Elkarrizketa Warren Mosler-ekin (2020)

Episode 90 – The MMT Sequence with Warren Mosler


Episode 90 – The MMT Sequence with Warren Mosler

Talking to Warren Mosler reminds us just how far MMT has come since the days he traveled from conference to conference, peddling his intellectual wares. Well, they no longer laugh at Mosler Economics, AKA Modern Monetary Theory. It’s a well-known part of MMT history that Stephanie Kelton, fresh out of grad school, set out to disprove his assertions, point by point, and ended up making MMT her life’s work. Today, in Warren’s view, she’s arguably the most influential economist in the world, because all of the powerful economic advisors have read The Deficit Myth. Of course, he gives credit to Randy Wray, Bill Mitchell, Mat Forstater, and those who came after, but, he says, her book saved the world.

That we get this deficit spending is just great, you know, that we’ve had recently. You could say MMT has saved the world. Whether it knows it or not. There’s no way they would have done three trillion1 and now talking another two trillion. And there hasn’t been a single mention of a tax. 

In this first episode of a two-part interview, Steve decided it’s a good time to revisit the money story. This podcast always has new listeners and, for those also new to MMT, who better to go to than Warren Mosler for the money story? If you haven’t heard how he flummoxed a tour guide in Pompeii, you’re in for a treat. To further illustrate the order of operations, he includes the tale of British colonists in Africa, imposing a hut tax in order to create – or coerce – a labor force for their coffee plantations. 

Talking to Warren brings to light some of the differences among MMT proponents. They seem to be pretty much in agreement on the facts or core principles, although you might say proposals for the federal job guarantee are a significant departure from his “employer of last resort”. For the most part, however, Warren only expresses frustration with choices of emphasis, especially when it comes to the Fed’s inadequate analysis of some basics, like the rate of inflation

What is the rate of inflation? Well, how is it defined academically? Academically, inflation is the continuous change in the price level that’s happening right now. It’s faced by people in the real economy. What’s the continuous change in the price level they’re facing right now? That they’re dealing with? That’s affecting their business, their purchases, their sales.

What the Fed doesn’t grasp is when they set interest rates, they are setting the inflation rate for the economy

Throughout the interview, Warren details some of the most significant contributions of MMT, including a tax liability’s function, the national debt, and the cause of unemployment. He explains that the Fed’s use of “easing” (lowering rates) and “tightening” (raising rates) are exactly backwards. Even those who don’t understand the Federal Reserve’s operations should be able to see that when they raise interest rates, it’s mainly a boost of interest to the wealthy. Warren calls it a “basic income” for people who already have money.

Warren Mosler is an American economist and theorist, and one of the leading voices in the field of Modern Monetary Theory (MMT). Presently, Warren resides on St. Croix, US Virgin Islands, where he owns and operates Valance Co., Inc. He is the author of “The Seven Deadly Innocent Frauds of Economic Policy” and “Soft Currency Economics,” which are available on his website.

Entzun hemen:



[00:00:03.710] – Warren Mosler [intro/music]

The concept is: first you need tax liability, which puts everyone in debt to the government. And it’s coercive. They have to be enforceable, otherwise it’s not going to work. And it’s a question of, well, what right does the government have to force people to do anything?

Well, with the U.S. Constitution, we the people gave the government the right to do this. An important MMT contribution to the history of thought is that unemployment is everywhere and always a monetary phenomenon and the tax liability by design functions to create unemployment. 

[00:01:26.880] – Geoff Ginter [intro/music]

Now, let’s see if we can avoid the apocalypse altogether. Here’s another episode of Macro N Cheese with your host, Steve Grumbine.

[00:01:34.540] – Steve Grumbine

All right. And this is Steve with Macro N Cheese today. I have Warren Mosler joining me. Warren has been with us forever. Without Warren, there is no Real Progressives and without Warren’s work there is no MMT. And it’s just such a great honor and privilege to have Warren not only as a friend, but as somebody who really gives of his time and of his knowledge.

And so Warren had recently written a – I guess about six months ago recent – written a covid-19 response, his concept of what that was. So I thought it would be great to bring Warren on to talk about that. But one of the other things that I thought was really important to bring Warren on, Warren obviously created what he considers to be Warren Mosler or Mosler Economics, OK? Pre MMT.

And Warren took that information and spread it around to a couple early adopters and Randy Wray and Bill Mitchell and Mat Forstater and it became this thing. It became MMT. And so I think it’s really nice to hear, especially for people that haven’t really been indoctrinated, haven’t had the opportunity to learn the stuff that really you’re about to really hear what core MMT, according to Warren Mosler means and is.

And I think it’s a very valuable conversation. Warren wrote the book Seven Deadly Innocent Frauds of Economic Policy. I suggest that you get that book at some point in time. We have a publication of it on Real Progressives website. Warren was kind enough to allow us to publish it through there. So with that, Warren, thank you very much for taking the time to be with us here at Macro N Cheese.

[00:03:16.470] – Warren Mosler

Good to be here. And every time you introduce me, I’ve got to go out and get new hats. They don’t… they’re too small. My head swells up.

[00:03:23.560] – Grumbine

Well, it’s true though, man. [laughter] Well, I didn’t talk about you being a great automobile designer. I didn’t talk about you being a wonderful tennis player. I didn’t talk about you building boats and stuff like that. So, I mean, I got room to grow the head, man.

[00:03:40.770] – Mosler

Oh, no. Oh, no.  [laughter]

[00:03:46.180] – Grumbine

So with the introduction. OK, let’s just start out. Tell us what Mosler Economics that is now being called MMT, tell us what that is. Explain to us what that is.

[00:03:58.700] – Mosler

OK, so I wrote something called the White Paper and I sent it around to the MMT proponents I knew for comment and nobody ever answered. [laughs] So I wanted to make it kind of a collaborative effort to list what the MMT contributions are to the economic history of thought, to know the economics in general, macroeconomics, the general understanding of economics. So I just kept chipping away at it and nobody’s ever picked it up and published it or spread it around. So, I’ve got on my website…

[00:04:31.360] – Grumbine

We’ve got it on our website. .

[00:04:31.860] – Mosler

Yeah. Yeah. Did you get any feedback? Not much?

[00:04:36.470] – Grumbine

No, we did not. We have some regular activists who read it. It’s like, Wow, and they shared it around. So yes, we did.

[00:04:41.900] – Mosler

Right. That is to me at this point in time, that’s what the contributions are to economics. OK, and so the number one contribution was the sequencing idea: where every member of Congress thought they needed to get dollars first through taxing to be able to spend, what they didn’t tax they’d have to borrow from China and leave the debt to our grandchildren under President Obama.

And Hillary Clinton, or whoever, went to China to make sure that they were going to finance our health care system. Because the whole idea is we have to get that to happen. Right? And if every president we’ve had has been insisting that we’ve got to be really careful with bond markets and everything else, because we have to be able to get this money or we can’t spend.

And what I pointed out – too long ago now, 30 years – is that, in fact, as everybody in Fed operations knows, every senior civil servant at the Fed, not the political appointees who can’t tie their own shoes, but the civil servants who are very, very good – the people in monetary affairs – they all know that all the money to pay taxes, all the money that can be used to buy bonds, all the US dollars to pay taxes and to buy bonds, come from the government and its agents.

You say the government is not like some guy out there who’s the government. It has agents like the Fed, Congress, and the military. So all the dollars that pay taxes come from the government or its agents, and its agents include the banking system. The first thing people say, “Oh, the banks can make money,” that they’re agents of the government, and we’re not going to talk about it now but they are. [laughter]

I owned a bank. I know I was an agent of the government. They made it very clear to me. [laughter] If I tried to act in any other manner – slam! OK? So there’s no discussion on that point. So they have the right to change management if they don’t like what you’re doing, and under the CAMEL’s regulations, they’re not shy about pointing that out.

