Overt Monetary Financing – again

Adair Turner has just released a new paper – The Case for Monetary Finance – An Essentially Political Issue – which he presented at the 16th Jacques Polak Annual Research Conference, hosted by the IMF in Washington on November 5-6, 2015. The New Yorker columnist John Cassidy decided to weigh into this topic in his recent article (November 23, 2015) – Printing Money. The topic is, of course, what we now call Overt Monetary Financing (OMF), which simply means that all of the unnecessary hoopla of governments matching their deficit spending with bond-issuance to the private bond markets, as if the latter are funding the former, is dispensed with. That artefact from the fixed exchange rate Bretton Woods system is maintained as a voluntary procedure by fiat-currency issuing governments but only provides financial assets to the non-government sector in the form of ‘corporate welfare’. The debt issuance of debt has nothing to do with funding the spending and is used by all and sundry to attack such spending for creating so-called ‘debt mountains’. OMF brings together the central bank and the treasury functions of government into a coherent framework whereby the central bank merely credits private bank accounts on behalf of the government to indicate the spending initiatives implemented by the Treasury.

As an aside, I liked the interview that John Cassidy did with Eugene Fama at the beginning of the crisis. He allowed Fama to demonstrate how ridiculous his ideas and assessments were.

Please read my blog – How to fail a simple macroeconomics examination – for more discussion on this point.

But in his current piece he is way off the mark.

Cassidy claimed that the world was stuck in a low growth era that “In economic-policy circles, the phrase of the moment is ‘secular stagnation’.”

He poses the question:

What could get us out of the rut? Until recently, the textbook prescription for slow growth involved cutting interest rates and introducing a fiscal stimulus, with the Treasury issuing debt to pay for more government spending or for tax cuts (aimed to spur household spending).

But then claims that “neither of the traditional policy responses is readily available” because interest rates are already close to 0 and political (US) and legal (Eurozone) constraints prevent any further fiscal stimulus.

This is where the recent intervention by Adair Turner, the previous head of the British Financial Services Authority, comes in.

There is a new book that accompanies new paper. It is interesting to me as a scholar that he fails to acknowledge any of the academic contributions of Modern Monetary Theory (MMT) writers in any of his work.

We have been at the forefront of proposals to use so-called Overt Monetary Financing (OMF) to accompany appropriate fiscal stimulus in various countries where aggregate spending is clearly below that necessary to achieve and sustain full employment for the last twenty years or so.

Given that, it is incumbent on authors who make similar proposals in more recent times to at least acknowledge they are part of a lineage of ideas. Turner fails in this regard.

I considered OMF in detail in these blogs – OMF – paranoia for many but a solution for all and There is no need to issue public debt.

I refined my discussion in one of the chapters of my current book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015).

From an MMT perspective, OMF is a desirable option that allows the currency issuer to maximise its impact on the economy in the most effective manner possible.

But in the neo-liberal world of taboo, ‘monetary financing’ is seen as a radical suggestion. It wasn’t always so. Abba Lerner’s second law of functional finance advocated the central bank ‘printing money’ to match government deficit spending sufficient to achieve and sustain full employment.

Please read my blogs – Functional finance and modern monetary theory and There is no need to issue public debt – for more discussion on this point.

Turner also fails to acknowledge the significant, early work of Lerner in this regard. His selective use of literature is annoying to say the least.

In his 1943 article – Functional Finance and Federal Debt – Abba Lerner said:

The central idea is that government fiscal policy, its spending and taxing, its borrowing and repayment of loans, its issue of new money and its withdrawal of money, shall all be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine about what is sound or unsound. This principle of judging only by effects has been applied in many other fields of human activity, where it is known as the method of science opposed to scholasticism. The principle of judging fiscal measures by the way they work or function in the economy we may call Functional Finance …

Government should adjust its rates of expenditure and taxation such that total spending in the economy is neither more nor less than that which is sufficient to purchase the full employment level of output at current prices. If this means there is a deficit, greater borrowing, “printing money,” etc., then these things in themselves are neither good nor bad, they are simply the means to the desired ends of full employment and price stability …

[Reference: Lerner, A. (1943) ‘Functional Finance and the Federal Debt’, Social Research, 10(1), 38–51].

The focus on government should not be on the deficits but on the prosperity and inclusion that full employment delivers.

He also understood that people are “easily frightened by fairy tales of terrible consequences” when new ideas are presented.

The sense of fright is driven by a lack of education that leaves people unable to comprehend how the economy actually operates.

Neo-liberals magnify that sense of fright, by demonising what are otherwise sensible and viable explanations of economic matters.

They know that by elevating these ideas into the domain of fear and taboo, they increase the probability that political acceptance of the ideas will not be forthcoming.

That strategy advances their ideological agenda. The basic rules that should guide government fiscal policy are, as Lerner noted, “extremely simple” and “it is this simplicity which makes the public suspect it as too slick).

Neo-liberals who have vested interests in ensuring that the public does not understand the true options available to a government that issues its own currency manipulate that suspicion.

In the place of these simple truths, neo-liberals advance a sequence of myths and metaphors that they know will resonate with the public and become the ‘reality’.

The idea of OMF is very simple and does not actually involve any printing presses at all. While the exact institutional detail can vary from nation to nation, governments typically spend by drawing on a bank account they have with the central bank.

An instruction is sent to the central bank from the treasury to transfer some funds out of this account into an account in the private sector, which is held by the recipient of the spending.

A similar operation might occur when a government cheque is posted to a private citizen who then deposits the cheque with their bank. That bank seeks the funds from the central bank, which writes down the government’s account, and the private bank writes up the private citizen’s account.

All these transactions are done electronically through computer systems. So government spending can really be simplified down to typing in numbers to various accounts in the banking system.

When economists talk of ‘printing money’ they are referring to the process whereby the central bank adds some numbers to the treasury’s bank account to match its spending plans and in return is given treasury bonds to an equivalent value. That is where the term ‘debt monetisation’ comes from.

