Wednesday, June 15, 2011

How to counter the, "printing money" line when explaining MMT

I was talking to Warren Mosler yesterday and he came up with a good way (I thought) of countering the "printing money" line that we often hear.

"All government spending is printing money. And all taxation and spending reductions are 'un-printing' money."

Quick, concise, clever.

Feel free to use it.


Art said...

Warren is awesome, but I'm not sure the line works. It's all in Bell (2000) where she quotes Lerner. Commercial banks buying Treasuries is printing money because the Fed will makes the reserves available. Fed buying Treasuries is printing because it just moves a Treasury liability to another part of federal government (same goes for any federal government fund, like SS, buying Treasuries).

But when Treasuries are sold to non-bank private sector, banks just move existing liabilities (and existing resrves) from non-bank private sector accounts to Treasury's TT&L accounts, which keeps money supply constant (and when TT&L balances are transfered to Fed it reduces money supply). So Treasury selling liabilities to non-bank private sector does not print money, unless non-bank private sector buys those Treasury liabilities with a loan from a bank and that loan causes Fed to take part in open market operations adding reserves or dicount window lending doing the same. Fed, of course, does this in order to protect payment system and maintain target rate.

Is this wrong?

Mike Norman said...

The point is, how do you say that in a sentence or two?

Tom Hickey said...

art, Warren's point and that of the other MMT economists is that the Fed's creation of reserves when it purchases tsys does not change the amount of non-government net financial assets but only their composition and term structure. Only fiscal policy is able to change the amount of nongovernment NFA by injection through expenditure and withdrawal through taxation, but requiring legislation.

"Printing money" suggests that the amount of nongovernment NFA is changed, but the Fed's OMO and POMO do not do this, so "printing money" is misleading applied to Fed monetary oprations. The idea is that the monetary based in causally related to the money supply through the money multiplier, which MMT shows is false, since any correlation is ex post (residual) rather than ex ante (causal). That there is no such transmission mechanism is now obvious factually with persistent excess reserves.

To show this, Warren suggests using "printing money for injection through government expenditure and "unprinting money" for taxation.

Art said...

What about just saying there is always exactly as much money in the system as the market desires because the Fed likes to set an overnight money market rate.

OK. That is too complicated too.

I just think that what MMT does best is tell the truth. And if we start dumbing it down we lose the power of the message.

The people we have to convince, for what it's worth, are not the deficit hawks, but the so-called thoughtful deficit doves who think that deficits are ever a problem in a financial.

If the NYTimes and Wash Post would just stop talking about deficits we would be good to go.

And those folks should be able to talk about policy at the level of analysis MMT requires.

What we need is a documentry film like inside job and an organized effort to reach middle of the road publications.

I've always thought our best way of explaining all this is by just telling Warren's story: the trader who realized Italy under the lira would never default and that bond vigilantes are like unicorns. Get Michael Lewis on board and Oliver Stone to make the movie and we are off the races, imho.

Thanks for answring my question.

Jim Baird said...


I think this points up the inherently slippery nature of the word "money" (As I like to say about MMT, "It's not particulary modern, it's a not a theory, and we don't like to use the word "money" - it's kind of like the old crack about the Holy Roman Empire...)

Even though the general public sees reserves as "money" and therefore anything that increases them as "printing money", we know that reserves are just one kind of financial asset that is interchangeable with other financial assets, and therefor measures of the :money supply are meaningless. I think what Warren is doing here is using "money" as a synonym for Net Financial Assets (which is atually closer to what people think reserves ARE, so I don't think the redefinition is unjustified.)

The point is to take the scary "OMG WIEMAR!!!!" connotations out of the phrase "printing money". If you can get people to start thinking more in terms of "Well, how much "money" (NFA) do you want to "print"?", then we've changed the terms of the dicourse

GLH said...

Tom Hickey: You did a great job of explaining what Warren Mosler did a great job of saying. This has furthered my understanding of QE.

Tom Hickey said...

Thanks for the kudos, GLK.

We are all helping each other out. That's what I like about the MMT community.

Oliver said...

So, government buys back your subsidized pension plan and you go out and party?

Oliver said...

... that was meant as a response to 'but, but, that's just printing money' - i.e. QE = instant Zimbabwe. Hope that makes sense.

WillORNG said...

Mike surely it's better to say that spending money creates it and taxes destroy money?