We don’t like the color you painted the building. We can change management.” OK, OK, whatever you want. But OK, so the money to pay taxes or buy bonds comes from the government, see? In other words, the government has to spend first before the US dollars are there that can be used to pay taxes or to buy bonds. So if the sequence is: first the government spends and then technically they’re crediting, for the most part, crediting reserve accounts at the Fed, which are like checking accounts at the Fed for all the member banks.

So first they spend by putting money in all the member banks checking accounts at the Fed, called reserve accounts. And those balances that they put in member bank accounts can only go to other member banks. They can transfer between each other, but they can’t jump off the balance sheet and run overseas or something. There is no such thing. Just an entry on a spreadsheet. You can only debit one account, credit another. There is no independent existence for these balances.

So they spend first. Some of those balances are then used to pay taxes. So they would then debit your account. And whatever’s left over can be used to buy government bonds. So they sell government bonds. When those get paid for, they shift the money from these checking accounts at the Fed to government bond accounts, which are just savings accounts, time deposits. OK, so the first thing is the sequence that they spend first and then taxes are paid or bonds are purchased.

Well, if that’s the case, then the whole idea of, “Well, where does the money come from?” is inapplicable. It’s just the Federal Reserve changing the numbers in some of these bank accounts at the Fed and other banks’ bank accounts at the Fed. That’s where the money comes from. It doesn’t come from taxing, it doesn’t come from borrowing, it doesn’t come from anywhere.

And people visualize money as flowing: it moves from this account and goes into that account and goes somewhere else. The analogy I like to give for money is a television screen. If you looked at your television screen today, you saw a tennis match between Nadal and Djokovic. You saw them running around and you saw the ball going around, but there was nothing moving on your television screen.

You get up really close to your screen – by the way, that’s the only time I use the word “really.” I don’t use it… You get up close enough to your screen, what you’d see are little dots going on and off. There is nothing moving on that screen. And if you look at money, at least in the banking system, what you see is numbers and accounts going up and numbers going down, but you don’t see anything moving in between accounts, all right? It’s just accounting. It’s scorekeeping. One score goes up and another score goes down, but there’s nothing actually moving.

OK, so I’m getting off track a little bit. So the first contribution that what is now called MMT made to this consequence here is that spending has to come first. And it’s easy enough to understand; everybody knows that the movie theater doesn’t collect the ticket first and then sell it. The football stadium doesn’t go out and collect tickets first and then sell them. They have to sell the ticket first before it can be collected.

Likewise, the government has to spend its dollars before they can be collected as taxes or as payments for bonds. And everyone in the Fed knows it. Now they used different language, they say, “Yes, we can’t do a reserve drain,” which means get payments, “without first doing a prior reserve act,” which means making payments. We have to do a reserve act first, we have to make payments, before the money is there, before the dollars are there to be able to pay us. Because it’s just a spreadsheet. So that was… The first contribution was the sequence.

[00:10:19.000] – Grumbine

So hold on for a second.

[00:10:20.190] – Mosler


[00:10:21.370] – Grumbine

So if I’m thinking about this, this means that, you know, the flows between banks… There’s nothing literally flowing. It’s computer A marks accounts up. Over on the other side, computer B marks accounts down.

[00:10:35.380] – Mosler

It’s computer A marking up and down accounts on its books. Each bank has its own computer and its own spreadsheet, marking accounts up and down in its own book. None of them can change what number’s on anybody else’s books.

[00:10:48.370] – Grumbine

So how do they map the flows between the banks then? How does that work?

[00:10:52.880] – Mosler

OK, well, we’re getting a little off track. But I can do that if you want. I can go on to go through how TARGET2 works in the euro system.

[00:10:59.290] – Grumbine

[laughter] Well, no, no. Just play with it for a second. Tease it for a second. 

[00:11:05.130] – Mosler

All right. OK, so we’ll take some time. And this always happens by the way. I understand. Just remind me where we started [laughter] which is the white paper and the contribution. So what happens is, imagine there’s only one bank. And I have an account at the bank and you have an account at the bank and the bank buys pencils from me or something and puts dollars in my account.

And now I can buy something from you and move the dollars from my account to your account, and you can buy something from me and move dollars from your account to my account. Or you can buy something from the bank, pay them for service or whatever. And then they’ll move dollars out of your account.

OK, so that’s one bank is moving the dollars between our accounts. There’s nothing else involved here, OK? There’s only one bank marking accounts up and down on its own books. Like if you’re playing cards and you’ve got everybody’s score on a piece of paper, it’s one scorekeeper. He adds to one person’s score and subtracts from another. And that’s it.

But there’s only one. The score doesn’t fly off that piece of paper. It stays on a piece of paper. So now the problem becomes, let’s say there’s two banks. So now you and I are doing this in this bank, back and forth, and then you want to buy something from somebody, but he doesn’t have an account at this bank. His account is at Bank B. We always name these banks A and B, by the way. [laugh]

And so we’re in Bank A and now there’s Bank B over there. And you want to buy something from somebody in Bank B. How do you do that? OK, it’s not easy. It’s not like… There isn’t any way to do it without something else involved. Something else has to be involved. The way it works is there is a bank in between.

Let’s call it the Fed. It doesn’t need to be, it could be a private bank or a private clearinghouse. But let’s call it the Fed. And Bank A has an account at the Fed and Bank B has an account at the Fed. Just like you and I have accounts at Bank A, and just like those other people have accounts at Bank B, Bank A and Bank B each have an account at the Fed. And the Fed can track money from Bank A’s account and add money to Bank B’s account.

But only the Fed can do that. Bank A and Bank B can’t make those entries, nor can the Fed make entries between you and I on Bank A’s books or between…  Bank B can make entries between the people on its books, but it can’t make entries at the Fed and it can’t make entries on Bank A’s books. Look, we have three banks now, one in the middle called the Fed and each one is the scorekeeper for accounts on its own books.

[00:13:37.310] – Grumbine

And that’s it.

[00:13:38.860] – Mosler

And that’s it.

[00:13:40.340] – Grumbine

Easy enough. Back to contributions.

[00:13:43.590] – Mosler

[laughter] OK. You didn’t ask me what happens if somebody has an overdraft and they’re not going to…

[00:13:51.710] – Grumbine

No. I didn’t want to get into the weeds there. I just wanted to taste test how that worked out.

[00:13:55.850] – Mosler

OK. All right. So, yes, it is that simple. Fortunately. Otherwise, I’ve met the people running this thing. If it wasn’t, they wouldn’t be able to do it. [laughter] And I used to have a small bank and they used to work for me. If it wasn’t that simple, they wouldn’t know how to do it. I’ve met with Bernanke, I’ve met with Janet Yeltsin, which are all very nice people. There’s no conspiracy. They’re just plain vanilla academics.

But this stuff’s hard. If I had to explain this to them, what I just explained to you, I would have had to dumb it way down. [laughter] Which is true. So anyway, one of the contributions is the sequencing, and that itself is a contribution. The sequencing. But out of that comes something equally as important to economists, to finance, to understanding monetary operations, you know, to running the financial system.

And that is… The money story comes out of that. And MMT has a money story that’s different, at least for now. It’s been different from the mainstream money story, which was: somehow there was people exchanging things without money and then money became convenient or something like that. They have a whole story about first bartering and then money, all kinds of stuff. OK, but, you know, to me, that doesn’t matter.

What matters is how today’s currencies work, because that’s what we’re dealing with, the dollar, the pound, euro. And so that money story begins with a government that wants to provision itself. All right, so how do you get people out of the private sector into the government? How do you get them into the army? How do you get them into the legal system? How do you get them to be schoolteachers and public health workers? All these things?

You could ask for volunteers, but that doesn’t work. That’s not a very strong way to do it. It’s not reliable. All right. Now, when I start this, I get pushback and people say to me, “well, you know, look, there was no private sector until the government… You can’t start with the government trying to get people from the private sector.” And I say, “OK, so let’s not call it the private sector, let’s just call it the population or something.” [laughter] So there’s all this semantic stuff… But, you know, the premise that the government wants to provision itself and get from the resources that are all around it. How about that? I don’t know.

