scholarship

    Warren Mosler’s contribution to MMT:

    Mandatory Readings

    Policy Proposals


  22. David Chester says:

    Does that mean we don’t need to study or understand the rest of economics outside of money?


    • Tom Hickey says:

      If one gets the money thing wrong, then the rest is just unrealistic model manipulation, since most of economics is based on using the unit of account to homogenize disparate data, financial and non-financial.

      Models can be designed to say anything, but what they say is determined by the assumptions.

      Without realistic assumptions, a model is unlikely to conform to evidence.

      If it does, the likelihood is that a special case is being described instead of a general case.

      Moreover, scientific explanations are ideally causal explanations where defined inputs regularly lead to expected outputs.


  23. David Chester says:

    Every a quantity of money changes hands there is a corresponding quantity of good, services, access rights, legal documents, taxes, savings, loans, etc. This means that theoretically we could manage to explain the same thing by these items. without having to employ MMT at all! I realize that to do so is not practical, but the point I wish to make is that WHY it is not practical. This is that because in fact both money and what it represents are both significant parts of our total macroeconomics system.

    Actually the money side is only a comparatively small part of the whole system, which includes, goods and services, land ownership and its access rights and leasing and rent, labor and earnings, government and its taxes and subsidies in terms of goods not only money, products and the process of bringing together of land access rights, commerce, production of durable capital goods (for making consumables), capitalism, monopoly, hire fees for use of durables, mortgaging of goods (houses), etc., etc.

    Consequentially there is so much more to macroeconomics than money and so much has already been said about money matters before they began to be called MMT, so I think a more balanced view should be taken of the whole shebang and less attention given to just one side of it.


  24. Tom Hickey says:

    MMT looks at one aspect of macroeconomics focusing on money and banking and finance as institutionally foundational. There are only about a dozen economists in the MMT camp and they have limited time and resources to put together an entire theory of macroeconomics, although they have touched on many aspects of the discipline.

    What the work done already by MMT economists shows is that a lot conventional neoclassically based macro cannot be right because it gets the institutional foundations wrong, which has deep and broad implications for methodological assumptions and analysis.

    MMT is situated in the Post Keynesian and institutionalist traditions and relies on contributions of these schools in areas that it doesn’t deal with specifically. However, these traditions are not homogenous and MMT economists agree with some aspects and not others. There has been some lively debate on this.

    The question is whether MMT has the areas with which it is directly concerned right. The next question is, if so, what are the implications for macro and policy formulation, because a lot of the assumptions on which macro and policy formulation are based would be wrong, for example, loanable funds and crowding out.

    Many questions would still remain to be answered and the answers tested, but many of the tunnels with no cheese would also be identified, and economists and policy makers could stop running down them.


  25. David Chester says:

    I would like to learn how MMT explains speculation in land values. I suspect that the true explanation for this damming phenomena is far from what landlords are doing to exploit the withholding of useful sites and driving up the cost of what is grudgingly available for development and proper use.


  26. Tom Hickey says:

    Warren Mosler has said he is open to a land value tax, but he generally prefers institutional change to address issues before they become a problem rather than fixing them later, e.g., by taxing in order to discourage rent-seeking behavior.

    See the proposals at his place for specific areas he has addressed.


  27. David Chester says:

    Lets face it, MMT does not explain about land value speculation and it also fails to cover a whole lot more macroeconomics phenomena. Warren might well be favorable to LVT but that does not prove how it is connected to MMT.


    • Giorgio Plaz says:

      A theory of everything is something not even the physicists managed to accomplish, althoug physics in some sense is more simple than economy.
      For relaxation:
      I just translated a free trade agreement from the year 1589 in the center of old europe. Sometimes I am sceptical whether our society including science really goes forward. (joke) Translated to english:

      Back to present time and MMT:
      I really enjoyed the latest article from Ms. Kelton in the NYT. It shows, how difficult it can be, when you try to get rid of old, irrational believes in the world of politics.