Instead of selling debt to the private sector, the treasury simply sells it to the central bank, which then creates new funds in return.

This accounting smokescreen is, of course, unnecessary. The central bank doesn’t need the offsetting asset (government debt) given that it creates the currency ‘out of thin air’. So the swapping of public debt for account credits is just an accounting convention.

I read an interesting blog this morning about the nonsense in using the term ‘printing money’ when referring to government spending or central bank balance sheet expansion – see – ‘Printing Money’ – A Grammatical Fiction.

Turner invokes the 1948 article by Milton Friedman as evidence that even arch free market economists support the money financing approach.

[Reference: Friedman. M. (1948) ‘A Monetary and Fiscal Framework for Economic Stability’, American Economic Review 38(3), 245-264].

There is a sort of security in this approach because it suggests the radical idea is not that radical at all. But this is a negative approach for progressives to take. The preferred option is to explain that OMF merely recognises that a currency issuing government never needs to borrow or tax in order to spend.

Friedman (1948: 5) wrote:

… government expenditures would be financed entirely by tax revenues or the creation of money, that is, the use of non-interest bearing securities. Government would not issue interest bearing securities to the public.

My references to Turner in the following discussion are from his Cass Business School lecture on February 6, 2013. His lecture was entitled ““Debt, Money, and Mephistopheles: How Do We Get Out of this Mess?”. The New Economic Thinking paper referred to above just builds on the ideas he outlined in that lecture.

Turner suggested that serious consideration be given to the “extreme option” of “overt money finance (OMF) of fiscal deficits’, which would involve the ‘permanent monetisation of government debt”. He channelled Friedman’s claim “that government deficits should always be financed in that fashion”.

But Friedman’s proposals were part of what was known as the Chicago Plan (emanating out of the free market bastion at the University of Chicago), which proposed a broad regime change where private banks would be prevented from creating new money and public deficits would be the only source of new money.

Equally, the government would run a balanced fiscal position over the cycle and destroy the money created in the downturn when they ran offsetting surpluses in the upturn. This is a very different proposition to the current suggestion for OMF that is developed by MMT proponents.

Turner claims that OMF is seen by an increasing number of economists and commentators as a way to get out of the “mess”. OMF supports fiscal expansion, which directly stimulates the economy by putting extra dollars of spending into the economy.

It is now clear that a reliance on monetary policy to resolve the crisis has failed and will continue to fail while fiscal policy is forced by the austerity mania to act in a pro-cyclical fashion.

Turner revives Friedman’s use of the term a “helicopter drop” to describe a situation where the “government printing dollar bills and then using them to make a lump-sum payment to citizens” – as if they had been dropped on the population from a helicopter flying above.

The former US Federal Reserve Chairman Ben Bernanke revived the idea of a ‘helicopter drop’ in 2002. In a speech to the National Economists Club in Washington (November 21, 2002) – Deflation: Making Sure “It” Doesn’t Happen Here – Bernanke talked about methods to avoid deflation.

Bernanke advocated a “money-financed tax cut” which he said was equivalent to Friedman’s anti-deflation proposal to drop money from helicopters in order to stimulate spending.

Bernanke said that when total spending collapses, a nation endures rising unemployment and ultimately deflation, as “producers cut prices on an ongoing basis in order to find buyers”. As the recession deepens, interest rates drop to zero, which reduces the flexibility of monetary policy.

Even from the conservative eye of Ben Bernanke, these situations call for a significant increase in fiscal deficits to stimulate spending and confidence, with the central bank issuing new money to support the deficits.

From the perspective of MMT, a helicopter drop is equivalent to an increase in the fiscal deficit in the sense that new financial assets are created and the net worth of the non-government sector increases.

Turner’s latest paper assumes that the economic and administrative issues relating to OMF are well understood. He says that:

Monetary finance of increased fiscal deficit will always stimulate aggregate nominal demand: in some circumstances it will be a more certain and/or less risky way to achieve that stimulation than any alternative policy lever: and the scale of stimulus can be appropriately calibrated and controlled – there is no knife edge nonlinearity which makes dangerously high inflation inevitable.

However, once “we accept that monetary finance is a feasible policy option” there remain “great political risks”, which need “a set of rules and responsibilities which will guard against its dangerous misuse” to be determined.

It is here that I depart with his approach (more about which below).

Turner understands that the “helicopter money” terminology does not reflect “modern reality”. He says that OMF:

… would typically involve the creation of additional deposit rather than paper money. This would be initially in the form of deposit money in the government’s own current accounts which would then be transferred into private deposit accounts either as a tax cut or through additional public expenditure.

So no printing presses or coin stamping machines are involved. Progressives should stop using the term ‘printing money’ when discussing these matters, even if they make finger gestures as they speak to indicate the term is in inverted commas!

Turner goes into an elaborate discussion about the difference between so-called “debt-financed government deficit spending” and “money finance deficits”.

This is the sort of stuff that students are forced to learn in intermediate and later courses in macroeconomics at universities around the world. It is largely nonsensical.

When the government matches its deficit spending with debt-issuance to the non-government sector it is really only altering the composition of the wealth portfolio of the non-government sector. It swaps bonds for bank deposits essentially.

The impact of the government spending is not influenced by these monetary operations, as Turner infers. That impact is the same irrespective of whether debt is issued to the non-government sector to match deficits or not.

That insight also bears upon the discussion of inflation risk, which I will return to presently.

Cassidy’s knee jerk response other than to conclude that Turner’s proposal is a “Merry Christmas, everyone!” is to write:

If, despite Turner’s impressive credentials, the words “hyperinflation,” “Weimar Republic,” and “Robert Mugabe’s Zimbabwe” are whirling around in your head, he would certainly understand. “My proposals will horrify many economists and policymakers, and in particular central bankers,” he writes. “‘Printing money’ to finance public deficits is a taboo policy. It has indeed almost the status of a mortal sin.”

It is a pity that Cassidy thinks it’s worth his time to rehearse these worn out arguments about the alleged link between expanding bank reserves and inflation.

