What’s wrong with MMT? Nothing!

25 Feb, 2019 at 19:17 | Posted in Economics | 47 Comments

kelt MMTists often like to position themselves as the only ones to properly understand the ‘operational realities’ of modern monetary systems. Ironically, many of the claims made by MMTists on this topic are misleading at best. One common rhetorical tactic that I’ve noticed they employ, which often catches their critics out, is to use the term ‘government’ in a way that’s different typically from how it is used in mainstream economics. When they say ‘government’, they tend to include basically any institution that is an agent of the state, including the central bank — hence the ‘government’ here includes consolidating the treasury and the central bank into one entity, effectively ignoring or assuming away any independence the central bank may have.

Upholding Economics

mmyEffectively “ignoring or assuming away any independence the central bank may have”? That is strange indeed: Last — just to take one example — I had a look in L. Randall Wray’s Modern Money Theory there were more than fifty pages devoted to “technical details of central bank and treasury coordination” and diverse fiscal operations of the Fed and the Treasury. Guess we have to go looking for bad monetary crankery somewhere else …


  1. If you look at technical details you find that private credit can discharge tax obligations under the Treasury Tax and Loan program. Taxes don’t have to be settled in Fed reserves. MMT steadfastly ignores this …

    • Doesn’t need special attention. It’s just a means for managing reserves in the private banking system. http://www.levyinstitute.org/pubs/wp244.pdf

      • There are no bank reserves in the private sector other than FR notes, bank reserves being vault cash and banks’ reserve balances at the Fed. Bank’s reserve balances are liabilities of the FR and exist only as deposits in member accounts on the Fed’s books.

        The US runs a two-tier system, with the government consolidated books and the private sector books being separate systems linked though financial institutions being delegated access to the government-run payments system, in the US, the FRS.

        Member of the FRs have access to the two-tier system by being authorized to hold accounts at the Fed, which appear as entries on the government’s books.

        When taxes are payed using checks on commercial banks, final settlement takes place on the government’s books by commercial banks marking down liabilities on their books while the FR marks down bank assets on its books in the bank reserve account that the Fed. For banks, it is a wash, unless they are paying their own liabilities to the government, of course.

        Only government issues currency — bank reserve balances and cash (notes and coin).

        Banks extend credit denominated in the currency but they must obtain currency for final settlement after netting since they are not currency issuers themselves, but currency users. The only bank to which the US government has delegated currency issuance is the Fed as the government’s fiscal agent.

        All liabilities generated by credit extension in the private sector sum to zero as credits and debits balance on the consolidated nongovernment books. Non-government net financial assets in aggregate are greater than zero to the degree that government liabilities are held by non-government entities. The liabilities are on the government books and the assets are on the books of the consolidated nongovernment. Net can be non-zero depending on government policy and operations.

        “If you look at technical details you find that private credit can discharge tax obligations under the Treasury Tax and Loan program. Taxes don’t have to be settled in Fed reserves. MMT steadfastly ignores this …”

        If anyone disagrees, let’s see the T-accounts. I am willing to be corrected. I am neither an account nor an economist, or am I in finance, so I will check out the objections with those who are.

        See Eric Tymoigne, The Financial System and the Economy Principles of Money and Banking, the first MMT text (draft) on money and banking. It’s a must read if one is serious about understanding the foundations of MMT.

        • The Tymoigne article/text is behind a paywall.

        • Far more dollar settlement occurs in private clearinghouses which have their own rules that may or may not involve settling in Fed reserves. CHIPS has its own collateral acceptance rules and can settle customer payments in privately-created, dollar-denominated assets.
          Please see Mehrling’s article “Where is politics in the money view?”, available on his site:
          “another way to fund a new mortgage loan is to securitize it, and sell the security to a pension fund which holds it as the counterpart of its long-term pension liabilities. That’s credit funding–the new money is returned to issuer, and the expected yield on the new credit has to satisfy the wealth holder.”
          The liabilities associated with the security are off the seller’s books; they got a new net financial asset, and the liability is someone else’s problem and won’t come due for a while. The new, privately-created, money stays in circulation indefinitely.
          Private clearinghouses can use such privately-created new net financial assets to settle claims. In effect, they make the private assets into reserves, or into implied reserves. The Fed will print new money digitally to back the privately created new net financial assets.
          The MMT story leaves out the vast volumes of dollar settlements that are made outside the Fed.
          “let’s see the T-accounts”
          Okay, I have a balance sheet program; I will try to illustrate my point and show you.
          Mehrling’s blog, referenced above, provides a good example in words how securitization can create new privately-created money that stays in circulation a long time and can be used to pay taxes.

