(2) Tax Revenue Comes from Funds Spent by Government — Issue Resolved

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Continued from here.

It seems to me that the comment below has resolved the issue. Taxes can only be settled by using money created by government via the central bank: bank reserves.

Lector: This may be the problem. You or I can pay taxes with bank money, by writing a check on our bank account. As far as you or I see, there is no difference between bank money and government money here. (Say that this tax check exhausts, closes our bank account, for simplicity) But that is not the end of the matter, which I think may be your assumption. After the federal government has accepted our tax check, the bank now owes the government. 

It is as if the government now has our account at the bank. The government wants to be paid now, wants to close this account. The only thing it will accept from the bank as payment when it closes this account is federal money, reserves that it has earlier issued. If the bank does not have the reserves to pay up immediately, it will be in debt to the government, and the discount rate – determined by the government – is the rate that the bank will be paying the federal government on its “account”. If the bank can never pay this debt, it is eventually declared insolvent by the government 

Always, the government want’s its own money back. Rendered unto Caesar, as an ancient economist said.

The source.

(1) Tax Revenue Comes from Funds Spent by Government — A Query

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I have asked the below questions here:

You write: “Taxation revenue comes from funds that the government has already spent into existence.” 

I understand, however, that the largest amount of money is created by commercial banks in the process of extending credit/loans. I assume further that it is from this money that most taxes are paid/most tax revenue stems. 

Why, then, do you not write: 

“Taxation revenue comes from funds that the government has already spent into existence as well as funds that commercial banks have lent into existence?” 

Why do MMT texts tend to suggest that only money created by government provides the money that flows back to government as tax revenues? 

Am I overlooking something?

See also here and here. 

In the meantime, I have made the below replies:

Dear Derek Henry,

Thank you for your reply.

Unfortunately, I do not see how your points explain/prove that only government created money is capable of returning in the form of tax revenue.

Again, I may be overlooking something.

Can you spell out explicitly which facts and factors determine that all tax revenue must of necessity be money previously spent by government and cannot be money created by any other agent?

Thank you for your patience.

And (not published yet):

Dear paulmeli,

I refer to McLeay et al, who write

"Of the two types of broad money, bank deposits

make up the vast majority — 97% of the amount currently in

circulation.(6) And in the modern economy, those bank

deposits are mostly created by commercial banks

themselves."

(Source: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf)

As for my principal question above, please be patient with me.

I do not see how your points explain or prove that only government created money is capable of returning in the form of tax revenue.

Again, I may be overlooking something.

Can you spell out explicitly which facts and factors determine that all tax revenue must of necessity be money previously spent by government and cannot be money created by any other agent?

Thank you for your patience.


For the answer go here.

(2) The Business of Handling Language — Author It

The painting is entitled Developing a Personal Language. Image credit

As a follow up to (1) The Business of Handling Language:

CO2 Has No Role to Play in Determining Earth's Temperature

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It turns out that Earth's global temperature is independent of atmospheric composition. Thus, the sensitivity of climate to human-induced carbon emissions is virtually zero.

Interviewer: You were saying that you and [Dr.] Ned Nikolov have a new theory.  Can you tell us just a bit about that?

KZ: “Well, we actually call it a discovery.  And what we did is we took NASA data and we applied the engineering principle of dimensional analysis – Buckingham pi theorem for you engineers. And to make a long story short, we’ve had an unbelievable fit to the NASA data, where we’ve had an exponential regression line (an empirical equation, so to speak) that explains the temperature of all the planets across our solar system – that actually includes the Earth.   We can actually use planets other than the Earth.”

“And we can calculate Earth’s temperature without knowing anything else about Earth [other than its atmospheric pressure value and distance from the Sun]. . . within a degree Centigrade.  The amazing thing about that is [1] the Earth[‘s atmosphere] is [21%] oxygen and [78%] nitrogen, [2] Venus is [96.5%] carbon dioxide, [3] Mars is [95%] carbon dioxide, [4] Triton is [>99%] nitrogen, [5] Titan is [98.4%] nitrogen and [1.6%] methane . . .”

