The State Theory of Money: Your shortcut to understanding Modern Monetary Theory (Part 1)

65 Comments

1. Q1. Why does Bbob get more chips than Shirley, who can’t work at the moment because I’m pregnant.
   Q2. I clean at Coles. Why does the cleaner at BHP Coal mine, earn 3 times as much as I.
   Q3. Shirley cleans at home and gets bugger all. ( except fatter and wider)
   Q4. and so on…..?

   Due soon,
   Mark Needham (Shirley)

2. The hyperbole never ends. Fiat currencies are intrinsically worthless and lose value over time. Ours is no exception.

   MMT advocates think that we can continue exploiting our planet at no cost. Create currency, buy goods, create currency, buy goods…..
   MMT is a concept that tries to get something from nothing but, eventually, there is always a reckoning. TANSTAAFL. They all crash.

   “In exchange for this gold, the depositors received a receipt: ‘promissory notes’. These notes, the first bank notes, once their veracity was established, proved to be very popular with their recipients, as gold was heavy and cumbersome. Soon, these notes began to be used as currency, with everyone happy to accept that each was backed 100% by a deposit of gold.”
   http://www.moneyreformparty.org.uk/money/about_money/history_of_money.php

   We are governed by the laws of physics which, trump economic theory and political ideology every time.
   Gold and silver that was used as currency 2000 years ago is still being used today.

   Iain Dooley
   You state that, “all successful currencies have been “fiat””
   Care to name a few? Those currently in use excepted as we can see them in real time inflating away their perceived value.

3. Monetary theory no matter the flavour has no answer to how you increase national ‘competitiveness’ and national ‘economic well being’. Once this is addressed via the superior acquisition, manipulation and management of technology then you can align R&D, Innovation, Monetary policy, Fiscal policy, etc. to support the objective of increasing national ‘competitiveness’. Then put in place ‘public money’ and a ‘public bank’ in each state.

4. Harquebus: every single currency that has lasted more than tens of years is “fiat”, even if it was made of gold, even if it was backed by gold, etc. There has never been a successful currency that has not derived it’s value from the willingness of a sovereign to accept it in payment of taxes (or exoneration of some other obligation).

   That is what currency is, by definition. Anything else is a commodity.

   MMT advocates recognise that a monetary sovereign can issue currency up to the capacity of the society to produce, and beyond that we will have problems with inflation.

   Your problem is that you have not recognised the state theory of money. Until you do, you will remain confused and unintelligible.

   Perhaps you will see the light upon reading the next parts in the series.

5. Mark: You seem to be commenting on income inequality. This is inevitable and some income inequality is not necessarily a bad thing, so long as the government sets a base set of wages and conditions below which we deem work to be exploitative. Some people can earn more than others, and inequality can exist. There is some level of inequality that is not harmful, and some level of inequality that is harmful. We currently have a level of inequality that is very harmful, and it is mostly due to banking and financial deregulation and asset price bubbles.

6. “The children cannot redeem ticks unless you have issued ticks; in other words the “spending” of your currency precede the “taxation” of your currency.”

   I disagree that the children “do not produce anything for sale.” The children can’t earn ticks until they do chores – the ticks “arose spontaneously out of barter” for their labour.

   And if they have nothing for sale, what are they paying each other for. Why do there have to be more ticks created instead of less computer time? And those extra ticks don’t come from nothing, they are earned by harder work.

7. Kaye: in the context of the chore chart, we have a sovereign (the parents) moving resources to the public purpose (the children doing stuff for the good of the household that is not necessarily in line with their personal priorities right now).

   If the children started paying *each other* to do chores around the house, or they were trading, say, football cards in exchange for doing chores and then began to spontaneously use some other medium of exchange/store of value without the intervention of the parents, that would be analogous to the “spontaneous creation” story.

   “And if they have nothing for sale, what are they paying each other for”

   The reference to the point at which they produce “nothing for sale” is when there is no “private market”, only 100% government employment. At the point where they begin to trade “ticks” (or something else) with each other, they are producing things for sale in a private market.

   “Why do there have to be more ticks created instead of less computer time?”

   I don’t understand this question, can you put it into the context of the statement in the article you’re disagreeing with? I don’t think I mentioned a trade-off between ticks and computer time at the point of creating “horizontal” transactions.

   “And those extra ticks don’t come from nothing, they are earned by harder work.”

   From the perspective of the sovereign, they are created “out of thin air”. The point is that the constraint on how much work can get done is the children, not the ticks. The way we operate currently is called “sound finance” and it behaves as if the constraint on the government’s ability to spend (for example in the maintenance of full employment) is constrained by the amount of taxes it raised of bonds it issued. This is a contrived, self-imposed constraint. The real constraint is the capacity of the society to produce.

8. nexusxyz:

   “Monetary theory no matter the flavour has no answer to how you increase national ‘competitiveness’ and national ‘economic well being’.”

   I don’t know what you mean by those terms. Do you have a definition of what they are so I can tell you how MMT equips us to deal with them?

   “Once this is addressed via the superior acquisition, manipulation and management of technology”

   Again, I don’t know what you’re referring to here. Do you have any examples or sources for reference?

   “then you can align R&D, Innovation, Monetary policy, Fiscal policy, etc. to support the objective of increasing national ‘competitiveness’.”

   Why would that be an objective? I don’t want to be competitive, I want to be happy.

   “Then put in place ‘public money’”

   We already have public money. What are you referring to?

   “and a ‘public bank’ in each state.”

   Yes I agree that we should have a nationalised payment processing systems, and much smaller banks — potentially private banks but certainly small. Lectures 6 & 7 in this macro series from Randall Wray discuss banking and finance reform:

9. Define “capacity of the society to produce, and beyond”. How do you set ‘capacity’ and avoid the problem of ‘mal-investment’. I know how it can be done and it involves the laws of physics and an approach that drives investments in projects that deliver value – a ‘competitive outcome’ or a ‘superior outcome’ that benefits society (curing an disease for instance).

10. “we have a sovereign (the parents) moving resources to the public purpose.”.

    I would suggest that we have the public trading their labour – it comes before the ticks.

    You said, if the kids wanted to pay each other to do things “This would mean that kids actually wanted to have more ticks than they needed simply for getting their computer time. In other words, we would have to issue more ticks than were redeemed ”

    Couldn’t they just decide to have less time on the computer?

    And the sovereign isn’t creating extra ticks out of thin air. They are paying them in exchange for labour. The ticks have to be backed up by time on the computer.

    You really don’t do yourself any favours with these simplistic analogies.

    I agree that spending is not constrained by tax revenue. Our government chooses to make up the shortfall by issuing bonds. They don’t have to do that but they do.

11. Kaye:

    “I would suggest that we have the public trading their labour – it comes before the ticks.”

    Yes I see what you mean. The article I wrote actually listed some resources at the bottom, but it’s been split up, and this is continued in subsequent articles but what you’re talking about is actually the historically accurate version of how money originates. The “money” comes when people provide their contribution in advance and receive a receipt for that. Here is a video from Christine Desan:

    “You said, if the kids wanted to pay each other to do things “This would mean that kids actually wanted to have more ticks than they needed simply for getting their computer time. In other words, we would have to issue more ticks than were redeemed”

    Couldn’t they just decide to have less time on the computer?”

    Either way, more ticks would be issued than would be redeemed (ie. less time on the computer equates to less ticks being redeemed).

    “And the sovereign isn’t creating extra ticks out of thin air. They are paying them in exchange for labour. The ticks have to be backed up by time on the computer.”

    Again, the article has been split into multiple parts because it was too long. The next part (What the Fiat!?) explains how what we have created describes a currency operating under a fixed exchange rate to a commodity.

    “You really don’t do yourself any favours with these simplistic analogies.”

    I don’t need any favours: I already understand MMT and the state theory of money perfectly well.

    The simplistic analogies are to enable others who don’t understand MMT or the state theory of money to conceptualise it more simply. I think that some of your questions will be answered in subsequent parts of the series.

    “I agree that spending is not constrained by tax revenue. Our government chooses to make up the shortfall by issuing bonds. They don’t have to do that but they do.”

    Great, this is the core message. Functional finance is a better way to set up and run the economy.

12. Iain Dooley

    “every single currency that has lasted more than tens of years is “fiat””. Bullshit.
    The Egyptians had a currency backed by grain that lasted a thousand years.
    “even if it was made of gold, even if it was backed by gold, etc”. Bullshit.
    If that was the case, they wouldn’t be fiat currencies, would they?
    “There has never been a successful currency that has not derived it’s value from the willingness of a sovereign to accept it in payment of taxes”. Bullshit.
    Currency is a medium of exchange.

    It is you that lacks understanding.

    Fiat currencies do not hold their value over long periods of time.
    Fiat currencies distort the interaction between society and the real world in which we live. The largest debt bubble in history, supported by fiat currency creation facilitating the destruction and depletion of all that sustains us is clear evidence of that.
    Those whose hands receive newly created currency first, the less than 1%, are the only ones who benefit. They can purchase items before the resulting CPI increases take effect.

13. Harquebus:

    The subsequent articles in this series go further into this and include some resources you can follow up on in order to disabuse yourself of your fallacious understanding of currency. Here is the resource list:

    From the State Theory of Money to Modern Money Theory: An Alternative to
    Economic Orthodoxy, L. Randall Wray*
    http://www.levyinstitute.org/pubs/wp_792.pdf

    Making Money: Coin, Currency, and the Coming of Capitalism, Christine Desan
    

    Here is a short video by Christine explaining this new creation story of money:
    

    All currencies are “fiat” (that is, derive their value from a sovereign), but how you construct your currency constrains your fiscal policy space. Commodity money, gold standards, fixed exchange rates, pegged currencies etc. are all just shittier versions of what we have now which is more or less ideal: a monetary sovereign issues it’s own currency on a floating exchange rate and is free to pursue full employment, which is the goal of currency in the first place.

    You can’t call bullshit on this unless you read the sources I have read, and then refute them point by point with similarly academically rigorous sources (and the work of 17th century philosophers does not count as academically rigorous).

    You probably won’t do that, so you really have two options:

    1) Take my word for it (since I’ve read these sources and have found them to be incontrovertible fact) or;

    2) Continue to say inaccurate things about money and currency for the rest of your life

    Either way I think you should probably reserve judgement until you’ve read the subsequent parts of the series.

14. Iain,

    I think you misunderstand me. I agree that we can spend what we need to whilst there is unused capacity in the economy. Provided the money is spent wisely on things like jobs, education, health, infrastructure etc (huge question when in the hands of an executive government made of a single party facing an election every three years), it would not be inflationary and only constrained by our available resources.

    I get troubled about some concepts but not that.

    And I really get troubled when we talk about the purpose of bonds which I have been told is to control the overnight interest rate but in my opinion that is not why they are issued, just a way they are used.

    It is a remarkable coincidence that every year taxes+bonds=spending.

