MMT: Why the USA Is Not Broke

EnablingStructuresNEPMEDIA ROOTS — If you’ve taken Economics 101, you may have had the same realisation I did when the course reached the part where the USA, for example, goes off the gold standard and the dollar becomes a purely fiat currency with no gold or anything tangible backing it.  When the issues of the business cycle arise, the inherent boom and bust cycles of our capitalist system, and the citizenry, economists, and legislators face the questions of what to do about those recurrent economic recessions, conventional economics says we must cut spending and raise taxes. 

And, of course, those actions will be undertaken on the backs of the working-class and in favour of the ruling-class with regressive taxes and budget cuts.  Yet, one common sense solution was obvious given the USA’s fiat (or sovereign) currency:  Why doesn’t government simply print (or issue) more money, so small businesses can operate, hospitals and schools can be well-funded and accessible to all, and so on?  But our academic and civic culture has been so indoctrinated by neoclassical economic dogma the immediate rebuttal, not open for debate, simply insists that would be inflationary.  Yet, commercial banks create credit currency all the time, but neoclassical economics doesn’t decry those commercial activities as inflationary.

Thus, many of us have been impressed by the Modern Money Theory (MMT) school of political economics, which empirically confirms such common sense ideas as valid.  Media Roots featured Guns and Butter broadcasts of the recent MMT Summit in Rimini, Italy.  Particularly, Dr. Stephanie Kelton’s presentations explain what money actually is, how it works today, and how MMT presents viable alternatives to the fiscal austerity now being imposed on Europe and being proposed for the USA by the same banking and financial elites.  In a new article published at New Econonomic Perspectives, J.D. Alt uses the children’s game of Monopoly to help us rethink its objective as well as conventional notions of money, banking, and finance.  Alt helps us understand why the USA is not broke and fiscal austerity is not inevitable.



NEW ECONOMIC PERSPECTIVES — Why does it seem like there isn’t enough money to pay for the things we really need? The headlines are filled with stories about our nation’s “debt problem” and dire warnings about our impending “bankruptcy.” As an architect who fills his waking hours thinking up all kinds of wonderful things we could be building, I’m alarmed by the idea there isn’t enough money to pay for any of them. Before wasting more time dreaming, I had to find out: Is it really true? Are we reallytoo poor to put America back to work making and building the things we need to maintain a prosperous nation?

Searching for an answer, I discovered a small (but growing) group of economists (see here, here, here, here, here, here) who represent an emerging school of thought known as “modern monetary theory” (MMT). These men and women are valiantly trying to make us all understand a paradigm shift that occurred some forty years ago, when the world abandoned the gold standard. Their key insight shocked me: A sovereign government is never revenue constrained when it is the Monopoly issuer of its own pure fiat currency; it has all the money that’s needed to put its citizens to work building anything—and providing any service—that is desired by the public (provided the real resources are available). Even more remarkable, sovereign “deficits” in the fiat currency are just the accounting record of the surpluses that have been injected into the private economy. Eliminating the sovereign currency deficit by imposing austerity will not make the economy healthier; it will, in effect, bankrupt the citizens!

If this seems to defy logic, stay with me for just a few minutes. I’m going to propose a simple exercise that will help you “see” this reality for yourself. The exercise is simply that everyone join me in a familiar game of Monopoly. By the end of the game, I hope to convince you that MMT is correct and that we could be doing better, much better – for ourselves and future generations—if we just understood and took ad vantage of our modern monetary system.

Read more about Playing Monopolis Monopoly: An inquiry into why we are making ourselves so miserable.


Photo by flickr user Enabling Structures NPG

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Graham Hancock Explores Ancient Mysteries

pyramid sphinxMEDIA ROOTS — Graham Hancock, arguably the world’s foremost expert on ancient mysteries, has devoted his life to uncovering and demystifying the rituals, legends, and wisdom of ancient cultures.  In this video, he investigates oft-ignored inconsistencies.  For example, he discusses the true age of the Great Sphinx of Giza, which remains under debate.  Scholars’ estimates vary widely, though mainstream Egyptologists generally believe it was constructed approximately 4,500 years ago, whereas Hancock asserts heavy water erosion indicates the Sphinx was built quite earlier than believed, at a time when the Giza Plateau wasn’t even a desert yet. 

Hancock also questions how Egyptian culture could have attained, such an advanced state so quickly.  As he explains, cultures generally undergo evolutionary processes before reaching a point of historic greatness or iconic status.  There is usually a progression, in which the building blocks of a society are gradually created over time, giving rise to increased sophistication as the civilization matures.  However, with ancient Egypt this does not seem to be the case.  Egypt seemingly appeared out of nowhere, complete with massive, architectural wonders, a complex mythology, and an eerily accurate astronomy.  Yet, no concrete evidence links Egypt to a previous culture.  So, where did ancient Egyptians develop their wisdom?  Or should we be asking:  Where did the Egyptians come from?

In the video, Hancock lays out a fascinating theory.  He believes an ancient culture existed far earlier than contemporary scientists believe, which laid the foundation for Egyptian civilization.  He suggests around the end of the last ice age, approximately 10,500 BCE, a cataclysmic natural disaster altered the course of mankind by disrupting this ancient culture.  Because most people at this time were living close to water, flooding from the disaster killed the vast majority of them.  However, the small minority, which survived retained the wisdom of their antecedents.

Who were these people?  Hancock believes they were from Atlantis, the mythical lost island, which most scholars have concluded to be non-existent.  For example, Alex Cameron wrote in Greek Mythography in the Roman World (124), “It is only in modern times that people have taken the Atlantis story seriously; no one did so in antiquity.”

Hancock also investigates a number of other ancient artifacts, mysterious discoveries, and cultural anomalies.  With cultivated elocution and an erudite demeanor, Hancock tempers his non-traditional theories with cool, detached logic and reasoning.  Whether one’s persuaded by him or not, one can’t deny his ability to bring excitement and attention to the study of ancient cultures.  For example, Hancock tells us ancient cultures were much more in tune with nature, astronomy, and the Earth itself, all of which helped shape their worldview.  Consequently, their wisdom and spirituality was much deeper and more encompassing than modern cultures.  In fact, Hancock’s theories may cause you to wonder whether humanity has progressed at all since the time of the ancients.