[00:16:30.710] – Grumbine

I like that, actually. Yes. Keep going.

[00:16:34.010] – Mosler

So by saying the private sector, I got into trouble with some people who wouldn’t let go. Getting in a five-hour discussion as to what’s the definition of the “private sector.” So I started saying “non-government sector.” [laughter]

[00:16:47.310] – Grumbine

Fair enough.

[00:16:47.940] – Mosler

So it’s not the government it’s the non-government… And they can’t argue that. So that’s why you see in my work the government sector versus the non-government sector. Just to avoid that argument. OK, so the point is the government wants to hire people and it wants to buy food for the cafeteria, bullets for the soldiers, and that kind of stuff. So how do you do that?

Well the way we do it is the first thing we do is impose a tax liability. Now you can use income tax for this model that I’m building here, but it’s complicated, and it’s second order, and it requires computing incomes and all kinds of stuff, or it’s a non-starter. So, rather than get into that whole argument now – I’d be happy to get into it, but it’s diversionary – let’s just assume a property tax because that’s an easy one to understand, you know, the dynamics. And it works.

And I’m not saying that that is how the whole world works, always with property tax. It doesn’t, OK? But for purposes of this example, think about a property tax. OK, so the government puts a tax on everybody’s house of a certain amount. A tax liability. All right? Then that’s what drives the system.

OK, and they say, well, you know, you don’t need taxes to fund spending, OK, but you need tax liabilities to create things for sale. There’s a distinction there, but it’s you know, it’s a bit semantics, right, because people use taxes and tax liabilities interchangeably, unless you precisely defining words. You know, somebody says, “Oh, we don’t need taxes to fund spending.” I say, “Well, we need tax liabilities; you don’t need actual tax payments.”

Now, “Oh you’re saying I’m wrong.” OK, well, I’m not saying you’re wrong. I’m trying to point out how it works and you can say what’s right or wrong. So I’m uncomfortable when I read that MMT is saying, you know, taxes don’t finance spending. What does finance even mean? They don’t provide the dollars? Yes, that’s correct.

But that’s not necessarily what finance means. Finance means facilitated in some sense, more than it means the actual provision of dollars, right? To a lot of people. May not be wrong. Maybe technically finance means provide dollars. But, you know, I don’t want to be like dead right and say… You know, get in a semantic argument and say, OK, I won semantically, because the definition of finance means “provide the money” and they don’t provide the money for spending.

So in that sense taxes do not finance government. OK. So that’s a correct statement, but that doesn’t mean I’m going to put it out there and stand on it. Because that’s not what I’m trying to do. I’m trying to get a concept across here. The concept is: first you need tax liabilities, which puts everyone in debt to the government. And it’s coercive. They have to be enforceable, otherwise, it’s not going to work. And it’s a question of, well, what right does the government have to force people to do anything?

Well, that’s a nice philosophical question, but with the US Constitution, the people – we the people – gave the government the right to do this. To tax us and impose tax liabilities for the collective good. And the states already had it before they even had a Constitution. So anyway, tax liabilities come first. And what do tax liabilities do? They create sellers of real goods and services. And there are always sellers… I’m not saying there weren’t sellers before.

But these are sellers who now want the thing they need to pay that tax. They want US dollars if they are US dollar-denominated tax liabilities. So now we’ve got people looking for work that gets paid in US dollars. In Japan, the tax liabilities create people looking to get paid yen. In Europe, European countries, they create people who can get paid in euros, right?

And so they create this nominal demand for the currency and they create now people looking for paid work, which is exactly why the government did it, because it wanted people looking for paid work so they could go hire them with these – I’ve been calling them since way back – otherwise worthless dollars. If you ever hear that term, that’s one of the original terms. But the government can now spend its otherwise worthless dollars – without the tax liabilities they’re worthless – because they’re a tax credit.

The thing that you use to pay taxes is called the tax credit. So a dollar’s a tax credit. What’s the tax credit worth without a tax? Not worth anything. You have tax liabilities, now these tax credits are worth a lot because you need them so you don’t lose your house or your car or whatever, go to jail. Yeah. So, yeah. That’s 30 years of practice. I didn’t say it this way the first time. [laughter] So it’s evolving. And if I’d said it this way the first time, it might not have been effective right? Things change.

[00:21:30.680] – Grumbine

Very possible.

[00:21:31.750] – Mosler

The whole language changes. Everything changes. We were speaking a different language thirty years ago. OK, so the government imposes tax liabilities to create people looking for paid work, all by design so they can now hire them to be soldiers and public health workers and teachers and all the other people the government has to provision… Food inspectors, whatever we feel, whatever the government is there for, to serve public purpose. This is how it provisions itself, with the means to do it. All right. So now interestingly… or interesting, Steve, is that [laughter] Steve.

[00:22:06.720] – Grumbine

It’s all good.

[00:22:08.680] – Mosler

I get confused [laughter] The tax liability causes something that didn’t exist before, which is people looking for paid work, which is how we define unemployment. Unemployment is not people looking to volunteer at the American Cancer Society. People looking for paid work and want the money. And they can’t find it. And so the tax liability creates people looking for paid work who cannot find it because there aren’t any dollars, initially, apart from the tax credits, the dollars, apart from what the government has the ability to pay – to credit your account with.

And so the purpose of taxation, by design, is therefore as a point of logic, to create unemployment, something that did not exist before, period. There’s no other cause of unemployment. Without the yen, there wouldn’t be millions of people in Japan looking for work, that paid in yen, who couldn’t find it. Right? It doesn’t work that way. They’d be looking for something else if they were looking, but they wouldn’t be looking for yen. We define it as, in Japan, as people looking for work paid in yen.

In the US, it’s people looking for work paid in dollars. If there wasn’t a tax liability denominated in dollars, if the government hadn’t done that, there wouldn’t be any unemployment as we defined it. So. An important MMT contribution to the history of thought is that unemployment is everywhere and always a monetary phenomenon, and the tax liabilities, by design, function to create unemployment. So that is the source of unemployment. And when I talk to Marxian economists, guys like Riccardo Bellofiore, you know, over in Italy, he’s really sharp guy… I sound like Trump now. [laughter] “Really good guy.”

[00:23:47.450] – Grumbine

[laughter] Just make it great again, right? Just make it great,

[00:23:49.810] – Mosler

Great, great economist, great Marxist economist.

[00:23:52.430] – Grumbine

Beautiful, beautiful man.

[00:23:53.080] – Mosler

He is actually. Yes, beautiful guy. He is actually.

[00:23:58.220] – Grumbine

[laughter] You’re just testing out your Trump.

[00:24:00.050] – Mosler

Yeah. It does sound suspect now. It didn’t sound suspect before Trump when I said that. Now with Trump it’s suspect. [laughter] It’s really altered our ability to live. So he says yeah, Marx never understood that as the cause of unemployment.  He wrote an awful lot about it and the class struggle on point. But it was never understood that the cause of unemployment was coercive taxation. He gave us credit for that contribution to the history of thought. I did a little paper on it, I did a lecture for his class.

He said, tell me what you think are the contributions, gave full credit for that being the contribution. He’s now in his 70s, I think. A good historian. He’s seen it all, been to a the conferences. And a recognized leader in the field. So anyway, so OK. So I’ll take it. OK, so we get credit for that. For pointing out that the cause of unemployment is taxation. Nobody else says that, right?

[00:24:52.550] – Grumbine

Nfo ƒonfe.

[00:24:53.270] – Mosler

Whenever you see it written down somewhere or I say it, there is a lot of pushback.

[00:24:56.750] – Grumbine

Eyebrows go up for sure. Absolutely.

