MMT and Russia

Whenever I post anything about taxation and public expenditure, it’s a good bet that someone will pop up in the comments section to claim that, according to Modern Monetary Theory, states that issue their own currency don’t need taxation to finance public expenditure. That’s a misunderstanding of the theory, but it’s proved hard to explain this. The current crisis in Russia provides a teachable moment.

Russia is facing a lot of difficulties because of the drastic fall in the price of oil (more on this soon I hope), along with sanctions imposed following the war with Ukraine. The government depends on oil for around half its revenue, and it looks as if the drop in the oil price will be sustained for a while. But of course the Russian government can print as many rubles as it wants[^1]

Why, then, is there a problem? Modern Monetary Theory says that governments should not worry about the budget deficit. Rather, they should determine the appropriate level of public expenditure on standard economic grounds, then work out the desired rate of monetary expansion (in effect, a tax on money balances) based on the macroeconomic needs of the economy. Ordinary tax revenue is then determined as a residual, the difference between the desired level of spending and the desired level on monetary growth.

That’s a useful way to look at things, but it doesn’t make the problem of financing public expenditure go away. If oil tax revenue drops, and nothing else changes, some other source of revenue (that is, tax) must be made to keep the rate of monetary growth at its desired level, or else spending must be reduced.

In Russia’s case, the economic downturn implies the desirability of some monetary expansion, but that’s limited by inflation, currently running at 9 per cent and likely to accelerate as the plunge in the value of the ruble feeds into import prices.

To sum up, while MMT provides a different and sometimes useful way of looking at the interaction between monetary and fiscal policy, it doesn’t change the basic equation that, in the long run, public expenditure is paid for by taxes

[^1]: And is suspected of doing so to help some of Putin’s friends, but that’s a side issue.

196 thoughts on “MMT and Russia

  1. “To sum up, while MMT provides a different and sometimes useful way of looking at the interaction between monetary and fiscal policy, it doesn’t change the basic equation that, in the long run, public expenditure is paid for by taxes.”

    What’s the long run? As Keynes famously remarked we are all dead in the “long run”.

    According to the principle of sectoral balances its is easy to show that:

    Govt Deficit = Private Saving + Net Imports.

    In other words, all money spent by the Government will be returned in taxation, as that money is spent and respent in the economy. Where else can it go? That is unless someone saves it. Either in a piggy bank or in a bank account. Or if it is spent on net imports. That means that money gets saved in the central bank of the big exporters. Then, and only then, it becomes unavailable to the taxman.

    We see that countries like the UK, the USA can happily go on running deficit after deficit for year after year. The governments aren’t just funded by taxation. They are funded by these deficits too.

    So can it continue? Will they have to repay it in the “long run”? Are these deficits a burden to British children and grandchildren?

  2. @Troy Prideaux
    The quickest way to answer your question is refer you to Bill Mitchell’s recent article:
    http://bilbo.economicoutlook.net/blog/?p=29761

    But I’d just add that its exactly the same for Russia as every other country. Firstly make the most of all available resources. Don’t have a high percentage of the workforce hanging around doing nothing. If workers can’t find a job on the “free market” then Governments should find some way they can make a contribution to total production.

    In times of crisis ie war then extraordinary measures like rationing and price controls may be necessary to prevent unnecessary inflation. Its almost the case that Russia is at war. That’s for them to decide.

  3. @Auburn Parks

    Govt is the monopoly issuer of the currency
    Govt is in control of its interest spending
    Accounting
    Endogenous money creation

    Maybe the problem is that these isolated points do not represent political economy.

    You can have production and trading and exploitation without any of these.

  4. @John O’Connell

    Thanks for your sympathetic consideration. You said;

    “No, that’s done by the Treasury.”

    Technically that is true for Australia and maybe many other countries now. Thanks for the correction. But who it is done by under the aegis of government fiat depends on adminsitrative arrangements and where the chinese wall is placed. The Central Bank could be administratively set up as a branch of Treasury. It could still have an intra-departmental chinese wall between it and straight treasury functions if deemed necessary. I mean a chinese wall that might be not only an information barrier but also a functions barrier.

  5. @Ivor

    Sorry but that is simply false. A central organizing body (Govt) is essential to the maintenance of society and markets you cant just assume it away. Our public institutions (Govt) form the foundation for all transactions….monetary system, protection of property & rights, enforcement of contracts, education of the public, mediating differences among various groups, balancing social darwinism, providing public goods that the private sector cannot produce on its own, etc etc.

    The problem is that mainstream economics cant even get these most basic facts right, which is why no school of economic thought that is not consistent with these facts cant be taken seriously.

  6. @braddv

    You haven’t understood my point. Perhaps I expressed it badly. My point is precisely that that process is impossible. I thought it was so obviously impossible that I didn’t have to highlight its impossibility.

    “Start with zero cars, destroy one car and then make one car and have zero cars left at the end of the process.” is impossible because it is a real process.

    “Start with zero fiat dollars, destroy one fiat dollar and then make fiat one dollar and have zero net dollars left at the end of the process.” is a possible process for the currency sovereign precisely because the dollars are notional not real.

  7. @warren mosler

    In post number 18, nom de plume links to youtube claims by Evgeny Fedorov, Deputy of the State Duma and the coordinator of the National Liberation Movement for restoring sovereignty of Russia. Fedorov’s claims are incendiary and just might be true.

    “Economic hardship is being created by the foreign-controlled Bank of Russia’s monetary policies, to spread mass discontent and facilitate a Maidan in 2015 to remove Putin. So claims Evgeny Fedorov, citing the colonialist Central Bank law, established after Washington’s victory in the Cold War, and the system of fifth-column levers, methodically operated to steer the revolution.

    2:59 Foreign banks own the production in Russia.
    8:23 Putin has no authority over the Central Bank.
    13:56 Bank of Russia is legally a foreign-controlled Central Bank.
    15:21 (It’s a) Road map to Maidan 2015 (in Moscow).”

    It’s clear and a matter of news and public record that the USA and the West are waging economic war on Russia. Sanctions are war by other means. I just wonder if all his specific claims about monetary operations in Russia are true. Especially is it true that Central Banks in Russia and other nations designated “developing nations” do not have the same independence that Central Banks in developed nations have. Are they “controlled by the West”?

    Further, are Russian banks not permitted to loan (roubles) for Russian capital investment in Russia. Federov seems to claim that only foreign banks can lend for capital investment in Russia and then only in US dollars. He further seems to imply that the Russian economy is effectively a two-currency economy with dollars as well as roubles circulating domestically and that as I said capital investment must be denominated in dollars and come from outside Russia. If all this is true, Russia has partial currency sovereignty at best.