Interviewer: So you’re saying that actually carbon dioxide is not the driver [of planetary temperatures]?

KZ: “Carbon dioxide is just like any other gas.  Just like the ideal gas law, Boyle’s law, Charles’s law, Gay-Lussac’s law.  Carbon dioxide isn’t any different than any other gas in those laws.  And we’ve discovered that there’s a continuum across our solar system of the way atmosphere’s work: it’s strictly a function – the warmth that we experience – is due to two things: [1] distance from the Sun (which means how much solar energy we get), and [2] the amount of atmosphere we have, the atmospheric pressure that we experience here on the surface.”

Interviewer: And how was that [discovery] received?  Did you have the IPCC call you up and say “Wow, this is fantastic!”?

KZ: “We had to change our names to get the first paper [Volokin and Rellez, 2014] published.  It was returned [after the first attempt] because they knew who we were.  And the second time we published it we were required to pull it after they found out we had . . . [smiling] we spelled our names backwards.  It [spelling our names backwards] worked the first time, and it worked the second time [after we resubmitted it], but it was put on the internet before it was hard-copied.  A ‘climate denier’* from WattsUpWithThat [Willis Eschenbach] turned us in.  And so we experienced that, not only the so-called normal people, ‘warmists’, maybe . . . and a lot of ‘climate deniers’ do not like our work.  A lot of ‘climate deniers’ hold out for a little bit of a role with carbon dioxide.”

Interviewer: So in fact you’re saying there’s no opportunity for scientific inquiry anymore.

KZ: “Sure seems that way.  We’ve actually extended it now.  We’ve actually used some of the same principles to explain some of the past climate measurements that we’ve made here on Earth.  Same thing – pressure is the driver.  Pressure and the Sun.”

Banks Are Ex Nihilo Creators of Money, What Keeps Them from Issuing Money Ad Infinitum?

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I chanced upon a good article in which the author attempts to explain why 

banks are not free to create money willy-nilly. They are subject to restraints imposed by both the markets and regulators. But under current procedures, these restraints do not arise from a hard limit on the amount of reserves in the system. They arise from the costs of lending, which is conditioned by (a) the interest rate targeted by the Fed, (b) regulatory and market capital requirements and the market price for bank capital, (c) by back-office administrative and hedging costs of lending, and (d) the credit-worthiness and credit-hungriness of borrowers.

The source.

Is it not funny, in digging ever deeper into a theory — in this case Modern Monetary Theory — not rarely do I find myself incapable of finding the answers to elementary questions. The reason for this sort of haplessness is often that one is making assumptions that are not warranted.

I suspect, years ago when I briefly I had no answer to the question why banks do not issue money infinitely because I had overlooked 

(1) point (d) above (the demand side) — the need for "credit-worthiness and credit-hungriness" — and 

(2) the fact that from the availability of an infinite supply it does not follow that the supply will be used partly or in full.

To all intents and purposes, John has an infinite supply of insults in his head which he would love to level at his boss, but never in his life would he dare insult him.

Why not? The cost of doing so is too high.

There are costs associated with every new loan a bank is making. While the bank could make an infinity of loans (assuming an infinity of worthwhile loan applicants), each loan is costly and yields only a finite return, which ought to be larger than the cost of the loan, for the latter to be extended in the first place.

In short: if there is no infinite supply of cost-covering loans, the banks are not able to create (credit) money ad infinitum.

PS

Incidentally, at this very moment, I could not tell you what keeps banks from simply creating anew whatever money they need, to pay for expenses or finance investments.

Can you figure out the answer?

(1) The Business of Handling Language

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The business of translating is affected by the rapid progress being made in the development of automated translation technologies. Today, automatic translation is at the level of the language skills of a seven year old. In two years time automata will be linguistically as skillful as a fourteen year old. 