[00:25:00.230] – Mosler

Yeah. It’s not something anybody’s like leading with. OK, so the money story starts with a tax liability. It creates unemployment, the government hires. Right? But let’s say the tax liability creates five million or 10 million unemployed, OK? Because we have an institutional structure. We’ve got 10 million unemployed. So they were created by the tax liability, let’s say. And then the government decides to hire three million to provision itself. So it left that seven million people unemployed. Like, why would it do that? [laughter]

That doesn’t make any sense. If they only wanted to hire three million, why didn’t they put a tax structure out there that created three million unemployed? You know, it’s not a Democratic or Republican thing, or it’s not right wing or left wing. You know, nobody would do that. I guess if they knew that it worked this way, they might create a couple, a few million, to keep the unemployment numbers down, but certainly when the unemployment numbers are what they are today, which is higher than even they want for any kind of class struggle or anything, they would have pointed out that it seems like we’ve got a problem here.

Our tax structure is generating 20 million unemployed and we’re only hiring three million, I mean what are we going to do here, guys? So what would you do? So let’s look at what other people have done who have done the same thing. So when the British went into Africa to grow coffee, they put a tax on everybody’s house. They called it a hut tax. Notice how nicely history ties into my story?

[00:26:22.000] – Grumbine

Yes I do. [laughter]

[00:26:22.290] – Mosler

I didn’t have the hindsight of knowing I was going to tell this story. So I made it fit the history.

[00:26:28.020] – Grumbine

Made the history work for your story, right. Exactly.

[00:26:31.770] – Mosler

Right. And the people in Africa – and I used to say Ghana, but it turned out Ghana didn’t grow coffee. They did other things.  Mat Forstater actually had a professor there, who was from there and actually saw this happen where they put a tax on to get people to work for the British government. And he remembered when those first coins came out, as a child. So anyway, so they wanted to grow coffee in a plantation. Nobody in Africa wanted to go to a British plantation to grow coffee. They put a tax on all their huts, called it a hut tax.

And if they didn’t pay, they had the military there – they’d burn it down. If you don’t want your house burned down, you show up at the plantation for work, earn enough money to pay the tax. And they didn’t have to work full time… everybody didn’t have to work full time to pay the tax. It was enough to get what they thought was the amount of people they wanted to come grow coffee. So they put this tax on and people show up to work. Now notice the sequence: tax liability, right?

[00:27:23.620] – Grumbine

Yep. Absolutely.

[00:27:23.710] – Mosler

Something nobody has. It creates unemployment, people looking for paid work. They show up at the coffee plantation, they give them a job – they hire the unemployed their tax created – they pay them, they go home, and they pay their taxes. OK? And then that’s the sequence: the tax is the last piece of that monetary chain. After the tax is paid it starts over again, right?

So that’s our money story, that sequence. Now, what would happen if too many people showed up for work? You know, the British didn’t want that many people showing up because, you know, they all wanted to earn more than the tax because they wanted to save some, spend them on souvenirs or whatever they’re going to do with it – save it for a rainy day, put them in an IRA or something.

Merchants wanted to be able to make change for people, everything else. A lot of people didn’t want to go to work to grow coffee, so they go out and hunt or gather, whatever they were doing. Build houses. And other people would work more than they needed and buy things from them. And you had this… Something about satisfying wants. What do the economists call it?

[00:28:25.280] – Grumbine

Needs, desires, demands?

[00:28:27.390] – Mosler

Yeah. The market figures it out, and some people, you know, you get a division of labor where some people are working the plantations, earning a lot more than they need for their hut tax, but enough to buy things from other people who need to pay the tax. The whole economy gets monetized. But a lot of these people who… Probably all of them are going to want to earn more than they actually need to pay the tax so they have some extras if they get sick or anything else.

Which means the British would always spend more than they collected. They might pay the people ten thousand and nine thousand are used to pay taxes and the other thousand are in the street, right? Money in the street. The money supply. It was in cash registers, it was in people’s pockets, it was under mattresses. Parents took them home as souvenirs or whatever.

And you can think of New York City. They always sell more subway tokens than they collect. People have them in their pockets, people take them home for souvenirs. There’s a desire to collect them, to net save. I call it a savings desire. Right?

Now, so the British put a tax on, they figured a certain number of people would show up for work, they’d pay them all. The British spent more than they collected, they ran a deficit. That was the savings in the economy. But there were more people showing up than they wanted. So what did they do? Well they’d lower the tax, right? Or they’d hire them to do something else. They wouldn’t just let them be unemployed and go burn their house down?

[00:29:48.700] – Grumbine

Right. Yeah, right.

[00:29:50.230] – Mosler

[laughter] That’s what the European Union does, right? That’s just stupid. That’s what the United States government does. You put a tax on which creates unemployed. You only provide, you know, circumstances and institutional structure that employs a certain number of them. And the rest are left to wither and die. Like, what? I give people the benefit of the doubt. Maybe it’s, you know, innocent fraud. I say it’s a misunderstanding.

[00:30:15.150] – Grumbine

You’re very generous there, Warren.

[00:30:17.510] – Mosler

And nobody, whoever did this, knowing what they were doing, ever did what we all do today. That’s how the British wouldn’t just go say, all right, the tax is ten thousand. We’re only going to give you work for nine thousand, and then we’re gonna go out and burn houses down. The point wasn’t to burn the house down. The point was to grow coffee.

[00:30:32.950] – Grumbine

Coerce you to grow coffee. 

[00:30:34.940] – Mosler

Yeah, the point of the government provisioning is to get soldiers, to get public health workers, get the legal system staffed, you know, to provision the government with all these things. Not to have an extra 10 million people that it’s just going to let die in the street. That’s not what it’s about, to create this huge social problem and everything else. That’s not the purpose of the exercise.

So I can only conclude from that – and I know I’m being way too generous – that it’s a huge misunderstanding. And, you know, I don’t know which is more damning that they are smart enough to do it by design, or they’re stupid enough to not know what they’re doing. But neither one is a flattering situation. No. That’s what Galbraith meant by “innocent fraud.” You know, damning, damning with faint praise or something along those lines.

[00:31:19.790] – Grumbine


[00:31:20.610] – Mosler

So that’s the money story. And the money story teaches us everything we need to know about how the currency… briefly. And we can learn more operational details, but you really don’t learn anything new, conceptually, that’s not in this money story. So you can see what the public debt is. It’s dollars spent by the government that haven’t yet been used to pay taxes. It credits our accounts with five trillion when it spends – this year it’s six trillion – and only four trillion gets paid in taxes.

The deficit is two trillion. It sits there in reserve accounts. They sell securities, they get shifted from reserve accounts to securities accounts. It’s still “The Money.” But it’s the public debt – the dollars spent that haven’t been used to pay taxes. They sit in savings accounts, securities accounts at the Federal Reserve, earning interest, and that is “The Money.” You say how much money is in Bank of America? Citibank?

It’s the dollars in checking accounts plus dollars in savings accounts. That is The Money. If you count the money at the Federal Reserve Bank, it’s dollars in reserve accounts, which are like checking accounts, and dollars in security accounts, which are like savings accounts, earning interest. That is The Money. So? The public debt is The Money. Well, how do you pay it back? How do you pay The Money back? What kind of a stupid question is that? I mean, it’s not an applicable question.

[00:32:35.700] – Grumbine

Exactly. You delete it all?

[00:32:36.570] – Mosler

You could say what happened… Yeah, so like the British would spend ten thousand crown – whatever they made up, some scrip – paying everybody. Only nine thousand gets paid in taxes, the rest is saved in people’s pockets and cash registers. If somebody says, to the British, “You’re running a deficit. You’re spending ten thousand. You only collected nine thousand.” They’d go, “Yeah.” Then say, “Well, how are you going to pay it back?