    • Tom Hickey says:

      Warren Mosler is the founder of MMT through his “Soft Currency Economics.”

      Government spending and taxation are the two legs of functional finance as an approach to fiscalism as opposed to monetarism, that is, reliance on fiscal policy rather than monetary policy in economic policy.

      The primary tools of fiscal policy are injection through spending and withdrawal by taxing. Spending potentially generates inflation and taxation controls inflation that could result from spending, so they are tandem operations.

      Taxes also serve to discourage the behavior that is taxed. Therefore, tax policy is related to economic incentives as they relative to social and political issues, in addition to economic issues.

      Taxing land value discourages speculation in land by capturing land rent as profit unrelated to productive investment.

      Warren’s point was that a land value tax that discourages rent-seeking could replace income tax, which taxes productive work, in using taxation to control inflation.

      All of this does actually fit together.

      There is no practical general theory of macroeconomics on the table at present. The search continues.

      MMT is making a stab at it from a fresh angle. Generally speaking, macroeconomists accept the trifecta of growth, employment and price stability. This trifecta states that only two factors can be achieved simultaneously. MMT purports to show how all three can be reconciled if moderate inflation is accepted rather than a constant price level.

      Presently, monetary policy aims at low to moderate inflation, but it uses employment as a tool to target the desired inflation rate. That results in a buffer stock of unemployed. The MMT JG replaces the buffer stock of unemployed with a buffer stock of employed.


      • David Chester says:

        Tom: We are beginning to agree on certain matters especially on the LVT issue although I still contend that nowhere in MMT does its nature appear. As shown below this and other ways of taxation contain a large number of implications, which the Treasury should be taking into account by simulation and forecasting (but about which they probably haven’t a clue)..

        The idea of governmental fiscal control through a combination of less regular taxing plus less injecting of new money into the system through the banks, suggests that it is the secondary effects of taxation which are of the greatest significance to national progress. This also implies that when Pres.Trump promises lower taxes, he should also be saying that banks simultaneously will not be allowed so much freedom in giving (“thin-air” money) loans, but that nvestment in bonds will be raised along with the national debt.

        The effect of the tax on land values has 17 different features on the whole system which are listed below.

        Four Advantages for Government:
        1. LVT, adds to the national income as do other taxation systems, but it should replace them. The author has shown in REF.1, that taxation of any kind is beneficial to the country as a whole due to its income providing for more work too, but that when the tax applies to land the topology and spread of its effects are about 3 times as beneficial as when the same amounts of income are taken.
        2. The cost of collecting the LVT is less than for all of the production-related taxes–tax avoidance becomes impossible because the sites are visible to all and who owns each is public knowledge. The army of tax collectors who are opposing a similar set of lawyers, are no longer busy with tax loop-holes in the law, so the number of people more productively employed will grow and the penalty on the country of having complicated taxation is less.
        3. Consumers pay less for their purchases due to lower production costs (see below). They can buy more goods and enjoy a raised standard of living. This creates greater satisfaction with the management of national affairs and more prosperity.
        4. The national economy stabilizes—it no longer experiences the 18 year business boom/bust cycle, due to periodic speculation in land values (see below). The withholding of unused land is eliminated see item 7, so there is less need for the complications of frequent land sales, developers searching and buyers hunting for unused sites.

        Six Aspects Affecting Land Owners:
        5. LVT is progressive. The owners of the most potentially productive sites pay the most tax.
        a) Urban sites provide the most usefulness and have to pay greater resulting taxes per unit of area. b) Big rural sites have less value and can be farmed more appropriately, to meet their ability to provide useful produce. c) Small-holder farming closer to population centers becomes more practical, due to local markets and reduced distribution costs.
        6. The land owner pays his LVT regardless of how his site is used. A large proportion of the present ground-rent from the tenants (who do use the land properly), becomes transformed into the LVT, with the result that land has less sales-value but still retains a significant “rental” value.
        7. LVT stops speculation in land prices, because the withholding of land from its proper use is not worthwhile.
        8. The introduction of LVT initially reduces the sales price of sites, even though their rental value can still grow over a longer term. As more sites become available, the competition for them is less fierce and entrepreneurs have more of a chance to get started
        9. With LVT, land owners are unable to pass the tax on to their tenants as rent hikes, due to the reduced competition for access to the additional sites that comes into use.
        10. With LVT, land prices will initially drop. Speculators in land values will want to foreclose on their mortgages and withdraw their money for reinvestment. Therefore LVT should be introduced gradually, to allow these speculators sufficient time to transfer their money to company-based shares etc., and simultaneously to meet the increased demand for produce (see below, items 12 and 13).