          • “and can be used to pay taxes” For some individuals. You are missing the full picture. Securitization can’t do anything other than mmt says in the aggregate.

            “that stays in circulation a long time” How does this make mmt false? Please explain.
            “Mosler’s rules” for banking would vastly shrink private credit-money creation, if it is the size/duration of the collective private balance sheet you are worried about. Again, in no way whastsoever does this show mmt is somehow wrong. In fact, these details only go to show what a powerful lens mmt is in clarifying these issues.

          • The T-accounts will show that M1 increase with government injection (spending and transfers) and that M1 decrease with government withdrawal (taxes, fees, fines). All entries on the books in nongovernment financial system sums to zero in terms of credit extended by the financial system and debit that corresponds to it. The net in the banking system is always zero.

            Correspondingly, government injection increases rb (monetary base = M0) and government withdrawal decreases rb (M0). The flow of government injection increases the stock of nongovernment net financial assets in aggregate and government withdrawal does the opposite.

            Bonds are simply the substitution of term net financial assets for zero-maturity of net financial assets (rb). No change in the amount of net financial assets, although interest payment increase net financial assets. Owing to the legal requirement that deficits be offset with Treasury securities, securities issuance simply drains the payment system of the rb created by deficits spending.

            To understand MMT, it is a sine qua non to understand the accounting of the two-tier system and the operations that underlie this. This is the descriptive aspect of MMT. The theoretical aspect is providing a causal account of economics/finance based on correct understanding of institutional arrangements and operations.

      • See https://www.newyorkfed.org/aboutthefed/fedpoint/fed21.html
        “note option depositories may hold TT&L balances for an extended time period. As a result, note option banks have use of the Treasury’s funds for loans and investments”
        Private credit settles the tax obligations; the private credit goes right back into the private banking system so Fed reserves never need be used for tax payments.
        Thus MMT’s story that only government-created dollars can pay taxes is wrong.

        • Those funds are held “in limbo” as a facilitator of monetary operations. They are eventually credited to the TGA, at which time the rb are destroyed in that the TGA has no reserve balance counting toward the monetary base. When the Treasury spends it directed the Fed as the government’s fiscal agent to credit banks’ reserve accounts in the FRS with rb and debit the TGA.

          To understand the accounting and operations, read Eric Tymoigne’s book on money and banking and follow the T accounts and how the two-tier system operates.


    • I already explained to Robert that he misunderstands (like many people) what TT&Ls do. They are an accounting shortcut. He thinks they are a road to a different place, when in fact they are simply a shortcut to the same place. Taxes take an equal amount of reserves out of the system as a whole; allowing an accounting shortcut does not change that. The whole accounting structure of the US Gov does, unfortunately, work as if it were designed to “trick” people into believing taxes and bonds fund something. Hence the 50 pages in Wray’s book Lars mentions. People like Robert refuse to do the work that shows where Robert gets his accounting wrong.
      This is one point where I differ from how to support MMT. “MMT” people know the accounting shows it is as if we have OMF already, accounting-wise, so it is more important to simply use the gov in the right way since we can already despite an archaic system. I believe that voters will continue to elect representatives who run the gov as if taxes and bonds directly fund it (leading to austerity) as long as we have the current byzantine system. We must go to OMF simply so smart, concerned people like Robert above can see how spending actually works, in turn electing representatives who know how to run the gov correctly. Sad that TT&Ls and similar will remain, so the general public and economists will continue to convince themselves neoclassical econ is “correct”, and we will all continue to live, unnecessarily, under austerity.