The point to note is that the inflation risk lies in the spending not the monetary operations (debt-issuance etc) that might or might not accompany the spending.

All spending (private or public) is inflationary if it drives nominal aggregate demand faster than the real capacity of the economy to absorb it.

Increased government spending is not inflationary if there are idle real resources that can be brought back into productive use (for example, unemployment).

Related propositions include the claims that OMF would devalue the currency whereas issuing bonds to the private sector reduces the inflation risk of deficits. Neither claim is true.

First, there is no difference in the inflation risk attached to a particular level of net public spending when the government matches its deficit with bond issuance relative to a situation where it issues no debt, that is, invests directly.

Bond purchases reflect portfolio decisions regarding how private wealth is held. If the funds that we used for bond purchases were spent on goods and services as an alternative, then the budget deficit would be lower as a result.

Second, the provision of credit by the central bank (in return for treasury bonds) will only be inflationary if there is no fiscal space.

Fiscal space is not defined in terms of some given financial ratios (such as a public debt ratio).

Rather, it refers to the extent of the available real resources that the government is able to utilise in pursuit of its socio-economic program.

Further, hyperinflation examples such as 1920s Germany and modern-day Zimbabwe do not support the claim that deficits cause inflation. In both cases, there were major reductions in the supply capacity of the economy prior to the inflation episode.

Please read my blog – Zimbabwe for hyperventilators 101 – for more discussion on this point.

As an aside, Cassidy notes that a number of economists have in the past proposed to defy the taboo of OMF and says that:

More recently, a number of liberal economists rallying under the banner of “Modern Monetary Theory” have urged the government to reverse budget cuts, financing the spending with money created by the Fed.

Which is a 100 per cent accurate assessment of the Modern Monetary Theory (MMT) position.

He then makes the extraordinary statement that:

Even Paul Krugman, who is usually a big supporter of stimulus programs, has distanced himself from Modern Monetary Theory, pointing to the danger of inflation from excessive monetary growth.

So there you have it – that ‘authority’ on macroeconomics, Paul Krugman, who has consistently revealed a lack of understanding of the way the banking system operates is now the judge and jury on whether MMT is to be regarded as serious input into the macroeconomic policy discussion.

But moreover, Cassidy appears to just be rehearsing the worn out mainstream economics rhetoric when he says:

… creating money does pose other dangers,like an alarming jump in inflation.

My blog yesterday – Takahashi Korekiyo was before Keynes and saved Japan from the Great Depression – was a demonstration of one historical example where this policy has not generated inflation. There are other exmples as Cassidy acknowledges.

But then as if they are applicable Cassidy pulls out the usual scare examples “like the hyperinflation experienced by the … Weimar Germany, and modern Zimbabwe.”

Those examples provided very little guidance on what would happen to a modern state which abandoned matching fiscal deficits with debt issuance to the non-government sector as noted above.

There is a dishonesty in journalism that keeps throwing those examples up without informing the reader of what actually happened in each case.

No-one who advocates OMF is suggesting that a government would continue expanding nominal spending via ever-growing deficits once an economy had reached full capacity and full employment. It is obvious that if such a strategy was pursued then ever-increasing inflation would be the result.

Turner gives some fuel to this neo-liberal argument by claiming that:

If we accept money finance as a normal operation, deployed continuously year after year, the danger that future governments will abuse it is greatly increased …

To overcome this “danger” Turner says that rules would need to be employed.

He wrote:

… we can still place the use of monetary finance within the constraints of central bank independence and of inflation targeting: and we can still preserve the legally defined self-denying ordinance which prevents politicians from enjoying discretion to implement inflationary policies.

In other words, he wants to subjugate fiscal policy, which is normally the responsibility of the democratically-elected government, to the non-elected and unaccountable central bank management boards who would then maintain:

… independent control over the quantity of monetary finance allowed, guided by a clearly defined price stability rule.

That is, break the link between the exercise of democracy and the accountability of economic policy.

Cassidy doesn’t take up the issue of the diminution Diminution of democratic oversight, rather he doubts whether so-called “independent central bankers aren’t immune to temptation, or to political pressures: many of them are political appointees, after all.”

The latter recognition makes you wonder why he used the term “independent central bankers” at all.

Cassidy thinks that if “money finance … proved successful, there would be enormous pressure to use it for other purposes, such as debt reduction” and “the very hint of such a policy being enacted could sour the markets”.

To which any reasonable observer, who understood the way the monetary system operates, would say so what?

What exactly would a sour market do that was sufficient to undermine the capacity of the government to advance well-being in this way?

I’m often confronted with arguments by sceptics who say ‘the markets’ will be unhappy, or retaliate, but when I asked them, specifically, to articulate exactly what they think the markets (whoever they are) will or can do, I am met with a sort of jumbled set of propositions or more typically, silence.

Cassidy should have outlined what he thinks the “markets” could do. They clearly would be sulking because there public debt ‘teat’ would be drying up and so they would have to do use their imaginations to develop a new low risk asset on which to price their other riskier debt instruments. A guaranteed annuity in the form of a risk-free public bond is a very attractive asset for these parasites.

But there’s not much they can do to undermine a government intent on improving the well-being of its people.

Cassidy even admits later in his piece that:

the Bank of Japan, the country’s central bank, now owns about a fifth of this debt … Since one arm of the Japanese government is effectively lending to another arm, the public debt owned by the central bank could simply be written off. If that happened, Japan would have created a great deal of money and used it to reduce its debt burden—a form of money finance. And it’s hard to see how this would generate a spike in inflation.

So how would a souring of private markets stop that? And why would this, for example, generate increased inflationary expectations, which is one way in which mainstream economists claim monetary financing generates inflation?


It is interesting that more people are now talking about things that the MMT crowd have been writing and thinking about for a fair while now.

It is clear that ideas that were considered ‘crazy’ some years ago and now being entertained as being plausible by the mainstream media.

Given the vilification that our small group endured when we set out on this MMT journey, I find all of this rather amusing. Apparently it takes a British lord to give an idea credibility. So be it.