    My opinion is that we could do away with bonds and just credit an account at the RBA with a specified amount. We might have to change some current rules/laws to do that but that’s ok. Interest rates/money supply could be just as easily controlled by the RBA offering overnight deposit rates – no borrowing.

15. Kaye:

    “I agree that we can spend what we need to whilst there is unused capacity in the economy. Provided the money is spent wisely on things like jobs, education, health, infrastructure etc (huge question when in the hands of an executive government made of a single party facing an election every three years), it would not be inflationary.”

    Excellent.

    “And I really get troubled when we talk about the purpose of bonds which I have been told is to control the overnight interest.”

    Yes, this is a big problem. It is essentially the most “veiled” component of our monetary system currently.

    This is what Scott Fulwiler refers to as “weak” or “strong” form MMT: we can explain MMT with the RBA and treasury conflated which is LOGICALLY TRUE but OPERATIONALLY FALSE (or apparently so anyway, because of the way we have things setup).

    “It is a remarkable coincidence that every year taxes+bonds=spending.”

    It is no coincidence at all. The AOFM issues bonds in the exact amount that the government deficit spends. The reason they SAY they do this is that they run a policy of sound finance and all spending must be “fully funded” by taxes or borrowing. There is an operational reason beyond this which I’ll address below but let’s just assume that what they’re saying is true: even within this contrived system it is still obvious that the government creates money when it spends and destroys money when it taxes.

    Here is a video I did which explains things in terms of how the AOFM actually operates currently, and shows that even within this system government spending still creates net financial assets (monetary instruments) in the private sector:

    The core point here is that there is very little difference between bonds and reserves. Bonds are basically the same as term deposits.

    Now there is an operational reason that the government needs to issue bonds on the primary market in the same amount that it deficit spends:

    Since we have a system where the RBA uses bond sales on the secondary market to set and defend its interest rate target, if new reserves were created but new bonds were not, then the RBA would not be able to “soak up” the excess reserves it needed to in order to achieve that goal. The RBA cannot create new government bonds, it can only sell and repurchase them. So new bond issues on the primary market increase the size of the RBAs “sponge” that allow it to hit the cash rate target. HOWEVER …

    “My opinion is that we could do away with bonds and just credit an account at the RBA with a specified amount. We might have to change some current rules/laws to do that but that’s ok. Interest rates/money supply could be just as easily controlled by the RBA offering overnight deposit rates – no borrowing.”

    You’re absolutely right and all MMT economists agree. Here is Mosler advocating ZIRP forever:

    http://www.usnews.com/debate-club/should-the-federal-reserve-keep-interest-rates-low/federal-reserve-interest-rates-should-be-at-zero-forever

    The term “borrowing” is a complete misnomer and we don’t need it.

    Bill Mitchell even advocates that we don’t really need central banks at all, and since central bank independence is such a myth treasury and the RBA are more or less one institution anyway. There’s lots written by MMT economists on the myth of central bank independence and the ineffectiveness of monetary policy for just about everything.

16. Lain Dooley
    I have read a lot on MMT and always have come to the same conclusion. It is just more rubbish from those who practice in the dismal science.
    When you can provide me with some examples of successful fiat currencies, those currently in use excepted, as I challenged you to earlier, I will read your links.
    Over to you.

17. Harquebus:

    All currencies, ever, have derived their value from official decree; thus there is no distinction between “fiat” and “non-fiat” currencies. There are currencies, and there are commodities.

    The term fiat, as it is commonly used, is a poor choice of words and leads to a lot of misunderstanding. All currencies, regardless of whether they were pegged to another currency, constructed with a commodity, or backed by a commodity, derived their value from sovereign authority. They are a constitutional, legal project.

    What we have now, is a monetary sovereign that issues currency on a floating exchange rate. This is the system that allows the issuing sovereign the most domestic policy space, ie. the ability to pursue full employment and set its own interest rate.

    Here is a really good example: if a coin was not worth more than its commodity content, it would be melted. Since there are coins that were in existence for a really long time, this means that the monetary value of the coin, exceeded its commodity content for a really long time. So how can the value of a coin, exceed its commodity content? What is the “value” over and above the silver or gold contained within it? This is the value derived from the sovereign that will accept it in payment of taxes. This is what “The Case of Mixed Money” argued in the 1500s, ie. nominalism versus metallism. There is no other explanation for the existence of coin, than that the value of a coin was not solely determined by its commodity content.

    There is more on this in subsequent articles in this series.

18. Harquebus:

    This is why Randall Wray only ever uses “fiat” by saying “so-called fiat”:

    https://www.google.com.au/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=randall%20wray%20%22so%20called%20fiat%22

19. “we can explain MMT with the RBA and treasury conflated which is LOGICALLY TRUE but OPERATIONALLY FALSE ”

    So why use something that is false and will detract from your argument/explanation. The RBA operates as an independent body albeit run by political appointees. It causes mistrust when you incorrectly conflate the two and I also think there are differences between the RBA and the Fed so would prefer to just discuss the Australian set up.

    “it is still obvious that the government creates money when it spends and destroys money when it taxes”

    I will never understand why you insist on saying that. Whenever I ask questions about it I get dismissive comments about the irrelevance of accounting. I will agree that governments take money out of the private sector through taxes and inject money back in through spending. You can call it destroying and creating if you want. I still think bank accounts are credited and debited.

20. Iain Dooley
    You can’t even get your basic facts right.

    “All currencies, ever, have derived their value from official decree;” Bullshit.
    Currencies are a medium of exchange only. That’s twice now that I have told you this.

    “thus there is no distinction between “fiat” and “non-fiat” currencies”. Bullshit.
    “Fiat money is currency that a government has declared to be legal tender, but it is not backed by a physical commodity.”
    http://www.investopedia.com/terms/f/fiatmoney.asp

    “So how can the value of a coin, exceed its commodity content?”
    Got any Aussie coins in your pocket? Every one of them satisfies this criteria. It is only confidence that gives them value. Lose that and they’re worthless because, that’s what they intrinsically are.
    Ever wonder why coins are nearly always colored silver or gold?

    Haven’t found any examples of successful fiat currencies, have you? You won’t.

21. “So why use something that is false and will detract from your argument/explanation. The RBA operates as an independent body albeit run by political appointees. It causes mistrust when you incorrectly conflate the two and I also think there are differences between the RBA and the Fed so would prefer to just discuss the Australian set up.”

    If I said to you “Hey I’m going to go and send an email to my landlord to get her to fix the broken tap” would you think it was strange that I didn’t instead say “Hey I’m going to walk down 13 stairs and turn 90 degrees right then open the door to my office and walk through the door then close it, and turn around to make sure it’s closed without having to slam it then walk over to my chair, and position my chair in front of my desk before sitting down on it and swivelling into place, then I’m going to hit a couple of keys on my keyboard and …. ” blah blah blah. The details of how we do it are deliberately confusing and long winded. What MMT economists aim to do is cut through the bullshit and describe the outcome of what’s happening, which is that the government is not constrained in how many dollars it can create and that for all intents and purposes the RBA is a branch of government and the government creates money when it spends.

    That analogy isn’t perfect by the way because beyond being complex, the contrived system of sound finance is also setup to make it look as though the government is revenue constrained, so it’s an illusion as well as being overly complex, but you get what I mean surely.

    “I will never understand why you insist on saying that.”

    Because it’s true. Did you watch the video I linked you to?

    “Whenever I ask questions about it I get dismissive comments about the irrelevance of accounting”

    Do you mean that when you say that money is transferred to and from the official public account, that MMT proponents say that this is an “accounting trick” and not a real constraint?

    Well they’re correct.

    All money collected by the Commonwealth forms part of a self-executing consolidated fund:

    https://www.finance.gov.au/resource-management/appropriations/introduction/

    Money goes in and whether it is credited to an account or not, forms part of the fund. Money drawn down from this fund is also self-executing. The RBA chooses to operate the official public account as if it were a normal account purely for accounting purposes. Constitutionally, it doesn’t have to, and in reality the money is created when spent and destroyed when taxed, just like points on a score board or ticks on a chore chart.

    “I will agree that governments take money out of the private sector through taxes and inject money back in through spending. You can call it destroying and creating if you want. I still think bank accounts are credited and debited.”

    They are, but they just don’t have to be. Imagine that we had a score board, and we wanted to know how many points were awarded across 3 games.

    We might have a “master scoreboard” where we put 1,000 points. Then we play 3 games and award 100 points per game. At the end of each game the “slave” score board is wiped clean, but we still have a recored that we awarded 100 points because of our “master scoreboard”. From the perspective of those playing the game, the points were created when awarded (and would be destroyed if, for example, you could be penalised by having your points reduced for spitting on your opponents or something).

22. Harquebus:

    “Currencies are a medium of exchange only. That’s twice now that I have told you this.”

    Yes, you’re wrong. I have historically and academically rigorous sources which I have cited, which tell you how wrong you are. You will have to do some actual reading though.

    “thus there is no distinction between “fiat” and “non-fiat” currencies”. Bullshit.
    “Fiat money is currency that a government has declared to be legal tender, but it is not backed by a physical commodity.”
    http://www.investopedia.com/terms/f/fiatmoney.asp

    It’s a misnomer, and a poor choice of terminology. Investopedia is not an academically or historically rigorous source.

    “So how can the value of a coin, exceed its commodity content?”
    “Got any Aussie coins in your pocket? Every one of them satisfies this criteria.”

    Yes.

    “It is only confidence that gives them value.”

    No, it is the willingness of the Australian government to accept them in payment of taxes that give them value, and the ability of the Australian Federal Government to impose those taxes.

    “Lose that and they’re worthless because, that’s what they intrinsically are.”

    If the Australian government were to completely collapse and become a failed state, yes, the Australian Dollar would be worthless.

    “Ever wonder why coins are nearly always colored silver or gold?”

    Because coins to used to be made out of gold and silver?

    It’s true that mercenaries fighting war, for example on behalf of a sovereign, would only accept commodity money, so that if the side they were fighting for lost they could take the coins and get them reminted by the side that won, but they would get them reminted, they didn’t just wander around with gold. People minted their commodity into coins. Therefore the coins were worth more than the commodity. Therefore they gained their value from official degree, therefore they were “Fiat money”.

    QED

    “Haven’t found any examples of successful fiat currencies, have you? You won’t.”

    All currencies (as I’ve said a number of times) are “fiat”, and I would say that the AUD, the USD, the Yen, the pound, the canadian dollar, and like, all other currencies that aren’t pegged or experiencing hyper inflation in a failed state, are successful.

    What is your definition of a successful currency?