    Be interested in your thoughts on this.

  8. @Auburn Parks

    This is very typical of MMT bloggers.

    My point was specific to:

    Govt is the monopoly issuer of the currency
    Govt is in control of its interest spending

    Then we get a weird diversion:

    (Govt) is essential to the maintenance of society and markets you cant just assume it away.

    Huh?

    Addressing the cited issues of Government role in “issuing currency” and “interest spending” is not assuming the Government away.

    We then get a huge swamp of platitudes and truisms

    Our public institutions (Govt) form the foundation for all transactions….monetary system, protection of property & rights, enforcement of contracts, education of the public, mediating differences among various groups, balancing social darwinism, providing public goods that the private sector cannot produce on its own, etc etc.

    Whoopee, so what?

    Finally we get the Freudian slip:

    The problem is that mainstream economics cant even get these most basic facts right, which is why no school of economic thought that is not consistent with these facts cant be taken seriously.

    In fact this applies just as much to MMT religion.

  9. Did you mean to imply that Russia is at war with Ukraine? I think that NATO has been trying to provoke war with Russia, but so far, Russia has most pointedly refused to cooperate.

    I apologise for my non-technical jargon economics argument below, but would appreciate a response.

    With regard to monetary policy. Russia is huge and could be self-sufficient. I would have thought that the low price of the ruble would not affect internal trade, which would benefit people in Russia and that it would reduce the cost of exports which could be fueled with local resources. I reckon that Malthus was right in his essay on corn prices. It is sensible to avoid reliance on international trade for important things because that leaves you vulnerable in times of war or where your currency loses value. Especially important is the ability to adapt within the constraints of global oil prices by maintaining an economy within the lowest oil values.

    America is trying a desperate ploy of tearing up its own landscape, society, democracy and economy to extract embedded petroleum resources that it would previously have left there because of these costs which are economic and run counter to EROEI. It is doing this in a last ditch attempt to starve out the remaining traditional oil and gas producers, notably the Arab states like Qatar and Saudi Arabia, which then submit to it. I suspect that t is now trying to enter South American oil via Havanna, using Fidel’s brother, who seems to be a weak link. It will attempt thus to break the BRICS countries alliance and undermine Russian oil economics that way. Countries not wishing to submit to US-NATO could slow growth by reducing and sharing work, production, consumption and population growth (which is what the US did briefly at the time of the first oil shock and which the EEC/EU did long-term) until America implodes. America will resist this. The worst other countries could do is to imitate America, rip up their democracies and their landscapes, and beggar their taxpayers to feed the banks, which are a negative hole, dug by gutting resources and public assets all over the world.

    There is a theory that democracy gained currency post WW2 because of its need to combat the attraction of communism, socialism and dirigism. When the USSR collapsed, it became easier to do away with real democracy and global capitalism has been niggling away at dirigist-style national economies in Europe and the civil rights of Roman law. The EU seems to be increasingly influenced by US style policy pushes and I note that Sarkosi in France began the erosion of a basic premise of Napoleonic law in permitting spouses to inherit part of the family inheritance before children. Note that compulsory equal inheritance preferencing children and then related family makes this unnecessary.

  10. I wanted to add to my last post by saying that another reason to turn away from globalism to dirigism and national self-sufficiency for basic needs is the US debt. My understanding (initiated by Hans-Peter Martin and Harald Schumann’s theory in The Global Trap) is that the United States, as the world’s largest customer, debtor, and banker, is able to hold the world to ransom. See http://candobetter.net/node/2544

  11. @John Quiggin

    From reading this entry (which I had already read) and then from going on and reading the BIS entry and Article 75 of the Russian Constitution I can only find the vaguest of generalities. Certainly, there is nothing to confirm Fedorov’s allegations. Nor is there anything to specifically refute them that I can find. Next I will have to check “the special Federal Law” that the Wikipedia Article about the Central Bank of Russia refers to.

    I assume J.Q. you are saying all his claims are baseless. Is this correct? It’s strange because some of his allegations were quite specific. There was a reference to developing nations being treated differently from developed nations in the international money system and/or by the “Troika” (IMF, European Central Bank, and European Commission), by USA, by the West and so on.

    Russian nationalists or patriots like Fedorov (and Putin for that matter) are interesting cases and unusual mixes of ideology from our point of view. They can be and are all of reactionary (gay bashing, Western culture bashing), militaristic, authoritarian, Chekist, oligarchist and yet still State-Marxian or maybe even a tad MMT-ist in economic outlook. Fedorov could be foaming at the mouth from a different end of the ideological spectrum yet making about as much sense as Sarah Palin or the TEA party in the USA.

    At the same time, Realpolitik tells me Putin and Fedorov are justified in at least a few senses. They are right to be totally suspicious of the USA and to regard them as an enemy. They are right to regard the USA and its lapdogs like Australia as lying hypocrites. They are right that the USA continually attempts regime change and has been interferring in Ukraine recently. They are right to be highly suspicious of and rejecting of Western neoliberalism. After all, most of us who blog here are equally suspicous and rejecting of it. Fedorov implied that neoliberalism has a strong imperialist element and bias built into its monetary/banking/financial system. I happen to agree with that 100%. It’s a legitimator and facilitator of capital’s assualt on the worker. We can see that even in the rollback of our soc**l-democratic state.

    From the Russian point of view, they do have legitimate interests in the Crimea and even in Ukraine if only East Ukraine. If Russia started fomenting regime change in Mexico or Quebec how would the USA take it? That question is very easy to answer. If Russia started trying to organise the world into economic sanctions against the USA how would the USA take it? Again, that is easy to answer.

    The West and the USA are all of sanctimonius, “sanctionmonius”, hypocritical, scheming, exploitative, rapacious, militaristic, imperial and provoking. Of course, Russia historically and contemporaneously is just as bad. But we need to get realistic and stop pretending to ourselves that we are better. “Angelising” ourselves and demonising others only leads irrational and dangerous thinking (the Freudian process of projection basically).

    The West and the USA need to get wise to Realpolitik, get off Russia’s case and let it have “a legitimate sphere of interest” as all great powers demand by virtue of power; power being an accepted and indeed unavoidable reality in Realpolitiks (if I may use the plural). The world economy would be better off for such realism just as it would be better of if neoliberalism’s or monopoloy-finance capital’s crisis of over-accumulation of capital was addressed.

  12. craig :
    Why all the focus on the currency. The money supply is mainly deposits created by banks.

    Plus credit, or more specifically, the per capita increase in credit pa.

    When you express demand for an item, and purchase it, some of the purchase consists of increased credit per capita.