It is better that these ideas penetrate the mainstream debate through which ever means than be sequestered by the mainstream media and wheeled out as a way of humiliating commentators who dare to challenge the mainstream paradigm.

That is enough for today!

(c) Copyright 2015 William Mitchell. All Rights Reserved.

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    44 Responses to Overt Monetary Financing – again

    1. Carlos says:

      I think it’s a small vindication of the good work from MMT community, getting through to someone in the establishment. Even if he was too rude to acknowledge it.

      Looks like admitting to MMT will be like coming out the closet. Pretty soon MMT marriages will be on the agenda.

    2. Neil Wilson says:

      “Apparently it takes a British lord to give an idea credibility.”

      He’s actually a Baron – Baron Turner of Ecchinswell.

      So it’s hardly surprising that his proposal wants to wind back democracy and reinstate rule by Kings and Barons.

      Exactly what you’d expect of a slippery fish that was in charge of monitoring the banks when they all went titsup and somehow has managed to avoid responsibility for it.

    3. Keith Newman says:

      Prof Mitchell,
      Would the following be correct:
      -if government deficits are entirely financed by OMF and no government securities are issued to offset deficit spending then excess settlement balances cannot be drained from the interbank system by selling government securities.
      -the banks would then be required to carry government deficits indefinitely as they accumulate in the form of excess settlement balances. These balances constitute an asset of the banks and could eventually become very large. (Scott Fullwiler wrote something about this a few years ago)
      -the interest rate paid on the excess balances would be low, or zero, since welfare to corporations or the wealthy is rejected
      – presumably the banks would not be happy to carry these non-performing, albeit totally secure, assets and would try to offset their reduced profits by increasing net revenues by suppressing wages, increasing the cost of loans, or engaging in higher risk loans.

      If the above is correct then one can expect considerable opposition from the banks. In Canada, where I live, the banks are very powerful indeed – and very profitable. While they are heavily regulated and quite conservative and came through the financial crisis pretty much unscathed (except for problems with asset backed commercial paper which they sorted out themselves if memory serves) I suspect they believe the quid pro quo for running a secure banking system is that they be allowed to make secure profits.

      Given the chaos improperly regulated banks inflicted on most of the capitalist world I am not sure I wouldn’t be prepared to let them have it. At another time I would have said they should just be nationalised if they didn’t like it but in today’s world that would be even more jarring to our elites than OMF!

    4. Hello Bill,

      The only part of the above I don’t agree with is your claim that bond financing of government spending is essentially the same as OMT. E.g. you say “When the government matches its deficit spending with debt-issuance to the non-government sector it is really only altering the composition of the wealth portfolio of the non-government sector…..The impact of the government spending is not influenced by these monetary operations…”.

      It’s true that the “impact of the government spending is not influenced…”. However the secondary effects are different. I.e. if the private sector gets $X of bonds instead of $X of cash, there is less inducement to spend that $X. Cash can be spent, in contrast bonds cannot be spent other than by selling them for cash.

      Warren Mosler made the same point in his business card story. I.e. the children can be induced not to spend their cards if the parents offer them interest for lodging the cards with the parents.

    5. Podargus says:

      Fashionable thinking is monkey stuff. Strange that a few of the monkeys are beginning(just beginning) to see the monumental holes in current economic “thinking”.
      Wouldn’t it be funny if MMT became fashionable thinking.

    6. Hugh of the north says:

      Small grammar issue which has been imprinted on my head by Lisa Simpson – here: ”spending is not influenced by these monetary operations, as Turner infers”

      Turner IMPLIED. (you inferred)

    7. John Hermann says:

      Ralph said: It’s true that the “impact of the government spending is not influenced…”. However the secondary effects are different.

      The secondary effects would not seem to be greatly different Ralph. If Treasury sells bonds to the central bank, those bonds cannot be directly spent any more than can bonds held by the private sector — “other than by selling them for cash”.

    8. Mustsign topost says:

      Maybe the subject of corporate welfare can be expanded, since it seems that there’s a great deal of people who do not understand that most of the security trading has no effect on the security issuer balance sheet. That stock buybacks fueled by debt and securities based loans induce the CB to make sure the market goes up, CB interventions like currency devaluation with offsetting securities purchase with foreign currency, all of these things amount to a gigantic subsidy for the 1%. Now fiscal policy pales in comparison, although it is also rigged, to welfare through CB

    9. Willy says:

      The straw man argument against OMF by Cassidy is so typical of someone “too clever by half”. Yes, I realize an ad hominem attack is just as fallacious as a strawman, but in this case it seems appropriate as Cassidy, the author of a book claiming “no one saw it (the GFC) coming”, in this article again displays a blindspot dismissing MMT out of hand (without mentioning that many in it’s ranks DID see it coming) with a reference to authority instead of cogent argument. Being a lowly construction worker myself with no special academic training using logically fallacious arguments can be seen as excusable, but from a mouthpiece of the mainstream, an author of economic histories, this blindness is inexcusable.

    10. Ignacio says:

      Willy don’t sell your self short, most of the elitists ala Cassidy or Turner (even though with different opinion, both of them are elitists) are not as intelligence as their Ivy League fancy titles or curriculum may imply.

      At the end of the day this is the ultimate fallacy used by them, to which many people is gullible, an appeal to authority. In this case the authority to command and decide the lives of others and the self-proclaimed right to throw others under the bus to maintain their privileged status.

      They are the modern version of the aristocracy (well, in the case of Turner even not modern as he is a Baron lol), and in most cases not anything more than white collar criminals and mediocre. In a fair society they will be judged for treason and hold accountable for their responsibilities.

    11. J Christensen says:

      The word of MMT is spreading one conversation at a time. It has obviously appeared on the establishment’s radar now and they must be “stirring the little gray cells” mercilessly to find some spin that has traction against it. Trying to pretend MMT doesn’t exist isn’t working anymore. The failure of the mainstream thinking to produce favorable results for the vast majority is beginning to penetrate the dreams of even the deepest of sleepers. When they search for the reasons they start to listen to discussions like this one.