Written by Adam Miezio

Edited by Alex Starace



Photo by Flickr user S W Ellis

MMT Summit: A Debate on How to Get Out of the Euro

MoneyPileFlickrepSos.deMEDIA ROOTS — The current Global Recession, which like the Hurricane Katrina disaster, is largely manmade due to poor planning and political will refusing to respond adequately.  Italians seem to be ahead of the curve with their response by convening a summit on political economics.  Despite a media blackout, over 2,000 Italians packed into a basketball stadium for the first annual grassroots Summit Modern Money Theory 2012 in Rimini, Italy in February.  Such a summit on MMT by the Occupy Movement would go far toward increasing our financial and political economics literacy, as a contribution to the various Occupy Movement teach-ins and workshops on political economy toward greater financial literacy, particularly on May DayGuns and Butter has been broadcasting weekly programmes, featuring highlights from the three-day long event.  At Media Roots, we’ve featured the entire series on the MMT Summit

Perhaps, your Econ 101 experience was like mine; as soon as I got any big ideas, my professor would start dissing ‘command‘ economies and start going on about ‘free market‘ economies.  Yet, Dr. Michael Hudson reminds us, “The important thing to realise is that every economy is planned.  The question is:  Who is going to do the planning?”  Dr. Hudson joins his colleagues Dr. Stephanie Kelton, Dr. William K. Black, and Marshall Auerback for the relevant discussion on ‘How to Get Out of the Euro.’  If the banks do the planning, there will be austerity and pain, the people will suffer and lose rights and dignity.  If “government, on behalf of Main Street” does the planning “to help long-term growth, to help employment,” then the people stand a fighting chance.  MMT explains how this can be done.  (Please see transcript below.)



GUNS AND BUTTER — “There is an alternative, even under the screwed up EU structure that exists now.  The European Central Bank, as the de facto issuer of currency, could act like a sovereign.  It could provide the funds to provide the recovery.  And the ECB knows that it has this capacity.  THEY DON’T WANT TO USE THE CAPACITY TO HELP THE PEOPLE OF EUROPE. 

“There is an alternative, even under their screwed up system; and they refuse to use it.  And [Mario] Graghi, in his Wall Street Journal interview, two days ago made this explicit where he said, ‘The European model is dead’—the social model.  And that he wanted the private sector, the banks, to discipline the governments.”

Bonnie Faulkner (c. 1:24)“I’m Bonnie Faulkner.  Today on Guns and Butter:  Marshall Auerback, Michael Hudson, William K. Black, and Stephanie Kelton from the first economic summit on Modern Money Theory in Rimini, Italy in February of 2012.  Today’s show:  ‘A Debate on How to Get Out of the Euro.’

“We begin with economist and portfolio strategist Marshall Auerback.  Marshall Auerback is currently a portfolio strategist with Madison Street partners, a Denver-based investment management group.  He is a fellow with the Economists for Peace and Security.  And a research associate for the Levy Institute.  He is a frequent contributor to New Economic Perspectives.”

Marshall Auerback (c. 2:12):  “I’ve been asked to say a few words on the possibility of Italy leaving the Eurozone.  I want to stress that this is not necessarily the first option.  I think, in fact, this is a last resort, that should be taken with great care and when all other options have been exhausted.  I say this because there are no easy options available to you.  And I don’t think we’d be honest if we sugar-coated this.  So, this is a political judgment, that you, the Italian people, will have to make.  It would be presumptuous of me, as a foreigner to advise you on what course of action to take.  So, I’m just going to give a very few specific options as to what would be entailed if Italy were to leave the euro.  I have a little paper called ‘Exiting the Euro.’ [Snickers

(c. 3:16)  “Okay, so this is what would have to happen, first of all.  To exit the euro for a nation to regain its currency sovereignty.  Here are the following changes, that would have to occur.  First of all, you would have to reintroduce a new currency or the old lira under monopoly issue.  Within this currency the national government could purchase anything that was for sale in that currency, including domestic unemployed labour at the same time the central bank, the bank of Italy, would receive a refund of the capital it had contributed to the European Central Bank and it would also recede back all of the foreign currency reserves that it had moved over to the EU system.  The nation’s central bank would then regain control of monetary policy, which means that it and not the bond market could set interest rates along the yield curve and add to banks reserves if necessary. 

(c. 4:28)  “Okay, now, here’s where it gets more complicated.  There is clearly some existing sovereign debt that is denominated in euros.  This is a short-term problem because the nation that wanted to exit Italy for example would now have to deal with a foreign currency debt problem.  Now, to some extent, some of the transfers back to the central banking system from the ECB would help to offset the euro exposure upon exit from the euro.  But I’m not going to lie to you; it would be part of a painful adjustment process.  And you may have to default.  You would, at that point, have to enter into a negotiated settlement, whereby the creditors accepted your local currency or nothing. 

(c. 5:26)  “Okay, so, this, I think, is the key issue:  Now, some say that the financial markets would make it very difficult to exit.  They talk about, for example, the dreaded rating agencies would mark you down in the event of a default and force higher rates on local debtMy response to that is that they’re doing that anyway. [Snickers]  What else is new? [Laughs] [Audience Applause]

“I would also add that we have been downgraded in the United States and our borrowing costs have actually gone lower since that time of that downgrade.  These are the same organisations, that were calling toxic subprime mortgages ‘AAA’ as recently as 2007. [Applause]  I think even Mr. Berlusconi has more credibility than the credit rating agencies.

(c. 6:30)  “Now, we would all stress that it’s very important to retain currency sovereignty.  But it doesn’t give you carte blanche to do whatever you want.  When we talk about the pursuit of public purpose, which we do a lot in MMT., we are discussing ways that the government will spend, so that it promotes employment.  At a very minimum, jobs in a public sector Job Guarantee programme for those, that are currently unemployed, so that we can generate real output growth.  The government has to use its newly found fiscal freedom to advance public purpose and not to waste public spending on unproductive pursuits.  So, what do I mean by unproductive pursuits?  Well, obviously, major handouts to zombie banks counts as an unproductive use of government money.  You want to give money, as we like to say in America, to Main Street, rather than Wall Street.

(c. 7:38)  “Now, there are clearly going to be practical issues involved in changing back to the lira.  First of all, you’d have to amend the computer codes.  But you’ve had some experience with that.  You all remember the Y2K bug.  A lot of hard work had to be done to insure that we did not have a meltdown in our computer system. 

“So, how do we support the new lira?  Well, the Italian government would have to announce that it will begin taxing exclusively in the new currency, in the new lira.  And it will also announce that it will make all payments, going forward, in the new lira, not in euros.  That’s the main thing.  The government can now provision itself and continue to function on a sustainable basis.  So, what will be the value of the new lira?  Well, that’s where the markets do come into play.  The new currency will be allowed to float.  The exchange will be determined between willing buyers and sellers at market prices.  Now, as I said about the existing euro debt, that will be a subject of negotiation.  But now the leverage rests with the government, not with the markets.  It can be a long process.  Argentina is still negotiating and litigating claims from the time when it depegged its currency in 2001.  That hasn’t stopped Argentina from growing or functioning as a real economy.  Same thing in Russia; the rouble collapsed in 1998 against the dollar.  The banking system was highly disrupted.  The capital markets did not function for a number of months, but today we still have a rouble.  We still have a Russian banking system.  Russia has survived. 