  13. @Ikonoclast

    I seem to recall Malcolm Fraser saying much the same thing some months ago, when the Ukraine was on the boil.

    Paul Craig Roberts has been saying it for years. His latest is germane to this discussion too:

    http://www.paulcraigroberts.org/2014/12/17/financial-market-manipulation-new-trend-can-continue/

    The guts:

    ‘The US government, perhaps surprised at the ease at which all financial markets can be rigged, is now rigging, or permitting large hedge funds and perhaps George Soros, to drive down the exchange value of the Russian ruble by massive short-selling in the currency market. On December 15 the ruble was driven down 19%.

    Just as there is no economic reason for the price of gold to decline in the futures market when the demand for physical gold is rising, there is no economic reason for the ruble to suddenly lose much of its exchange value. Unlike the US, which has a massive trade deficit, Russia has a trade surplus. Unlike the US economy, the Russian economy has not been offshored. Russia has just completed large energy and trade deals with China, Turkey, and India. If economic forces were determining outcomes, it would be the dollar that is losing exchange value, not the ruble.

    The illegal economic sanctions that Washington has decreed on Russia appear to be doing more harm to Europe and US energy companies than to Russia. The impact on Russia of the American attack on the ruble is unclear, as the suppression of the ruble’s value is artificial.

    There is a difference between economic factors causing foreign investors to withdraw their capital from a country, thereby causing the currency to lose value, and manipulation of a currency’s value by heavy short-selling in the currency market. The latter can cause the former also to occur. But the outcome for Russia can be positive.

    No country dependent on foreign capital is sovereign. A country dependent on foreign capital, especially from enemies seeking to subvert the economy, is subject to destabilizing currency and economic swings. Russia should self-finance. If Russia needs foreign capital, Russia should turn to its ally China. China has a stake in Russia’s strength as part of China’s protection from US aggression, whether economic or military.

    The American attack on the ruble is also teaching sovereign governments that are not US vassals the extreme cost of allowing their currencies to trade in currency markets dominated by the US. China should think twice before it allows full convertibility of its currency. Of course, the Chinese have a lot of dollar assets with which to defend their currency from attack, and the sale of the assets and use of the dollar proceeds to support the yuan could knock down the dollar’s exchange value and US bond prices and cause US interest rates and inflation to rise. Still, considering the gangster nature of financial markets in which the US is the heavy player, a country that permits free trading of its currency sets itself up for trouble.

    The greatest harm that is being done to the Russian economy is not due to sanctions and the US attack on the ruble. The greatest harm is being done by Russia’s neoliberal economists. Neoliberal economics is not merely incorrect. It is an ideology that fosters US economic imperialism. By following neoliberal prescriptions, Russian economists are helping Washington’s attack on the Russian economy.

    Apparently, Putin has been sold, along with his internal enemies, the Atlanticist integrationists, on “free trade globalism.” Globalism destroys the sovereignty of every country except the world reserve currency country that controls the system. As Michael Hudson has shown, neoliberal economics is “junk economics.” But it is also a tool of American financial imperialism, and this makes neoliberal Russian economists tools of American imperialism.

    The remaining sovereign countries, which excludes all of Europe, are slowly learning that Western economic institutions are deceptive and that placing trust in them is a threat to national sovereignty. Washington intends to subvert Russia and to turn Russia into a vassal state like Germany, France, Japan, Canada, Australia, the UK and Ukraine. If Russia is to survive, Putin must protect Russia from Western economic institutions and Western trained economists.

    It is too risky for the US to take on Russia militarily. Instead, Washington is using its unique symbiotic relationship with Western financial institutions to attack an incautious Russia that foolishly opened herself to Western financial predation.’

    Roberts doesn’t mention MMT per se, but the phrase ‘Russia should self-finance’ along with the emphasis on its real resources is rather redolent. And the conclusion is uncomfortably redolent of Mr Federov’s analysis.

  14. Roberts is a political economist. Politics comes first, then economics. Currency operations are right out.

  15. @Ikonoclast #2

    Topic 1
    MMT uses at least one formal argument that is fallacious…
    MMT argues that expenditure precedes taxation. The corollary, which is explicitly stated, is that money is created via budget expenditure and destroyed by taxation. I argue the fact is you can look at matters in this way if you like and you can look at matters in the opposite way if you like and it makes no difference.

    Actually, no, in practice. Please read Frank Newman’s Freedom From National Debt. He is the former Deputy Secretary of the US Treasury, and explain US Treasury processes.

    1. The government spends first, according to Congressional appropriation, which is absolutely not notional. The money is authorized for expenditure, the only legal trigger that can create it. [If this were the first day of the government’s existence, there would be no dollar bills to tax.] Spending come first.

    2. The US Treasury authorizes its banker, the Federal Reserve, to mark up its General Account at the Federal Reserve in the amount of the appropriation. This increases the General Account balance in the amount of the Congressional appropriation.

    3. The US Treasury then authorizes its banker, the Federal Reserve, to mark up the accounts of the vendors that the federal government is buying from. This depletes the General Account balance…AND…it increases the money supply in the economy by the amount of the appropriation.

    4. By law, from the gold standard days, the US Treasury is not allowed to have zip or an overdraft in its General Account.

    5. The US Treasury, then, prints up (well, it did until April 2013, now it’s electronic) treasury securities in the exact amount of the congressional appropriation.

    6. The US Treasury, then, sells these treasury securities at auction on the open market to pension funds, banks, university trusts, wealthy individuals, businesses, households, foreign banks, and foreign governments. The Federal Reserve, the central bank, cannot purchase them, by law.

    7. This restores the money supply to balance.

    8. The interest on these treasury securities is calculated at the end of August every year, and the US Treasury issues treasury securities in the exact amount of the interest owed for the year. No children or grandchildren involved.

    9. Taxation is a completely different issue, and is not involved in this process at all. It is a fiscal operation to stimulate or de-stimulate sectors of the economy, and to either heat up or cool down the economy.

    You write:

    The person in the street does not see it this way. To them money is already existent, so they see the opposite process from their point of view. Their mental Seinfeld says “First you tax the money, then you spend the money.”

    You cannot tax the person on the street if he or she has not earned it yet. Government expenditure must come first, unless you expect the person on the street to counterfeit it. Your claim that “To them money is already existent,” means the person on the street is ignorant.

  16. To sum up, while MMT provides a different and sometimes useful way of looking at the interaction between monetary and fiscal policy, it doesn’t change the basic equation that, in the long run, public expenditure is paid for by taxes

    No, it’s not.