And they’d go, “What are you talking about? How is that an applicable question? What do you mean ‘how are you going to pay it back’?” It doesn’t have applicability, that question. There’s nothing to pay back. We’ve already used the money, it’s an outstanding tax credit, it can be used to pay taxes. If the British offered accounts that earned interest, like our securities, and people took their crowns and gave them to British to hold in bank accounts called Treasury securities that paid some interest

So then how are you going to pay that back? Like they’re tax credits, what do you mean? When the accounts mature, they can use those tax credits to pay taxes. You don’t ever, like, pay anything back. We could shift it from a savings account to a checking account. But a scorekeeper doesn’t, like, just take a score off the books and it disappears. Somebody makes a payment back to the government. So, yeah, they’re tax credits to be used to pay taxes. Until they’re used to pay taxes they remain outstanding.

[00:34:03.580] – Intermission

You are listening to Macro N Cheese, a podcast brought to you by Real Progressives, a non-profit organization dedicated to teaching the masses about MMT or Modern Monetary Theory. Please help our efforts and become a monthly donor at PayPal or Patreon, like and follow our pages on Facebook and YouTube, and follow us on Periscope, Twitter, and Instagram.

[00:34:50.150] – Grumbine

The concept of the tax now should be clear to everyone. It is the liability that drives the currency. It’s a liability that allows the government to provision itself, in and of itself. Right? The tax itself, though, doesn’t do anything. It dies. It’s like a score on the board, just like you were talking about looking at the television set. Nothing moving there. The tax itself, it’s like where does a deleted digital stroke go? It goes nowhere.

[00:35:21.520] – Mosler

Let’s follow the ticket at the football game. If I buy a thousand dollar ticket from the game, you know, from the stadium. Maybe I sell it to you forfive thousand. You really want to go – it’s a big game. And you sell to the next guy for 10,000. He goes to the game and gives it to the guy at the gate. What that guy do with it? He tears it up. Why would he tear up a ten thousand dollar ticket? [laughter] That’s pretty stupid, right? Nobody knows why he tears it up. Nobody asks that question.

Because it’s used up. It’s the end of the chain. It goes from the stadium to the person, and then back to the stadium – it’s returned to the stadium, right? – and they throw it away. And then for the next game, they use a new ticket. Right? OK, same thing with the movie theater. Same thing with the US dollar. Let’s say they were using cash. I used to pay the taxes on my house. I’d go down to the Fed, I’d give them my 20 dollar bills. Maybe I was a waiter. I was getting tips, the money’s a little bit ratty, right? And I pay my taxes with it.

And they say, thank you very much for supporting the war in Afghanistan and buying the president’s golf or whatever. And then as soon as I leave, what do they do with those old 20 dollar bills? They ship them out to some company that puts them in a shredder and destroys them. You can buy the shredded money in little bags in Washington. It’s the same path that the movie theater ticket takes. The same path any coupons take, you know, they spend it, they give it to me, I return it to them as a tax, payment, and they shred it. They throw it away.

Let’s say I bought a million dollars worth of Treasury bonds from them. So they spend the money. I don’t pay anybody with it, I save it all, I’ve got a million dollars in tips – I had a good night here at one of the St Croix restaurants, very successful – I go buy a million dollars worth of Treasury bonds. So the bank goes to the Fed with it.  Returns it to the Fed. I get my Treasury bonds.

They pay me two percent interest, one percent interest, whatever. They used to pay five, six, used to pay twenty. And what does the Treasury do with the money as soon as they get it? They send it off to the shredder. OK, who would take your money, borrow your money from you, pay interest on it, promise to pay it back, and then throw it away? What’s the point? Nobody does that, right? They don’t need your money for anything in particular. It should be pretty obvious

OK, so that’s the sequence. And when it was explicit, like it was in Africa or Pompei… I’ve been looking into that more because I went there as a tourist. We were on one of those little public tours, 30, 40 of us. The guides showed us these old coins. Turns out – I looked them up – they were made of copper, or some cheap metal. They said it was a very nice place to live, Pompei, they had great public services, but taxes were high.

They would collect these coins for taxes, then they’d pay the police for public safety and the sanitation. But people wanted to live there because it was a nice place to live. So I said to him – you know, I’m a little bit of a troublemaker – I said, “you know, actually they would pay the people first, then they would collect the coins.” And he goes, “No, no, no, no, no, they would collect the tax and then they’d pay the people.” I said “Where did the coins come from?” He said “Well the government made them.”

I said, “Well, how did anybody get a coin to pay the tax?” They have to spend the first and then collect them. So how else could they do it? He grabs his head, he goes, no, no, no, no, no, he walks away. He wouldn’t talk to me again. [laughter] I guarantee you, everybody in Pompeii two thousand years ago knew that they would put a tax on your house, people would show up for work, they’d earn these coins – more than they needed, so they could buy things from other people who needed the coins – the taxes would get paid, and they’d be returned to the government.

Now, do you ever think of why they call your tax return? Because you’re returning the government’s coin. The word “revenue” comes from the French or Latin word, meaning to return, revert, revenue. Return. Have you ever heard “Render unto Caesar what is Caesar’s?”

[00:39:23.840] – Grumbine

Oh yes. [laughter]

[00:39:23.880] – Mosler

You pay the taxes. You’re returning the coin to the government. Everybody knew that. That was not like some revelation. The Book of Revelations didn’t have that in it.  Everybody already knew that. OK, so this knowledge has been lost. And it’s been deadly. I mean, it’s the most expensive loss in the history of the world. You think of all the losses of real output from unemployment in the last year. It’s probably more than all the losses of all the – all the real losses, you know, you can’t measure human lives – but all the real losses, in terms of resources and everything else, of all the wars in the history of the world combined. Right?

And it’s all because we don’t understand the sequencing, that taxes create unemploymentbecause it’s simple stuff that everybody in the planet understood until not too long ago. I mean, Mitchell Innes wrote about it in 1900. He was a lawyer, he wasn’t even an economist. I mean, everybody had to have known this. And now when you mention it you’re some kind of heterodox economist that people are pushing back at. [laughter] You know, I got published in a mainstream journal two years ago, kind of ……, about what’s effectively the job guarantee.

It’s called maximizing price stability in a market economy. And it was a proposal for the European Central Bank – in a monetary economy, “Maximizing Price Stability in a Monetary Economy” – for the European Central Bank, and how to meet their inflation targets using, you know, a transition job, a job guarantee rather than unemployment in the European Union. It was published in a peer-reviewed mainstream journal, the number two journal in the world: Journal of Policy Modeling. And…”Oh, this is still heterodox.”

No it isn’t. It couldn’t be any more mainstream. Except that the mainstream economists individually reject it. I’m going to get to the interest rate part – and remind me about that – OK, so we have the money story, which is not necessarily an MMT contribution, but it’s the MMT narrative for what money currency is nowadays. And I’d say it probably is a contribution in that sense because no one else is using it today. Not that no one ever understood it, but it’s part of the narrative.

OK, so we’ve got the sequence in the money story. Now the next big thing that I think I have – and tell me if any other MMT proponents are out front with this at all – is that the Fed has the interest rates thing backwards. They think lowering rates is “easing” and raising rates is “tightening.” and you’ll see heterodox economists, MMT economists, maybe criticizing the Fed because they didn’t lower rates aggressively enough when there was unemployment because they’re too worried about price stability than they are about unemployment. Not all of them, but you’ll see them doing it.

And it’s because they’re not paying attention. When the Fed is lowering rates, they’re creating more unemployment, they’re reducing aggregate demand, they’re reducing inflation. They’ve got it backwards. And so, fortunately, when they tried to raise rates too soon, they were actually helping the economy. By raising rates. But, you know, they’re helping it in a way that’s my absolute last choice of how I would ever help an economy, and that’s pay more interest to people because interest only goes to people who already have money.

So when they raise rates, people who already have money are getting an increase. But raising rates… A positive interest rate policy is what I call basic income for people who already have money. Now, a lot of people who think basic income is a good idea, but usually not only for people who already have money [laughs] and in proportion to how much money they have. But that’s what raising interest rates does. So yes, it helps the economy. It increases deficit spending.