      1000 CASTAWAYS: Fundamentals of Economics

      (CH 5 deals with related issues)

      • I agree, Clint. One would suppose from the arcane design of the system in terms of institutional arrangements and obscure operations that it was designed to create the impression that government is beholden to the private sector and that its finances operate in the same way as a household or firm. This needs to be changed, starting with the confusion of the central bank being “public private partnership.”

      • PS Robert seems more concerned with the role of credit-money in the system; it is still the unneeded complexity of what could be a simple tax-credit/omf that allows that kind of worry to creep in. He will waste potentially valuable reform effort aimed at the wrong problem, which is simply a lack of understanding that we are well below full desired resource use, with one unique resource especially underused (willing labor) and that finance should never be the reason this happens. (combined with a lack of understanding by politicians on why we need to make banks hold the loans they grant and other simple rules that make the banking system do what it should, which is fund private capital development).

        • Thanks, Tom, for the clarifying stuff

        • Private credit becomes money. MMT denies this. MBS asset purchases prove it, though. The Fed created new money to backstop privately-created credit. Dollar-denominated MBS assets turned into Fed dollars; the Fed dollars did not pre-exist. The money the Fed used to buy MBS from the private sector was not taken from anyone; it was created by keystroke. Private credit became Fed reserves, which MMT denies is possible. MMT says the Fed has to create the money first but the private sector created the new net financial assets first.

          • Robert – Again, you are criticizing bailouts, along with many others, not mmt. I understand your worry about credit-money and MBS, CDOs etc though.
            Anyway, ‘mmt’ has long tried to stop the situation that would require those bailouts (Wray etc, with a huge focus on Minsky, one of his teachers). Mosler and Mitchell have advocated policies that would stop the types of “finance” and banking that led to the post 2008 bailouts (Mosler here http://moslereconomics.com/wp-content/pdfs/Proposals.pdf ). Again, the fact the US (and other countries) put themselves in such a silly situation in no way undermines anything about MMT. In fact, just about everything before, during and after 2008 has been a massive vindication of MMT.

          • “Private credit becomes money. MMT denies this.”

            MMT holds that money is basically credits and debits on accounts, with money things (notes, coins) issued as tokens of this as demanded. There is a two tier financial system, government and nongovernment. Financial systems that have accounts at the cb are the interface between the two systems.

            Thus the money supply is affected in two ways. Moreover, the money supply is composed of different types of “money.” 1. High-powered money (monetary base = M0). 2. M1 (chiefly funds held in commercial banks’ demand deposit accounts plus cash in circulation. 3. M2 (chiefly time deposits). There are other levels, too. For example, vehicle manufactures extend loans at special rates for the purchase of their vehicles.

            When banks extend loans, the credit the borrowers deposit account (bank liability, customer asset) and an a loan obligation (bank asset, customer liability) on the banks books.

            This increases the M1 money supply, which included commercial bank deposits and cash in circulation. That is one way that “money” is created.

            When the government (currency issuer) spends by currency issuance, its does so through appropriations, a political process. The Treasury pays the invoices by directing the cb to credit the reserve accounts of the various banks so that the banks can then credit the account of the respective recipients. Banks get an asset (increase in rb) and incurs a corresponding liability (customer deposit). Net zero for the bank. The government has increased liabilities and the customer has more assets. Also net zero, but the liability is on the side of government and so the net in nongovernment increases. The M1 money supply is increases in aggregate. The monetary base (M0) is also increased and decreased by government fiscal operations.

            • Not sure what is meant by “(increase in rb)” in the last paragraph. It makes sense to consider it reserve balance. Am I correct?

              • “rb” is “reserve balances”

      • To clarify for others who may not be up on this, the TT&L accounts are Treasury accounts at commercial banks that are funded by payments to government. The purpose of the TT&L accounts is reserve management to facilitate the Fed’s monetary policy when it is not paying IOR or setting the FFR to zero. Then the Fed targets price and adjusts reserves to meet it. Sale of Treasury securities, payment of which is in bank reserves in the Fed-run payments system, drains banks’ reserve balances. Conversely, the TT&L accounts keep banks rb in the system until the TT&L accounts are drained and the amount credited to the Treasury account (TGA) at the Fed for spending.