“And the other question is what to about euro bank deposits and euro bank deposit loans.  Well, for now they remain in place.  There is nothing to stop Italy, ordinary Italians from using euros or having euro deposits.  Just like there’s nothing stopping you from having dollar deposits or British pound deposits.  Panama has decided to dollarize.  Nothing that the United States has done prevents Panama from continuing to use the dollar.  Okay, so here is, I think, where the Job Guarantee programme, that Stephanie [Kelton] has discussed, is extremely important.  I think it’s absolutely essential this be one of the first programmes that’s introduced by the government because the first thing you want to do is to insure there is minimal unemployment. [Applause]

(c. 10:32)  “And for any given size government taxes should be adjusted to insure that the labour force, that works for that wage, be kept to a minimum.  So, as low taxes as possible.  Remember your taxes are no longer funding your spending; you have fiscal freedom.  Now, there is some talk about tax evasion.  How do you enforce a tax?  Personally, I think that this problem is overstated in Italy.  But I think you can maximise compliance by introducing a tax on land, a national real estate tax.  Obviously, it’s much more difficult to avoid.  You can’t move land around.  So, it seems to me that’s an effective way to collect taxes.  Compliance would be maximised because if the tax isn’t paid, then the state can simply sell the property at auction.  Everybody contributes, either, as an owner of the property or the renter, as the owner’s costs would ultimately be passed through to the renters. 

(c. 11:40)   “I might probably substantially reduce taxes, such as the VAT because that would penalise the ability to spend.  And it is a very regressive tax. [Applause

“Finally, I would say that all lira bank deposits would be fully insured by the government.  I would not insure euro deposits, but I would insure lira deposits.  Banks would be government regulated and supervised.  They would be prohibited from any secondary market activity, which means no derivatives, no credit default swaps [Applause], no trading against your clients. [ApplauseBankers are there to lend, provide capital for businesses and consumers, so that the economy could grow, not to bet against their consumers, as they do today. [Applause]  And I’d probably include substantial capital buffer requirements, around 15% to 20%.

“Those are just a few specific suggestions I have.  I know we’re going to discuss them in greater detail on the round table, but I thought I’d introduce these now, as there had been considerable demand for this sort of presentation yesterday during the question period.  So, thank you very much.”

Bonnie Faulkner (c. 13:08):  “You’ve been listening to economist and portfolio strategist Marshall Auerback.  We next hear from economist and historian Michael Hudson.  Michael Hudson is a Wall Street financial analyst and distinguished research professor of economics at the University of Missouri, Kansas City.  Today’s show:  ‘A Debate on How to Get Out of the Euro.’  I’m Bonnie Faulkner.  This is Guns and Butter.”

Dr. Michael Hudson“I will be talking about the small aspects.  But I want to talk about the political frame for this about Italy, the way in which it might leave the Eurozone.  I think you should ask why Italy wanted to join to begin with.  I think that it hoped that somehow joining Europe would solve its own domestic problems.  They hoped that Europe would be a civilising influence, helping it solve its political corruption, its tax corruption, its bad financial structure, and, especially, those of its own big banks.  But the fact is Europe is only able to impose financial and fiscal austerity.  No matter what happens, Italy is going to have to solve its own political and banking problems itself.  It’s going to have to deal with its large families and its oligarchy and its predatory finance by itself.  Europe is, obviously, not going to help you because the European Union is on the side of big banking and big finance against you. [Applause]

(c. 15:12)  “So, as you discuss the alternatives to remaining in the euro, I think you have to say that, if you leave, it’s not going to be out of weakness, not out of default, but because you’re living on a principled position.  And you’re leaving, not be leaving the euro, but by your saying, Europe has left the euro. Europe has been captured by the banks.  And you’re saying; here’s how Europe should work.  You, here, can outline a declaration of independence for how a good Europe should work and you will lead the way into Europe, the new Europe, not out of the old, bad Europe. [Applause

(c. 16:04)  “The important thing to realise is that every economy is planned.  The question is:  Who is going to do the planning?  Will it be, as Marshall said, by Main Street, by government on behalf of Main Street to help long-term growth, to help employment?  Or will it be planned by Wall Street or, even worse, by your bankers, which are even worse, even more predatory, even more enjoying evil than I have ever seen on Wall Street.  The bank planning is geared toward austerity, not towards economic advance.    

“Contrary to what the newspapers say, bank planning wants governments to run deficits; the neoliberals want larger deficits than have ever been run before.  And you have seen from Stephanie [Kelton’s] charts that the deficits in the last three years have been enormous into what she called the private sector.  But what was her private sector?  It wasn’t the labour markets.  It wasn’t into industry.  It was bailouts for the bankers.  The private sector, itself, is divided into the financial sector and the host economy of production and consumption.

“So, I think that if you’re issuing or thinking about issuing a declaration of economic independence and political independence and saying what you think Europe should be, the fiscal policy of the European Central Bank, which is the European government, should be replaced by parliament.

(c. 18:01)  “Today’s European Central Bank tells you:  We will tell you about your fiscal policy will be. We central bankers will say what the labour policy will be. We want unemployment. They will say what your central policy will be. That is, stop paying pensions, so that the employers can pay the banks.

What you want is a dependent central bank, a central bank run by government for the people, not for the commercial bankers, that are seeking to replace democracy with oligarchy. [Applause]  A real social democratic government would be a real socialist government.  As Stephanie explained, it would run deficits to reflate the economy.  Countercyclical spending to reflate the economy and restore employment is called hyperinflation by the neoliberals.  Employing Italian labour is called turning Italy into Zimbabwe.  You have to realise the Orwellian doublethink that is used here.  Your policy should be workplace reform, labour security.  And your fiscal policy should be untaxing labour by returning Italy’s tax system to real estate and to wealth off the value added tax, which is the most inefficient, the most costly, tax, onto property and wealth taxes. [Applause]

“And, finally, as to the government spending deficit, if Europe tells you to balance the budget, tell them:  Okay, we’re starting by withdrawing from NATO.  That will put the fear of gawd [Applause], that will put the fear of gawd into their politicians—namely the United States.  So, good luck on your declaration of independence. [Applause]”

Paolo Barnard (c. 20:20):  “What’s gonna happen to my bank account?  What’s gonna happen to my savings?  What’s gonna happen to my shop?  Please answer this, please.  People are asking.  You know?  These are the questions that I’m getting.”