The government is a huge net payer of interest. Raising rates just spews out more interest payments. You know, what some people might call printing money, right? But deficit spending to spending beyond, you know, what will come back as taxes, adding to the net money supply – by making more interest payments to people who already have money, in proportion to how much money they have. To me, that’s like absurdly regressive policy. But, the Fed’s got it backwards. And everybody else has it backwards. And they think that when they raise rates, they’re tightening and throwing people out of work. Now, back in the 1970s – probably early 1970s, or mid – when they raised rates, they did throw people out of work because savings and loans were capped at how much interest they could pay depositors, at like five percent, maybe five and a half.

So when they raised rates to seven or eight percent to, quote, fight inflation, all the savings and loans lost all their deposits, couldn’t make any mortgages, and that slowed down the economy. OK, that was a unique institutional structure that linked higher rates to a slower economy. You know, it’s been long gone. That cap was removed not long after that, maybe late 70s. And so the interest rates function the way I’m saying they function. But the idea that high rates are deflationary and bad for the economy certainly would only be applicable to some kind of institutional structure like that in place, which is long gone. And it’s also applicable to maybe fixed exchange rates or gold standard, which is long gone.

But it’s entirely unapplicable to today’s floating exchange rate. It’s backwards. So given that, OK, Paul Krugman, Professor Krugman, made an interesting statement in response to the discussion he was having with Stephanie Kelton on Bloomberg – I don’t know if you remember that – where he said, “Look, the problem with running deficits to sustain full employment,” (which I’ve said from the beginning, you can always sustain full employment by running deficits, and so there’s no reason not to do that.)

He said “Oh, there is a reason because if the deficit gets large enough, and then you start getting some inflation and you want to raise rates to slow down that inflation…” You can’t do it. It doesn’t work. It’s backwards because if the deficit is large enough and you raise rates, it’ll cause more inflation from all the interest the government has to pay. And so the problem with using a deficit to sustain full employment is that if you want to raise rates to fight inflation, you can’t do it because it would cause more inflation. So he’s actually making my point, right?

[00:45:46.670] – Grumbine

Yeah. [laughs]

[00:45:48.620] – Mosler

And that’s what I said, too, I said, yeah, exactly my point, and that’s why you don’t raise rates to fight inflation because it causes more inflation. It’s not only if the deficit goes high enough, it already is high enough. It’s already 25 trillion or whatever. OK? You know, you add one percent to the interest rate – that’s one percent of GDP extra that you’re paying out. It’s huge.

Yet you raise rates to five percent by placing… just increasing deficit spending on interest, which is all demand side and no supply side, and it’s all going to upper income people. So it’s all skewing the whole issue of income distribution. And so that policy of raising rates to fight inflation has never been a viable option. It’s always been based on an error, which you just pointed out. He says, “Well, how would you draw that on an IS-LM curve?” [laughs] Like, excuse me?

[00:46:39.250] – Grumbine

Oh, boy. Their models.

[00:46:40.410] – Mosler

You know, yeah, I can do that. “So you’re saying this curve is flat? There is no IS-LM… There is no… You know, the interest rate is not a function of that?” Yeah, that’s exactly what I’m saying. You know, “Well, draw it out for me and I’ll take a look at it.” Why is the burden of proof on me? I just gave you something intuitively obvious.

[00:46:57.050] – Grumbine

He’s not really an economist. [laughs]

[00:46:58.970] – Mosler

It’s in your own model. Yes, in his own model. He’s the one who said it… It’s like you said it first, I don’t have to prove it. You already said it. That’s enough. [laughter] I don’t have to prove something you… Why do you not accept something that you said first unless I can prove it? [laughs]

[00:47:11.570] – Grumbine

That’s insane. Yes. He probably [laughs] I don’t think he did. He probably had a friend do it for him and then took credit for it, is what it ended up being.

[00:47:19.950] – Mosler

That’s New Keynesian understanding. That’s their argument against full employment. OK, so… But again, that’s reinforcing the idea that the interest rate thing is backwards. And there’s yet another one that I came up with, I’m not sure… This one I came up with in 1995 or 96, it was a long time ago, maybe before that, because I remember having a meeting at the Bank of England pointing this out to a guy at the Bank of Japan, one of their officials, when they were going into the zero rate policy and QE.

And I remember the guy from Bank of England, whose name was Crocker, was standing next to me talking to the official from the Bank of Japan. They were just doing quantitative easing – and a lot of it – back then. I said, like, I don’t see how it does anything. I said here you are, buying JGBs, government bonds, and paying the banks in yen.

The idea that now they’re somehow going to be some channel between that and increased lending. I said it’s not like there’s a line of people waiting to borrow again if only the banks had lending capacity. They already have lending capacity, loans go to deposits and all that. You know, whether there’s reserves or not is not a factor in lending. You know, they’re not constrained by reserves.

And Crocker, who’s an older guy – because I was younger at the time, he was probably younger than I am now. He looks at the guy from the Bank of Japan and goes, Yeah, what do you have to say to that? And he says, Well, you know, that’s our policy and our models say that it’s going to work, or something.

But anyway, so I know that back in the 90s I was pointing this stuff out. Because I didn’t have any reason to document it. Nobody was asking me about it.

So we had this idea that the whole policy is backwards and I’ve been saying it for a while. A long time. The paper on “Zero is the Natural Rate of Interest,” I think was written in 1997. I wrote that with Mat Forstater. So it’s a long time, right? None of the MMT proponents are going after it, that you can see. I think that’s a big risk right now. That we get this deficit spending is just great, you know, that we’ve had recently. You could say MMT has saved the world. Whether it knows it or not. There’s no way they would have done three trillion and now talking another two trillion. And there hasn’t been a single mention of a tax, right?

[00:49:32.890] – Grumbine


[00:49:33.010] – Mosler

That’s a pretty massive shift. And they can say what they want, but I don’t think they would have done that if it wasn’t for our influence in the last couple of years, particularly Stephanie, with the book coming out, and being on the Senate Budget Committee, getting that attention with academics that never would have happened before. I think she has to be, by and large, the most influential economist right now in the world.

[00:49:55.270] – Grumbine

I would agree with that.

[00:49:55.330] – Mosler

And, you know, I’m not arguing she’s the smartest or the best, even though she probably is. But you could say she’s not. You could say she’s the least knowledgeable and least capable, but she’s the most influential. [laughter]

[00:50:11.380] – Grumbine

And very smart too. 

[00:50:11.500] – Mosler

She’s extremely smart and extremely capable, you know, I wouldn’t hire any of the others to make coffee in my office. [laughter] But I’m saying, worst case, even if she wasn’t anything, you cannot take away from her, no matter how much you want to criticize what she’s saying, how much you might want to criticize her personal skills, which I think are impeccable – she’s so deep into things and so rigorous about everything.

I mean, she did that whole model about Treasury spending and taxing, came up with the idea that they spent first. Nobody could ever have done that. That was a very difficult exercise. She’s only like a year or two out of being a grad student. But no, I can’t say enough about her skills. I’m saying even a critic who would criticize her as being some left wing radical member of the squad, you know, whatever you want to say…

[00:50:57.510] – Grumbine

Some of us would consider that to be a compliment.

[00:51:00.130] – Mosler

Right. It could not take away the fact that she’s the most influential. I think that’s a fact. They don’t give an award to the 100 smartest economists or the ones who can do math the best, or anything like that, right? When they mention the top 100 economists, it’s based on influence. And she is – on a scale of one to ten, you know, she’s a ten.

The number two guy’s about a three right now. What other economist is influential right now? There aren’t any. They’ve all lost their… Krugman’s lost his influence. He was influential. And you certainly wouldn’t have said he was capable, but he was influential. He was the most influential. Now he’s not influential at all. They just kind of read him anecdotally. OK, you name another economist…

[00:51:45.800] – Grumbine

I guess that’s the question, right? I mean, you see the Larry Summers…

[00:51:49.370] – Mosler

OK, Larry Summers. Do you think he’s influential?