      At the moment it seems that most of our politicians don’t know what to say when confronted with an MMT based argument, so they say nothing. It’s as if they are waiting for new instruction.

      We know what should be happening in democracies as people become informed about MMT; however, we can’t ignore the history books either. When elites discover they can’t win a game with stakes they consider too high to lose, they will try to use their powers to change the rules.

      Economics is not a game though, and it’s up to MMT’rs to ensure that future policy is based on evidence, and life’s neccessities, rather than a largely irrelevant rule book the people themselves didn’t write.

    12. joe bongiovanni says:

      Glad to see the ‘money’ issue return to MMT discussions, noting a warming trend towards government issued money. Hallelu-jah .
      I have to disagree with Bill that either he, or any MMT scribe, have embraced the type of direct public money-issuance that Lord Turner has led in his proposals.
      While Bill can cite especially Lerner (Print the Money) among some of what should have been MMT’s foundation of incorporating ‘sovereign money’ into MMT theory, rather Bill’s unfortunate past postings on the Kucinich Bill and full-reserve banking have been a partial cause of a giant years-long gap of serious discourse on what we reformers refer to as the “public money solution”.
      Hopefully, we can turn the corner here.
      The Kucinich Bill does everything that Adair Turner calls for.
      It does everything recognized here by Cassidy, also now by Wolf, by Evans-Pritchard and other International Economics journalists.
      Bill, I implore you.
      Work now to advance the missing link in MMT theory – the reality that this wonderful world has ZERO “sovereign money-issuing governments”, that all national governments use the private Bankers Money System (one that even Turner is not fully willing to abandon), and begin thereby to democratize ‘money’ so that it works for the people, not the One Percent, and becoming the servant of The Restofus, and not the other way around.
      All economics is politics.
      For the Money System Common.

    13. Simonsky says:

      Turner is poacher turned gamekeeper- he rode high on the lead up to the GFC and is now ‘selling’ himself as saviour-talk about having your cake and eat it!
      These people never mention intellectual indebtedness because they want to be seen as ‘thinker’ in their own right and feted as such. As Bill implies, it’s shoddy and dishonest but if it helps a better idea get through then I suppose it’s > 0.

    14. Eric Tymoigne says:

      He also has no clue about what money is. He states that NPV = 0 for money because money issued by gov is irredeemable and does not pay any income. If this was true why would anybody accept monetary instruments? Also balance sheets would need to be reevaluated to account for that: your savings are worth nothing!
      He also state that money is only a notional liability for state because NPV is 0, but it is an asset of positive value for the private sector: try to make that work in balance sheet accounting!
      Government money is redeemable at par: government accepts its money in payments at face value at anytime. NPV = FV (think zero coupon, zero term to maturity bond).
      He confuses redeemable and convertible.

    15. Christoph Stein says:

      There was a verry interesting speech by Benoît Cœuré, Member of the Executive Board of the ECB, about central banks independence.

      >Decision-makers in different policy areas act independently and are at the same time interdependent. Managing interdependence requires strong framework: “monetary dominance” is the framework in the euro area in which the central bank acts in independence and fiscal policies are constrained in the SGP.<

      I think “monetary dominance” is almost self explaining: Its about power and submission! Central bank acts free!!!! and fiscal policies are constrained!!!!

    16. Christoph Stein says:

      I forgot the link:

      “Lamfalussy was right: independence and interdependence in a monetary union
      Speech by Benoît Cœuré, Member of the Executive Board of the ECB”


    17. Kevin Harding says:

      Just a consideration on inflationary pressures.
      Is there any traction to the argument speculators would seek to sell the currency
      of an open OMF government promoting devaluation and import inflation?
      The opposition of the elite would not just be at the loss of central bank backed savings.
      The political debate would change beyond full employment.Democratic pressure would
      seek a better social wage (health ,education etc) and increasing the net income of the
      majority.The elites control of real resources would be under real threat from bringing more
      resources into the government sphere to increasing the spending competition from
      the poorer private sphere .They might not get first choice on all the good stuff.
      Coup’s ,embargo’s ,tariffs any strategy may be possible .Lets hope the USA go MMT first.
      Even if the link between bonds issued and the size of the government sector deficit was scrapped
      what harm would be done by governments offering secure savings in their currency to rich and
      poor ?

    18. joe bongiovanni says:

      A little irony amid error by Mr. Wilson.
      The first would be that Turner’s proposal is to democratize the money system by having the public in charge of balancing monetary resources (through OMF) with economic potential (something that Turner recognizes cannot happen today), yet there is a claim of the opposite. The only grain of truth there is that Turner is not yet willing to completely give the money lever over to the people, preferring to hang on to some semblance of private money (fractional reserve banking) at the same time. But, Turner is learning better, and faster, than most.

      Neil’s claim that Turner was in charge of monitoring the banks when they all went titsup is just completely false. That would really be in 2007, when Turner was in fact Chair of both the Economic and Social Research Council and also the Council of the Overseas Development Institute. A public servant.

      Early in 2008, he Chaired the UKs first Committee on Climate Change, as well as co-authored with David Kennedy “Building a Low-Carbon Economy”. Again, doing good work.

      And then, AFTER the Lehman collapse, he took the reins of the Financial Services Authority, where he openly criticized the FSA for its failures of financial oversight.
      Then he took up with the National Banking Commission, from where he actually started to learn about money … as is evidenced in his subsequent writings.

      Jeezum, talk about shooting the messenger..

    19. Eric Tymoigne says:

      He also has no clue about what money is. He states that NPV = 0 for money because money issued by gov is irredeemable and does not pay any income. If this was true why would anybody accept monetary instruments? Also balance sheets would need to be reevaluated to account for that: your savings are worth nothing!
      He also state that money is only a notional liability for state because NPV is 0, but it is an asset of positive value for the private sector: try to make that work in balance sheet accounting!
      Government money is redeemable at par: government accepts its money in payments at face value at anytime. NPV = FV (think zero coupon, zero term to maturity bond).
      He confuses redeemable and convertible.