Dr. William K. Black:  “What’s happening now?  What happens right now is that you’ve lost all power.  And they have you completely in their power because of two things and Stephanie [Kelton] has explained them.  You are not allowed to have any policy, that keeps people employed because the bond market will destroy you.  You are not allowed to have the government step in because of the Stability and Growth Pact.  But both of those points of leverage come entirely from the euro.  That’s the only reason they have any power.  If you have a sovereign currency that floats, the bond markets leave you alone and they go attack the people using the euro.  And there is no reason for a Stability and Growth Pact if you’re not on the euro.  That’s the only reason it exists.  It’s because of the euro.  So, it goes away as well.  You refuse to deal with it.

(c. 22:02)  “What Stephanie [Kelton] showed you, in terms of how your shop works, is the creation of There Is No Alternative where they have shrunk and shrunk and shrunk your policy space to take away every alternative.  So, what happens in your shop after you have created and gone back to the lira?  Well, that depends on what else you do, how well you adopt theories of Modern Monetary Theory and similar post-Keynesian thought and put people back to work.  If you put people back to work, then they have money, then they come to your shop and they buy things.  Then you hire workers.  That’s called an economic recovery.  That’s called a government, that actually works for the people and serves the interests of the people. 

“Does it produce inflation?  Well, look at the United States.  Look at Japan.  Japan has a debt-to-GDP ratio twice as large, basically.  It does not have inflation.  It can borrow money for virtually zero.  The United States, after the credit-rating agencies downgraded us can borrow money for very close to zero.  The United States, because it has not adopted austerity, is growing.  I don’t know if the joke will work in Italian; but we say of the Stability and Growth Pact, that it is an oxymoron produced by regular morons.  As Stephanie [Kelton] showed you, it does not produce stability.  It produces recurrent recessions.  And then when they respond to the recession, they make it worse through austerity.  And so it’s not growth, it’s Anti-Growth Pact.  It shrinks the economy instead of having it grow; and there is only one thing left in the policy space.  All of us, simultaneously, must compete for exports. 

“Now, first, that’s impossible because of the fallacy of composition.  But, second, the very effort is what they want.  This is what we’ve been explaining because the effort is—we call it—the road to Bangladesh.  Germans have not been the winners under the Hatz policy.  German workers’ real wages have fallen.  It is only the German bankers and large industrialists who are winners.  And the rest of Europe does not have the productivity levels close to Germany.  So, the only way to compete under this strategy is to have wages one-fourth the wages a German worker would have. 

(c. 25:35)  “So, when we were in Ireland the government strategy is to cut Irish wages, so they could outcompete Portugal.  But if you go to Portugal the strategy is to cut wages, so that you could outcompete Greeks.  And if you go to Greece, the strategy is to cut wages, so that you could outcompete Turkey.  And Turkey’s trying to outcompete China.  And China soon will be trying to outcompete Vietnam.  And, as I say, the bottom line of all of this is you are in Zimbabwe or Bangladesh, not because of hyperinflation, but because of hypercuts in workers’ wages.

(c. 26:26)  “So, to bring it back to your little shop.  If you get rid of the euro and follow the types of strategies that we’re talking about, you have a shop, that makes more money because it has more customers because you and everyone else are paying your workers enough they can actually live and buy things.  So, demand increases.  Employment increases.  Could you cause hyperinflation?  Of course, it is possible to cause hyperinflation.  You have to have intelligent policies.  But you need not have even serious inflation.  Although, frankly, small inflation would be a good thing right now. [Applause]”

Dr. Michael Hudson (c. 27:20)  “Bill talked about German industry running a surplus.  But what happens when Germany runs a surplus?  You get dollars in exchange.  And dollars, as he’s pointed out, are created as a fiat currency to reflate the American economy.  So, on a global scale, Europe is supporting Zimbabwe; it’s supporting the United States and any other country.  This government is creating its own money and running its own deficit.  So, you are plugged into a fiat money system.  But it’s a dollar system with whom you’re running a balance of payment surplus.  So, your austerity and your exports are designed to promote the United States, whose investors come out and buy Siemens.  Siemens is largely owned by U.S. investors now.  Siemens doesn’t pay any German taxes; and I could go right down the line with other German companies.  So, you have to look at this in a global scale:  Your pain is to benefit other countries.  And what you want is your own independence, so that your effots will support yourself. [Applause]”

Bonnie Faulkner (c. 28:49):  “You’ve been listening to lawyer and former bank regulator William K. Black and economist Michael Hudson.  William Black is associate professor of law and economics at the University of Missouri, Kansas City and the author of The Best Way to Rob a Bank is to Own One: How Corporate Executives and Politicians Looted the S&L Industry.

“We next hear from Stephanie Kelton.  Stephanie Kelton is associate professor of economics at the University of Missouri, Kansas City; research scholar at the Levy Economics Institute; and director of graduate student research at the Center for Full Employment and Price Stability.  Today’s show:  ‘A Debate On How to Get Out of the Euro.’  I’m Bonnie Faulkner.  This is Guns and Butter.”

Dr. Stephanie Kelton (c. 29:48):  “The difference with Argentina is that Argentina defaulted.  But it didn’t have to launch a new currency.  It devalued its existing currency.  Okay?  Things in Argentina had gotten very bad under IMF austerity.  And you ended up with a situation where there was, essentially, no electable party.  And that created the conditions, that made an Argentian default and devaluation possible.  What was unimaginable before became possible because things had gotten so dire.  Argentina was close to being a failed state.  But what worked in Argentina was not the default as much as the devaluation.  They devalued their currency by 65% on a trade-weighted average against the rest of the world.  If this happened in southern European countries, I would expect that the whole trade pattern would be a mess, perhaps collapse for a time.  Countries may come out better in the end, but they would come out better in the end with their own currency.  So, it seems to me that the best example is not Argentina for what we’re talking about and what Italy one day might decide to do.  But Slovenia because Slovenia withdrew and launched their own new currency. 

“So, when we were in Ireland, as Bill [Black] mentioned, many, many people asked us what you’re asking us now.  If it were easy, Greece probably would’ve done it by now.  Everybody wants to know how to get out.  Marshall talked about reprogramming the computers.  But there’s no undo button for the euro.  It’s not easy.  And none of us here have ever drafted a blueprint for a country to lay out the steps, that they need to take to withdraw from the currency union and launch their own currency.  So, I don’t know if any of us here can answer the detailed questions you so reasonably have.  But I know someone who can.  I know who drafted the blueprint in Slovenia.  So, why don’t we meet next week, we’ll invite him. [Applause]  I mean I’m joking, but [Applause] you need—for this level of expertise—you need someone other than the five that you’ve got here today I’m afraid.  But it does require a great deal of planning.  As I understand it, the gentleman who drafted the Slovenian withdrawal—Slovenia started planning six months ahead of time getting everything in place, accounts, transitions, decisions about when to convert, bank accounts, debt questions, all of the kinds of issues, that Paolo has raised and, that many of you have raised have been dealt with; and in the recent past.  And we can get answers to the kinds of questions, that you have.  But, unfortunately, I don’t know if any of us here can provide you with adequate answers today.”