In the medium term, reasonable money is to be made only by those who combine their translating skills with specialised knowledge while preferably being in a position to efficiently support the building and dissemination of content. 

This is why it may be a good idea for a translator to extend her business portfolio to include research and writing. 

This could give her the capabilities needed to accompany the work flow by which the content a client wishes to disseminate is built from the stage when the messages are identified through to the delivery of end products (speeches, internal messages, articles, seminar and other study materials, web content, research papers, books, etc.).

Perhaps the most critical issue here is that a company's content building work flow is shot through with power relations. These may either keep an external provider out of the flow altogether or make her contributions less effective, ineffective or even disruptive. Ownership of content building may prove to be just as jealously guarded a privilege as other forms of controlling power.

Typically, being accorded a high degree of trust by the client is the prerequisite for an external writer-cum-translator to effectively enter the content building work flow.

How does one earn this trust?

One strategy is to become part of a team that has already won a client's trust. (1) This could be a team that does not specialise in writing and translating but has a demand for these services — again, even in this context, content ownership will always be a highly sensitive issue, within the provider and vis-à-vis the client. (2) Or it may be a team that is offering these services and is looking for a new team member. Later one may use the experience of working in such a team to attract one's own clients.

Specialised competence (say in the ETF business), ability to research relevant related topics, generate content drafts or add to drafts proposed by the client — for instance a speech to be delivered by the ultimate content owner, the CEO.

Being involved in content building and delivery on all fronts lends consistency to the overall corporate message-scape, creating a distinct linguistic culture which may be translated into a consistent yet varied offering of content, targeting specific purposes and groups.

The job profile covers requirements that stand in tension to one another: you will want a creative individual(ist), a linguistic authority holding clear views about good and inadmissible writing, an iconoclast with ideas that strike others as novel or helpful in a way they would not have been able to come up with. At the same time, there is a need for humility, tolerance, empathy for the thoughts and the language style of other persons.

Continued here.

Taxes Linking Private Benefits to Social Costs — A Preliminary Thought

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In explaining the functions of taxes, I have expanded what is really only one point into two more points.

The generic point is that taxes ration purchasing power to regulate the relative availability of resources to government and the non-government sector, respectively. Taxes take money out of the non-government sector, reducing its ability to spend.

Two more aspects are related to this, being just special cases of the rationing function of taxes:

(1) By increasing or lowering taxes, the non-government sector may be left with more or less purchasing power. Thus taxes may be used to encourage economic activity, providing more purchasing power to support it. Equally, taxes may be used to put a break on economic activity by contracting purchasing power, curbing spending by the non-government sector and hence leaving less money to fuel the sales on which capitalism runs.

(2) A more sophisticated point, perhaps: There may be a divide between private benefits and social costs. For instance, government may  provide the means to build a road network, which, however, is largely used by owners of cars who derive a huge private benefit from it without having contributed to its provision. 

One might argue that a government with substantial fiscal space (leeway for spending to create full employment) might shoulder the cost of creating the road network without having to financially constrain any players of the non-governmental sector — in other words: provide a road network for free.

Why do governments in this position still charge members of the non-government sector with taxes like a petrol tax?

Functionally speaking, one may interpret a petrol tax as a means of limiting the purchasing power of some members of society according to the demands that they are making on social resources overall.

Taxes serve, among other things, to restrict purchasing power of the non-government sector so as to leave part of the pie of an economy's output for the state.

While government does not need tax to finance its spending, it does require taxes to hinder the non-government sector from buying all or too much of what the economy offers relative to the resources that government needs in order to fulfil its public purposes.

So one may ponder which groups of the nongovernmental sector deserve to be more heavily restrained in their ability to exercise purchasing power than others. Part of the answer might be: those who benefit privately from using the road network but do not incur corresponding private costs, may justly be required to accept a restraint on their purchasing power that those who do not benefit from the road network are not asked to put up with.