[00:51:51.910] – Grumbine

Well, he’s influential with people that are unfortunately in Washington, not necessarily influential with anyone else.. Like the people that are…

[00:51:57.840] – Mosler

Like who anymore?

[00:51:59.650] – Grumbine

Who’s advising Biden? Is that Jared Bernstein?

[00:52:03.760] – Mosler

He was. Yeah, they were, but they’re not like… Their advice is all flowing from Stephanie now. What are they advising him? That he’s got to raise taxes to pay for – like they would have two years ago?

[00:52:12.580] – Grumbine

So Stephanie’s got herself in the Biden campaign now? Is that what you’re saying?

[00:52:16.240] – Mosler

No, not her.  She’s made an intellectual contribution. She’s influencing those economists. Those economists are all 100 percent influenced now by her book. They would not have been saying… Right now they’d be advising Biden, look, we need an emergency tax on the rich. We have to… We need a huge corporate tax or else the country is going to go broke.

You know, Obama had a thousand-page thing on his desk, how if he did the two trillion stimulus instead of the one trillion, interest rates were going to go through the roof, the dollar was going to go down and the world was going to collapse. Biden doesn’t have that book on his desk – because of Stephanie Kelton.

[00:52:50.650] – Grumbine


[00:52:51.660] – Mosler

Stephanie Kelton being, you know, the last link in the chain that got to them. You know, I’m not saying that it was only Stephanie Kelton and not Bill Mitchell and Randy [Wray] and everybody else, because then there wouldn’t have been Stephanie. But I’m just saying, at the moment that’s the immediate link.

She is the immediate link to their thinking in the United States. And certainly in the European Union. In Australia, maybe it’s more Bill Mitchell. Her book has been, you know… Way outsold anything Bill did or anything, and you know, maybe for the wrong reasons. You know, she’s better looking, or whatever. [laughter]

[00:53:26.740] – Grumbine

Goodness gracious… 

[00:53:29.170] – Mosler

For politically incorrect reasons. I’m just saying the fact is that Stephanie – with her book, the way it came out, the way they timed it, publishers and everything else – the book saved the world, OK? And that is to not be taken away by any of the critics.

[00:53:45.730] – Grumbine

That is absolutely true.

[00:53:46.010] – Mosler

They can say whatever they want. They cannot take that part away: that it is the pivotal factor for what saved the world. And so that’s not nothing, right? It’s only saved the world now, but the world is in danger. Look, the nuclear weapons, you can argue, ended World War Two. But they didn’t save the world. [laughs] They created the next crisis that we’re still not even beginning to emerge from.

This fifteen, twenty-five, thirty thousand nuclear weapons in the world aimed all over the place that’ll take everybody out in 30 minutes if they’re ever fired. We haven’t done much with that. So we’ve got an understanding now that the government can’t be insolvent, that they can make payments, that we could spend the money. The money doesn’t come from taxing. We can go ahead and spend it.

We’re not ready for the consequences, any more than we’re ready for the consequences of nuclear. We know we have to use it to end the war. We thought we did. Personally, I’m not sure, but I’m not going to get in an argument. So let’s say we knew we had to use it to end the war, so we did it. But now we’re open to all the consequences, right?

And now we’re open to all the consequences and they’ve got the interest rate thing backwards. So if inflation numbers – CPI or however they want to measure inflation – starts to pick up, or housing prices, or who knows what, and they decide, look, we need to raise rates to go after this, it’s going to be a mess. It’s going to be that Krugman nightmare of, you know, massive debt, interest rates causing more inflation, and… You know, as the carpenter with this piece of wood, no matter how much I cut off, it’s still too short, right?

So they keep raising rates and the inflation keeps getting worse. We get in one of those situations. To me, the next critical piece of knowledge to keep this thing from backfiring on us, is to understand they got the interest rate thing backwards. And I’m not seeing the kind of support that I think we need to get that understanding into mainstream thinking. OK, it’s not coming from Bill, it’s not coming from Stephanie. They’re not disagreeing or anything, but not leading with it. And they’re not in an all-out effort to get this out there.

[00:55:45.150] – Grumbine

You hear a lot of these guys talking about how, “Oh, it’s a good time to finance deficits because interest rates are low.” And I’m like, what are you talking about? That’s ridiculous. 

[00:55:54.400] – Mosler

Right, but you don’t see MMP proponents leading with that. They’re still leading with things like, “look, the government can’t go insolvent. You know, they’re spending first.” It’s all correct, but it’s kind of fighting last year’s battle. And I’m not saying we’ve absolutely won that battle, but the next battle is the threat. I don’t think the solvency battle is a threat anymore. And there are plenty of people on that bandwagon now, plenty of MMT proponents working on the solvency.

Every Real Progressives type organisation is all over the solvency. Government prints the money. We can always make payments. What about inflation? Yeah, inflation. In the meantime, we can pay for covid. We can do this as long as we don’t do too much to cause inflation. We’re OK. They’ve got that. All the armchair economists got that one. All the millions and millions of MMTers. The armchair MMTers who are very good and we owe the world to.

But this whole thing has been a grassroots movement. People like yourself, people like these armchair MMTers, the bloggers, the Twitters, nobody’s ever seen this. This isn’t something that came down from some University of Chicago, like [theory of] rational expectations, you know, or Friedman or something, from anybody with any credentials. This came from people with literally zero credentials. OK, Stephanie, Randy, Bill, they have no Ivy League academic credentials. Period.

They are considered heterodox, out of the mainstream, never published once in any, you know, what would be considered a real academic journal. They publish in their own little heterodox journals that publish each other. You know, these people who couldn’t do math.. That’s what they call them – which isn’t true, Bill is a good mathematician – but that’s…

“Heterodox people weren’t smart enough to do math, so they became heterodox. Ideas that don’t make sense, but look, we’re politically correct, so let them do whatever they want.” It all came from them. And you see plenty of other ideas that have gestated there that didn’t make it. Because they were nuts, right? [laughs] Positive money and all that stuff.

[00:57:55.650] – Grumbine

Exactly, yes.

[00:57:57.720] – Mosler

OK, but this thing has survived the test of time. It came out of… Purely from the bottom up, nowhere else. I got a B.A. in economics from UConn. I don’t have credentials for anything. I was a finance guy on Wall Street, the academics won’t even talk to me. So it really came from nothing. And it’s just it’s all pure force of logic. And the fact that it’s true, you know. It’s the emperor has no clothes.

So the next contribution from MMT – there’s one more aspect to this and I won’t go into too much detail. But, if you ask the Fed what is the rate of inflation, they’ll say, well, what do you mean? Well, just the rate of inflation. They’ll say, well, we can tell you last month it was point three percent. The Consumer Price Index went up. Or the trimmed weighted average went up point two, or something, you know. They’ll give you all these measurements of past price index because they got it. They can tell you how they change.

That doesn’t mean that right now that that’s the rate of inflation. That’s what it was last month. They’ll say Oh, would you like a forecast of what it will be next month? Well, yeah, but that isn’t the rate of inflation. That’s your forecast of it. What is the rate of inflation? Well, how is it defined academically? Academically, inflation is the continuous change in the price level that’s happening right now. It’s faced by people in the real economy. What’s the continuous change in the price level they’re facing right now? That they’re dealing with. That’s affecting their business, their purchases their sales.

And that is what the markets call forward pricing. You’re a gold miner and you’re mining gold, you want to know what the prices for next year. Your gold jewelry, you want to know what price. Somebody wants to do a project, well how much is gold going to cost me if I buy it for delivery next year, or something. And so those are called forward prices. And those forward prices are a direct function of the interest rates set by the Fed, the policy rate, the risk-free rate.