Dr. William K. Black (c. 33:50):  “Well, a clarification first. [Applause]  It was not the default, that caused the crisis in Argentina.”

Dr. Stephanie Kelton:  “No, no.”

Dr. William K. Black:  “The economy collapsed because of the lack of default in some ways.”

Dr. Stephanie Kelton:  “No, no.  It was the IMF austerity.”

Dr. William K. Black:  “Right.  And it was the fact that Argentina pegged the peso to the dollar, so it effectively created a euro-like situation.”

Dr. Stephanie Kelton:  “And it ended up with a bailout from the IMF.”

Dr. William K. Black:  “And it ended up with a price because the dollar appreciated, that made it very difficult for Argentina to export.  And, so, Brazil basically destroyed them in terms of the export markets.  And Argentina went from a first-world nation to a third-world nation because of that crisis.  As Stephanie said, it’s then the default and the devaluation and the re-adoption of a sovereign currency, that allowed Argentina recover. 

“But key things:  They did default.  They still can’t borrow on conventional terms.  As Marshall [Auerback] said, they’re still in litigation, but they’ve averaged over 6% growth in for 15 years.  So, yes there are problems.  It’s not easy.  It’s not clean.  But it’s immensely successful.  Alright?

“Stephanie is absolutely right that there are an enormous number of technical steps to transition out of the euro back to a new lira.  Many of you are old enough to remember that there were months of preparation to convert from the lira to the euro.  Right?”

Dr. Stephanie Kelton:  “Years.”

Dr. William K. Black (c. 34:58):  “That money went out before to the banks, and there were educational programmes about how all of it would work, and there are reprogramming issues, and such.  I can tell you, though, that the fundamental question, however, is the one keyed up by Marshall [Auerback].  Italy—first, there’s no one size fits all—Italy is in a position, that if it regains its sovereignty, it can decide:  Do we wish to default or not?  You are not like Greece.  Greece will default.  Ireland will default, unless it continues to be insance.  Portugal will default, unless it continue to be insane.  Italy is a much richer country. 

“If you choose to default it gets messier.  And you have to have a different plan.  You also have to remember it’s a negotiation.  And I would guess most people in this room have negotiated.

“You have to be ready to default.  You don’t go around simply threatening to do it without the ability and the plan on what you’re going to do. [Applause]”

Marshall Auerback (c. 37:29):  “Let me start by saying that most of the things that I suggested this morning were largely based on Warren’s [Mosler’s] proposal.  And I’m not trying to suggest that what Warren and I have suggested wouldn’t really work.  But I would simply suggest that there would be some disruption.  It is operationally feasible, everything, that Warren has suggested.  All we are saying is its not the sort of thing that you could decide on the spur of the moment.  It doesn’t just happen over five minutes.  It does take a degree of planning.  There will be negotiations.  There will be litigation.  It’s very hard to convey that in a blog post.  So, it is doable.  But I think it would be dishonest of us to suggest that it could be done without any kind of adjustments or any kind of economic disruption.” [Applause]”

Dr. Stephanie Kelton (c. 38:31):  “I would also add [Applause]; I know that Marshall [Auerback] and I are both in communication with Warren [Mosler] several times a day.  We know him well.  And we know what his preferred solution to the ongoing solvency crisis is and has always been.  The piece, that Paolo [Barnard] is referring to is a piece, that Warren [Mosler] wrote in response to something that someone sent him saying:  Europeans are looking for a plan for default.  How do you exit the euro?  So, he wrote out his thoughts.  They wanted an exit plan.  And he produced something.  But his preferred plan and the one he continues to push is for the ECB to hold this thing together.

“You know the old joke?  Why did the man rob the bank?  Because that’s where the money is. 

“The solution for Warren [Mosler] has always been simple and painless, unlike a messy default.  Warren [Mosler] has always said the whole problem could be solved in five minutes, if the ECB would simply write the check.  You know why?  Because that’s where the money is.  They can’t come to you—and the Greeks and the Portuguese and the Irish—and impose austerity and crush your economies trying to extract euros from the people to transfer them to the bondholders because the effects are going to destroy the European Union.  The solution is to have the one who creates the money create the money and stop trying to come and get it from the users of the currency. 

“So, Warren’s [Mosler] proposal, Marshall [Auerback], I’ll just give it to you quickly, is for the European Central Bank on an annual basis to make a contribution equal to roughly 10% of the Eurozone’s GDP to give it to every member of the European Monetary Union [EMU].  The funds would be divided on a per capita basis, so that Germany would actually receive the largest payment.  It would, therefore, not be viewed as a bailout.  Everyone gets it, regardless of the size of their deficit or surplus.  And you get it on an annual basis.  It’s a revenue distribution.  It comes from the only entity in the EMU, that can create the euro, provide you with financial resources, that the government can use to run programmes, a Job Guarantee, whatever it is you need here. 

“The thing it deals with immediately is the solvency problem, which is what’s crushing you today.  It gets the bond markets off your back.  It brings interest rates down.  And as that happens, your debts become serviceable, sustainable, and it can be dealt with without a default.”

Bonnie Faulkner (c. 42:07):  “You’re listening to professor and economist Stephanie Kelton; economist and portfolio strategist Marshall Auerback; lawyer, author, and former bank regulator William K. Black; and Wall Street financial analyst and research professor of economics Michael Hudson.  Today’s show:  ‘A Debate On How to Get Out of the Euro.’  I’m Bonie Faulkner.  This is Guns and Butter.”

Dr. William K. Black:  “Warren’s [Mosler] idea is very interesting.  Warren [Mosler] points out that there is an alternative, even under the screwed up EU structure now.  The European Central bank, as the de facto issuer of currency, it could provide the funds to provide the recovery.  And the ECB knows that it has the capacity.  They don’t want to use the capacity to help the people of Europe. [Applause]  There is an alternative, even under their screwed up system, but they refuse to use it.  And [Mario] Draghi, in his Wall Street Journal interview, two days ago made this explicit where he said, ‘The European model is dead’—the social model.  And that he wanted the private sector, the banks, to discipline the governments.