Creating a road network uses up social resources that cannot be employed for other purposes. So the beneficiaries of this social project are really being privileged at the expense of potential beneficiaries of social projects that had to be foregone. The beneficiaries may just as well be subjected commensurately to the purchasing power restraint that needs to be imposed on the non-government sector so that the state has sufficient resources to live up to its mandate.

We might argue that requiring members of society — some of them or all, as the case may be — to curb their purchasing power is a cost levied on society, i. e. a social cost. This social cost ought to be allocated, if possible, to those who benefit disproportionately from the benefits created by incurring the social cost.

Complete Picture Politics

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I have posted this comment here:

Reich is making a very grave point — unconvincingly, though.

I do not trust the one-sided propagandists who talk about the problems of deregulation — which are in many ways severe —, but cut out the huge problems that are associated with regulation — assuming a posture often typical of the so-called left whereby all it takes for regulation to be ideal is that it is designed and implemented in accordance with their political goals.

This is what I call the left’s syndrome: once the left have taken power, they assume, the state’s policies can only be good.

The left’s myth of the state becoming unproblematic by virtue of its being controlled by the left is no better than the right’s myth of a self-regulating market order.

I trust only her who is capable of defending the good in regulation and deregulation and criticising the bad to be found in both.

Only yesterday I participated in a conference where a green politician assumed without compunction the left’s “Bonapartist” attitude described in the first paragraph above.

He proposed to get rid of democracy because he felt multi-party politics was not compliant with green policies. While at the same time demanding an industrial policy for Germany, he conceded that the Energiewende (turn to renewables) was failing/has failed — a policy that if it succeeded would have an effect on world temperature so small that it cannot be measured by modern instrumentation (not to mention that the theory of anthropogenic global warming is highly contested, increasingly so, while a mono-causal explanation of something as complex as climate is in itself already a strong indicator that something is amiss).

When I pointed out that the Energiewende is the most massive industrial policy that we have seen since II. WW, his answer was: yeah, but politics isn’t following our blueprint (which in itself is a steep claim), coming up with all kinds of ad hoc provisos that needed to be fulfilled, in his view, to resuscitate the White Elephant.

It never occurred to him that the comprehensive mix of bad regulation and bad deregulation in favour of Energiewende projects (largely driven by the green blueprint for industrial policy) was beginning to create a political backlash (just as politically correct suppression of unprejudiced science is beginning to get challenged) — even in green crazed Germany.

The inability to take a differentiating look at pros and cons leads to or is the result of one-sided dogmatism, the religious approach to politics.

Like a libertarian, this gentleman was eagerly demanding depoliticisation right, left, and centre (meaning: cut the people out, disempower democracy, cripple political competition, stunt democracy, let politically correct technocrats rule (a mythical self-regulating economy, in the case of libertarians)).

He had only an embarrassed smile for me when I pointed out that his cat was biting her own tail as nothing is more political than deciding what depoliticisation is to mean, how it is to be applied and who will be affected by it in what manner and which areas are to be exempted from it.

Keynes, Minsky, Marx and Hayek

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I made this remark concerning an excellent synoptic article about (conceivable?) similarities between Keynes, Minsky, Marx, and Hayek:

Thanks for this admirably lucid piece. An original and ambitious exposition that I find fruitful—not least because being willing and able to competently discuss schools that are in many ways radically opposed is a quality sorely needed but rarely found in the intellectual discourse.

Faking Drama ...

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... and constantly peddling drama used to be the preserve of the yellow press. Today its the meaning of journalism:

(4)*** Studying Modern Monetary Theory (MMT) — The Secret Life of Taxes

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Continued from here.


The Functions of Taxes

If government does not need taxpayers money to fund its spending, why does it bother to raise taxes at all?

Taxes have a number of functions unrelated to government funding.

(1) Taxes give intrinsically worthless fiat money value.

(2) Taxes ration purchasing power, so that vying between government and non-government for the products of the economy does not trigger inflation.