        • How long can note option deposits last?
          “note option depositories may hold TT&L balances for an extended time period. ”
          During that time, private credit has settled tax obligations. What if the bank runs out of reserves when the Treasury calls the loans in? The bank can simply borrow newly-created Fed funds money, and keep the loans rolling over using private collateral that the Fed will accept. The Fed is passively backing private sector new net financial asset creation.

          • Only if it wants to. Willingly endogenous http://heteconomist.com/verticalhorizontal-vs-exogenousendogenous/

          • The argument is not about following the trail of rb but rather the operation of aggregates. This is what consolidation is based on. Journals are based on individual transaction. They are transferred to general ledgers and economic reports are prepared from combining ledger entries into income statement, balance sheets, flow of funds, etc.

  2. I read a lot about MMT AND HAVE NEVER seen government conflated with other institutions. For the record I am opposed to central bank independence of government because by default that means they are dependent on the private sector and mainstream economists. Central banks should be accountable to parliament or other elected representatives with appropriate oversight. Good comment by Robert S Mitchell. Wondered about that too. Not to mention private sector money creation.

  3. Great Lars! If those who criticize Modern Monetary Theory, at least read up on the topic they deal with!Are they to lazy?Most of those,even Ivory League economists like Krugman et consortes,at least what i read from them,constantly misinterprent MMT,delibteratly or not. Of course the so called MMTers is dealing a lot with “technical details” in a wide range of areas and topics,from banks to labour theory of value and deficits,budget,and so on.Do those that criticize MMT,think that people like Randy Wray,Stephanie Kelton,Mathew Forstater,Mike Hudson,Bill Black are stupid?It´s hard to tell because they seldom mention any of them by name.But if for example Paul Krugman,think that people like Stephanie Kelton,former Chief Economist for the Democratic Minority Staff of the Senate Budget Committee,don´t understand budgets and banking and debt,then i suggest that he state that openly,and don´t deliver sweeping and inaccurate criticism.Only cowards do such!

    • Exactly, Jan. Conversely, Paul Krugman is not expert in these areas and has made freshman mistakes about it in criticizing MMT, as well as in his other analysis.

    • “Do those that criticize MMT,think that people like Randy Wray,Stephanie Kelton,Mathew Forstater,Mike Hudson,Bill Black are stupid?”
      Just ignorant. MMT starts with a theory and denies all the evidence from BIS transaction statistics that show far more dollar settlements occur outside the Fed than are settled in Fed reserves.
      MMT sometimes quotes Mehrling, but MMT steadfastly ignores passages such as the following from Mehrling’s “Where is politics in the money view?”:
      “The present crisis of legitimacy comes from the dealer of last resort operations of the Fed and other central banks during the financial crisis (Mehrling), which essentially involved blessing tottering private money funding operations for securitized mortgages by taking them onto central bank balance sheets. The alchemy of commercial banking is one thing, always subject to the discipline of ultimate funding as we have seen, but the alchemy of central banking is even more powerful magic, especially so in times of crisis when wealthholders seek to shift their portfolios strongly out of credit and into money. Such a private portfolio shift would have been impossible without the willingness of the central bank to expand its own holdings of credit by expanding its own issue of money–acting like a dealer to absorb an imbalance in flow supply and demand for a particular asset.”
      “blessing tottering private money” is what MMT denies. The private money was created first; then after the fact, in a crisis, the Fed printed digital money to turn the private money into Fed money. Private credit became Fed reserves. MMT denies this causal sequence, saying instead that the Fed has to create money first before the private sector can book it as a new net financial asset. But MBS were booked as new net financial assets before the Fed blessed them …

      • Weird, you are criticizing quantitative easing and lender of last resort as if that is a criticism of MMT. MMT economists (and many others) are against unjustified bailouts etc etc. Welcome to the club. Isn’t a critique of mmt though

      • “far more dollar settlements occur outside the Fed than are settled in Fed reserves.”