“So, let me turn to Paolo’s [Barnard] question.  What do you do if—and it’s really a question of devaluation and they’re really two questions; one is the Latvian question, though it’s not unique to Latvia.  In Latvia, of course, you could have borrowed in your local currency or you could borrow in the euro.  And the interest rate on mortgages was much lower than the euro.  So, people borrowed in the euro and the local currency lost tremendous value and it was much harder to repay the mortgages.  It happened in Iceland as well. 

(c. 44:27)   “You have a general problem once you go to the lira, if the euro continues to operate as an alternative where you’re exposing your consumers to potential huge currency risk.  And that exposes the banks if it’s your local banks, that are making the loans denominated in euros to substantial credit risk.  So, going forward you might want to say, at least, that Italian banks must issue their mortgages in lira, as opposed to euros.  So, that’s the going-forward question.  And it’s a question for you.  And, again, this is our point.  There are many questions for you.  And Italy has to make its own decisions about how it wants to run its financial system.  There’s no one game plan, that tells you the right way. 

(c. 45:27)  “The second question is what do I do with my mortgage that’s already in euros if we develop a lira and if we decide a la Argentina that we want to devalue?  And Randy’s [Wray] point was:  If this produces massive problems in the ability to repay, then that is a place where the government should step in using the resources, that Modern Monetary Theory makes clear, and other theories make clear, are available to it, if it has a sovereign currency, and deal with the problem instead of letting millions of Italians go bankrupt.  And, yes, that’s very much something that I know we agree with and my guess is there’s a consensus.  And, now, someone who’s actually been in Latvia will probably tell me why I’m wrong about Latvia. 

Dr. Michael Hudson (c. 46:20):  “I was a research director of the Riga Graduate School of Law and senior consultant to the largest political coalition, the Harmony Centre Party there.  Latvia has not devalued its currency against the euro.  It has remained in the euro straightjacket.  The problem that it’s dealing with is exactly what Professor Black has explained.  What do you do if your mortgages are denominated in euros, or sterling, or dollars, and the currency goes down against it? 

“We have solicited the advice of international lawyers and the answer is quite simple.  First, Latvia redenominates all mortgages in its own domestic currency, then it lets the domestic currency float, or devalue.  Any sovereign government can do what President Roosevelt did in the United States in 1933.  Contracts in America had a gold clause, saying that the creditors had a right to collect the value in gold.  President Roosevelt simply said:  We’re America.  We can nullify the gold clause.  And he did it.  And John Maynard Keynes, in London, wrote an article saying President Roosevelt is magnificently right. 

“Latvia and Italy have the same option.  You can nullify the foreign currency clause in your mortgages and your personal loans and your commercial loans. You can simply redenominate all loans in your own currency.  Under international law this can be done.  So, follow the U.S. model and do it. [Applause]”

Dr. Stephanie Kelton (c. 48:16):  “Paolo [Barnard] just asked me to maybe say one more word about Randy’s [Wray] proposal about the mortgages.  It’s not something that we support just here.  It’s also something we support in the U.S.  We also suffer from a very, very serious problem in our mortgage markets where millions of Americans—we use the term under water in their homes; they owe more on the mortgage than the property is worth and I imagine you’re dealing with a very serious problem with that as well.  Marshall [Auerback] and I were looking at the rate of growth of private sector debt in Italy over the last ten years.  And we were comparing the rate of growth of public sector debt to the rate of growth in the private sector debt, looking at Italy from 2000 until 2010.  And what you find is that the public sector debt has actually increased only modestly over that period, while the private sector debt has absolutely exploded.  And, so, mortgage debt is part of that, but it’s not all of that. 

“And what you may need and likely need is what so many countries in the world need; the U.S., certainly, does.  And that is our own debt restructuring, a writedown.  We need a writedown of these debts, so that they become affordable to the people.  They aren’t affordable now.  So, if you were to leave the euro and launch your own currency, those debts would be redenominated; and they would be written down.  And it would be the Italian government’s decision to decide how much to write them down. 

“One of the proposals, that we here in the U.S., that some of the MMT economists have supported is that homes, that are currently underwater, could be purchased at a fair market price by the government and then leased back to the owner over time.  They wouldn’t lose the home.  They wouldn’t have to disrupt their families.  But they would be given an affordable payment.  And they would be allowed to stay in the home and, ultimately, regain ownership of the property, but on terms very different from the ones, that exist today. [Applause]” 

(c. 51:10)  “The only other thing I would point out is that even with the inflation, Argentina has been growing between 6% and 10% every year for the past decade.  That’s a huge difference from what it was doing under the IMF-sponsored programmes of the 1990s.  There is also a large component of commodities-related inflation and that’s in part related, I think, to the financialisation of the commodities complex because you now have Wall Street banks speculating in oil.  They speculate on food prices.  And these have played a major role in helping to create a significant cost-push inflation in the commodities sector.  And this is a question of, again, financial regulation.  It’s not something specific to Argentina. [Applause]

(c. 52:14)  “Marshall, you know, those high-growth rates, that Argentina managed to achieve were a result, in part, from the fact that Argentina defaulted in the context of a booming global economy.  And we sit, today, discussing the possibility of a default in the context of a global economy, that is teetering, I think, on the brink of another recession.  And, so, while the rest of the world helped to lift Argentina up, an exit today wouldn’t have that same benefit.  But with a sovereign currency and MMT and the ability to craft your own economic policies to create full employment at home, to sustain incomes for the Italian people, you can lift yourselves. [Applause]”

Bonnie Faulkner (c. 53:25):  “You’ve been listening to professor and research scholar Stephanie Kelton; economist and portfolio strategist Marshall Auerback; lawyer, author, and former bank regulator William K. Black; and Wall Street financial analyst and research professor of economics Michael Hudson.

“Today’s show has been:  ‘A Debate on How to Get Out of the Euro.’  This debate concluded the first Italian economic summit on Modern Money Theory in Rimini, Italy.  Please visit the University of Missouri, Kansas City, New Economic Perspectives blog at

“Guns and Butter is produced by Bonnie Faulkner and Yara Mako.  To leave comments or order copies of shows, email us at [email protected].  Visit our website at”

Transcript by Felipe Messina for Media Roots and Guns and Butter


Guns and Butter – April 25, 2012 at 1:00pm

Click to listen (or download)

Photo (synopsis) by Flickr user Kevin Dooley

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Dr. Stephanie Kelton: Modern Money Theory Explained

NoMoneyFlickruserBugsyhoPacifica Radio’s Guns and Butter has stayed on the drumbeat coverage of the revolutionary economic school of thought, Modern Monetary Theory (MMT), broadcasting extensive audio from the grassroots economic summit in Rimini, Italy produced by journalist Paolo Barnard:  Summit Modern Money Theory 2012.  At Media Roots, we’ve covered the entire series.  With this week’s instalment, Dr. Stephanie Kelton’s discussion includes:

“Myths about taxation and government revenues in a sovereign currency situation; debts and deficits; full social security and price stability; the use of sectoral balances to analyze the financial position of the different sectors of the macro economy; the three sectors of the macro economy; the two rules governing the three sectors; the financial balance model.”