(3) Taxes can be used to accelerate or slow down economic activity, regulating the business cycle.

(4) Taxes penalise undesired behaviour — like making smoking very expensive by imposing a high tax charge on cigarettes.

(5) Taxes charge beneficiaries with the social costs underlying privately enjoyed benefits — like making users of automobile routes pay for the publicly provided road network via a tax on patrol.

Functions (4) being of no further concern for our present purposes, we shall examine only functions (1), (2), (3), and (5) more fully below.

1. Taxes Giving a Currency Value

ad (1) A Dollar bill by itself is virtually worthless. There is hardly anything one can do with it that is useful enough to command much value. It is not even much of a help in keeping you warm when you burn it. So something that is not intrinsic to a Dollar bill must be introduced into the world to give it notable value. 

To do that, government turns the Dollar into a symbol with which you can do special things — valuable things.

Like the operator of a stadium may use pretty worthless pieces of paper and turn them into a symbol that signifies that the holder of such a so-called ticket is entitled to watch a football match millions of people are eager to attend. Suddenly that paper shoots up in value tremendously.

To appreciate its own currency, to make it sought after and hence genuinely valuable, the government attaches to many of the things we need (income etc.) or like to do (drive a car etc.) a charge for not going to prison. Depending on how much you earn, you must pay government a certain price so that it will let you continue to live as a free person rather than getting thrown into prison. That charge is called a tax. And the way to pay that freedom tax is by delivering to government certain special symbols that represent the currency it issues: government money.

Consider this example: as a result of working hard, you are able to build a house to live in. Everyone rich enough to afford such a house are liable to a freedom tax on housing. If you were into exchange in kind and had built this house entirely of your own resources, perhaps with additional help from friends or by using means acquired through mutual barter, in other words if you had not earned money denominated in the national currency, the house would make you go to prison. You are unable to pay the freedom tax levied on having a house as nice as your freshly build mansion.

There are many other freedom charges the government imposes on its citizens.

So people will want to earn government money. It keeps them out of prison and enables them to enjoy openly and without fear countless things humans tend to like, a nice car, a beautiful house, lots of money in a savings account etc.

Imposing a freedom tax on housing, the so-called hut tax, was exactly the method by which the British got members of a certain region of Africa to adopt the currency the Empire intended to prevail in the area. If you wanted to keep your hut, you had to earn money denominated in the government's currency. Suddenly everyone was eager to offer goods and services that would earn them the special symbols by which they could settle their freedom tax liabilities with the government, stay free and keep their homes.

In a modern exchange economy, money is ubiquitous. You cannot live without it. So everyone is interested in acquiring the currency that attracts the largest demand: the money with which you can do the greatest number of useful things (like getting a loan or settling a debt owed) and accomplish the most important things (like humoring the tax collector to stay out of prison). Even if you are not liable for taxes for some reason, you will still prefer the currency in which people are required to pay taxes. Those who do have to pay taxes obviously prefer that money and so it will tend to be in demand in the most diverse kinds of economic activity.

(2) Spending Comes Before Taxing — The Answer to My Question, Perhaps

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Continued from here.

If MMT does indeed state that taxable money can only be created by the state, it is wrong and right at the same time.

It is right in so far as money must be created, technically implemented and coercively enforced against spoilers by the state before the latter can collect taxes. I think that is an important insight by MMT, as it clears up the common nonsense whereby somehow the act of saving/retaining money creates additional money which then can be transferred to government or firms or other individuals for them to be able to afford what otherwise they could not purchase.

It is wrong in so far as clearly the state imparts the right to create money out of nothing to the banks, who act as delegated money creators when making loans to the public. The money that they create is taxable, as it is national currency, the money that the state created as an institution (and to some extent in the form of money injected into the economy), helps implement and enforces.

There may be a technical aspect about the difference between bank money and taxable money whose significance I do not yet recognise.