        Final settlement in the FRS payments system takes place after netting through clearing houses. This is just canceling of mutual liabilities within the banking system. Netting affects mostly the Big Banks that account for most of the financial transaction as they cancel mutual obligations. Most smaller institutions still use FedWire to settle in the payments system.

        Final settlement after netting is in the FRS operated payments system. Government spending and transfers create reserve balances and taxes destroy them. Bond issuance and redemption take place in bank reserves in the FRS payments system by crediting and debiting the FRS books. This is also the case with monetary operations such as repo and reverse repo.

  4. Case in point. Warren Mosler just tweeted: “More
    Any economic model that does not model the currency itself as a public monopoly is inapplicable to our monetary system:”
    Richard Werner responded: “Private monopoly.” Prof. Werner apparently thinks that the Fed is a private institution.” He is not stupid. This is confusion is spread wide and it is not just cranks that fall into the trap. The FRS is a creature of Congress through the Federal Reserve Act of 1913 (as amended). The court has ruled that the 12 FRBs are private institutions, so many conclude that the FRS is private.

    BTW, most people think that US banks are private like other firms, but they too are public-private partnership that hold their charters only as long as they are in good standing. Same with banks that belong to the FRS. They have to observes standards and submit to regulation.

    But equity in the private banks is very different from that held by the member banks of the FRS. It is not transferable, for instance, and the sole benefit is the 6% return based on Fed profits. The residual of profit goes to the US Treasury. So who “owns” the FED?

    • If the person with the gun lets you do something useful for everyone, he still has the gun. We let private banks do something the gov wouldn’t be good at. Its that simple. We have to keep a better rein on them. That’s all. But getting rid of them would not benefit the public. As far as the fed, it should be done away with I think – just reduced to a payments processing system within the treasury. The FOMC should be converted, almost as is, to a committee who recommends to congress what absolute level of spending we can get away with; in other words, their decisions everyone sits on the edge of their seat for would not be ridiculous entrails in a teacup (oops, I meant to say ‘monetary policy’) but rather empirically useful research on the value of the $, the amount of change in the gov’s ELR program, what real resources we have available, and how to balance these.

    • The US government is not the monopoly issuer of dollars. Eurodollars are outside of the Fed’s control, for example.

      • Eurodollars are just dollars saved in foreign banks. They weren’t _made_ by Europeans (or Japanese or the UN or the Saudis). “Outside of control” – what does that even mean? The $10 note in a German tourists pocket when they get home from NYC is “out of control of the Fed”. So what?

        • Clint Ballinger & Robert S. Mitchell: That’s not correct, Clint. Eurodollars are liabilities denominated in dollars, thus dollars issued by foreign banks, backed by the bank’s assets, in particular the bank’s US government-issued dollars/reserves/bonds. They’re comparable to another country’s US-dollar-denominated bonds. So they were made by them Japanese, UN & Saudi Europeans. 🙂

          So Robert Mitchell is right here, but he misinterprets what is meant by the “monopoly issuer of dollars” in MMT, not unnaturally, because that phrase is too abbreviated. The phrase means the US government is the monopoly issuer of US government dollars, reserves, the base money, HPM. And US Treasury bonds too of course. That is the thing that it is crazy to disagree with.

          Generally speaking, the points of dispute and confusions come from not being clear or speaking clearly about who is the issuer of whatever is under consideration. But the MMTers do it in numbing detail & do answer all the points of critics adequately. But you need to look at their academic work and grasp their language.

          • Thanks for the clarification. I got that wrong, it seems. I thought that “Eurodollars” were Fed created liabilities that are not recorded on the Fed’s books. Why does the Fed do USD swaps then?

            • Thanks Calgacus for clarifying. Tom, not surprising we get it wrong since the Encyclopedia Brittanica says “Eurodollar, a United States dollar that has been deposited outside the United States, especially in Europe.” and an investment group writes “Eurodollar is a term that refers to any United States dollar (“U.S. dollar”) held outside the U.S. banking system”.Elsewhere you see the same, but I always wondered why they are always spoken about as if they are bonds/futures etc. Calgacus explains and clarifies. Regardless, I wish I had some to know what they are 🙂

              Anyway – the funny thing is – that makes Robert’s point even MORE wrong, by a long shot. If all “Eurodollars” are is someone else (non US) pegging an instrument to the Dollar, then it is no more important than, say, Tether is to analysing the Fed and Treasury. (there could be ‘fake’ bubbles in those markets, but that is not on the US or the Fed in any way, and does less than zero to support Robert.s interpretation).