    See my reply on page 2: December 20th, 2014 at 17:44 | #19

  17. @MRW

    Indeed yes. Taxes are paid via public expenditure. Indeed, you can tax prior to spending, but you can’t COLLECT those taxes in your own currency before you spend at least that amount.

    Well, you could if you were ok with counterfeiting. I can’t recommend it.

  18. @Jordan

    I’m afraid your argument has become circular. You are assuming that a high interest rate is inflationary and describe a vicious inflationary circle triggered by it.

  19. You are assuming that a high interest rate is inflationary and describe a vicious inflationary circle triggered by it.

    The high interest rates are inflationary argument has been taken up by some people who should know better, based on a spurious interpretation of the fisher equation.

  20. @MRW

    I still get the feeling that there might be a formal fallacy at the heart of this part of MMT. Stay with me as I am re-attempt my “real versus notional” refutation of this part of MMT. But honestly, I now run into a real problem and might have to attempt a refutation another way if I can.

    By “this part of MMT”, I mean the apparent formal insistance that runs;

    (A) Money creation MUST come before money destruction.
    (B) Therefore Government spending MUST come before taxation.
    (C) Therefore taxation does not fund government spending.

    I argue that because money is a notional category not a real category;

    (A) Money creation could come before or after money destruction.
    (B) Government spending could come before or after taxation.
    (C) Therefore “taxation does not fund government spending” is a meaningless statement in this formal system.

    Remember, you ought not conflate an accurate description of a formal nominal process (your description of fiat money creation in the United States) with an insistence that it MUST be this way and can be no other way.

    Fiat money is not a real category. It is a notional category. It does not belong to the category of real objects.

    Let us look at the impossible and possible processes for real quantities. These follow from the Law of Conservation for Matter-Energy.

    (A) Start with -1 cars. Build a car. Finish with zero cars. (Impossible process).
    (B) Start with 0 cars. Build a car. Destroy a car. Finish with zero cars. (Possible process).

    Let us look at these processes for notional quantities. I maintain both are possible processes.

    (A) Start with -1 fiat dollar. Fiat 1 dollar. Finish with zero dollars. (Possible process).
    (B) Start with 0 dollars. Fiat a dollar. Destroy a dollar. Finish with zero dollars. (Possible process).

    The argument now hinges on how the state-citizen system could start up without the state fiating a positive quantity of dollars. The year zero start-up of a fiat system is often invoked by MMT advocates for illustrative purposes. In year zero MMT says the first budget must fiat positive dollars to kick-start the system. I argue this is not quite technically correct. A step has been forgotten. I argue that the state must first fiat the CATEGORY of dollars as legal tender by a sovereign act; by law or legislation. The NOMINAL CATEGORY of dollars must exist legally before any quantity of dollars legal tender can exist.

    Once the category exists by fiat then quantities of dollars can be fiated. Taxation (negative money creation or destruction) could occur before positive money creation. The government could (rather unwisely) decree a poll tax or window tax before bringing the first budget down. It could debit each citizen’s account or ledger by $1.00. It’s a rather primitive economy obviously. The government could then credit its accounts with this money to use for its first budget. If one can imagine a transition process from a barter economy with coconuts as a proto-currency and a 1 for 1 coconut for dollar conversion for a tranition period one can see how this would work.

    However, here I run into a real problem which appears to sink me. The problem is money supply. The money supply must be positive and it will be zero after x coconuts are traded for the x dollars created by the poll tax or pre-tax. The government will have to fiat more dollars to have a positive money supply. So it now appears that the simple fact that a positive money supply is required in circulation demonstrates that positive fiat money creation must precede taxation.

    Whether this applies in the circular case where budgets follow year on year is another issue. Taxed money could be hypothesised as destroyed by taxation or hypothesised as passed through to the spending side of the ledger. Either way could be institutionalised in accounting but this does not save me from the year zero money supply problem.

    In the real resources sense citizens do of course pay for their goverment’s consumption. But then again after all distribution of social income is not the total disutility of taxes, requisition and labour drafting equal to the utility of social income to the population. (Distributions may be uneven and inequitable of course.

    I think we need J.Q. to demonstrate formally how in the long run, public expenditure is paid for by taxes. All I have done in my bizarre attempts is refute myself and look silly. I thought I could belt up the tarbaby and ended up stuck and defeated. LOL.

  21. @Alex K.
    I am not saying that interest rates trigger inflation, i am saying that rising interest rates will only support alrerady existing inflation. Inflation is already there due to demand for dollar and fact that sellers keep prices in dollar values of ruble. This fact you also demonstrated in comment #31 with cheese prices, they are $10 yestrday and today even tough in rubles is much higher.

    It is not circular logic if rising interest rates only support and increase allready existing inflation. If i said that interest rates trigger and cause inflation then you would be right. If interest rates were kept at the level of time zero, then such inflation would fizzle out and would not rise anymore. Reduce interest rates and it might even go lower.

  22. Iconoklast –

    It depends on what you mean by taxation. If we take it to mean the levying and collection of the unit of account, then spending must precede taxation. If you get more granular about the process, the fiscal authority can indeed levy the tax before it spends, it just can’t collect it.

    BTW, by levying the tax, the fiscal authority has created unemployment. The taxpayer is now forced to offer his goods/services in exchange for the unit of account and the fiscal authority becomes the price setter.

    So much for the “Free Market” economy. Kind of difficult to get that one going when the currency itself is coercive.

    As the currency is fiat, you could say the fiscal authority has none of it or you could say it has an infinite amount of it. If it really wants to spend, taxing would be the most difficult, costly (in real terms) and convoluted way of going about it. But a fiat currency with no velocity is a pretty useless thing.

  23. @John Hobgood

    Yep, I now have a lot of egg on my face. In getting between two economists and an economic theory I have been arguing well above my intellectual weight division. However, in for a penny, in for a pound. (A currency joke seems appropriate at this point.)

    I am clearly veering around a lot on what I believe re MMT. I am lost in the woods, no doubt about it. The paradox of money in general and the paradox of fiat money in particular has me flummoxed, at least in relation to MMT. I’ve also perhaps created a minor sh**storm on two blogs, this and Bill Mitchell’s blog, by my incompetent arguments. However, there is no malice in my flounderings. There is intellectual pretension, a wish to be right and a wish to find the truth. One out of three is not good, but it’s a start.

    On Bill Mitchell’s Blog, Prof. J.Q. has written this, starting with a quote from an MMT proponent on that site.

    ” “A common misconception seen in the derivative literature on MMT (which is dominated these days by blogs, social media pages and tweets) seems to think that MMT says that currency-issuing governments are omnipotent and can solve any crisis just by spending. None of the main proponents of MMT over the last 2 decades has ever made statements to justify such a view.”