    20. Steve says:

      The time for fragmented debate is passed. All of the discussion about reform on the internet in various forums and on various aspects of the economic and monetary problem is between the various theories and theorists and also primarily focused on convincing the current operators of the system to change their minds and policies….even though their egos are caught up in defending the current failed theoretics and/or they don’t actually give a shit about changes that will impact their dominance of the vast majority of enterprises and nearly all of the individuals in the system. It’s almost as if we are a bunch of frustrated wives arguing with a drunken and abusive husband to stop beating us and get his mind right??? Is that workable?

      The first law of marketing is showing the customer how it is in his/her interest to buy your product. We need some marketing insight applied in economic and monetary reform. To wit I propose Project Grace as a mass social movement.

      We need a movement based on grace as in addition, abundance, sovereignty, existential temporal presence, dynamic flow, change and process and direct to the individual giving/gifting,. As these aspects of the concept of grace reflect the current most cutting edge research and reform movements of MMT, Positive Money, Public Banking, Disequilibrium Theory and Social Credit I suggest integrating the truths, workabilities and applicabilities of each of these reforms into Project Grace and marketing their benefits to the two major constituencies that will make change as rapid and as complete as possible, namely the individual and virtually every traditionally productive enterprise in the economy.

      Upping our philosophical and marketing games is the shortest route from A to B. Let us begin.

    21. joe bongiovanni says:

      “”But Friedman’s proposals were part of what was known as the Chicago Plan (emanating out of the free market bastion at the University of Chicago), which proposed a broad regime change where private banks would be prevented from creating new money and public deficits would be the only source of new money.””

      One might ask, ‘so, what’s wrong with that …. banks must do banking, and all new money coming from public deficits?’ So I will.
      That’s not the same as all public deficits must be funded by new money creation, which they cannot do as a rule.

      While Friedman was indeed a student of Henry Simons, original leader of the Chicago Plan proposal, Friedman had no position on the CP until much later. In 1933, when the CP originated, UChicago was not yet the bastion of free-market capitalism that it later became.
      Friedman;s proposals were thus not part of the CP, they came much later.
      Rather the CP became part of the Friedman “Framework'(*) proposal.
      Friedman supported Fisher’s 100 Percent Money proposal, and finally penned his own ideas around 1948 with his “”Fiscal and Monetary Framework(*) for Economic Stability”” – as proof that even conservatives can support a rule-based position on money-creation ….. ostensibly recognized by Friedman that, without a level playing field with money (of Guv issue), there could never be a continuing regime of free enterprise.
      He was, and remains, correct.

    22. Thorvald says:

      Well written Bill
      MMT message is gradually getting trackion, but no rewards or recognition, as usual
      Still, I think we should support Turner who is sticking his neck out to push for an urgent redirection of official policy
      And, if you watch his presentation (available on the IMF Web site) you will see a surprising capitulation by his discussant Lars Svensson, who admits that he had a hard time finding anything to disagree with in Turners paper
      That is a great “win” over one of the architects of Inflation Targeting policies
      Again, thanks for your persistent advocacy for sanity

    23. mark says:

      1) Wasnt the Lisbon Treaty signed to stop govts. from using the central bank in the way that youve suggested ?
      2) MMT need an advertising (propaganda) machine like the neo liberal used to brainwash society into accepting the garbage that neo liberalism is.

    24. Neil Wilson says:


      “The first would be that Turner’s proposal is to democratize the money system by having the public in charge of balancing monetary resource”

      Those blinkers must be really big if you idolise Lords in 2015.

      There is no democracy unless Parliament decides and others implement. Can you imagine the uproar if the DWP turned around and said that they are not implement any cuts to tax credits that parliament may pass because it would affect aggregate demand.

      Yet Turner is suggesting that parliament will be unable to spend as it sees fit under his regime. There would have to be a cabal of the elite (no doubt including many Barons and neo-classical ‘thought leaders’) who would pass judgement on the elected chamber. We had a constitutional crisis over that already in 1910 when Lloyd George wanted to pass the people’s budget. There is no desire to go round the loop again and give back financial control to the Lords.

      “Neil’s claim that Turner was in charge of monitoring the banks when they all went titsup is just completely false. That would really be in 2007”

      Is it. From Wikipedia.

      “On 17 September 2008, very shortly after the demise of Lehman Brothers, HBOS’s share price suffered wild fluctuations between 88p and 220p per share, despite the FSA’s assurances as to its liquidity and exposure to the wider credit crunch.”

      Perhaps my memory is better because I live in Halifax amongst people who lost their jobs at Head Office thanks to Turner’s driving.

    25. joe bongiovanni says:

      Neil, I don’t idolize anybody or any authority. Silly.
      My statement
      “that Turner’s proposal is to democratize the money system by having the public in charge of balancing monetary resource (through OMF) with economic potential ”
      stands as a matter on monetary-economic history and science.

      Either adding the ‘public’s input into managing the private money system ‘democratizes’ the systems operation, or not. Of course, it does.

      I admit that Turner’s effort does not go far enough (being a Martin Wolf supporter toward ending fractional-reserve banking) … but I am also convinced that any movement in the ‘public money’ direction will eventually win over the system for The Restofus.

      You are just plain wrong to claim …..
      “”Turner is suggesting that parliament will be unable to spend as it sees fit under his regime.””
      How could you possibly advance such a statement…… from what of either the earlier Cass Business School speech, his “Debt, Money and Mephistopholes” paper, or the IMF posting would prevent any legislature from spending its appropriated budget (as it sees fit)? It would not. It would enhance the government’s ability to spend.

      And that diatribe about the Cabal of Lords overseeing Parliament is nothing more than fanciful, unsubstantiated posturing. Why? Any proof? Even any inkling of truth? No.