23. Actually the first paper ‘money’ was issued by merchants in China 1400 years ago – it was only later that the ‘government’ produced them on masse until inflation caused their early demise and paper money was not used again for many hundreds of years.
    I have a special interest in money in all forms – from paper, gold, silver even tin, lead, glass shells etc and all sorts of metal combinations and in many and varied shapes – You get to learn a lot about history and empires from a study of money. (Today I got hold of an old indo-greek copper coin – over 2200 years old – and still in good nick. I even have some believable copies of ancient chinese paper money probably made with wood block prints on mulberry paper, they are quite large – made I’m told in the 1930’s – the real thing would be worths many thousands of dollars today)

    Money and its issuance (complete with corruptions) is central to the survival and prosperity of nations and empires. Gaddafi wanted to help Africa break free of Western control of African banking (by issuing a new gold backed currency) – with France as just one example still riping billions out of Francophone Africa – and is partly why Gadaffi’s Libya was destroyed. France’s wealth is partly dependent still on African dispossession.

    The US empire is dependent upon the survival of the US dollar as the reserve currency for the world – if and when that goes so too will the US empire (with the corruptions of its issuance hastening its decline) – Its partly why we have war in Iraq and Syria and why it will resist the rise of China and the establishment of its many silk roads projects and why war looms with Russia and China. Its the logical outcome – as one system or dominant player (US/unipolar) is overtaken by another group of players in a multipolar world.

    And its why I believe no US Presidential candidate (or the cabal surrounding him or her) has the nous to navigate the maze ahead.

24. “historically and academically rigorous sources which I have cited”
    Saying so does not make it so unless, of course, it is fiat. Like I said, find a successful currency and I’ll read ’em.

    I should probably say at this point that, I despise economists and their profession. It is not the dismal science, it is just dismal.
    Fundamental equations in economics were derived from the laws of thermodynamics however, they did not give the result that was wanted so, they have been fudged ever since. Your whole premise is based on a fundamental flaw that disregards externalities. That’s econospeak for things like the environment and resources.

    Investopedia is not the only entity offering this definition. It was just the first that I came across. The definition is correct.

    “willingness of the Australian government to accept them in payment of taxes”. ROLMFAO.
    It is the willingness of suppliers to accept an agreed payment type in order to enable transactions.
    Marijuana is currency but, I don’t see any government accepting it as payment for tax.

    “Therefore the coins were worth more than the commodity.” Please, stop. You’re killing me.
    Coins and commodities are worth what people are willing to trade for them.

    Before Nixon removed the gold standard in 1971, most currencies were fiat and pegged to the U.S. dollar. Since the U.$. is now fiat, for the first time in history, all currencies are fiat so when, one goes, they will all go in the biggest financial crash the world has ever seen.

    A definition of currency. Note “long periods of time”.
    Unit of account, medium of exchange, portable, durable, divisible, fungible and stores value over long periods of time.
    A successful fiat currency would have to satisfy these criteria. None have stored their value and even the ones we use today are constantly being devalued by inflation.

    “every 30 to 40 years the reigning monetary system fails and has to be retooled.”
    “In other words, the most successful long standing currency in existence has lost 99.5% of its value.
    Given the undeniable track record of currencies, it is clear that on a long enough timeline the survival rate of all fiat currencies drops to zero. ”
    http://georgewashington2.blogspot.com.au/2011/08/average-life-expectancy-for-fiat.html

    As I am not yet prepared to read your links, you are under no obligation to read mine.

    Good luck with your search.

    Cheers.

25. Harquebus, can i say …its like a game of musical chairs – every is one is happy till the music stops.

26. mark delmege:

    “Actually the first paper ‘money’ was issued by merchants in China 1400 years ago – it was only later that the ‘government’ produced them on masse until inflation caused their early demise and paper money was not used again for many hundreds of years.”

    Yes I read about that, I think it was in Finley’s “The Ancient Economy” but it could be somewhere else …

    “I have a special interest in money in all forms – from paper, gold, silver even tin, lead, glass shells etc and all sorts of metal combinations and in many and varied shapes – You get to learn a lot about history and empires from a study of money. (Today I got hold of an old indo-greek copper coin – over 2200 years old – and still in good nick. I even have some believable copies of ancient chinese paper money probably made with wood block prints on mulberry paper, they are quite large – made I’m told in the 1930’s – the real thing would be worths many thousands of dollars today)”

    Excellent, you would thoroughly enjoy this book then if you haven’t already read it:

    I actually link to that in the Resources section of this article but it’s been split up into 3 or 4 parts.

    “Money and its issuance (complete with corruptions) is central to the survival and prosperity of nations and empires. Gaddafi wanted to help Africa break free of Western control of African banking (by issuing a new gold backed currency) – with France as just one example still riping billions out of Francophone Africa – and is partly why Gadaffi’s Libya was destroyed. France’s wealth is partly dependent still on African dispossession.”

    Yes currency has always been synonymous with sovereignty. Similarly, I have often thought that we don’t need to “forgive” 3rd world debt, we just have to get it reissued in a currency controlled by each nation.

    “The US empire is dependent upon the survival of the US dollar as the reserve currency for the world – if and when that goes so too will the US empire (with the corruptions of its issuance hastening its decline) – Its partly why we have war in Iraq and Syria and why it will resist the rise of China and the establishment of its many silk roads projects and why war looms with Russia and China. Its the logical outcome – as one system or dominant player (US/unipolar) is overtaken by another group of players in a multipolar world.”

    I think it’s more correct to say that it is the US economic and military imperialism that has dominated since WWII through the CIA[1] have allowed the US to run persistent and very large current account deficits because of the special status as reserve currency that this imperialism affords. It is the imperialism that affords them the reserve status, not the other way around. When their imperialism diminishes, the only logical outcome is that they won’t be able to consistently run current account deficits which isn’t such a big deal.

    “And its why I believe no US Presidential candidate (or the cabal surrounding him or her) has the nous to navigate the maze ahead.”

    I think they can’t navigate the maze ahead because they’re playing from a flawed economic playbook!! Thanks for checking out the article, I hope you read up the following parts in the series.

    [1] Excellent book on the topic https://www.amazon.com/Ruses-War-John-Quigley/dp/0879757671

27. Harquebus:

    “historically and academically rigorous sources which I have cited”
    “Saying so does not make it so unless, of course, it is fiat. Like I said, find a successful currency and I’ll read ’em.”

    Read the book, and look at it’s sources, and check them. It is one of the most thoroughly resourced works I’ve ever come across, and not just citations of other academics but references to local court records and official records of the Exchequer and things like that. It is a definitive work.

    “I should probably say at this point that, I despise economists and their profession. It is not the dismal science, it is just dismal.
    Fundamental equations in economics were derived from the laws of thermodynamics however, they did not give the result that was wanted so, they have been fudged ever since.”

    Bill Mitchell (and all other MMT economists) agree with you:

    “mainstream economics is defunct and we should decommission teaching programs throughout the world”
    http://bilbo.economicoutlook.net/blog/?p=25121

    “Your whole premise is based on a fundamental flaw that disregards externalities”

    No my whole premise is based on a body of historical work that validates a logical argument about what money is and what it is not.

    “That’s econospeak for things like the environment and resources.”

    Environment and resources are at the centre of MMT. You might have read a lot about it, but I don’t think you have understood any of it.

    “Investopedia is not the only entity offering this definition. It was just the first that I came across. The definition is correct.”

    No, it’s not. It’s the orthodox definition. Which is ironic since you despise the economic orthodoxy and yet all of your opinions about money are the basis for the economic orthodoxy. You’re like a repressed self-loathing orthodox economist.

    “willingness of the Australian government to accept them in payment of taxes”.
    “ROLMFAO.”

    Good argument.

    “It is the willingness of suppliers to accept an agreed payment type in order to enable transactions.”

    You obviously haven’t read anything I wrote, or if you did you have a block to learning new information, because the examples I’ve given logically invalidate this as a theory, and the sources I’ve given historically invalidate this as a theory.

    “Marijuana is currency”

    No, it’s a commodity

    “but, I don’t see any government accepting it as payment for tax.”

    If they did, it would be a commodity money.

    “Therefore the coins were worth more than the commodity.”
    “Please, stop. You’re killing me.”

    Is this a more eloquent way of saying “ROFLMAO”?

    “Coins and commodities are worth what people are willing to trade for them.”

    In a monetised economy, the value of a currency is defined as what can be purchased in that currency, yes. But the market that develops that trades with that currency cannot exist without a sovereign, or rather cannot exist for very long.

    “Before Nixon removed the gold standard in 1971, most currencies were fiat and pegged to the U.S. dollar. Since the U.$. is now fiat, for the first time in history, all currencies are fiat so when, one goes, they will all go in the biggest financial crash the world has ever seen.”

    The Australian dollar floats against the USD and has done since 1983.

    “A definition of currency. Note “long periods of time”.
    Unit of account, medium of exchange, portable, durable, divisible, fungible and stores value over long periods of time.”

    Wrong.

    “A successful fiat currency would have to satisfy these criteria. None have stored their value and even the ones we use today are constantly being devalued by inflation.”

    Storing value is not a goal or a function of currency. The only functions of currency are to provide liquidity to society and provision a sovereign.

    Saying a successful currency “holds its value” is like saying a successful car drives at 60km/h. It’s a nonsense, arbitrary success metric.

    Rather, I would say a successful currency maintains aggregate demand at a level consistent with full employment and price stability, and ensures sustainable use of resources. No currency has ever achieved this, however commodity monies are far worse at it.

    The pound sterling was stable for like 400 years and in some cases saw deflationary periods which were crippling. There were chronic shortages of currency. It was a dismal failure. That is not success, and it’s not what currency is for.

    “every 30 to 40 years the reigning monetary system fails and has to be retooled.”
    “In other words, the most successful long standing currency in existence has lost 99.5% of its value.
    Given the undeniable track record of currencies, it is clear that on a long enough timeline the survival rate of all fiat currencies drops to zero. ”
    http://georgewashington2.blogspot.com.au/2011/08/average-life-expectancy-for-fiat.html

    This article is operating under the same flawed definition of currency as you are, and most of orthodox economics is (which you profess to despise and yet keep citing). A currency does not fail if it does not “hold its value”. Price stability is important, but some inflation is perfectly acceptable and is FAR BETTER than deflation.

    “As I am not yet prepared to read your links, you are under no obligation to read mine.”

    I took a quick look, they’re garbage as expected.

    “Good luck with your search.”

    My search is over.

28. ‘It is the imperialism that affords them the reserve status’ Ok I shan’t quibble.

    a correction on fact… I did say my (flying money – I think) mulberry paper notes may have been printed using woodblocks – it was probably via brass plates – of which I also have a couple though I’m not sure of their authenticity.

29. Ian Dooley, you advance powerful arguments. And dismiss garbage with appropriate disdain.

    But could you advance arguments why people need jobs that go beyond the need for income?

30. Iain Dooley

    I have read quite a lot about MMT, including Bill Mitchell’s work who, also doesn’t have a clue and have come to my conclusion. It is garbage with no grasp of physical realities.