    Agreed, and this was the main point I made in my post.” – J.Q.

    This is good as it demonstrates an area of agreement between MMT economists and J.Q. No controversy on this point, move along folks. Incidently,I don’t know what kind of an economist J.Q. self-identifies as:- Orthodox? Keynesian? Post-Keynesian?

    However, J.Q. also wrote at the end of his blog.

    “To sum up, while MMT provides a different and sometimes useful way of looking at the interaction between monetary and fiscal policy, it doesn’t change the basic equation that, in the long run, public expenditure is paid for by taxes.”

    Therefore, there is still an area of disagreement between J.Q. and MMT economists on that point. I have attempted to refute the MMT camp on this point using a bizarre and incompetent argument (self-judged in retrospect) and have failed. J.Q.’s mission, should he accept it, is to provide to the proof for his own contention.

    My own thoughts on this matter amount to random waffle at this point or maybe “notes towards”… something.

    The citizen is a person. The state is an institution. This is obvious enough but certain observations flow from it. The citizen can pay a cost in a way that the state cannot and does not. The citizen pays a disutility cost for obtaining needs and desires. This is not some abstract disutility cost but a concrete one which can involve personal pain, discomfort, boredom or deprivation (in a couple of senses of the word). Compared to this organic, personal reality, the state as an impersonal inanimate institution can pay no disutility costs. Its agents (ministers and bureaucrats) can have the state make trade-offs to achieve certain goals at the expense of other goals but that is about it.

    The position of the fiat-money state and the position of the citizen with respect to fiat currency is clearly different. If a citizen prints money, he/she is counterfeiter. In common parlance, they get something for nothing. (Though there are still disutilty costs for counterfeiting.) The state can legally print money. In a sense, the state is the “legal counterfeiter”. The state “gets something for nothing”. It gets the chits called fiat dollars for nothing other than the costs of “printing money” or now the electronic process crediting accounts.

    Where does this leave the statement “public expenditure is paid for by taxes”? In one sense it seems true. Public expenditure is paid for by taxes paid by the citizen. The citizen is “taxed” for effort in earning money. Money is a representation for the value of this effort. The citizen is then taxed the money and it represents a real loss for the citizen. The citizen now cannot buy something or “appropriate something with money”.

    If we assume the 1 for 1 equivalence of a balanced budget, the state can appropriate this very item for state uses via the “fiat-fiction” (which might be to give it to the PM for his use or to give it to a poor person for his use.) But how is the state “taxed” for this action? How does it pay a disutility price? It does not and cannot pay a disutility price in the sense that a citizen does. It uses the “fiat fiction” to pay the price in the process of pumping money supply into the economic system: a process required anyway if the economy is growing and if money supply is “leaking” in any way.

    The creation of fiat money backed by taxation (as either real backing in some form or as symbolic backing with inflation tamping) is not the only way a state can appropriate resources. It’s just the current legal process it uses in orderly peacetime. A modern state can also confiscate or requisition materials and products and it can use impressment, drafts or conscription on its citizens. It will often do this in times of existential stress like total war. Everything from fiat currency (“legal counterfeiting” without any pejorative judegement) to confiscation and impressment comes with legal backing and/or the state use of its monopoly of of force also called monopoly on violence.

    For the proposition “public expenditure is paid for by taxes” to be shown to be formally true in the financial system (as opposed to being “disutility-true” in the real economy of real citizens) it has to be shown that a fiat-curency-issuing government can never spend or almost never spend enough without taxes. What the mechanism of this demonstration is I cannot figure out.

    The seeming paradoxes appear to arise with the melding of a notional system with a real system and presumably have been arising in ever more baffling form with the evolution of money from barter to proto-currency, to precious metal backed currency to fiat currency. In the later stages of this evolution, modern capital has also arisen (actually or as new notional categories of finance and analysis?) in forms such as fixed capital, money capital and fictitious capital (if we follow Marx). But orthodox finance also recognises these categories albeit using diffrent terms and without as many pejorative connotations.

    So either the question is genuinely baffling or I am trying to reason beyond my competence.

  24. Footnote to my last post.

    Rather than saying “public expenditure is paid for by taxes” it might be better to say “public consumption is paid for by the foregoing of private consumption.” But some if not all public consumption becomes private consumption again, like welfare or contracts to the private sector. But of course some potential consumption can also become investment (public or private) via a government action.

    Heck, in a mixed economy we might as well just say “The state transfers some consumption and alters some investment destinations.”

  25. John Hobgood :
    BTW, by levying the tax, the fiscal authority has created unemployment. The taxpayer is now forced to offer his goods/services in exchange for the unit of account and the fiscal authority becomes the price setter.

    I agree. Essentially, how a fiat currency become the coercive entity that it is. You have to have a reason to work for the Unit of Account. And what do we get for this coercion? In the hands of competent men (and women) who are working for the benefit of all Americans: prosperity and provisioning of the general welfare of the people as the preamble to the Constitution so orders.

    However as Warren has said many times in his talks, repeating the inside-baseball Federal Reserve term: “Reserve add before reserve drain.” Spending before the issue and sale of treasury securities.

  26. Ikonoclast :
    So either the question is genuinely baffling or I am trying to reason beyond my competence.

    There’s nothing wrong with your reason or competence, you’re just over-noodling it. You’re over-thinking. I suspect you’re like I was for a couple of years: “Could it really be this simple? . . . . And if it’s this simple, why hasn’t anyone said it this simply before now?”

    The federal government is not revenue-constrained. It does not need taxes to pay for public expenditures. (State and local govts do, however.)

    So let me lay this corkscrew on you, which contains statements that will appear to you as mutually exclusive, except this is how it really works, all laid one on top of each other because they didn’t bother to change the laws back then because a war intervened:

    because we have a fiat currency that requires its use as taxes to establish and maintain the country’s legal tender or legal ‘unit of account’

    because the law from the gold-standard days requires the US Treasury to maintain a positive General Account at its bank, the Federal Reserve (because they were really “printing money” against the gold then, not so after 1933)

    because treasury securities under the gold-standard, which were convertible to gold just like physical dollars, could not be cashed in for gold until after the treasury securities matured, which the government used to reduce the risk to the whole gold supply (reduce hoarding)

    because the law since 1947 says that the Federal Reserve system must return all profits to the US Treasury annually after operating expenses for the 12 districts, and the ~1.56% dividends paid to the (non-voting) member bank shareholders in each district

    because the act of returning the ‘unit of account’ to the US Treasury—as taxes, or as interest payments from Quantitative Easing— extinguishes that money from the economy, as in “poof, all gone”

    because the amount paid in taxes is used to reduce the amount of treasury securities that the US Treasury must issue to match the Congressional appropriation (for the purposes of rebalancing the money supply that the spending adds to the economy)

    Because of all this, there is the perception that federal taxes pay for federal public expenditures. They don’t. Only your state and local taxes pay for public expenditures in any real sense. Only your state and local governments need real revenue–hard cash, if you will–from the public in order to operate.