      Your little wiki quote mentioning September 17th and banks failing is even more laughable. Turner took over the FSA on September 20 of that year.
      Also from wiki: “”On 29 May 2008, it was announced that he (Turner) would take over as Chairman of the Financial Services Authority. He took up this post on 20 September 2008 for a five-year term to succeed Callum McCarthy.”” (my emphasis)

      And, as I said, he was clearly and openly critical of the FSA’s history of failure when he took over. Lord, or no Lord.
      Another classic ‘shoot the messenger’ FAIL.

    26. Neil Wilson says:

      “Neil, I don’t idolize anybody or any authority. Silly.”

      You must do – otherwise you’d realise that the whole Sovereign Money/Chicago Plan nonsense is simply an illusion that adds no control points to anything, changes nothing and is, certainly in its Positive Money/Green party form, anti-democratic and completely unacceptable.

      “How could you possibly advance such a statement”

      Because that is what they are advocating – a cabal of the elite in control of the purse.

      “independent control over the quantity of monetary finance allowed, guided by a clearly defined price stability rule.”

      ie a group of people like the current MPC but that goes further and defines what parliament can spend. That is what ‘independent’ means – a group of people who are not elected who can dictate to parliament. Including people that literally stood around like frightened cats when the world was falling to pieces because that had no idea what to do.

      There is no such rule. There are no such people. The world has a supply side problem with Solomons. Hence why parliament must be in charge of deciding how much money is to be spent and what rules are to be operated in the current period *and only parliament must be in charge*. If the parliament gets it wrong then they will be replaced with another parliament with different rules and spending criteria.

      Ultimately the question you have to answer is why is parliament good enough to decide the death penalty, sending people to war and public health/eduacation, but has to have its hand held by Very Clever People when it comes to money.

      “Turner took over the FSA on September 20 of that year.”

      Turner was appointed in May. And the whole collapse of Halifax happened in the months after that September – and Turner was all at sea at that point unable to articulate what should be done *because he hadn’t got a clue* – and neither had the rest of the FSA staff.

      And yet still he advocates limiting parliament with a group of people like him – people who haven’t really got any more of a clue than the rest of us.

      It took decades if not centuries to get rid of the autocrats and put the parliament of the commons in charge of things. Those who advocate back-pedalling on that should be ashamed of themselves.

    27. Kevin Harding says:

      Whilst completely agreeing with Neil about the necessary democratic control of government spending,
      The notion that the parliament of the commons is in charge of things is incredibly naive.

    28. Robert says:

      Using the term “parliament” as an abstraction is unilluminating in the extreme. In the world in which most people live the House of Commons is seen to be made up of individual all-too-fallible (just like the rest of us) human beings. In order to get there they (or their parties, of which they are the lobby-fodder) have made certain promises which they believed would procure them – or at least not lose them – votes. No party or politician dares to go to the electorate promising to abolish tax-relief on mortgages (regardless of its indefensibility viewed objectively) because he or she would then become unelectable; the same goes for abolishing taxpayer-funded deposit-insurance (ditto). A five-year (or less) stint is not long enough for the chickens hatched from vote-catching eggs to come home to roost; or so they hope.

      For the last four or five decades “parliament” has provided a fertile seed-bed for propagating and executing neoliberal ideology. If that isn’t a convincing argument for preventing it from getting its hands on deciding, on rational criteria, about the supply of money I’d like to know what is.

      And this stuff about “lords” is just depressingly boring in my opinion. Who cares? If someone is talking sense that’s all that ought to matter. Unelected “experts” can be as wrong as anyone else but at least they’re fully in the public eye instead of being able to hide behind their parties like MPs.

    29. Clint Ballinger says:

      Neil from mikenorman “Do you want the level of government spending to be decided by elected representatives in a parliament – who you can then fire if they get it wrong via the ballot box. Or do you want it deciding by unelected technocrat Lords, like Baron Turner of Ecchinswell, who you can’t.”

      Neil – PM explains exactly how the level would be chosen – as that closest to creating full employment without causing inflation. The AMOUNT following this formula, with the WAY it is spent entirely by congress/parliament.

    30. RJ says:


      “The secondary effects would not seem to be greatly different Ralph. If Treasury sells bonds to the central bank, those bonds cannot be directly spent any more than can bonds held by the private sector ”

      This is not correct.
      -Bonds held by the central bank drain neither reserves held by banks or money held by us.
      -Bonds held by the central bank drain neither reserves held by banks or money held by us.
      -Bonds held us drain both reserves held by banks and money held by us.

      So the central bank ‘buying’ Govt bonds will impact on the economy if and only if banks do not buy these bonds instead.

      I agree with Ralph and Warren.

    31. RJ says:

      “PM explains exactly how the level would be chosen ”

      Positive money have got this wrong. They are doing great work but still do not fully understand the Treasury payments side or what money is. DEBT FREE MONEY is not possible as money is a financial asset. Financial assets are always without exception backed by debt.

      And their full proposal could very likely create a Euro type situation where the UK would be much worse off.

    32. Clint Ballinger says:

      State money (like greenbacks) are just tokens, their value deriving, as MMT points out, from the fact people need them to pay taxes.
      When you start a game of Monopoly, the money for the game is just printed tokens, not backed by debt. OMF money would be the same. The government is not a household, and besides the monopoly on force, the other thing that makes a government sovereign is its unique ability to create the tokens a nation uses for money out of thin air, just like at the beginning of a monopoly game.
      This power also of course allows a government to spend directly into an economy (by parliament/congress) to the point of essentially zero unemployment (inflation being the limiting factor), through simply “printing” more tokens (these days usually digital).
      Because everyone is still trapped in the household analogy about debt, governments do not avail themselves of this power.
      MMT, of course, shows why they should.

    33. RJ says:

      @ clint

      “When you start a game of Monopoly”

      But in the real world all money without exception is backed by debt. This is a fact. If you follow the journal entries this is very clear. But many go down this dead end debt free money path. We can have interest free money though but not debt free.

    34. Clint Ballinger says:

      How, exactly, were greenbacks backed by debt? They were just treasury notes (zero interest with no expiration) allowed to circulate as currency.

    35. Clint Ballinger says:

      PS I.e, Tokens. ike subway tokens.