    “No my whole premise is based on a body of historical work that validates a logical argument about what money is and what it is not.”
    Real money is gold and silver. Currency is a receipt for same. Fiat currency is a receipt for nothing.
    I am a computer and information scientist. Logic is my forte and believe me, there is nothing logical about economics, MMT nor its under qualified overrated gurus.

    “Environment and resources are at the centre of MMT.” I have never seen it.
    Apart from the youtubes, I have searched all of your links and not even one hit for physical resources, the environment nor externalities.

    “It’s the orthodox definition.”
    Oh, MMT advocates change definitions to suit themselves now. What else is new?

    ROLMFAO. I have never heard of any government who is not willing to accept taxes.

    “In a monetised economy, the value of a currency is defined as what can be purchased in that currency, yes. But the market that develops that trades with that currency cannot exist without a sovereign, or rather cannot exist for very long.”
    Any proof for this gobbledygook. Gold and silver have outlasted all governments to date and still hold value.

    “The Australian dollar floats against the USD and has done since 1983.”
    Yep. Your point is?

    “Storing value is not a goal or a function of currency. The only functions of currency are to provide liquidity to society and provision a sovereign.” Bullshit.
    The criteria that I provided is the standard. Yours is conjured up in order to reinforce your argument.

    “Saying a successful currency “holds its value” is like saying a successful car drives at 60km/h. It’s a nonsense, arbitrary success metric.”
    This is just nonsense. What can you buy with a hundred dollars put aside for 40 years compared to an ounce of gold or silver put away for the same length of time? Which has lost the most value?

    “Rather, I would say a successful currency maintains aggregate demand at a level consistent with full employment and price stability, and ensures sustainable use of resources. No currency has ever achieved this, however commodity monies are far worse at it.”
    No currencies ever will. It is not currency that determines productivity and employment, it is the flow of energy through the system.
    Others might be interested in this. I will not ask you read any of my links until you have met my challenge and I read yours.

    What really causes falling productivity growth — an energy-based explanation

    “The pound sterling was stable for like 400 years and in some cases saw deflationary periods which were crippling.”
    From George Washington’s link above.
    “Founded in 1694, the British pound Sterling is the oldest fiat currency in existence. At a ripe old age of 317 years it must be considered a highly successful fiat currency. However, success is relative. The British pound was defined as 12 ounces of silver, so it’s worth less than 1/200 or 0.5% of its original value. In other words, the most successful long standing currency in existence has lost 99.5% of its value.”
    Losing 99.5% of its value with crippling deflationary periods is stable? Take my free idiot test. Only $5.

    Yes. I despise economics. I read about its failures every day. As I stated in this forum a couple of weeks ago, keep your eye Deutsche Bank. It is in serious trouble and it’s derivatives exposure is something like 60 trillion euros.

    So you did find a successful fiat currency then? Please tell.

    Seeyatermorra.

31. Harquebus:

    Like most currency USERS (as opposed to issuers) you are hung up on the value money has to you as a store of wealth. You define the “success” of a currency by how well it holds it’s value, for those that “own” it. And that’s to be expected. After all, you’ve never been a currency issuing government. But if you want to understand what money “IS” and not just “what it means to users of money” like yourself, you must attempt to see the phenomenon of money from the point of view of the authority that declares what money is. And that should be your first clue about the true nature of money… the fact that it cannot be separated from authority that declares what money IS. There’s a reason why the king always puts his likeness on his coinage. Peasants of the empire didn’t willingly trade their labor or hard to come by means of sustenance for bits of useless metal because they supposed the rare metallic content had some innate value recognized by their fellow man. They accepted them because the man whose likeness was on the metal sent tax collectors to their door and demanded payment of taxes in that medium.

    It’s true that those who are required to pay their tax with a certain money can also use that money as a store of value. Because even if the other peasants don’t want to accept it for real goods, it can at least be used to extinguish tax obligation to the authority. But the authority doesn’t issue money for the purpose of providing subjects/citizens with a reliable store of value. Why would any authority, much less the primitive ones that left us histories which make it clear they did not have the best interest of their subjects as priority, make the effort to provide the people with something to act as an economic “store of value”? That’s not the primary purpose of money for the issuing authority. As Christine Desan points out “Money is, instead, a method of representing and moving resources within a group: it is a way of referencing or entailing material value that creates a unit to measure other resources over time, pay off obligations finally, and transfer value immediately.”

    The earliest issuers of money certainly had the authority to collect taxes in kind instead of in currency. They could accept livestock, grain, military service and the like as a way to move real resources from the private domain to the “public”. But money offered at least two major benefits to the authority over in kind tax collection. First, tokens were easier to collect and transfer back to the royal court than so many bushels of grain or heads of livestock. Second, it let the authority spend first and tax later. He could pay his soldiers for their service immediately and then collect the tax later from his broad base of subjects.

    Of course the first question from most people is: “But why would the soldiers accept (potentially) worthless coins from the king for their service?” And the answer again is authority, which makes the money and cannot be separated from it. The same authority that allows the king to collect grain and livestock as tax in the first place is what allows him to tell the soldier he will be paid with coin instead of useful commodity. Furthermore, the coins are given their value when the king allows them extinguish tax obligation. The value of the currency actually depends on the effective tax collection! As MMT says, taxes drive money.

    So what was true of money in it’s early days is still true today: The authority issuing the money is only concerned with how well money “holds its value” for individual currency users insofar as it effects it’s efforts to buy the goods and services it wants.

32. “What MMT economists aim to do is cut through the bullshit and describe the outcome of what’s happening,”

    It would be good if you did that explaining what is ACTUALLY happening because what you say doesn’t marry up with current reality. I find it much easier to understand by saying we have a choice as to how we fund deficit spending. Currently our government chooses to issue bonds to cover the deficit but they could just as easily credit an account at the RBA and call it electronic seignorage in their accounting.

    “The RBA chooses to operate the official public account as if it were a normal account purely for accounting purposes. Constitutionally, it doesn’t have to”

    I find it very hard to believe that any financial institution would operate any other way. They have to keep records of in and out and reconcile them. Saying our taxes are destroyed makes no sense. They are credited to an account.

    PS I really hope you are not going to do the analogy of people in one room with white cards and people in another room with green cards

33. Kaye Lee:

    Kaye Lee: “It would be good if you did that explaining what is ACTUALLY happening because what you say doesn’t marry up with current reality. I find it much easier to understand by saying we have a choice as to how we fund deficit spending. Currently our government chooses to issue bonds to cover the deficit but they could just as easily credit an account at the RBA and call it electronic seignorage in their accounting.”

    Would it surprise you to learn that Australia doesn’t just sell bonds when it has a budget deficit, but also in years of budget surplus?

    Take a look at what happened after the budget surplus around 2000-2001. In 2002, the Australian Federal government conducted a “review” (http://debtreview.treasury.gov.au/content/discussion.asp) that determined that for a number of reasons it would be best to continue selling bonds “even in the absence of a budget financing requirement”. That’s right, your government “borrows”, or rather sells interest bearing financial instruments, even when it’s not necessary.

    Kaye Lee: “I find it very hard to believe that any financial institution would operate any other way. They have to keep records of in and out and reconcile them. Saying our taxes are destroyed makes no sense. They are credited to an account.?

    Yes, but they are being credited to the account of a sovereign government that issues the currency being paid. Instead of saying “my tax payments are destroyed” say “my federal tax liability was extinguished” or “the negative balance of my income tax account was paid”.

    If you calculate that you owe $2000 in federal taxes, you send the government a check for that amount. When they receive that payment, they create a “tax liability” account for you that says you owe $2000 then it credits your $2000 payment to that account and the balance is again $0. Your taxes are paid. Congrats.

    You do the same thing when you pay your credit card bill. The difference is your negative balance with your credit card company should only reflect the spending they’ve covered for you. But the negative balance on your “federal tax liability” account is determined by law. It exists because the government says it exists. No spending took place to create that negative balance, it was just calculated. And when you make the make payment it goes away. It is destroyed. The balance is paid off. The liability is extinguished. However you want to say it.

34. “Would it surprise you to learn that Australia doesn’t just sell bonds when it has a budget deficit, but also in years of budget surplus?”

    Not at all. I know what has happened in the past and why. As I have already said, I find the bond market a totally unnecessary construct because its aims could be achieved in other ways.

    My tax liability is a bill from the government, not the RBA. It is a payment/contribution for services provided by the government. I do understand that taxes are used for other reasons such as to encourage/discourage certain behaviour. Regardless of the semantics around taxes, the reality is that when I pay them my account is debited and the government account is credited. They are not “destroyed.”

    I had a brief look at the link and see nothing of relevance to this discussion there. Perhaps you could point me to the relevant bit because I don’t have the time (or desire) to read chapters about something we both consider unnecessary ie the bond market.

35. Harquebus:

    I have to give you credit for your Malcolm Roberts level of commitment to denial in the face of evidence and logic.

    In fact, calling for a return to the gold standard is just the sort of crazy shit that One Nation would love, have you considered applying for a position as a senator?

    After all they just appointed an Austrian economist as their chief economic advisor … you’ll fit right in!

36. Kaye Lee:

    This blog post by Bill Mitchell (http://bilbo.economicoutlook.net/blog/?p=29140) quotes a few relevant passages from the 2002 Review.

    We are in agreement that when you pay your taxes it results on your account being debited and the government account being credited. But it is also true that no matter how large your tax payment is, it will not result in any excess funds that accumulate for the government to spend. If you underpay or overpay by $10, as long as the discrepancy isn’t large enough to flag as an inconsistency, your payment is just “credited” to your account at the same time your account is “debited” for the exact same amount.

    It may be confusing to say “your taxes were destroyed” or “your tax payment was destroyed” but it may indeed be accurate to say your “tax liability was destroyed”. After all it was extinguished or negated. And since it could be argued that the payment and the liability cancel each other out, I could not really argue with the statement “your tax payment was destroyed”. Since the payment was also negated by the corresponding liability. In any case, I acknowledge the overall point the MMT crowd makes when they say this.

37. Matters Not:

    “Ian Dooley, you advance powerful arguments.”

    Thank you

    “And dismiss garbage with appropriate disdain.”

    Also thank you

    “But could you advance arguments why people need jobs that go beyond the need for income?”

    Bill did this just the other day:

    http://bilbo.economicoutlook.net/blog/?p=34412&cpage=1

    The point of this series is to provide a basis from which the tenets of MMT are a logical conclusion. The discussion about how best to inject demand into an economy to offset private sector behaviour whilst maintaining price stability is more of a political discussion. It’s an important one to have but I want to have that discussion from the same economic framework.

    For example, if you discuss basic income proposals versus a job guarantee with a UBI advocate, you find that many of their arguments in favour of a UBI are irrelevant once you understand MMT, but it’s hard to have that conversation if they don’t already understand it.