For the time being, I see no problem in the inaccurate or at least misleading claim that only government can produce taxable money. After all, in a sense this phrasing is correct: modern fiat money and taxation applied to it are institutions that only the government can institute.

Ignore - mere notes. sometimes I just write and write as if being hot on a trail, only to find that I was on the wrong track:

If the non-government sector is to enhance its net assets, only government spending can achieve this. The liabilities incurred by that sector are exactly offset by the corresponding assets in that sector. Hence, the balance is always zero. If the balance is to become negative, another sector, the government sector, must withdraw assets from the non-government sector (by taking out of it via taxing more than it puts into it via government spending), which will leave the latter with a deficit and the government with a surplus. If net assets of the non-government sector is to become positive, the opposite must happen, government must add to the non-government sector's assets by spending more into it than taking out of it via Taxation.

No, that is not the answer.

Remember the question is: why is MMT insisting that the government (and only the government) must first spend money before it can collect taxes, when banks are also creating taxable money?

Let's try a two person economy: you are the government (G), I am the non-government sector (NG). You create 10 UM (units of money) and spend all of it on services that I provide you with. You do not demand a tax. In this case, NG is in surplus and G has a deficit ("Income" - spending = 0 - 10 = -10).

Next time you spend 5 UM, which increases my net assets from +10 UM to +15 UM. The government has a deficit of -15 UM (-10 from last time plus another -15 this time). But this time G demands taxes to the tune of 15 UM. In this way, NG arrives at a balanced budget of 0 UM just as G does mit a net balance of 0 UM.

Next time G does not spend anything but demands taxes to the tune of 5 UM. In this case, G generates a surplus of 5 UM, while NG ends up with a deficit of -5 UM.

The Pain of a New Idea

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The pain of a new idea is one of the greatest pains in human nature … Your favorite notion may be wrong, your firmest beliefs ill founded. And your favorite foods may be the root cause of your greatest pains! It’s a fact of life that people find it much easier to believe a lie they’ve heard a thousand times than a fact they’ve never heard before.

The source.

(1) Spending Comes Before Taxing — But What Role for Bank-Created Money?

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In the comment section to one of Bill Mitchell's many posts, a certain Alex poses a question that has been occupying me for a while:

I can totally see the logic of the public sector creating net financial assets (or destroying them) but having read many of your blog posts now I can’t help wondering “What about bank-created money!?!” If banks are not constrained by reserves then they can create money whenever they wish. Yes once the money is paid back the net is 0 but surely there are drastic implications for unconstrained bank lending? After all, that bank-created money is as good as the government-created money until it is extinguished. The only control the government can have over the amount of bank-created money is by affecting the demand for it by changing interest rates. 

Doesn’t all the aggregate money supply information (like M3) show a constantly increasing money supply in almost every nation? Is this from constant deficit spending? Constant expansion of debt creation by banks? Both? Which one is the greater contributor to the money supply?

Source.

Specifically, my question is: According to MMT, government must spend before it can tax. Not taxes are making it possible for government to spent. It is the other way around, by spending government creates the money, injects into the economy, into people's pockets the money that will be subjected to taxation. Without issuing this money in the first place, people would not have the money to pay taxes. 

I am unclear about the status of banks and bank-created money in this context. According to MMT, banks are privileged (by government consent) to create money out of thin air, sharing this privilege with government. For instance, when a bank finds a creditworthy client, it will be happy to accommodate the client's demand for a loan. By granting the loan, a client deposit is created by the bank, from which account the borrower can withdraw the borrowed money. Usually granting of a loan precedes the appropriate adjustment of reserves held by the bank at the central bank. So banks are creating money at their own discretion and the requisite central bank action follows suit.

My uncertainties are these:

Is credit creation by banks regarded as some sort of delegated government spending (making taxation possible)?

Is the money created by banks ultimately based on government created money (central bank reserves), so that government liabilities are always issued when taxable money is created? 