              • The link that defined Eurodollars that way is here btw. Not saying you are wrong Calgacus – just pointing out how confused everyone seems to be by this issue. Now explain petrodollars! 🙂 Robert will probably bring them up next. Then Jekyll Island lol https://www.cmegroup.com/education/courses/introduction-to-eurodollars/what-is-libor-what-is-eurodollar.html

                • WIkipedia is good on them and the history. Postwar there was a dollar shortage, which lasted for about 13 years. That was long enough for (a) Many economists predicted the shortage would last forever. They got tenure exactly when their theories were shown false. (b) The USA “won” every single vote in the UN General Assembly until that point.

                  Once the dollar shortage ended in the late 50s, there were enough dollars savings outside the US to back, them, and as Wiki explains Cold War reasons to hold dollars outside. The US government thought about trying to regulate them as they are sort of outside the formal Fed system. (Of course now there is a lot more – money market funds, shadow banks). But the dollar glut went on and they decided not to as to much of a bother.

                • There is a bit of an ambiguity, does Eurodollar mean the bank’s dollars, which are ordinary US government dollars/reserves? Or does it mean the dollar denominated account at the bank? I believe the usual meaning is the latter, but some may use the first meaning and some may just write and think in a confused and confusing way. In any case in actual practice they arose from the growth of Fed dollars held outside the US. Before that, of course you could promise to pay in dollars, but it might have been very hard to fulfill that promise.

                • I would like to see the T-accounts. Whose balance sheet are they on, commercial banks or cbs, or both?

                  Then, of course, there are the Benjamins ($100 FR notes), the medium of transactions preferred by criminals and off the books transactions.

                • I thought maybe the definitions I linked to are making the same mistake Robert is making, that is, calling something a “dollar” when it is really a promise-to-pay a dollar. In that case, Eurodollars would just be credit-money denominated in a foreign currency. Would be a weird thing to do, except for the 80-20 rule, that is, the top currencies in the world will be “special” – dollars, pounds, yen etc, and the top of all of them super special (the $ for now).
                  FWIW, I think this is what the US exports like a commodity ($s), and hollowing out our increasing returns manufacturing industries to do so is not a good thing for the US. On trade, the “imports good, exports bad” view, even _with_ full employment, is too simple. That’s another post though. As always, see Erik S Reinert on that 🙂 And this great paper https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1944-8287.2002.tb00184.x

                • If it’s on cb books is it from the Fed, I believe, unless cbs can create credits in another country’s unit of account, which I don’t think is the case.

                  If it is only only the books of commercial banks it is likely credit money denominated in dollars that the bank need to get for final settlement. As I understand it, the Fed’s $ swaps are to clear the balance of payments in accounts denominated in USD that need to settle in USD they have to obtain ultimately from the sole issuer.

                  Anyway, really need to see the books and talk to mid-level operations people.

      • Who issued the Eurodollars in the first place? The Fed. Dollars held outside the Fed appear on the balance sheets of other cbs and not on the FRS balance sheet. Eurodollars used to be limited to European banks but now has gone international.

  5. Just read Mosler’s rules for banking reform. The distinct and separate roles of Treasury and the Fed are very clearly delineated.

  6. Here is the paper where the MMTers explain consolidated and unconsolidated.

    Click to access Fullwiler%20Kelton%20Wray%20MMT.pdf

    Left the comment on medium too.

  7. It might just be me, albeit I’ve noticed a distinct group dialectal dynamic – for some time – coming from those that expend a tremendous amount of energy on the terms public and private. One might even think it proceeds all other things in examination of above.

    One such individual responded to a clip of Mosler with an exasperated “why does it need to be so hard” … to which I responded … its only as hard as you want to make it.

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