38. Kaye Lee:

    “What MMT economists aim to do is cut through the bullshit and describe the outcome of what’s happening,”
    “It would be good if you did that explaining what is ACTUALLY happening because what you say doesn’t marry up with current reality”

    Okay well I’ll say 2 things about that:

    1) I have explained what’s actually happening in comments above and the video on AOFM operations. But it’s really confusing. I have tried both explanations and the one “the government creates money when it spends” works much better on most people. But where someone really digs into the position that bank accounts are used etc. I do have that explanation ready. I don’t lead with it though.

    2) It sounds as though you have gone from disagreeing with MMT to disagreeing with how it is explained. This seems like a positive step. Now that you understand it you can join the effort to figure out how best to explain it to people, and I would welcome your input and efforts in that regard. We publish videos to a YouTube channel and do a podcast, I’d love to have you on and hear your ideas. My email is iain.dooley@australianemploymentparty.org

    “I find it much easier to understand by saying we have a choice as to how we fund deficit spending.”

    Okay well the word “fund” is inaccurate but hey, whatever works.

    “Currently our government chooses to issue bonds to cover the deficit but they could just as easily credit an account at the RBA and call it electronic seignorage in their accounting.”

    Sure, why not.

    “The RBA chooses to operate the official public account as if it were a normal account purely for accounting purposes. Constitutionally, it doesn’t have to”
    “I find it very hard to believe that any financial institution would operate any other way. They have to keep records of in and out and reconcile them.”

    Sure, but they could also just let the balance on the OPA run into the negative, credit as many ES funds to the system as they please and not issue bonds at all. They could operate that account however they wanted in order to keep track of records, and it wouldn’t have an impact on their ABILITY to spend as much as required at any time to maintain demand consistent with full employment.

    “Saying our taxes are destroyed makes no sense. They are credited to an account.”

    Look here:

    1 | 0
    0 | 1

    Is the number one on the second line, the same number one as on the first line? If I showed you those two lines in quick succession you might think “oh he moved the 1 from the left to the right” but is it the “same number 1”? If I chose to, I would be able to do this:

    1 | 0
    1 | 1

    I don’t have to reduce the left side before I increment the right side, but I choose to because of a system I have created that aims to keep track of my number 1s.

    The goal here is to dispell the myth that money is anything other than a record keeping tool, issued by a sovereign to provision itself and used by private markets as a medium of exchange.

    It’s more inaccurate to say that “taxes pay for things” because that implies that when I tax someone and then pay welfare to another person, that the tax payer has some right to tell the welfare recipient how to live. In reality it has nothing to do with them and they should shut the hell up. As long as the myth persists that “my tax dollars are hard at work” we will continue with the same divisiveness and lack of compassion that has become the hallmark of human society.

    “PS I really hope you are not going to do the analogy of people in one room with white cards and people in another room with green cards”

    Sounds intriguing but I don’t know what you mean.

39. Kaye Lee:

    “It is a payment/contribution for services provided by the government”

    In a sense that’s true, but not directly. We have a model that is setup to look as though your taxes are collected and then spent, and it’s very damaging to society because it allows people like Pauline Hanson to whip up a frenzy and demonise people on social security payments.

    The reality is that the government limits spending power in some areas if it needs to create fiscal space for itself to spend.

    The way we do that currently (income taxes) is a terrible idea (after all we want people to work, why would we try to discourage it?!) and we would be better of taxing wealth and unearned income more than earned income (which would serve the dual purpose of mitigating income inequality).

    “I do understand that taxes are used for other reasons such as to encourage/discourage certain behaviour. Regardless of the semantics around taxes, the reality is that when I pay them my account is debited and the government account is credited. They are not “destroyed.””

    The reality is that private sector spending power is destroyed. The numbers themselves are numbers, but the “destruction” could perhaps be better explained as a destruction of spending power. That would be much less ambiguous and after all it is spending, not “money” that matters at the end of the day.

40. Iain,

    I have never been an opponent of MMT. I just find that the answers I am given often do not mesh with operational reality. It’s like Amway to me. The product sounds good but the regurgitated spiel is dodgy.

    I started out saying bond issuance was the government’s way of creating new money and that led to all sorts of kerfuffle about bond markets and money being created and destroyed. I think the discussion gets way too esoteric unnecessarily, like your example with the 0s and 1s which made no sense to me at all.

    The conflating of the RBA and the treasury is a real issue for me. The RBA must keep accounts. That has nothing to do with constraining government spending – they are entirely different things. It isn’t the RBA that issues bonds but they DO keep track of money in and out. In that respect, they are just record keepers. They won’t allow the government to be overdrawn for any extended period – in fact they charge interest if they do overdraw. To keep everyone happy including the record keepers, the government would have to account for deficit spending somehow which is why I bring up e-seignorage. It seems to me that would solve all problems.

    As for taxes, you seem to ignore the purpose of redistribution and behaviour management. It isn’t just about reducing private spending power though I do much prefer that than saying any taxes paid to the government are destroyed. I also really do not understand the part about making a demand for our currency but I don’t think that’s important to the thrust of the matter that spending is only constrained by available resources.

    I am on my way out shortly. I will get back to you later re the other stuff you mentioned. I actually live very close to you.

41. Thank you Iain.

    I think the easiest way to explain how money works is by using a credit card analogy.

    i.e.

    you get a credit card with a $10,000 limit, which you can use as currency (as most money is actually i.o.u’s) to buy things.

    Now, the bank did not take $10,000 from other depositors and put it in to your card to spend. They just credit one “account” and debit “another” as per standard double entry book keeping for each purchase that you make, all by computer, in essence creating money out of thin air.

    When you make a payment, these IOU’s are negated, like matter and antimatter, leaving nothing.

    Most currency (IOU’s) in circulation have been issued by banks in this manner (whatever the debt instrument) with ACTUAL sovereign currency being used to settle the balance of debts between institutions.

    But even this “sovereign currency” has no intrinsic value other than that accorded to it by common acceptance and decree, as there is no requirement that it be linked with an actual real world asset since the abolition of the gold standard and the introduction of fractional reserve banking.

    I suspect that until people “un-learn” the erroneous concept that taxation pays for expenditure at a sovereign currency issuer level, you will always run into problems with their understanding of MMT.

    If you really want to get a grounding in the macro environment in which this issue rests, i would suggest doing some Noam Chomsky.

42. Kaye: I live in north Avoca if you’re nearby I’d love to catch up for a coffee sometime.

    Taxation always destroys private sector spending power. There are a number of reasons why one would do that but that is mechanically what happens when taxes are imposed.

43. Kaye: a recent example of why I think the taxes message is so important is a stoush I got into on Twitter with people saying that since abortions are available on Medicare that people had the moral right to say when and how a woman would make a decision to get an abortion.

    It would be valid if there were a shortage of OBGYNs and a woman couldn’t get a Pap smear because all of the capacity were taken up with women getting abortions but that’s not the case.

44. It would never be valid Iain for far too many reasons to bother with. The government makes family tax payments. Do I have the right to say how many children women should have?

45. John Henry.
    Again, money is gold, silver or other commodity that satisfies the criteria I posted above.
    Here it is again.
    Unit of account, medium of exchange, portable, durable, divisible, fungible and stores value over long periods of time.
    Fiat currencies also satisfy these criteria except, they do not hold their value over long periods of time. They are not money.
    You are another who thinks that they have an understanding when the fact is, you also can not even get your basic facts right.

46. John Henry

    “And that should be your first clue about the true nature of money… the fact that it cannot be separated from authority that declares what money IS.” Bullshit.
    I can trade my bullion for whatever with whoever will accept it without any government involvement.

    “sent tax collectors to their door and demanded payment of taxes in that medium.” Bullshit.
    Medieval serfs could pay their taxes with coins of the realm but, almost always it was paid in kind with produce and labor.

    I will read the rest of your comments but, if it is going to be more MMT economic mumbo jumbo bullshit, I will not be responding.

47. Iaan Dooley
    “I have to give you credit for your Malcolm Roberts level of commitment to denial in the face of evidence and logic.”
    The same can be said about you. So far, MMT doesn’t have any evidence, at all. It is just opinion. The track record of fiat currencies though, is evidence.
    There is no logic in economics. To say so confirms one’s ignorance.
    Cheers.

48. Who says gold is worth anything?

49. Yet another example of the damage done by the “taxes pay for things” myth http://theconversation.com/factcheck-do-eight-out-of-10-taxpayers-work-every-day-to-pay-our-150b-welfare-bill-39573

50. Rossleigh
    Those willing to trade for it.
    Avagoodwun.

51. Harquebus:

    “And that should be your first clue about the true nature of money… the fact that it cannot be separated from authority that declares what money IS.” Bullshit.
    I can trade my bullion for whatever with whoever will accept it without any government involvement.

    True. You can also trade with seashells, but that doesn’t make them money.

    In theory you could work and trade all year and make your living by only accepting bullion, no dollars. But guess what you will be using to pay your taxes. Dollars. That is money because it is THE unit of account. Account as in accountable. It’s what the government says you are accountable for as your obligation to the group.

52. Iain – thank you for the article(s) – I’ve not read much on MMT and your primer helps establish a couple of the premises. I do think they seem flawed and Harquebus (and others) make some good counterveiling points, but I look forward to reading the next articles in your series. If I understand correctly:

    Premise: currency derives its value from the sovereign monetary authority. Thus, if money is held by the government it has no intrinsic worth, i.e. it is “destroyed”, or more precisely its value is destroyed even if the government artificially keeps track of the amount it “holds”. Value is “created” when disbursed to non-government entities.

    There seem a couple of flaws with this. As Kaye says, that’s not how it practically works: governments consider themselves to be constrained to the amount of monetary value they hold. In this way governments become just as subject to the requirements of currency as do private citizens and corporations. If currency only held value when outside of government control, i.e. it was valued solely in terms of the ability to satisfy liabilities to said government, then there would indeed never be a need for a government to raise capital through loans. In practical terms this is not the case.

    It is not the case for two reasons. First, because no sovereign nation is an island. If a government considered its budget always balanced because it issued all the money it ever required to disburse to a non-government entity, it would never be able to provide value to a different sovereign nation. If its currency only has value when in the hands of its own subjects, handing that money to a citizen of another nation in practical terms destroys the currency, because the sovereign authority of that other citizen is not beholden to accept that currency for its own liabilities. Thus exchange rates and a global market is formed. Creating exactly as much currency as you require for your nation, with a growing population and expanding economy, means your own currency will forever decrease in terms of international value. If your nation was fully self-contained this would be acceptable, but no nation now is able to ignore the effects of exchange rate devaluation.

    Secondly, all currency – whether paper or coin, gold bullion or hamster teeth – is backed by scarcity. There is a finite amount of resource in the national/global economy. Gold holds value over the long term because the supply does not increase more than the demand. If you add together the “value” of every molecule of gold, silver, oil and grain within the grasp of human reach, you find the maximum point of value that can be distributed. Your nation cannot create more currency than the value that the country holds without decreasing the value of that currency in the global market. All currencies combined can only be worth as much as this maximum value.