    36. bill says:

      Dear all

      I’ve made the point before and so this is the last time I will say this. My blog is a private expense. It is not hosted on university resources nor do I seek sponsorship or income from advertising or subscription. It has an enormous traffic these days and the expense is not insignificant.

      I note a persistent ambition by some of my readers to continually promote ideas that I have no interest in hosting on my site. I have made my position clear on what I think of ideas such as those espoused by ‘positive money’ or the ‘Chicago Plan’ in the past.

      I have no interest in sponsoring a debate here about those ideas, which I largely disagree with.

      So please save yourself the time by not telling me or others to get real and read this site or that site where these ideas are entertained.

      I have nothing personal against the promoters of these ideas but they can promote them on their own sites at their own expense.

      I will delete any comments that promote these ideas or provide links to other sites where they are so promoted.

      Best wishes

    37. RJ says:

      “It has an enormous traffic these days”

      Wonderful news.

    38. Howard Switzer says:

      I think it has been proven that money need not be debt, in fact that is the issue ever since the oligarchs overpowered democracy in ancient Greece. Any government that does not issue its money is controlled by those who do. A money system that is private and run for personal gain is usury, once banned by all religions for good reason. We want a public money system that is based on public care for public needs. I think having an elected group focused on just monitoring inflation/deflation, a job that could probably be done by a computer, while the deliberative body decides how much and on what it is spent is a good idea. If it doesn’t work we can change it. The essential reforms common with the AMI, GP and PM are all in the NEED Act. I agree with Steve that we need to align our efforts but the issue is political. We have a proposal that has been through the legislative legal review ready to go, we need to elect its sponsors and then some.

    39. Clint Ballinger says:

      Dear Bill,
      I do not work for PM. Nor do I try to promote their ideas per se (personally I believe MMT and something like “sovereign money” proposals can and should be unified, which most on both sides doubt, but I write on this issue in good faith and try to be as clear and fair as possible. I also think the relation – effects/interactions – between OMF and endogenous money still needs clarification, despite all that has been written on it. I have posted links to a particular post of mine on that topic in places not to spam, but because it lays out my reasoning more clearly than is possible in a short comment, and I only link to it when relevant).
      On this and similar MMT sites I have asked questions about the topic of the post, which in this case is OMF, Turner’s proposals, and how money is created and spent into the economy. It seems normal that some comment threads might discuss various related issues, such as endogenous money and other related monetary reform proposals, such as Joe and Neil begin to do.
      On this and other good blogs, often some of the best (despite many negative threads) and most productive “thinking out loud” goes on in the comments section, and the good threads not infrequently turn out to be extremely educational in highlighting the economic concepts under discussion.
      Cheers, Clint
      PS I think I speak for many if I say that we all greatly appreciate your blog as one of the most sustained, clear, in-depth and authoritative resources on MMT and economics in general.

    40. Viorel Emilian Teodorescu says:

      I think that mostly the American readers of this blog conflate the meaning of “Government Debt” and “debt”.

      All money is debt. It never was anything else, and never will be.
      Government Debt is a different beast, born from accounting conventions.

      When the good intentioned people talk about debt-free money, I think they speak of Government Debt-free money.

      We have given the Government the right to issue debt-money on our behalf. As any debt, we have to accept it back in payment. So does the Government.

      If the Government spends more than it taxes, it incurs Government Debt.

      So in American parlance, yes there can be Government Debt-free money, even if the money itself is debt, issued by the same government.

      Just a matter of names and terms.

      By the way, the fact that it is all confusing and presented using overlapping terms is not bug, is a feature. As Bill Mitchell himself says above.

    41. Viorel Emilian Teodorescu says:

      @Clint Ballinger

      Money/Dollars is backed by the debt incurred by all the workforce in the country. We, as the workforce/population of a country, through the social contract, give the government the right to issue debt on our behalf. It is this debt that backs up the currency.

    42. Brendanm says:

      Not the money is (a form of) debt definition is really tenable even as technical jargon. Both sides of a lending measure obligations in money, so money used to measure debt, but that doesn’t make it actual debt any more than the metre unit is actual length.

      Trying the twist the mind to make government spending and taxing debt issuance is where the identity really breaks down and money-is-debt speakers make no sense at this point.

    43. Some Guy says:

      Brendanm: No, money-is-not-debt speakers are the ones who tie themselves into knots – making things so much more complicated than they really are. As Viorel said, money is always debt (= credit = obligation). Explaining words only by longer, synonyms is not the best or only way to proceed, although the point that these and many other words are synonyms needs to be made.

      A meter stick is not a length, but an abstract meter, what the meter stick measures is a length. Money is properly defined in terms of debt, not vice versa. Government spending certainly is debt issuance. Taxation is acceptance of debt (e.g. money, or “debt-free money” greenbacks) – as matching / canceling a debt going the other way, that incurred by the person taxed, which is the only way debts disappear – or are measured.

      Adding to Viorel’s explanation – Government debt is just a debt of the government. Bad economics and bad terminology both conflates what shouldn’t be conflated and makes absurd distinctions (reminiscent of Nelson Goodman’s bleen & grue) between what should be. What some horribly call “debt-free money” is just a government debt (with an absurd non-distinction). The point is that the word is used for government, in MMT exactly as it is used in normal speech.

      The errors of bad economics are not as much terminological, as logical (abetted sometimes by bad terminology) – the mainstream is the one that uses words like “debt” strangely and changes its logic capriciously. The problem is that the bad ideas are so omnipresent that people fail to recognize how hyper-intuitive MMT is – Keynes & Wigforss on full employment, job guarantees are rare exceptions that make this point.

    44. Mike Ellwood says:


      Hugh of the north says:
      Wednesday, November 18, 2015 at 20:05
      Small grammar issue which has been imprinted on my head by Lisa Simpson – here: ”spending is not influenced by these monetary operations, as Turner infers”
      Turner IMPLIED. (you inferred)

      I’m a big fan of Lisa too Hugh, but if we are nitpicking, I think that’s semantics, rather than grammar.
      ;-) :-)

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