    Federal taxes are used, when properly understood, to manage the economy of the USA. To increase or decrease the velocity of different sectors in the economy/country. To increase or decrease the wealth of different sections of the country (e.g, tax breaks, say, for car manufacturers to build factories in poor or blighted areas). To heat up a cold economy when no one is spending, and the government wants people to have more money to spend. To cool down a hot economy when everyone has a job but there aren’t enough goods and services available for everyone (leading to higher prices) just like they did as WWII ended to offset the huge savings American workers had in their bank accounts from full employment (1.2%, I think). They taxed the rich up to 90%, and gave the little guy a break after using the country’s resources for the war effort, and created the middle-class, and let them buy all the refrigerators and TVs and cars they wanted.

    I strongly recommend you buy Frank N. Newman’s April 2013 87-page book that explains this. Incidentally, he says to read Warren Mosler, Randy Wray, and Scott Fullwiler–and someone else–to learn how the system works.

  27. nom de plume :
    @Ikonoclast
    The American attack on the ruble is also teaching sovereign governments that are not US vassals the extreme cost of allowing their currencies to trade in currency markets dominated by the US. China should think twice before it allows full convertibility of its currency. Of course, the Chinese have a lot of dollar assets with which to defend their currency from attack, and the sale of the assets and use of the dollar proceeds to support the yuan could knock down the dollar’s exchange value and US bond prices and cause US interest rates and inflation to rise. Still, considering the gangster nature of financial markets in which the US is the heavy player, a country that permits free trading of its currency sets itself up for trouble.

    While I agree that someone is trying to destroy Russia and force the Ukraine to dump their currency and use the Euro, Paul Craig Roberts is not clear about how the US currency works. In fact, he doesn’t have a clue, although his heart is in the right place.

    China hasn’t accumulated treasury securities to defend its currency from attack. And this statement is just bizarre: “Of course, the Chinese have a lot of dollar assets with which to defend their currency from attack, and the sale of the assets and use of the dollar proceeds to support the yuan could knock down the dollar’s exchange value and US bond prices and cause US interest rates and inflation to rise.” Just off the effing wall.

    Here’s how it works, in real life.

    The Federal Reserve has two kinds of bank accounts: checking and savings. (They have fancier names, but this is what they are)

    The only entities that can bank at the Federal Reserve are:
    1. US Government
    2. US banks
    3. Foreign governments
    4. Foreign banks

    1, 2, 3, 4 have checking and savings accounts at the Fed. China has a checking and savings account at the Fed.

    When Walmart buys $100,000,000 of tires and skidoos rom China, it wires the money to China’s checking account at the NY Fed. That’s how the payment system works.

    China has 4 choices. [USD cannot leave the US banking system by law. It cannot leave the US Federal banking system.]

    1. Exchange the USD on the open market for Yuan and wire it home.
    2. Buy something American with the money: farm equipment, planes, oil.
    3. Leave it in checking and earn 0.25% interest.
    4. Earn more interest.

    Let’s say it chooses #4.

    China tells the Federal Reserve it wants to buy $100 million of treasury securities (treasury bonds).

    The Federal Reserve moves China’s $100 million to China’s savings account.

    China buys treasury securities on the open market.

    When China wants to cash them in, it tells the Fed the sell them.

    The Federal Reserve moves the $100 million in principal and interest from China’s savings account to its checking account.

    This is called Paying Off the National Debt. The act of going from China’s savings account to its checking account is called paying off the national debt.

    Nothing more complicated than that.

    It has nothing to do with the dollar’s exchange value, US bond prices, US interest rates, or inflation..

    Zero.

    All it is is what Walmart paid China for imported goods.

  28. @MRW

    The farthest point I can get my mind to in these matters is;

    (1) The federal government is not technically revenue-constrained. It can create any amount of fiat currency it wishes or believes it needs to do. However, this technical or nominal non-constraint is really neither here nor there. The fact is real constraints exist. Are the real goods and services available for the government to purchase? Will excess inflation be created? What happens to unemployment and indeed social equity and cohesion in all this? The real contsraints are what counts.

    I accept that the change in emphasis by MMT and the rebuttal of certain everyday myths (“the government is like a household”) is useful but I don’t hold this reasoning, perception and advocacy to be the sole preserve of MMT. And sure, the neoliberals might chant differently openly to the public but privately they bail out business with deficit trillions and/or QE trillions. So even they (the most Machiavellian of them anyway) know the real facts too.

    2. Does taxation fund spending for a fiat currency issuing Fed Govt.? This is a second order question compared to 1. above in my opinion. It may or it may not. It depends on your viewpoint, how you do the accounting and whether you are going to focus on the notional (accounting) processes or the real processes. The latter tend to show taxation as a redistribution tool, a pigovian tool and maybe a fiscal space making tool because it is a way, not the only, way to damp inflationary pressure.

    3. Finally, all of these controversies are based in both current conventions of public-private finance and in the assumptions of and presumptions for capitalism as a system. Capitalism has now evolved to late stage or monopoly-finance capitalism for reasons inherent to capitalism itself and its control by an oligarchic set-up. This set-up is now propped up by private wealth and power and government wealth power de-democratised, bought and suborned to the purposes of the oligarchs.

    4. Capitalism is very likely to collapse in my opinion. This collapse might be due to internal contradictions (revolution by the poor against the long-run stagnation induced by oligopolisation and over-accumulation of capital). Alternatively, the collapse might be caused by external contradiction namely the conflict of capitalist over-production with the environment causing irreparable environmental damage. Either way, the system will go through a disjuncture in an abrupt change to a new system (or chaos and anarchy) such the “laws” of bourgeois or capitalist economics will be completely or largely obsolete. That’s my best guess at this stage even though it might not happen in my lifetime.

  29. Not sure whom Cameron was addressing but this is certainly the crux of Quiggin’s continual misunderstanding of MMT:

    “public expenditure is paid for by resources” (i.e. not taxes)

    verse

    according to Modern Monetary Theory, states that issue their own currency don’t need taxation to finance public expenditure

  30. @Ikonoclast

    I poured coffee on my laptop about 90 minutes ago and it’s fried. So I was answering you on my iPad and I just lost everything I wrote because I accidentally hit the wrong part of the screen.

