I'm glad I read this before I tried to listen to Stewart's podcast - I would have been so frustrated. Thank you for making some sense of Stewart's and Hoenig's conversation.
Should the possibility be asked and answered regarding QE (Quan or Qual); do the have to be run through too big investment banks? What regulatory authority has a sincere sociatal voice, other than TINA? Why are WE not able to have a public media dialogue about "our" dollars? One which allows consciousness to gain traction.
Stewart has good instincts, which is not surprising, but he doesn't have a clue how all this works. Almost no one does. He says he understands how banks work, but then explains that banks get money from their depositors and loan it to borrowers at a higher interest rate. I guess, like most ordinary people, Stewart would be blown away to learn that banks create the money when they make a loan. People are so used to the idea that money is something almost tangible that is just "out there" so that banks have to "get their hands" on some to make a loan and that governments have to get their hands on some through taxes or borrowing to spend. The truth, as explained by MMT, is not widely understood., to say the least. So I hope an MMTer will go on the show to explain how the financial system really works.
International finance is a Pyramid Scheme challenged only by a crypto-currency Ponzi Scheme. The US is currently creating war to cling to the dollar as world reserve currency, the only way to continue the con job.
I'm going to say again that, in addition to The Deficit Myth, a good article in The Atlantic by a qualified MMTer could help the educated public--people like Jon Stewart--understand this stuff. It is utterly shocking to people when they are first exposed to it. Here Stewart is incredulous to learn that the Fed can buy government bonds by creating the money (and bank reserves) with which to do it. The idea that, to investors, it's not that big a deal whether they are holding Treasury bonds or cash is a completely new concept to Stewart--as it would be to most people. They are used to thinking of money like gold, that there is just a certain amount out there (and that if the government "prints" some more and spends it, it will surely be inflationary). There is much to learn.
Fascinating for me to watch Jon Stewart wrestle with the same questions I was asking myself just five years ago—before I discovered & read Kelton, Mosler, Grey, et al. Very satisfying analysis here, thank you.
It seems to me that much of the confusion might disappear if the point were forcefully made that what they are calling "dollars" are actually a tax credits -- this might dispel the associations otherwise held with household budgets and personal debts that such conversations inevitably unconsciously trigger.
Jon's instinct is right: the Fed can create the money to pay off the national debt. Jon only has the mechanics wrong. The Fed can and does create money and buys the bonds from the private sector (QE). Since the Fed is just an agency of the Federal Government, Jon is right that this effectively means the bonds are paid off. But technically they are still outstanding and are counted as part of "the national debt." With the approval of Congress, the Fed could just forgive them at that point. The $22 trillion national debt would instantly decrease. (Jon's guest would strongly oppose this action, however, believing like most mainstream economists, that the new money in the system would cause massive inflation--whether it causes more spending or not.)
US dollars can be created out of thin air, but they don't grow on trees. The deficit/"national debt" hawks have to explain the provenance of the US dollars sitting in their savings accounts. While it's true that the banking system, through the issuance of loans, creates the bulk of US currency circulating in our economy, all of that money has strings attached. So if you own "bank money" free and clear of any debt obligation, you stole it. Or you did business with a bank robber. Banks have a nasty habit of wanting their loans repaid in full. Now it's true that bank loans are responsible for the creation of an enormous amount of REAL WEALTH--schools, hospitals, housing, equipment, motor vehicles, etc. But bank money, as a matter of logic, cannot create a dime of FINANCIAL WEALTH. Let's say a contractor takes out a $1 billion loan to build a new hospital. The money allows him to employ AVAILABLE labor, energy and raw materials to build it. He sells the finished product to a medical consortium and repays his banker. The loan is wiped off the books and $1 billion disappears into the accounting ether. The only evidence that the loan ever existed is a shiny new hospital. REAL WEALTH was produced, but because the entire $1 billion loan was repaid and the money destroyed, not a dime of FINANCIAL WEALTH was created. This kind of thing happens about a million times a day.
Unlike banks, the federal gov't doesn't care about clawing back every dollar it issues. So far, depending on whose numbers you want to use, the gov't has allowed about $28 trillion (in accumulated deficits) to go uncollected in taxes. And this is the source of the world's FINANCIAL WEALTH held in US dollars. Counterfeiting is illegal, so where else could those dollars in your savings account possibly have come from? Do the hawks really want the gov't to go on a $4 trillion per year budget surplus plan for 7 years to wipe out the debt--and their entire FINANCIAL WEALTH?