Put differently, even when reserves (government money) are created after the event, the banks could not create new taxable money unless the government created government money to back it up (for purposes of accounting and to keep the payment system run smoothly).

(For internal purposes, possibly for future reference: here.)

Continued here.

Warren Mosler's Story

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"The Radical Left-Wing Theory That the Government Has Unlimited Money"

The headline is wrong, but the article is good.

MMT is a theory of how the economy works that is not intrinsically left-wing. It may be interpreted and applied differently by people of diverging political convictions. 

To be more precise: MMT shows how the economy works, especially its monetary infrastructure, demonstrating that there are powerful instruments of steering the economy toward the public purpose. 

At this point, however, the technical, non-political structure of MMT leaves its adherents with a political choice that cannot be resolved by the intrinsic logic of MMT. 

What do you wish to use fiscal spending for? What do you consider to be the public purpose?  

A "right-wing" application of MMT might divert government resources from "renewables" toward different social priorities, a "left-wing" strategy might strengthen "green" energy schemes by heavy subsidies, starving other purposes of government resources. 

Making its appearance in the 1990s, MMT's Keynesian emphasis on effective demand and the benign character of demand management used to be politically almost neutral during the Golden Age of capitalism, when all major political parties, left, center and right, subscribed to it. 

Of course, in an age when the self-proclaimed left and almost all leading parties are of neoliberal persuasion, MMT might be looked at even as "right-wing" in that by its purely technical analysis it debunks as dysfunctional favourites of the "left" such as the EU and its neoliberal austerity bias.

Here is the story of the founder of MMT, Warren Mosler:

The original prophet of MMT is Warren Mosler, who 30 years ago was a Wall Street investor trying to gain competitive advantage over other traders by peering deeply into exactly how the federal government taxed, borrowed, and spent. 

Fit, tanned, and currently residing in St. Croix in order to lower his tax bill, the 68-year-old multimillionaire makes an odd spokesman for a progressive economics movement. As his friend and hedge fund partner Sanjiv Sharma told me, “Warren is more politics agnostic.” 

As a boy, he was fascinated by machinery, how it worked, how to fix it, how to put it together. Mosler told me he planned to major in engineering but he switched to economics after taking a course and finding it much easier. After graduating from the University of Connecticut in 1971, he was hired by a local bank and found himself being promoted rapidly. Soon, he left New England for Wall Street.

“I look at things at an elemental level,” Mosler told me. He got down in the weeds to examine precisely how the Federal Reserve and the Treasury interacted with the general economy. He wanted to understand what happened to balance sheets when the Treasury collected taxes, traded bonds, spent and created money. He came to believe that the conventional wisdom has the relationship between the government and the private sector ass-backward. 

Most of us assume government has to tax before it spends, that like you and me it has to earn money before it purchases goods. If it wants to spend more than it taxes—and it almost always does—it must borrow from the bond market. But by examining the granular way government accounts for its spending, Mosler saw that in every case, expenditures come first. When your Social Security check is due, the Treasury doesn’t look to see if it has enough money to pay it. It simply keystrokes that money directly into your bank account and debits itself simultaneously, thereby creating the money it pays you out of thin air. 

When you pay your taxes, the same process happens in reverse. The federal government subtracts dollars your account and eliminates the same amount from the liabilities side of its ledger, effectively destroying the money you just paid to it. Unlike households or firms or even state and local governments, the federal government is authorized to create dollars. It adds money into the economy when it spends and it takes it out when it taxes. “There's nothing to prevent the federal government from creating as much money as it wants and paying it to somebody,” is how Alan Greenspan, then the Fed chairman, put it to Congressman Paul Ryan during a 2005 hearing. 

Wren-Lewis, the Oxford economist, told me MMT sounds more radical than it really is. “In my view a lot of what they say is mainstream. When interest rates are at their lower bound their anti-austerity policy is totally mainstream,” he said. “In terms of their theoretical framework, I would describe it as being quite close to 1970s Keynesian, with the addition of a very modern understanding of how bank money is created.” Kelton told me MMT isn’t trying to change the way government spends and taxes, it is merely describing the way it already does. 