    So now it’s bar time.

  31. @MRW
    MRW –

    You can remove the Hard Disk Drive and save your stuff (except for your answer to Ikonoclast). You just need to remove it from the laptop and put it in an external enclosure (they aren’t expensive). The sooner you get it out of the laptop the better. Let me know if you need help with that.

  32. I found an interesting paper and read it pretty much right through. I even re-read key paragraphs several times. This is the paper.

    “Understanding the Modern Monetary System” – Cullen O. Roche, August 5, 2011.

    Here is one place to find it.

    Click to access cullen-roche-mmt-understanding-the-modern-monetary-system.pdf

    The author introduces the paper as being about Monetary Realism. He discusses MR more than MMT as such. The paper is intended to be a description of the contemporary US monetary system. It is largely this description. I am not a scholar with independent research behind me so I cannot comment on its accuracy and comprehensiveness. My guess is it is basically right.

    However, the paper does wander off a couple of times into the author’s philsophical musings about the US economy and what underpins it. Private enterprise innovation is one factor he represents as important. A few other such comments indicate the author, although not buying into myths about the monetary system, might be buying into a few other US and capitalist myths, as I might call them, that are conservative or even slightly neoliberal. It’s an unexpected mix and he should have stuck to his self-set brief.

    In the conclusion he says;

    “In sum, most of what we have been taught in school is based on a now defunct monetary system (the gold standard). MMT is not a theory, but merely a description of a modern fiat currency system. While its description of the modern monetary system is accurate, it is by no means a holy grail. And those who apply policy prescriptions are merely utilizing the realities of the system to apply what they believe are sound uses of the system. It does not mean the
    government can just credit accounts and create real wealth. No, real wealth is only created through real productivity. And while government can’t create this wealth it can be used as a tool to help the private sector to achieve prosperity. I think it’s important to understand that government is not always bad or that government spending is always evil. In fact, government serves a vital purpose within our society. How involved that government is in the day to day lives of its citizens is to be decided by the citizens themselves.

    I believe MMT and Functional Finance provide a more accurate portrayal of the monetary system
    in which we reside in the USA and in many other autonomous states throughout the world. It is
    my hope that a greater understanding of our monetary system will result in a less dogmatic, more pragmatic and more rational perspective of our economy so as to help us all in achieving the prosperity we desire.”

    Okay, this conclusion is well and good and certainly not neoliberal in spirit. It’s motherhood and apple-pie. The implied belief that US citizens (the masses other than the 30% or so who vote and even other than the “1%” wealthy) have a say in how the US economy is run is quaint and completely inaccurate IMO.

    Does this paper really reflect MMT accurately? I don’t know.

    MMT has a bit of a split personality IMO and suffers from both grandiosity and dogmatism. Now that’s a bit rich coming from me but I hold it to be somewhat true nonetheless. MMT is very strong on saying it’s just an accurate description of how the modern monetary system works. It then makes the assumptions or claims that;

    (a) that nobody else knows this or has figured it out (presumably even those who made it and exploit it); and/or
    (b) nobody else knows or has discovered how it might be used for good instead of evil.

    That’s a bit of a caricature but you get my drift.

    It’s as if simply describing the system accurately has initiated MMT-ers into a profound secret nobody else knows. Converts, even temporary ones like me who approach it and then pull away again, seem to be encouraged into this same belief. They now know a profound set of powerful truths that nobody else knows. If only life was that easy. I am not sure how you get from a very accurate desciption (without theory) to a profound secret nobody else knows.

    Now, I might be doing MMT a disservice here. If that is the case, well MMT-ers are prolific proselytisers and can easily out-preach me any day of the week. They are well capable of looking after themselves.

    At the same time, I do not want to do Bill Mitchell a disservice. I agree with many of his policy prescriptions and his analysis of the disaster that is the EU. This is possibly because he seems to me almost Marxian in some of his political economy. He has done and is doing an enormous amount of work. Finding out and detailing how things work empirically is painstaking, voluminous work. Bill Mitchell also works with and publishes a LOT of data as a macroeconomist and econometrician. I hope I have got his specialities right. He respects empirical data and I respect that highly.

    With regard to my criticism that I am “not sure how you get from a very accurate desciption (without theory) to a profound secret nobody else knows,” it may well be I haven’t encountered the theory part properly yet. Bill Mitchell’s textbook when it comes out next year (IIRC) might address this area.

  33. @Jordan

    “I am not saying that interest rates trigger inflation, i am saying that rising interest rates will only support alrerady existing inflation.”

    So we agree that an external shock (a drop in commodity prices) leads to ruble inflation. However you’re saying that a low ruble rate would slow down that inflation – by encouraging investment in domestic production, if I understand correctly? Assuming it can work, it will still take months. To get there, Russia has to survive the short-term panic, which is a matter of days, not even weeks. A higher interest rate sends a reassuring signal to the public and helps dry up ruble liquidity in the banking system, easing pressure on the ruble. These are very short-term effects but the alternative is general panic, banks runs, and social unrest. Russian authorities prefer slow-boiling the frog.

  34. @Ikonoclast

    Ikonoclast

    I just came across a podcast you might be interested in; From Alpha to Omega’s Tom O’Brien interviewing anti-NATO activist Rick Rozoff, who sure knows his political onions, providing both context and counterpoint to Mr Federov’s econ/finance perspective and chiming with Roberts, Fraser and Keating… quite a mixed bag to be nodding in agreement. The danger of American madness makes for strange bedfellows.

    http://fromalpha2omega.podomatic.com/entry/2014-11-01T01_52_13-07_00

  35. @Alex K.
    We agree that something else then interest rate is causing rising inflation. That else is capital flight caused by sanctions and economic attack on Russia. It is political reason for inflation inside colonialy (import based) set up system. Due to sanctions, many foreign companies are closing up shops in russia and exchanging rubles for dollars in order to leave. This is lowering the ruble which is triggering even more capital flight due to fear more then from sanctions. It is the demand for dollar that is devaluing ruble and as you noted prices will be kept in dollar value. Prices will rise due to exchange rate, not because of cost of production.
    The reason is not drop in comodity prices but increased demand for dollars due to capital flight.

    “However you’re saying that a low ruble rate would slow down that inflation”
    No, im saying that low ruble rate would help decouple prices from dollar value in rubles. First, the domestic loans have to switch to rubles by baning dollar denominated loans and then refinance into debt with fixed and lower interest rates. This will help start ups that fill the demand for imported goods.
    Yes, all that takes years, not days. Present aproach only delays this needed change that is inevitable while giving impression that it can be avoided. High interest rates do not help, they only destroy demand for loans needed for new production and to upgrade tehnology.
    High interest rates destroy production because most companies operate under debt. This destruction is much much worse thing then loosing foreign investments which will leave anyway.