    How does money get created? Apart from social support to the needy and payment for nation-building, most commercial activity does not involve input from the government. So the value and the currency arises spontaneously when a worker trades value for money. The employer has a stock of money (originally issued by the government, but not in exchange for work or liabilities). The stock of money held by the employer has value not because it is able to meet government liabilities, but because it is finite. There is a national pool of currency, and the employer has a share of this. It trades some to the worker in exchange for labour. If the pool of currency could be arbitrarily changed by the government, the value of the money held by the business would be unable to be trusted as an exchange for value. A new currency would *have* to arise.

    As soon as you start issuing currency to exactly meet demand, you divorce it from limitations of resource availability. It can certainly still be used to fulfil government obligations (taxes) but it’s no longer relevant to the cost of a commodity. As Harquebus says, this is a recipe for ignoring the true cost (value) of any commodity, be it food, metal or energy. Advocates of MMT might be satisfied with this, but humans interested in the long-term survival of our species and planet should not be.

    Finally, I suspect MMT ignores the source of authority for sovereignty. In Australia we don’t have a royal dynasty. Our government arises out of social agreement. Our use of currency arises out of social agreement. Our liability for taxes is not a divine constant, it’s a choice we’ve made as a society to support those of us with less resources than others. It would be nice for the government to simply mint as much money as it needed to pay for housing, health and food for the needy, but doing so would decrease the value of the very currency it pays to the providers of those services and commodities and the overall equation of *value* would not change. I’m not sure that MMT works in the current capitalist environment, simply because taxes are not simply a means of controlling the amount of money in the economy – they are practically used to pay for welfare and social needs.

    I look forward to further articles on the topic to address these practical limitations of the theory.

53. OzFenric:

    “Premise: currency derives its value from the sovereign monetary authority. Thus, if money is held by the government it has no intrinsic worth, i.e. it is “destroyed”, or more precisely its value is destroyed even if the government artificially keeps track of the amount it “holds”. Value is “created” when disbursed to non-government entities.”

    That sounds correct. Although I’m starting to think that it’s better to think about “spending power” rather than “money”, since this cuts through whatever accounting systems the government happens to use when keeping track of the flow of funds in and out of the official public account.

    “There seem a couple of flaws with this. As Kaye says, that’s not how it practically works: governments consider themselves to be constrained to the amount of monetary value they hold.”

    This is a policy choice, but yes that is how things are setup. However even within this contrived system government deficit spending still creates net financial assets in the form of bonds which are, for all intents and purposes, indistinguishable from cash. This video explains that:

    “In this way governments become just as subject to the requirements of currency as do private citizens and corporations. If currency only held value when outside of government control, i.e. it was valued solely in terms of the ability to satisfy liabilities to said government, then there would indeed never be a need for a government to raise capital through loans. In practical terms this is not the case.”

    It is only the case because we choose it to be so, and in reality the government issues bonds “out of thin air” anyway so there isn’t actually a constraint… its easy to sell this constraint to the public though which is probably why they do it. I think it would be just as easy to sell a well designed functional finance constraint such as a job guarantee to the public.

    “It is not the case for two reasons. First, because no sovereign nation is an island. If a government considered its budget always balanced because it issued all the money it ever required to disburse to a non-government entity, it would never be able to provide value to a different sovereign nation. If its currency only has value when in the hands of its own subjects, handing that money to a citizen of another nation in practical terms destroys the currency, because the sovereign authority of that other citizen is not beholden to accept that currency for its own liabilities. Thus exchange rates and a global market is formed. Creating exactly as much currency as you require for your nation, with a growing population and expanding economy, means your own currency will forever decrease in terms of international value. If your nation was fully self-contained this would be acceptable, but no nation now is able to ignore the effects of exchange rate devaluation.”

    Australian dollars never really leave Australian shores. You can take a note physically outside the country (but not much!) and then exchange it and then someone else will bring it back into the country, but when that exchange occurs, the “record keeping” part of it still happens at the Reserve Bank of Australia. Central banks have accounts with each other, that’s how foreign exchange works.

    So importing, for example, creates spending power in AUD that is at the discretion of a non-Australian entity, but still within the control of Australian Government regulation.

    “Secondly, all currency – whether paper or coin, gold bullion or hamster teeth – is backed by scarcity. There is a finite amount of resource in the national/global economy.”

    Yep that is one of the points I make in my article: the constraint on how many chores you can get done, is the number of children you have not the number of ticks you can write down.

    “Gold holds value over the long term because the supply does not increase more than the demand.”

    Gold is a commodity, not a currency. The goal of a currency should not be to “hold its value” but to achieve liquidity and full employment in the society in which it operates. When people misconstrue the purpose of money this way you end up with chronic currency shortages, extreme inequality and poverty, as happened throughout the middle ages in Britain as discussed in Desan’s book which is in the resources section of the article (but obviously won’t be there until part 4 is published):

    Incidentally part 2 is out now:

    The State Theory of Money: Your shortcut to understanding Modern Monetary Theory (Part 2)

    “If you add together the “value” of every molecule of gold, silver, oil and grain within the grasp of human reach, you find the maximum point of value that can be distributed. Your nation cannot create more currency than the value that the country holds without decreasing the value of that currency in the global market. All currencies combined can only be worth as much as this maximum value.”

    I would say a much more important resources is human labour. This is essentially why MMT has a job guarantee as it’s main policy outcome, and is in-line with the theory of functional finance advanced by Abba Lerner in the 40s: if there are involuntarily unemployed people the monetary sovereign can afford to employ them without inflation risk.

    “How does money get created? Apart from social support to the needy and payment for nation-building, most commercial activity does not involve input from the government. So the value and the currency arises spontaneously when a worker trades value for money. The employer has a stock of money (originally issued by the government, but not in exchange for work or liabilities). The stock of money held by the employer has value not because it is able to meet government liabilities, but because it is finite. There is a national pool of currency, and the employer has a share of this. It trades some to the worker in exchange for labour. If the pool of currency could be arbitrarily changed by the government, the value of the money held by the business would be unable to be trusted as an exchange for value. A new currency would *have* to arise.”

    I think what you’re talking about is spending power but you might also be talking about private banking or “horizontal money” rather than government banking which is “vertical money”. Private banking is discussed in part 2 linked above.

    “As soon as you start issuing currency to exactly meet demand, you divorce it from limitations of resource availability.”

    Issuing currency doesn’t meet demand, it creates demand by injecting spending power into the economy. The best way to do this is to target full employment and the best way to do that is with direct government job creation at the low end of the spectrum (rather than, say, Keynesian pump priming).

    “It can certainly still be used to fulfil government obligations (taxes) but it’s no longer relevant to the cost of a commodity.”

    I don’t see the logic here.

    “As Harquebus says, this is a recipe for ignoring the true cost (value) of any commodity, be it food, metal or energy. Advocates of MMT might be satisfied with this, but humans interested in the long-term survival of our species and planet should not be.”

    I don’t agree with this statement and don’t understand the logic behind the claim that maintaining demand consistent with full employment will somehow ignore “true cost” of commodities.

    “Finally, I suspect MMT ignores the source of authority for sovereignty. In Australia we don’t have a royal dynasty. Our government arises out of social agreement. Our use of currency arises out of social agreement. Our liability for taxes is not a divine constant, it’s a choice we’ve made as a society to support those of us with less resources than others. It would be nice for the government to simply mint as much money as it needed to pay for housing, health and food for the needy, but doing so would decrease the value of the very currency it pays to the providers of those services and commodities and the overall equation of *value* would not change.”

    The purchasing power of currency is decreased when spending power or claims on resources exceeds the capacity to produce or exceeds the resources. The government uses taxation to create fiscal space to spend in the public interest, and the public accept that imposition because they benefit from it. When there are people who are involuntarily unemployed, the government can afford to spend on hiring those people and injecting demand into the economy, and it won’t be inflationary.

    “I’m not sure that MMT works in the current capitalist environment”

    It works in every environment, by default, because MMT describes how all money works regardless of whether or not it is pegged or convertible to a commodity or made out of a commodity.

    If you’re disputing that functional finance and focus on full employment is compatible with capitalism we had a policy of full employment in this country until 1975. The problem is that, because we were using “top down” demand management rather than a job guarantee it was difficult for the government to get the correct level of spending and this resulted in inflationary pressures from time to time. Ultimately it was supply side inflation that allowed the monetarists to gain control again and oust the Whitlam government by pointing the finger and saying it was solely expansionary fiscal policy that caused this inflation.

    “simply because taxes are not simply a means of controlling the amount of money in the economy – they are practically used to pay for welfare and social needs.”

    They’re not really, any more than I can re-use a number 5. Every time I write the number 5, it’s a fresh version of the number 5. We can choose to constrain our spending with “sound financial policy” or we can choose to constrain our spending with “functional financial policy”. The latter ensures full employment and adequate social services, reduces inequality and maintains aggregate demand in the economy to smooth out the natural “boom and bust” cycles of the private sector — this is called spending “counter cyclically” where as the private sector behaves “pro-cyclically”.

    “I look forward to further articles on the topic to address these practical limitations of the theory.”

    Part 2 is out as linked above, parts 3 and 4 should be out in the next couple of days, thanks for taking the time to comment and I look forward to further discussion.

54. OzFenric:

    “As Kaye says, that’s not how it practically works: governments consider themselves to be constrained to the amount of monetary value they hold.”

    They do?! I have ears. I hear the soundbites perpetually flowing from the political class “Our Nation is going broke, we must balance the budget and get our financial house in order”. But I have eyes: I see the national debt which represents the reality that over long periods government spending has NOT been constrained by tax “revenue”.

    I concede that the political class is largely ignorant on the subject. They probably do believe what they about government budgets having the same constraints as household budgets.

    But if it’s your goal to determine “reality” you must examine what government “does” and not what it “says”.

55. OzFenric:

    ” If currency only held value when outside of government control, i.e. it was valued solely in terms of the ability to satisfy liabilities to said government, then there would indeed never be a need for a government to raise capital through loans. In practical terms this is not the case.”

    OzFenric, please take this opportunity to get to the bottom of this issue and understand what government bonds are.

    First, logic tells us that a government that has an infinite supply dollars available to spend/create does not need to borrow them. As a matter of logic it cannot borrow them. But we do know that bonds are issued, so let’s examine why.

    From a practical perspective, please consider the fact that the government sells bonds even when there is a budget surplus!!

    For confirmation, we can go directly to the source. (http://cache.treasury.gov.au/budget/2011-12/content/download/bp1.pdf) Here’s an excerpt from Budget Paper No 1, published by the Australian Treasury about the “Review” of the Commonwealth Government Securities (CGS) market that happened in 2002-2003 as a result of the budget surpluses just prior.