        Three Aspects Regarding Communities:
        11. With LVT, there is an incentive to use land for production or residence, rather than it being vacant and held unused.
        12. With LVT, greater working opportunities exist due to cheaper land and a greater number of available sites. Consumer goods become cheaper too, because entrepreneurs have less difficulty in starting-up their businesses and because they pay less ground-rent–demand grows, unemployment and poverty decrease.
        13. Investment money is withdrawn from land and placed in durable capital goods. This means more advances in technology and cheaper goods too because the effectiveness of labor has been raised.

        Four Aspects About Ethics:
        14. The collection of taxes from productive effort and commerce is socially unjust. LVT replaces this national extortion by gathering the surplus rental income, which comes without any exertion from the land owner or by the banks– LVT is a natural system of national income-gathering.
        15. Previous bribery and corruption for gaining privileged information about land cease. Before, this was due to the leaking of news of municipal plans for housing and industrial development, causing shock-waves in local land prices (and municipal workers’ and lawyers’ bank balances).
        16. The improved use of the more central land of cities reduces the environmental damage due to a) unused sites being dumping-grounds, and b) the smaller amount of fossil-fuel use, when traveling between home and workplace.
        17. Because the LVT eliminates the advantage that landlords currently hold over our society, LVT provides a greater equality of opportunity to earn a living. Entrepreneurs can operate in a natural way– to provide more jobs because their production costs are reduced. Then untaxed earnings will correspond to the value that the labor puts into the product or service. Consequently, after LVT has been properly and fully introduced as a single tax, it will eliminate poverty and improve business ethics.

        1. David Harold Chester, 2015: “Consequential Macroeconomics—Rationalizing About How Our Social System Works”, Lambert Academic Publishing, Saarbüchen, Germany (write to me: for free e-copy, and blow away those dismal pseudo-science macroeconomics cobwebs! Macroeconomics is a true science at last!)


    • Giorgio Plaz says:

      I agree with everything Mr Hickey said.

      If I am allowed to, I would like to add a short authentic story:
      A few month, I started to discuss things with a former chairman of a small swiss bank (consisting of about 500 small banks in the country, in the form of cooperatives, where you can participate – with 1 person = one vote, not 1 share one vote)
      He ran against all economists and politicians (stupid people..)
      One time, by chance, I mentioned the “dogs and bones” story of Mr. Mosler, with a link, which attracted his attention. Before he went into holidays, he bought his book about the seven innocent frauds for reading it during his holidays.
      When he was back, he emailed me, that he was in 100 percent agreement with the book and with Mr. Mosler and therefore eventually had found someone, who was thinking like himself.

      Since this time, he only attacks the “orthodox economists (and some politicians)”, but leaves the “heterodox economists” out.

      There is a possibility, that such discoveries are made by other bankers, who know the financial operations from practical experience and wonder about the (wrong) storytelling in media and politics. So there is hope and potential.


  28. Giorgio Plaz says:

    I have three simple, basic questions:

    1) You know how commercial banks create money.
    2) You know how the state spends: Central bank sends reserves to recipient bank, which uses it as asset, adding a matching amount to a deposit account (liability). As described in Eric Tymoigne’s course.
    The reserves move inside the checking accounts of the banks (payment transactions between banks) and find their way back to the state (the checking account at the central bank), after taxes are paid.