    “To get there, Russia has to survive the short-term panic, which is a matter of days, not even weeks.” I do not think that interest rate helps exchange rate any, i think that even keeps it fall faster because it feeds fear and speculations. Higher rates help a bit and short time and coupled with selling of currencies,but only under normal conditions, not under sanctions. Economic sanctions turn things upside down. Political decisions trump economic rules.

    “and helps dry up ruble liquidity in the banking system, easing pressure on the ruble.” are you advocating even more economy be based on dollar? All that just to keep nice looking exchange rate? What is that good for?
    In normal conditions that is how it would play out and force even more economy into foreign debt to keep equilibrium, but under sanctions that is not an option.

  36. Ikonoclast :
    @braddv
    “Start with zero fiat dollars, destroy one fiat dollar and then make fiat one dollar and have zero net dollars left at the end of the process.” is a possible process for the currency sovereign precisely because the dollars are notional not real.

    How so? By destroy a fiat dollar you mean collect it in taxes, right? How can you collect it in taxes if it does not exist? Even “notionally”?

  37. Ikonoclast :
    Once the category exists by fiat then quantities of dollars can be fiated. Taxation (negative money creation or destruction) could occur before positive money creation. The government could (rather unwisely) decree a poll tax or window tax before bringing the first budget down. It could debit each citizen’s account or ledger by $1.00.

    IIUC, something like that was done by some colonial gov’ts to introduce their currency into the colonial economy. A poll tax or hut tax was decreed, to be paid in the ruling country’s currency, the only local source of that currency being the colonial gov’t or colonists from the ruling country. But though the tax was decreed, it was not collected until the currency had been introduced into the colony.

    In other contexts, British tally sticks started out as gov’t payments, with the promise that they would be accepted in payment of taxes. In America, colonies issued their own money as IOUs to get around the requirement that only the British crown enjoyed seignorage rights. In both cases the money and the debt were created together, at the same time. 🙂

  38. John Quiggin: “it doesn’t change the basic equation that, in the long run, public expenditure is paid for by taxes”

    Why is that anything other than an article of faith? Reasoning backwards from a mythical day of reckoning is problematic, to say the least.

    Consider the American Continental Dollar. It paid for a lot of the expense of the American Revolution, yet the Continental Congress, which issued it, did not have the power to tax, nor did any state accept it in payment for its taxes. As a result, it crashed. The payment was not it taxes, but in real resources and efforts, and in ruined lives. Thomas Paine unsympathetically asked if people had wanted a war for free.

  39. John Hobgood :
    @MRW
    MRW –
    You can remove the Hard Disk Drive and save your stuff (except for your answer to Ikonoclast). You just need to remove it from the laptop and put it in an external enclosure (they aren’t expensive). The sooner you get it out of the laptop the better. Let me know if you need help with that.

    Thanks, John. That’s exactly what I did. And it was dripping wet. A SSD. Hope it’s OK. I’ll find out tomorrow.

  40. This piece by Mike Whitney is even scarier than Federov. He provides a road map for the so far strangely compliant Putin, one which involves a return to Cold War era proxies and capital controls, ramping up the danger of war and European depression considerably. If Putin can’t or won’t move, if he won’t utilise his greatest asset – his massive approval ratings (based as they are more on nationalism than the man himself) – then eventually some other Strong Man else will.

    http://www.counterpunch.org/2014/12/19/ruble-takedown-exposes-cracks-in-putins-defense/

  41. @nom de plume

    I give Putin more credit than most. I have found few Americans who understand what went on with Crimea and why it is so important to Russians. The rah-rah against Putin for backing Crimea is as idiotic as expecting the U.S. federal government not to defend and aid Puerto Rico or Guam. Anyone who has been to Crimea, and I have, knows that it is a Russian area. It was the summer seat of the Russian government for two centuries that I know of. Putin didn’t have to blink twice when they asked him for help. This is in addition to the Russian naval base at Sebastopol.

    In addition to his masters degree in international law, Putin has a PhD. His doctoral thesis was How to bring a totalitarian state into the 21st C by using natural resources judiciously. He has a very clear idea of what’s underneath the ground, and Russian resources are vast.

    Mike gives an accurate reading of the geopolitics, IMO. He doesn’t get the dollar reserve structure right, however. His comment that it’s like having a credit card you never have to pay off tell me that. Obama has given a great big wet kiss to China in his mishandling of this. BECAUSE OF the currency wars, which Obama initiated, I believe China will be setting up payment schemes in their own currency which could produce the kind of market in yuan that they will need to become the reserve currency in 15 years. The other side will push back hard. The TPP, and whatever the European one is called, is the global legal system being set up for the global governance movement operating as a side issue to all of this. Lots of players on this chessboard.

  42. @MRW
    You listed who can bank with the Federal Reserve (US Treasury, US Banks, Foreign Governments and Foreign Banks). You also say that the Fed cannot buy (original issue) US bonds (I understand they can only buy old, ‘used’ bonds 🙂 via the recently completed Primary Open Market Operations (POMOs). So someone (the US Banks, ie, Primary Dealers) has to by the treasury bonds when they are first issued.

    I want to clear up something for my understanding.

    I’m assuming the funds in these Fed (cash) accounts are what is meant by the term ‘Reserves’. (‘Securities’ accounts hold Treasury bonds and are analogous to savings accounts.)

    Mr. Mosler has written that The Fed’s bond sales are carefully coordinated between it and the Primary Dealers (ie, the major US banks) so as to never fail.

    To me this implies several possibilities: the PDs have enough cash to always purchase what is coming down the pike and just buy the new bonds, or the Fed can loan the funds available to the PDs to allow the PDs to purchase the new bonds. Either approach allows the PDs to fulfill their obligations to enable them to ‘make the market’.

    By implication, the interest from the treasury bonds will exceed the cost to borrow from
    the Fed, so the PD (US bank) is not out of pocket.

    Is this how it works? And/or, are there other mechanisms used for this?

    Thanks very much for your excellent summaries earlier.

  43. MRW :
    Obama has given a great big wet kiss to China in his mishandling of this. BECAUSE OF the currency wars, which Obama initiated, I believe China will be setting up payment schemes in their own currency which could produce the kind of market in yuan that they will need to become the reserve currency in 15 years.

    I generally agree with most of what you’ve said, although I’m of the opinion that the ‘currency wars’ had a more peripheral effect with China’s intentions of introducing a competing reserve currency. That’s been their aspiration before the ‘currency wars’ or at least the era of QE.

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