Instead of looking at the "national debt" as a looming crisis, the hawks should instead regard it as an amazing accomplishment of an American economy so strong that it can absorb $28 trillion in excess currency without triggering runaway inflation (the pandemic surge will probably work itself out in a couple of years). Of course, this inflation-free ride is almost certainly due to the fact that most of this FINANCILA WEALTH has accrued to the ultra-rich who have a high propensity to save. They've already bought all the toothpaste and toilet paper they need, so their excess dollars aren't chasing those goods and driving up their prices. If this $28 trillion were more equitably distributed over the past couple of decades, then it's a good bet we would have experienced somewhat higher inflation. In an economically just world, the "national debt" might have to be cut, say, in half to $14 trillion (I'm pulling this number out of a hat) in order to keep inflation at bay. Aside from the uber wealthy, I think this is a tradeoff a majority of Americans would be willing to make.
If I'm correctly understanding where the MMT argument is going, the above is, for me, the most surprising--shocking, really--implication of the theory.
During the Bill Clinton administration, as I recall, conditions allowed the national debt to be rapidly paid down, to the point that bondholders were worried that in the near future there would be no T-bills for them to clip coupons on. Thus they couldn't continue to get large amounts of interest-income to enable a fancy life of leisure guaranteed by the government. This is FINANCIAL WEALTH. The financialization of our economy has destroyed the ability of people who actually make things to improve their status in life.
"...conditions allowed the national debt to be rapidly paid down..."
Clinton's bombing of Sudan's Al Shifa pharmaceutical factory during the height of the Monica Lewinsky scandal still stands as one of the most outrageous war crimes by any American president. That said, all that paying down the deficit did was to make Americans poorer. As Kelton is fond of saying, "the govt's red ink is our black ink!"
I know just how Stewart feels. To a certain extent one must defer to the authorities, if you are a talk show host talking to a fed banker.
It would be nice if you, Rohan, or Warren could reach out to Stewart and get on his show to straighten things out.
Agreed.
I'm glad I read this before I tried to listen to Stewart's podcast - I would have been so frustrated. Thank you for making some sense of Stewart's and Hoenig's conversation.
Stewart rocks!
Should the possibility be asked and answered regarding QE (Quan or Qual); do the have to be run through too big investment banks? What regulatory authority has a sincere sociatal voice, other than TINA? Why are WE not able to have a public media dialogue about "our" dollars? One which allows consciousness to gain traction.
Thank you, Stephanie and Rohan...and John.
Stewart has good instincts, which is not surprising, but he doesn't have a clue how all this works. Almost no one does. He says he understands how banks work, but then explains that banks get money from their depositors and loan it to borrowers at a higher interest rate. I guess, like most ordinary people, Stewart would be blown away to learn that banks create the money when they make a loan. People are so used to the idea that money is something almost tangible that is just "out there" so that banks have to "get their hands" on some to make a loan and that governments have to get their hands on some through taxes or borrowing to spend. The truth, as explained by MMT, is not widely understood., to say the least. So I hope an MMTer will go on the show to explain how the financial system really works.
International finance is a Pyramid Scheme challenged only by a crypto-currency Ponzi Scheme. The US is currently creating war to cling to the dollar as world reserve currency, the only way to continue the con job.
I'm going to say again that, in addition to The Deficit Myth, a good article in The Atlantic by a qualified MMTer could help the educated public--people like Jon Stewart--understand this stuff. It is utterly shocking to people when they are first exposed to it. Here Stewart is incredulous to learn that the Fed can buy government bonds by creating the money (and bank reserves) with which to do it. The idea that, to investors, it's not that big a deal whether they are holding Treasury bonds or cash is a completely new concept to Stewart--as it would be to most people. They are used to thinking of money like gold, that there is just a certain amount out there (and that if the government "prints" some more and spends it, it will surely be inflationary). There is much to learn.
Fascinating for me to watch Jon Stewart wrestle with the same questions I was asking myself just five years ago—before I discovered & read Kelton, Mosler, Grey, et al. Very satisfying analysis here, thank you.
It seems to me that much of the confusion might disappear if the point were forcefully made that what they are calling "dollars" are actually a tax credits -- this might dispel the associations otherwise held with household budgets and personal debts that such conversations inevitably unconsciously trigger.