GUNS AND BUTTER — “MMT emphasises the relationship between the state’s power over its money and its power to do things, real things, to conduct policy in an unconstrained way.  It emphasises that the state, because of its power over money, has a form of power to command resources in the economy.”  —Dr. Stephanie Kelton

“I’m Bonnie Faulkner.  Today on Guns and Butter:  Stephanie Kelton.  Today’s show:  Modern Money Theory Explained.

“Today’s presentation was given at the first Italian grassroots economic summit on Modern Money Theory in Rimini, Italy in February, 2012.

“Stephanie Kelton is associate professor of economics at the University of Missouri, Kansas City, research scholar at the Levy Economics Institute, and director of graduate student research at the Center for Full Employment and Price Stability.”  

Dr. Stephanie Kelton (c. 1:45):  “I’m going to cover some new ground.  And I’m also gonna go back and talk a little bit about a few really important concepts in MMT, that Paolo [Barnard] asked me to spend some more time talking about because I, maybe, went a little bit too quickly in one of the previous lessons.  So, let’s talk about MMT.  And why we think it’s such a revolutionary way to think about so many important economic questions.

“A day ago, two days ago, I forget, I’ve been awake a long time.  The Financial Times ran an article on MMT.  It was a big deal for us in terms of getting these ideas out there, into the mainstream and taken seriously by politicians, financial writers, and journalists, academics, and even into the hands of regular people, who pick up and read the papers.  
(c. 2:53)  “The Financial Times piece said that seeing MMT is like seeing an autostereogram, those images that look wavy and like there’s no picture.  But if you let your eyes rest long enough, the picture becomes clear.  And this is how the Financial Times described MMT.  Some people might see it right away.  And others will have to spend more time wrestling in their minds with some of the ideas because they’re so counter to everything, that we’ve been taught and that we thought we understood about money and government deficits and debt.  

(c. 3:39)  “And, so, I wanna go back and talk again about some of those important concepts.  We think, most people think, that the government collects taxes from us.  And raises money by selling bonds, so that it can finance its expenditures:  ‘The government needs our money, in order to spend.’  But MMT rejects that.  MMT says that a sovereign currency issuer doesn’t have to go out and get the currency from the users in the economy.  The sovereign currency spends its own IOUs, it spends its own money.  It creates its own currency. 

(c. 4:32) “Not only that, but the taxes they collect from us can’t actually finance anything.  And the bonds, that are sold to raise revenue for the state, in a sovereign government, also doesn’t pay for government spending.

“We think of two aspects of monetary channels.  We think of a vertical channel; this is where state money becomes important.  MMT emphasises that the state spends by issuing, what we call, high-powered moneyHigh-powered money is a fancy word for the currency of the state, the notes, the coins, and also the liabilities of the central bank, that are called bank reserves.

(c. 5:27)  “When you and I write a check to the government to pay our taxes, the check goes through a process where our bank account gets debited; and the numbers go down.  A government account gets a credit; and the numbers go up.  But the money supply, the high-powered money itself, the liabilities of the state are destroyed in the processThey are eliminated from balance sheets.  The money has gone down the drain and it can’t be used to finance anything.  

(c. 6:07)  “In addition to the vertical money—the state money—there is a horizontal aspect in any modern monetary system.  Most of the transactions in the private sector don’t involve the government, but private-issued credit money.  We can think of this as the leveraging of state money.  So, high-powered money is the liability of the government.  It sits at the top of the pyramid.  And the private sector uses the government’s money to leverage the creation of its own IOUs, its own money, its own debt.

(c. 6:58)  “In all modern systems, the central bank targets an overnight interest rate.  And then it supplies reserves, on demand, horizontally, at the interest rate, that it sets.  It also drains any excess reserves using what we call open market operations, buying and selling government bonds to hit its overnight interest rate target.  So, bonds are thought of, more appropriately, not as a financing tool, but as an instrument of monetary policy.  Bonds help the government coordinate the reserve add, that is caused by its government spending, with the reserve drain, that’s caused by the collection of taxes.

“In the US, the Treasury and the Fed have a very complex way of coordinating the government’s fiscal operations.  Many of us in the MMT school have written about this.  It is very complex.  It involves a lot of institutional detail and it isn’t something, that we need to cover here today.  If you’re interested in finding out how the very detailed operations work, you can look for something published by Scott Fullwiler on the New Economic Perspectives blog.  You can look back at an article I published in 2000, in the Journal of Economic Issues, that was called ‘Do Taxes and Bonds Finance Government Spending?

(c. 8:52)  “And, of course, Randy Wray’s book, Understanding Modern Money, also deals with some of this.  But I’m gonna skip over the operational details and just tell you that when government spends it adds new money to the banking systemWhen government collects taxes, it takes money out of the banking system.  If the government spends more than it takes out, we say that the government has run a deficit.  The deficit leaves extra reserves in the banking system.  And this triggers a response by the central bank.  The extra reserves push the interest rate down.  This is different from what conventional economics teaches us.  Conventional economics teaches that a government deficit should push interest rates up because the government is thought to compete for some limited pool of savings, and if you want to increase your deficit, you have to pay a higher price to get some of those savings.  MMT rejects that.

We understand that the state creates money, that money is not scarce, that the government doesn’t borrow household saving to finance its deficit, but rather spends first, creating the reserves, that it then drains by selling bonds.  So, the private sector loses the reserves and gains the government bonds.  This is how bonds are used to maintain interest rates in a sovereign currency setting. 

“We use a graph.  I don’t know how helpful it is.  But the vertical component, is this component, that goes straight up and down, and it shows that Treasury spending adds high-powered money (HPM), that builds up in banks until we pay taxes and then some of that money goes down the drain or banks use the state money to create their own liabilities, lending to private citizens and to private firms, leveraging the state’s money.

(c. 11:31)  “So, this is what we like to think of as the vertical and horizontal parts of the story in MMT.  It incorporates the credit theory of money, endogenous money theory, and state money.  It’s all related to Lerner’s Theory of Functional Finance.  In that piece that Lerner wrote, entitled ‘Functional Finance and the Federal Debt,’ Lerner explained that taxes don’t finance anything.  The government can’t spend the money it collects.  It’s eliminated.  And he understood that bond sales are a tool for conducting monetary policy.  Conventional economics teaches that bonds are a tool for fiscal policy, that they are financing tools.  MMT views that very differently.  The bonds are important because they allow the central bank to sell and buy bonds, adding and draining reserves from the banking system in order to hit its interest rate target.  