So when you have a zero interest rate environment in Japan for 10 years like we do now, if gold is two thousand dollars today and you want to buy it for delivery 10 years from now, it’s still two thousand. Because whoever buys it, somebody sells it at a profit, and he has to hold it for 10 years, he doesn’t care. No interest charge, right? But if the rate is 10 percent a year – the interest rate, they raised their rate – now, the price of gold is going up. If you buy it and not take delivery for 10 years, it’s going to go up.

You have to compound it over 10 years. It would be like eight thousand dollars, ten thousand dollars, because whoever is holding the gold has to you know, you can hold your money and earn the interest or you have to borrow the money and pay the interest. So the interest rate determines the forward price. You know, it’s a core component of forward pricing. The interest rate is a core component of forward pricing.

So you go through the analytics, you go through the idea of relative value and pricing, and you can say that the term structure of prices, based by today’s merchants, agents, people – buying and selling things for delivery tomorrow, the next day, next year, 10 years from now – that rate of inflation is the interest rate. The interest rate set by the Fed is the rate of inflation. It doesn’t mean gold will be higher in 10 years. It means that if you want to buy it now, you’ve got to pay that much more for 10 years delivery. It might be lower, but that’s what you’ve got to pay right now. That’s just a fact. That’s the calculation.

It’s not a theory. It’s just forward pricing. And so that is the academic definition of inflation. The term structure of prices, which is a function of the interest rate, faced by today’s market participants. And so the irony is that the Fed, if you ask, hasn’t even considered that. So the actual rate of inflation, academically determined – and that’s what they’re charged to take care of, the rate of inflation – is something they haven’t even considered.

Now they spend hundreds of millions of dollars a year on research into inflation in the economy. They don’t have a single Ph.D. directed at looking at forward prices and how that affects the economy. And of all the things they do, the rate of interest, they look at how that affects their own stuff, the economy, and all these other things in their models, they don’t recognize or understand or pay attention to the idea that the interest rate they’re setting is directly changing the term structure of prices facing the economy.

That they are setting the inflation rate for the economy, when they set interest rates. If they have a policy rate of one percent, in the 10 years at one percent, then the 10-year rate of inflation faced by the economy is one percent right now. They don’t consider that. And if they raise rates to two percent, then that doubles. Now, the economy is dealing with a two percent inflation rate. Go to buy a house, somebody has to build a house, it’s going to take a year.

The rate of interest is a big factor. It’s not something they look at. So the actual true semantic, the definition of inflation, whatever you want to call it, academic, they don’t even look at it. Because they don’t know how that affects the economy or doesn’t. Maybe it makes no difference and they shouldn’t be looking at. But they need to know that I think. [laughs] I would think.

[01:02:54.350] – Grumbine

You know, I’ve never heard them talk about this.

[01:02:55.370] – Mosler

Some curiosity you would think. I mean, no central back in the history of the world has talked about this. You think there’s at least be a curiosity to see this rate of inflation, the academic rate as defined by all the universities, that they are setting with their policy rate – how that influences the economy. You know, try that. You know, like put that in your pipe and smoke it. [laughter] They don’t even, like, give it a passing thought. That’s a contribution I’ve sort of made to the interest rate discussion.

But it also points out that the higher rate of interest from the Fed is a higher rate of inflation, as academically defined, directly. Not like… It doesn’t influence it, it is the rate. OK, so back to the argument that higher interest rates are higher inflation. Rates of inflation is direct through forward pricing, and it’s influential through the aggregate demand channels, and the forward pricing channels through the cost channels for businesses. So we’ve got three ways. You know, we’ve got all the data, right? Because Japan had zero rates for 30 years and you haven’t seen that cause inflation?

[01:03:58.700] – Grumbine


[01:03:58.900] – Mosler

And I can remember, Basil Moore was an economist – he wrote Horizontalists and Verticalists – used to ask me, you know, 15 years ago, he said, “I can’t understand it. Why don’t we have hyperinflation in Japan? They’ve had zero rates now for 10 years.” I’d been telling him for 10 years, that the zero rates are deflationary. He goes, “Yeah, but why don’t people just borrow like crazy and do that?” I’d go, Basil, well, for one thing they don’t. You’ve got all the data, OK? So maybe the stuff I’ve been telling you, the theory behind that data, maybe it’s right. [laughs] You could accept it.

You would think people would just go out and borrow like crazy. I kept telling him, look, the interest income on the other side is just as powerful. And it was fun to watch him try and reconcile. What he thought to be true, with both theory and, at that point, 10 years of evidence. We got what was happening and now we’ve got 30 years of evidence. Ten years from Europe, negative rates and no inflation. Isn’t that supposed to be hyperinflation? All their models, all the little curves, forecast inflation from those policies? That didn’t happen? Same with the Fed.

[01:05:00.930] – Grumbine

The Fed has a dual mandate: price stability and full employment. They screw up full employment with NAIRU, and on the flip side, they screw up price stabilizing.

[01:05:10.450] – Mosler

But that’s the…. What does NAIRU mean? It means they raise rates too soon, right?

[01:05:17.410] – Grumbine

Right. Yes!

[01:05:17.510] – Mosler

But that promotes full employment. So actually, the NAIRU saved them from being worse. Now, they’ve done it by basic income for people who already have money on a pro rata basis, which is absurd, really regressive. OK?

But see, that’s what I’m talking about when, you know, MMT proponents talk about the Fed and its mandate, what it’s done, and how the NAIRU has caused unemployment to be higher. But once you factor in that they’ve got their policy tools backwards, it’s…  Thank goodness. It would have been worse.

[01:05:44.740] – Grumbine

That was an accident. Accidental…oh. Yay. [laughter] Wow. So this is an area that we really do need to really dive into.

[01:05:53.560] – Mosler

I don’t want the Fed to get inflation up by raising rates. I’d rather see a progressive spending on something that we desperately need right now, or at least a progressive change in the tax structure, to lower taxes progressively. That would be my first choice.

Way more than paying more interest to people who already have money, if I wanted to get the economy going. I’d rather have a payroll tax cut than an interest rate increase, right? What would you rather have an interest rate increase or a Green New Deal? I’m going to help the economy – those are your two choices.

[01:06:20.850] – Grumbine

Yeah, I’m going to go with the New Deal.

[01:06:23.440] – Mosler

Nobody’s putting it that way. They’re saying if you have a Green New Deal, the Fed is going to have to raise rates. No, that’s backwards, right? It just uses up fiscal space. It doesn’t create it.

[01:06:32.170] – Grumbine

Can you describe what makes up fiscal space, please?

[01:06:35.860] – Mosler

Yeah. Rising unemployment is the evidence of fiscal space.

[01:06:39.490] – Grumbine

Got you. OK.

[01:06:41.840] – Mosler

And excess capacity – things for sale in dollars. Don’t forget that tax creates things for sale. So if you just have a small tax, you’re only going to get a few things for sale. And that’s all the government can buy; it can’t buy any more than is offered for sale. And you know, Randy and Stephanie will make that clear in their discussions that by excess capacity they mean offered for sale. But I don’t think they lead enough with that when you’re talking to a general audience.

They’ll say, well, as long as we have excess capacity, we can do this or that. It’s critically important to say that as long as there are things for sale with a dollar price tag on them, then the government could buy them. But without tax liabilities, there will not be things for sale in dollars. It just won’t work. You could have hyperinflation. But, you know, that needs to be like led with more, I think. You know, they’re technically correct. I can’t fault them for that. But, I can just say I’d like to see more emphasis on it.

[01:07:31.780] – Grumbine

Right. Understood. OK.

[01:07:39.600] – End credits

Macro N Cheese is produced by Andy Kennedy, descriptive writing by Virginia Cotts, and promotional artwork by Mindy Donham. Macro N Cheese is publicly funded by our Real Progressives Patreon account. If you would like to donate to Macro N Cheese, please visit patreon.com/realprogressives

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