    “In 2002-03, the Review of the Commonwealth Government Securities Market was undertaken in response to concerns about the future viability of the declining CGS market. Since this review, successive governments have committed to retaining a liquid and efficient CGS market to support the three- and ten-year Treasury Bond futures market, even in the absence of a budget financing requirement.”

    In that official publication from the Treasury, it plainly states that after the “Review” the government has been committed to selling bonds even when there is no deficit. Unfortunately, they don’t elaborate on the “concerns” about the declining CGS market.

    For an explanation, let’s look at a quote directly from theTreasury’s (2002) Review Of The Commonwealth Government Securities Market, Discussion Paper (http://debtreview.treasury.gov.au/content/discussion.asp). From that paper, here are the stated benefits of government bonds:

    “… assisting the pricing and referencing of financial products; facilitating management of financial risk; providing a long-term investment vehicle; assisting the implementation of monetary policy; providing a safe haven in times of financial instability; attracting foreign capital inflow; and promoting Australia as a global financial centre.”

    There is nothing there that says “to finance government spending”. That is obviously absent because the purpose of the “review” was to provide reasons/excuses to continue issuing bonds in times of surplus.

    OK, now let’s return to the 2012-2013 “Budget Paper 1” referenced above to learn more about how/why the 2002 Review took place:

    “… the Government consulted a panel of financial market participants and financial regulators on the future of the CGS market … The panel underlined the crucial role of a liquid, AAA-rated CGS market and associated futures market during the crisis and supported retaining liquidity in these markets as the primary objective for the CGS market in the future … Maintaining liquidity in the CGS market to support the three- and ten-year bond futures market will continue to be the Government’s primary objective, in particular as Australian banks prepare for the 2015 commencement of the Basel III liquidity requirements. In addition, the Government will: support liquidity in the Treasury Indexed Bond market by maintaining around 10 to 15 per cent of the size of the total CGS market in indexed securities; and continue to lengthen the CGS yield curve incrementally, in a manner consistent with prudent sovereign debt management and market demand … These objectives will mean that at some stage after the budget has returned to surplus, the Government will need to transition from reducing the level of CGS on issue to maintaining an appropriately sized CGS market … To ensure flexibility in implementing the Government’s objectives for maintaining a deep and liquid CGS market, and to meet the Government’s financing needs over the forward estimates, the Government will seek an amendment to the Commonwealth Inscribed Stock Act 1911 to increase the legislative limit on CGS issuance. ”

    Please step back and try to understand this for what it really means; what really happened:

    When the government budget is in deficit (as it usually is) the calls come nearly everyone (most citizens, and liberal and conservative politicians) to balance the budget at all costs to reduce government debt. Then, in the rare circumstance when the budget turned out to be in surplus, and the Treasury decided it must stop issuing bonds for sale, what happened? Complaints from bond brokers and portfolio managers (see above “the government consulted a panel of financial market participants and financial regulators on the the future of the CGS market) who no longer have access to low risk, interest-bearing financial instruments (government debt)! So the review was conducted “in response to concerns” and the Treasury determined (and published in official documents) that in this case and any future cases of budget surplus, it will continue to sell enough bonds to “satisfy the market”.

56. OzFenric:

    “Our government arises out of social agreement. Our use of currency arises out of social agreement. Our liability for taxes is not a divine constant, it’s a choice we’ve made as a society to support those of us with less resources than others.”

    There is so much wrong here!! This is why the social sciences like economics must be done with a solid understanding of history.

    It’s true that we can think of our government as a social agreement among ourselves. One that, at this point in time, allows us some democratic participation. But that social agreement depends on the authority granted to the government. Since we are discussing ideas on forums like this I assume we all want a “better” government in some way. But surely we agree that the authority to enforce the rules are an integral part of the agreement.

    I’m not exactly sure what you mean by “Our use of currency arises out of social agreement”. And while it may seem like splitting hairs to question that statement, the difference in interpretations is profound. If you mean that our currency is basically an extension of our government, and every detail of that currency is defined and enforced by our government, and you also consider our current democratic government to be a “social agreement”, then YES, it follows that our currency (like all other laws that we submit to) is part of our social agreement.

    However, if you mean that our use of currency is something that humans developed, like language, to naturally benefit any willing and able to “participate”, with no authority involved to force their use of the currency, then NO.. that is not the case. Before money could exist, the concept of taxes had to exist. Money is just a token that was accepted by the taxing “authority” instead of in kind taxes of real goods or services. But for taxes (currency or anything else) to be levied on an individual, the concept of “private property” had to also exist in that community. This is a VERY important point when understanding money. Money is in essence a legal construct and it requires other legal institutions like private property.

    We may surmise that primitive people raided real resources from others in their own group and especially from other groups of people. But the concept of private property is more than possession. It’s just naive to think that taxes or currency could exist without some concept of private property, however primitive. For an individual to be accountable to the authority for taxes, whether in kind or in currency, there had to exist a concept of private property (and the enforcement to go along). Christine Desan uses examples of early English societies with written laws stipulating that any transaction over X number of livestock must be made in town with witnesses to be valid and enforceable by the authority. Private property laws and it’s enforcement evolved as money did.

    There is plenty of evidence: archeological, numismatic, legal, and no one presents it better than Christine Desan. But at the end of the day it’s just common sense that both private property, taxes, and currency all evolved in the presence of authority, and like any other legal construct, can’t exist without it. Imagine a primitive society with no authority attempting to consolidate power. There is huge risk involved for any member of society to would attempt to trade any useful resource like food, tools, etc in his possession for some currency that he knows to be of less value materially. Likewise, there is risk for anyone who would attempt to build up wealth in the form of stored food, livestock, land. With no authority to acknowledge his possessions as property and protect them, his possessions would be at the mercy of the nearest hungry family in the best of times. Just imagine during a famine attempting to maintain some material wealth much above the level of nearby people with no authority in place protect your “property”.

    What a revelation! Authority is just as necessary for defining, recording, protecting private property as it is for collecting taxes!

    Let’s move on to the next part of your statement: “Our liability for taxes is not a divine constant, it’s a choice we’ve made as a society to support those of us with less resources than others.”

    The first part is very true. It’s not constant. It’s not divinely ordained. It’s absolutely an imposition of the authority that collects the tax. That is as true today as it is when the first tax payment, the details lost to history, was made. And we are luckier, on the whole, than our ancestors who were allowed no democratic participation in the decisions about how to tax.

    It’s the second part of the statement that should keep you up at night. Are you under the impression that tax policy is a collective decision, but laws and enforcement of “private property” is a divine constant?! As we discussed above, there is no natural distribution of material wealth to be expected if humanity were to abandon government and revert to anarchy. If any individual wanted to “own” more than the share his rivals would concede he would have to use his own “authority” to protect it. With no “social agreement” to define the laws around private property, who can be sure who is the rightful owner of this herd of cattle or that 40 acres.

    You boldly challenge the idea that taxes are used to “support those of us with less resources than others.” But not a second thought for the legal system of private property that has resulted in the wealth inequality we see today!? No mention of the “divine right” for one citizen to inherit billions? And no mention of the cost to record private property, prosecute violations and punish them?

    Old habits often carry more weight than is possible to be moved with political will. Just look at the struggle of the United States to rid itself of racism after slavery. Our modern ideas about both taxation/money and private property are forever linked to what those legal constructs were like in their infancy. The authority behind both institutions was course and brutal in it’s early days. And by comparison, both are much more fair today. But they are two wounds on the same limb. Let us not attempt to treat one while we ignore the other.

57. There are obviously a multitude of problems with capitalism as it exists. Property and inheritance rights, the ability and willingness of some to take every avenue available to them to avoid their social responsibilities, the increased authoritarianism of sovereign powers. I am no apologist for capitalism, and while I like my material “stuff” as much as the next man, I believe there are vastly superior methods of social organisation that ensure equitability whilst not negating individual success. But I maintain that human power structures and taxes evolved as a social construct with the primary purpose of supporting those in need. The only reason I am happy to pay tax is that I can see that I am privileged where others are not, and government has the role of providing services and support that I as an individual (with the multitudes of other individuals in my society) could not provide alone. I, like many Australians, pay my taxes on the assumption they will be used effectively for public health, education, welfare and other services. It’s a social contract and any government that doesn’t fulfil its side of the bargain will soon be voted out (or, in more authoritarian situations, overthrown).

    When it comes to authority, this is something we willingly grant. In every human society there needs to be laws and regulations – that’s what society *is*. These laws are arrived at through consensus and enforced by virtue of the fact that more force supports them than opposes them. In historical times, a monarch could command the obedience of the army to keep the peace. We no longer believe in divine right of Kings, and our police forces etc. operate effectively because they believe, on the whole, in the benefits of the system of law that we maintain. If enough of us – including the police – objected to laws they were being asked to enforce, then dissent would arise leading either to changes in the law or changes in the social agreement about who has authority.

    I agree that currency arises out of the existence of central authority, but by this point in history it is largely divorced from that authority. We can change government – or potentially even our form of government – without changing our currency. (Regardless of whether the face of HRH is on our coins, they would still represent dollars and cents with continuity and, almost certainly, backwards compatibility). Like the rest of our laws and regulations, we accept the authority of money as a matter of convenience. If our dollar became practically worthless, you can be sure we would be transacting in goods or bullion.

    Basically speaking, our government has no divine right to create or destroy money at whim. If it creates or destroys currency, that has impacts on the value of money in the marketplace, and the global market, and affects the daily lives of its citizens. If our government wanted to ensure full employment, full housing, absolutely perfect public services, and started minting money to pay for these, society as a whole would suffer. As I said earlier, creating currency to contribute directly to releasing the stored value of unused labour or resources has merit. If you were to simplify the model to one involving just gold and currency, then the only way you can justify creating more money is by mining more gold. Otherwise adding more money to the market devalues the static amount of gold. The Australian dollar is no longer backed by gold bullion, but even a fiat currency must be backed by the actual value of the society it is used in. Adding more dollars than are matched by growing man-hours of work or increasing resources must necessarily lead to inflation.

    MMT seems, to me, incompatible with capitalism as we currently experience it.

58. Government bonds are not currency. They are a promissory note, guaranteeing the repayment of money in the future for investment today. Creating bonds is not equivalent to creating new money. Instead, it’s borrowing money from the future.

    The incorporation of debt into financial markets is a significant problem because it means that currency is no longer just a “point in time” figure. Money now has an additional dimension to it. We can’t overspend our value allocation using future money any more than we can overspend current value. In the first instance, a government’s currency (the total currency held by the government or private interests) must be pegged to the value of the labour, energy and resources held within that government’s authority. You can borrow extra currency from the future, but that is paralleled by future value – labour, energy and resources. The GFC was caused by more currency being borrowed from the future than was backed by future value.