    Question 1:
    Assume that a state spends more than it taxes.
    Why is this called “deficit” at all?

    Question 2:
    Aren’t the names “deficit” and “surplus” misleading (for the public) when they are used in the context of spending/taxing of a state with a souvereign currency?

    Question 3:
    According to Mosler, I get the net financial value in the private sector, when I sum over all spendings of a state and subtract all taxes. ( I exclude state bonds and QE). This is called “state debt”. (which I again see as misleading name)
    Who or what is the creditor of that “state debt”?


    • David Chester says:

      Prerequisite. 1. Banks do not create money because if they did they would not need to borrow it or to be bailed out. What they print or electronically generate has already been given to them by government approval.
      2. No these names are not confusing, and it all depend on the national balance sheet.
      3. It is called deficit not a debt, which is the total of all previous annual deficits.

      Question answers. 1. It is simply the name we give when this money is owed. (and is covered by borrowing or printing some more).
      2. There is no confusion. If the annual balance sheet shows a positive balance it is a surplus and when it shows a negative balance (wrongly called a loss) it is a deficit.
      3. As already shown above it is a deficit not a debt because it applies for the year that has just passed. The creditor of this are investors in national bonds, which are both banks and private individuals and there are enough of them because when the interest rate is increased they find it worthwhile. If the debt were to be covered by the government issuing its own money to cover its current expense (loss) then the effect on the macro-economy would be to inflate the cost of goods and reduce the power of one unit of the local currency.


  29. Tom Hickey says:

    Governments issue currency. Financial institutions extend credit.

    Banks are unique financial institutions that extend credit denominated in the government’s unit of account, since they are allowed to have accounts at the central bank with the ability to borrow against collateral, along other government perks that non-bank financial institutions do not. For this, banks are required to submit to government regulation and meet certain requirements to remain in good standing.

    Banks increase the M1 money supply when they extend credit by making loans and crediting deposit accounts, which increases the financial assets of customers in the unit of account.

    There are limits to the amount of credit that banks can create owing to regulation, e.g., the capital ratio and leverage ratio.

    Banks are also limited by solvency, since they do not issue currency, but only extend credit

    Currency sovereigns have no solvency constraint if they don’t assume obligations in currencies they don’t issue.


  30. David Chester says:

    Good explanation by Steve and he rightly claims that a depression is on the way. My problem with it is that he is mostly describing the money side of government policy and control, whilst in fact the physical side of the social system also plays a significant part. In particular this is due to the speculation in land values, which itself is unstable and greatly contributes to what the other capitalists do. Land owners are not capitalists because when looked at separately, the value of land and of investments in buildings and machinery and other durable capital goods, have different changes. Land has a different way for its dynamics to operate and that of these truly capitalistic quantities is more regular. So it is my claim that If Steve had properly included land values in his simulations (and not included it as a part of the capitalists share, we would obtain an even clearer picture and in particular we would find the need to stabilize the whole economy by control of the land prices. How to do this is another story.


    • Giorgio Plaz says:

      Yes, a good explanation by Steve Keen.

      However, I keep my opinion about government spending:
      The term “deficit” is misleading, because it has a simple meaning for the public: “something gets lost” – which is wrong.
      Additionally I reject the argumentation, that selling state bonds to the private sector is a way to “finance” the government.


  31. David Chester says:

    If you look at the Swedish economy and their variations in land prices, we should expect a crisis to happen in less than a year–something in his talk Steve is suggesting too..


    • Giorgio Plaz says:

      According to Steve Keen, many countries are moving towards a crisis, because the private debt is too big and increasing at the same rate or faster then the GDP. A decrease in credit (speed of new debt per year) can trigger a contraction in the economy, according to correlations.
      There are a lot of candidate countries for this.

      However a change in the view of “money” could help to avoid crisis anytime, View money as a tool and focus on good workload of the economy, by making sure, enough credit is given by commercial banks and enough currency is issued by governments, so that aggregate demand is kept high enough.


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