Mosler’s understanding of money provided him with an insight: Any government that prints its own currency can’t go bankrupt. That insight made him millions. 

In the early 1990s, Italy was struggling with high debt and low tax receipts; economists and traders feared it was heading for collapse. Italian government bond yields inevitably shot up. Mosler recognized that Italy could not be forced into default: It could print as many lira as it needed. (This was in the pre-euro days.) He borrowed lira from Italian banks at an interest rate lower than Italian government bonds were paying and used that money to buy Italian government debt other investors were dumping. Over the next few years, this trade made him and his clients more than $100 million. 

It was after that that Mosler wanted to start a dialogue with academic economists. He wrote to Harvard, Princeton, and Yale, laying out his analysis of Federal Reserve payments and their startling implications, but was ignored. But then, using his contacts with Donald Rumsfeld, wrangled a lunch with Arthur Laffer (of supply-side Laffer curve fame). Laffer told Mosler not to expect anything from Ivy League economics departments, but there was this wacky heterodox group called the post-Keynesians, and they might be interested. 

These economists—including Randy Wray, Bill Mitchell, and Stephanie Kelton—taught Mosler about the chartalists, an early 20th century group of economists who like Mosler saw money as debt created by the state. (MMT is sometimes called “neo-chartalism.”) Abba Lerner’s functional finance is another precursor to MMT. Lerner, a mid-century British economist, insisted public officials ignore the deficit and instead focus on maintaining sufficient demand to keep the economy at full employment. If unemployment was too high government should either spend more or tax less. When inflation threatened, it should cut spending or increase taxes. For Lerner, as for the MMT crowd, there’s no reason to care about the size of a government deficit. 

Mosler explained to the post-Keynesians that taxation and borrowing did not finance government spending. At first Kelton didn’t believe him. “Warren is putting out this stuff and it is way out there. It is the inverse of everything that we’ve been taught,” she told me. She decided to write a paper disproving Mosler’s theories, but in the end, after looking deep into the way the Federal Reserve, the Treasury, and the private banking system interact, she concluded, to her surprise, that he was right. “I went through all of this research,” she said, “and I got to exactly the same place Warren got, just with a lot of complicating details.” Tax and bond sales do come after spending; their purpose is not to fund the government but rather to take money out the system to keep it from overheating. 

Though Mosler came from outside academia, his theories dovetailed with some work done by economists. “What Warren did in some sense was remind people of things we should have known,” she told me. “He made original contributions to be sure, but he also reminded us of what was in the literature and was well-established 60, 80 years ago and then we just unlearned all those lessons.” 

Kelton and Wray introduced Mosler to Wynne Godley’s sectoral balance analysis, which suggests government deficits are not just harmless, they are actually beneficial. To simplify Godley’s theories, every economy has two sectors: the private sector and the public or government sector. When the government spends more than it taxes, it runs a deficit. And that deficit in the public sector inevitably means a surplus for the private sector. 

Kelton explained it to me this way: Imagine I’m the entire government and you are the entire private sector. I spend $100 either going to war or fixing bridges or improving education. The private sector does the work required to achieve those goals and the government pays it $100. It then taxes back $90, leaving $10 in the private sector’s hands. That is the government running a deficit. It is spending more than it receives back in taxes. But you, the private sector, have $10 you didn’t have before. In order to accumulate money, the private sector needs a government deficit. 

Mosler’s hedge fund profited from this theory. In the late 1990s, just about everybody thought the Clinton budget surplus strengthened the US economy. But Mosler realized the Clinton budget surplus meant the government was taking more money out of the private sector in taxes than it was putting in in spending. Mosler reasoned this private sector deficit (the flip side of the government surplus) would inevitably lead to recession, so he bet on interest rates to fall (which they did in 2001) and his hedge fund again made out like bandits.

The source.