    What this means is that bonds, like currency, are still limited by scarcity. Government can no more create bonds without having an impact on markets current and future, than it can blithely print a few billion more dollars. Basically, the government can’t just give itself more money without pissing off all those who rely on the scarcity of the dollars they already hold, and without pissing off all the other countries of the world who are also holding liabilities in dollars.

    I’m reading more on the subject because MMT seems like a model of merit, if your society is fully equipped to handle it. But in practical terms it doesn’t appear to describe how we actually operate.

59. ozfenric:

    “There are obviously a multitude of problems with capitalism as it exists. Property and inheritance rights, the ability and willingness of some to take every avenue available to them to avoid their social responsibilities, the increased authoritarianism of sovereign powers. I am no apologist for capitalism, and while I like my material “stuff” as much as the next man, I believe there are vastly superior methods of social organisation that ensure equitability whilst not negating individual success.”

    I think capitalism works pretty well but that it needs government regulation. Minsky called the model of capitalism that we have now “money manager capitalism” and it really goes against many capitalist principles because it doesn’t actually focus on capital (meaning the engine room of production; the stuff that enables us to produce) but finance, which produces nothing.

    Ellis Winningham recently said “we need to make banking and finance boring again” which I agree with. They’ve both become glorified as ends in themselves and financiers have taken on rock star status. Trump is a good example of the conclusion of this bizarre pantomime.

    Lectures 6 & 7 here talk about finance reform:

    “But I maintain that human power structures and taxes evolved as a social construct with the primary purpose of supporting those in need. The only reason I am happy to pay tax is that I can see that I am privileged where others are not, and government has the role of providing services and support that I as an individual (with the multitudes of other individuals in my society) could not provide alone. I, like many Australians, pay my taxes on the assumption they will be used effectively for public health, education, welfare and other services. It’s a social contract and any government that doesn’t fulfil its side of the bargain will soon be voted out (or, in more authoritarian situations, overthrown).”

    This statement is entirely correct: a population accepts sovereign rule and pays taxes in exchange for the public purpose served by that sovereign. If the population rejects sovereign rule, they also reject the payment of taxes and the currency becomes worthless.

    Minor terminology quibble though: taxes aren’t really “used” to pay things — they create fiscal space for the govt to spend but are not required to “finance” that spending.

    “I agree that currency arises out of the existence of central authority, but by this point in history it is largely divorced from that authority.”

    It absolutely is not!!

    “We can change government – or potentially even our form of government – without changing our currency. (Regardless of whether the face of HRH is on our coins, they would still represent dollars and cents with continuity and, almost certainly, backwards compatibility).”

    We can change our representatives but we have the same constitutional framework and the same mechanisms by which we pay taxes. The account holder of the Official Public Account is always going to the Australian Federal Treasury. It is our institutions and constitution that in this case determine what “Authority” is (and weak institutions is one of the reasons why developing nations find their currencies so tenuous).

    “Like the rest of our laws and regulations, we accept the authority of money as a matter of convenience. If our dollar became practically worthless, you can be sure we would be transacting in goods or bullion.”

    The currency would be come worthless because of a collapse in the government and lack of ability to impose taxes. Foreign exchange rate may fluctuate and imports may become more or less expensive. Speculators may find our currency less favourable but so long as our governmental institutions are in tact and we accept the imposition if taxes in AUD, and therefore offer things for sale in AUD the currency will never become worthless.

    “Basically speaking, our government has no divine right to create or destroy money at whim.”

    All AUD comes from government spending and all government spending is money creation. The word “money” is a bit nebulous but even if you look at the “sound financial policy” we currently operate under, the government creates bonds “out of thin air” when it deficit spends which simple add to the net financial assets of the private sector and in reality bonds are very similar to ES funds:

    “If it creates or destroys currency, that has impacts on the value of money in the marketplace and the global market, and affects the daily lives of its citizens.”

    That’s not true. Only SPENDING has an impact on the purchasing power of money. We should talk about spending power or claims on resources, rather than “money” which can mean many things but only where total spending exceed total production do you see a drop in the spending power of the currency

    “If our government wanted to ensure full employment, full housing, absolutely perfect public services, and started minting money to pay for these, society as a whole would suffer.”

    Wrong, all government spending is money creation and is only inflationary where spending exceeds production. The government can use taxation to create the fiscal space it needs to provide things like housing and full employment IF REQUIRED, but for example would not need to increase taxes in order to pay for a job guarantee that employed everyone currently unemployed by the private sector.

    “As I said earlier, creating currency to contribute directly to releasing the stored value of unused labour or resources has merit.”

    Agreed.

    “If you were to simplify the model to one involving just gold and currency, then the only way you can justify creating more money is by mining more gold. Otherwise adding more money to the market devalues the static amount of gold.”

    Which is a massive failure as a currency, as we have seen whenever we tie currency to a commodity either through a fixed exchange rate or by making currency out of a commodity.

    “The Australian dollar is no longer backed by gold bullion”

    Thank heavens!

    “but even a fiat currency”

    All currencies that have ever existed gained their value by official decree and are thence “fiat”. The only difference is that a fixed exchange rate or commodity money limits your domestic policy space.

    “must be backed by the actual value of the society it is used in. Adding more dollars than are matched by growing man-hours of work or increasing resources must necessarily lead to inflation.”

    Yes adding more spending power in the absence of increased production is a Bad Thing(TM), but we can use taxation to create fiscal space required to improve inequality outcomes.

    “MMT seems, to me, incompatible with capitalism as we currently experience it.”

    MMT is not incompatible with any economic configuration. It describes how money works, regardless of your policy choices. Functional Finance which advocates spending to maintain full employment is perfectly compatible with capitalism. The current version of capitalism we have which emphasises finance and export lead growth is just bad for everyone, it’s a shit version of capitalism and we would probably need to change regulations on banking and finance to maintain a healthy economy but let’s get the basics right first: the government can and should provide employment to anyone willing and able to work. We should never have involuntary unemployment.

60. ozfenric:

    “Government bonds are not currency.”

    Bonds are functionally almost indistinguishable from ES funds at the RBA. they are like term deposits but can be liquidated very quickly. They’re just reserves on which we pay interest.

    “They are a promissory note”

    So is currency.

    “guaranteeing the repayment of money in the future for investment today”

    They are a liability swap since the ES funds used to settle a bond purchase transaction already existed and were already a liability of the federal government that would be accepted in payment of taxes.

    “Creating bonds is not equivalent to creating new money”

    Yes it is.

    “Instead, it’s borrowing money from the future.”

    It is guaranteeing that we will create a certain amount of new ES funds in future. It has nothing to do with borrowing, let alone borrowing from the future.

    “The incorporation of debt into financial markets is a significant problem because it means that currency is no longer just a “point in time” figure. Money now has an additional dimension to it. We can’t overspend our value allocation using future money any more than we can overspend current value. In the first instance, a government’s currency (the total currency held by the government or private interests) must be pegged to the value of the labour, energy and resources held within that government’s authority. You can borrow extra currency from the future, but that is paralleled by future value – labour, energy and resources. The GFC was caused by more currency being borrowed from the future than was backed by future value.”

    I have never heard anyone say that and I don’t really understand the logic. Do you have a source for that statement?

    “What this means is that bonds, like currency, are still limited by scarcity. Government can no more create bonds without having an impact on markets current and future, than it can blithely print a few billion more dollars”

    Again, it is only spending power that matters. Also ironically you are equating bond issuance with currency creation, which makes me think you must see that they are virtually identical operations.

    “Basically, the government can’t just give itself more money without pissing off all those who rely on the scarcity of the dollars they already hold, and without pissing off all the other countries of the world who are also holding liabilities in dollars.”

    People with vast currency reserves or who receive lots of interest payments, or hold lots of debt based assets may object to a more equitable distribution of money, but they are literally the 0.1% of people. So stuff them. We can do better and we don’t need their stinking money or their stinking jobs.

    “I’m reading more on the subject because MMT seems like a model of merit, if your society is fully equipped to handle it. But in practical terms it doesn’t appear to describe how we actually operate.”

    It describes exactly how we operate. Check out the other videos in the MMT explainers playlist I linked to above.

    Thanks for reading and taking the time to comment, I hope you keep looking into MMT.

    Iain

61. For anyone who hasn’t seen them here are links to the remaining articles in this series:

    The State Theory of Money: Your shortcut to understanding Modern Monetary Theory (Part 2)

    The State Theory of Money: Your shortcut to understanding Modern Monetary Theory (Part 3)

    The State Theory of Money: Your shortcut to understanding Modern Monetary Theory (Part 4 – final)

    Thanks!

62. http://www.counterpunch.org/2016/09/30/can-russia-learn-from-brazils-fate/

63. “””
    “Creating bonds is not equivalent to creating new money”

    Yes it is.

    “Instead, it’s borrowing money from the future.”

    It is guaranteeing that we will create a certain amount of new ES funds in future. It has nothing to do with borrowing, let alone borrowing from the future.
    “””

    When the government signs a contract with an aircraft manufacturer to have a fighter jet built, it makes a promise to create the dollars necessary and deposit them in the account of the manufacturer. (As we’ve discussed, the payments don’t have anything to do with the tax revenue.) The payment may be made upfront, or it may be spaced out over the life of the contract, with final payment on delivery of the aircraft. When it sells a bond it makes a promise to create the dollars necessary to pay the interest.

    When government buys a fighter jet it creates dollars for the purpose of increasing it’s military capability. When it pays the interest on government bonds it creates dollars for the purpose of ….. providing risk-free investments for the benefit of those market participants who wish to have them in their portfolio. As Warren Mosler said: “it’s a basic income policy for those who already have money 😉 “

64. “Basically speaking, our government has no divine right to create or destroy money at whim.”

    You are absolutely right, there’s no divine right. We expect our government to create/destroy money and do all of it’s other work on our behalf, not “at whim”, but through the democratic process.

    Replace “create or destroy money” with:

    build bridges
    send citizens into outer space
    build and operate prisons
    buy aircraft carriers
    declare war

    to illustrate the absurdity. Nearly everything that (federal) government does involves the money creation process. It is the tool that government uses to get things done.

65. I’ve been reading through the comments and the word fiat is coming up a lot. I’ll crawl through my take. First, let’s start with a simple definition of the word fiat: an official order given by someone who has power: an order that must be followed. The sovereign issuer of the currency is the controlling power – the Religious authorities, Government – and can issue as many fiats as it wants to define its money.

    Simplistically a convertible paper currency into something else has two Government fiats. The first fiat, what the something else is that one can turn in for paper notes. The second fiat, how much of something else one would get for turning in paper notes. So, it is logically safe to say all money is fiat. It’s just how many fiats the issuing authority chooses to have.

    Even if one can turn in paper notes for something else the “value” of the paper can be inflated away number of ways by Government fiat usually by changing the rate of exchange of paper notes for the something else.

    What forces people to use the currency is that you gotta have it to pay taxes or go to jail. How can I have something to pay the authorities unless they “spend” it into existence first?