While true, that would sure take some explaining....
I really got tired of Stewart’s arguments. You are making his reasoning not what he means. He has no idea how the system works.
Jon's instinct is right: the Fed can create the money to pay off the national debt. Jon only has the mechanics wrong. The Fed can and does create money and buys the bonds from the private sector (QE). Since the Fed is just an agency of the Federal Government, Jon is right that this effectively means the bonds are paid off. But technically they are still outstanding and are counted as part of "the national debt." With the approval of Congress, the Fed could just forgive them at that point. The $22 trillion national debt would instantly decrease. (Jon's guest would strongly oppose this action, however, believing like most mainstream economists, that the new money in the system would cause massive inflation--whether it causes more spending or not.)
"Yes, you can levitate, but you cannot spin around" -Jon Stewart
"It's all faith based... oh lord"
bizarre
Interest is a policy choice.
Great breakdown!
US dollars can be created out of thin air, but they don't grow on trees. The deficit/"national debt" hawks have to explain the provenance of the US dollars sitting in their savings accounts. While it's true that the banking system, through the issuance of loans, creates the bulk of US currency circulating in our economy, all of that money has strings attached. So if you own "bank money" free and clear of any debt obligation, you stole it. Or you did business with a bank robber. Banks have a nasty habit of wanting their loans repaid in full. Now it's true that bank loans are responsible for the creation of an enormous amount of REAL WEALTH--schools, hospitals, housing, equipment, motor vehicles, etc. But bank money, as a matter of logic, cannot create a dime of FINANCIAL WEALTH. Let's say a contractor takes out a $1 billion loan to build a new hospital. The money allows him to employ AVAILABLE labor, energy and raw materials to build it. He sells the finished product to a medical consortium and repays his banker. The loan is wiped off the books and $1 billion disappears into the accounting ether. The only evidence that the loan ever existed is a shiny new hospital. REAL WEALTH was produced, but because the entire $1 billion loan was repaid and the money destroyed, not a dime of FINANCIAL WEALTH was created. This kind of thing happens about a million times a day.
Unlike banks, the federal gov't doesn't care about clawing back every dollar it issues. So far, depending on whose numbers you want to use, the gov't has allowed about $28 trillion (in accumulated deficits) to go uncollected in taxes. And this is the source of the world's FINANCIAL WEALTH held in US dollars. Counterfeiting is illegal, so where else could those dollars in your savings account possibly have come from? Do the hawks really want the gov't to go on a $4 trillion per year budget surplus plan for 7 years to wipe out the debt--and their entire FINANCIAL WEALTH?
Instead of looking at the "national debt" as a looming crisis, the hawks should instead regard it as an amazing accomplishment of an American economy so strong that it can absorb $28 trillion in excess currency without triggering runaway inflation (the pandemic surge will probably work itself out in a couple of years). Of course, this inflation-free ride is almost certainly due to the fact that most of this FINANCILA WEALTH has accrued to the ultra-rich who have a high propensity to save. They've already bought all the toothpaste and toilet paper they need, so their excess dollars aren't chasing those goods and driving up their prices. If this $28 trillion were more equitably distributed over the past couple of decades, then it's a good bet we would have experienced somewhat higher inflation. In an economically just world, the "national debt" might have to be cut, say, in half to $14 trillion (I'm pulling this number out of a hat) in order to keep inflation at bay. Aside from the uber wealthy, I think this is a tradeoff a majority of Americans would be willing to make.
If I'm correctly understanding where the MMT argument is going, the above is, for me, the most surprising--shocking, really--implication of the theory.
During the Bill Clinton administration, as I recall, conditions allowed the national debt to be rapidly paid down, to the point that bondholders were worried that in the near future there would be no T-bills for them to clip coupons on. Thus they couldn't continue to get large amounts of interest-income to enable a fancy life of leisure guaranteed by the government. This is FINANCIAL WEALTH. The financialization of our economy has destroyed the ability of people who actually make things to improve their status in life.
"...conditions allowed the national debt to be rapidly paid down..."
Clinton's bombing of Sudan's Al Shifa pharmaceutical factory during the height of the Monica Lewinsky scandal still stands as one of the most outrageous war crimes by any American president. That said, all that paying down the deficit did was to make Americans poorer. As Kelton is fond of saying, "the govt's red ink is our black ink!"