(c. 12:44)  “So, we should reject the orthodox theory because it’s wrong.  Conventional wisdom on government finance, taxes, and bonds is incorrect.  The conventional theory is that if the government were to finance its spending by creating new money that it would be inflationary, hyperinflationary, they usually say.  But, in fact, as MMT shows, all government spending is, by definition, financed by the creation of new money.  Sometimes, people think that we’re proposing that government do something different, that MMT says sovereign governments should finance their spending by creating new money.  We’re just describing the way they do it now.  So, this isn’t a policy proposal.  It isn’t going to lead to inflation because they already do it that way and it’s not inflationary.

(c. 13:52)  “The orthodox position again suggests that the government sells bonds and that they have to compete for some little, limited, pool of financial resource that’s out there, and if the government wants a piece of that pool and private firms want a piece and households want a piece, we have to outbid one another, and the price of those savings goes up.  The argument in the textbooks is that as the price goes up, the interest rate rises, that this crowds out other forms of spending.  The government comes in and sees that pool and says I want this piece, pushes the interest rate up for all of the other borrowers who want to borrow.  

(c. 14:43)  “And, so, it crowds out the more efficient kinds of private sector spending to make room for the inefficient big government spending.  This is the conventional story.  But, of course, this is wrong.  The bonds are sold in order to take back government money that was created by running the government deficit in the first place.  So, the deficit creates the money that is then made available for purchasing the bonds.  The pool of resources is not limited.  It grows with deficit spending.

“So, everything that the conventional story teaches, what students in any economics class, in any classroom—as we were told yesterday, in Italy they’re being exposed to an orthodox, neoclassical version of economics that doesn’t apply to governments that issue a sovereign currency.”

Bonnie Faulkner (c. 15:54):  “You’re listening to professor and research scholar, Stephanie Kelton.  Today’s show:  ‘Modern Money Theory Explained.’  I’m Bonnie Faulkner.  This is Guns and Butter.  

Dr. Stephanie Kelton: “MMT emphasises the relationship between the state’s power over its money and its power to do things, real things, to conduct policy in an unconstrained way.  It emphasises that the state, because of its power over money, has a form of power to command resources in the economy.  The state imposes the tax; that allows the state to get people to want to work and produce and provide things to the state in order to get the money that they need to settle the tax liability.  This way, the state has command over how to use society’s resources.  It’s not something that’s immediately obvious, but it’s central to MMT.  

(c. 17:06)  “And, so, at an event like this, what we want to do, as much as anything, is to lift that veil that conceals the potential that the state has to use the monetary system in the public interest. [Applause]

“We talked a little bit yesterday about how economists think about the problem of unemployment.  Essentially, there are three options when it comes to dealing with the inevitability of unemployment in any market economy.  Pure unemployment means that the unemployed sit idle, as a buffer stock of people—human beings—who get no wage and have nothing useful to do.  They are assigned no tasks and they have no income.

“Under most systems, there is some form of support for the unemployed, a safety net of some kind.  It might be unemployment compensation, a small payment made to the person who’s lost a job and can’t find one.  That payment might go on for a period of weeks, months, or even years.  All the while, the person is drawing an income, but has no tasks to perform.  

The third option, the one that MMT prefers, is a buffer stock of, not, unemployed, but of employed people.  And I talked about this yesterday and we referred to it as an Employer of Last Resort [ELR] programme or a Job Guarantee.  In a programme like this, when a person loses a job in the private sector or in the public sector, they have another job to go to.  The government does not allow them to sit idle and to pay them to do nothing.  It assigns them a useful task, something society needs done.  They get a wage.  And they get a task.

“We mentioned yesterday that Argentina implemented a form of a Job Guarantee, theirs was called the Jefes Programme.  It offered a job to the head of household.  It gave them a useful task and it paid them a basic wage.  It was highly successful.

“ELR provides people with a transition job, as the economy goes through its normal business cycle of ups and downs.  And then business lay off and then rehire workers, these people have a place to go.  They don’t sit idle in the unemployed pool.  They work in a pool of employed people.  

“The Job Guarantee programme performs the task of a genuine automatic stabiliser; no government bureaucrat has to decide whether to spend when unemployment increases.  No bureaucrat has to decide; it happens automatically.  If you become unemployed and you would like to participate in the Job Guarantee programme, you show up and you’re assigned a task and paid a wage.  You may receive training while you’re in the programme.  When the private sector recovers and begins hiring again, workers will flow out of the Job Guarantee pool and back into other forms of employment.  In this way, the Job Guarantee is a buffer stock programme.  It buffers the economy against the inevitable economic cycle.  So, society gets workers performing useful tasks; the people get to do something useful that makes them feel like they are contributing members of society.  They have wages and benefits instead of nothing or a very minimum with probably no benefit.  

“We’ve never had a Job Guarantee programme in the U.S.  But we did have an interesting programme that did many of the same kinds of things.  Someone in the audience asked yesterday about Roosevelt’s New Deal.  When Franklin Delano Roosevelt was president and the U.S. economy was in the throes of the Great Depression, Roosevelt instituted an alphabet soup of jobs programmes:  the WPA was the Works Progress Administration, my grandfather, one of them, worked in the WPA; the CCC was the Civilian Conservation Corps.  Some of you have asked about environmental problems and whether MMT has anything to say about environmental policy or energy policy.  The CCC was very much concerned with the environmental aspects.  The NYA was the National Youth Administration.  This was a programme designed, specifically, to deal with the problem of youth unemployment, which we know is a very serious problem in many parts of Europe today.

(c. 22:59)  “Roosevelt’s programmes hired the unemployed, gave them a wage, and gave them something useful to do.  They built hospitals, schools, parks, bridges, roadways, airports, stadiums, and much, much more.  They rebuilt America.  The programmes employed millions of Americans in productive and socially useful jobs.  Builders, architects, engineers, and even painters, poets, and actors were employed in these programmes.  But this is something on a huge scale.  It requires the ability to run large government deficits.  It requires sovereign money.  With sovereign currency and a commitment to functional finance, people can design a democracy that works for them. 

“When the people understand this, it eliminates for the policymaker their excuse for not acting.  They cannot say, we don’t have the money to do it.  Whatever is physically possible is financially feasible.  The only constraints that we concern ourselves with, in MMT, are real constraints.  We have already overcome in our minds, because of the monetary system and our understanding of it, the financial constraints.  They don’t exist.  The issuer of the currency can mobilise resources to achieve public purpose.  In any democracy, the people should decide what that means.  As long as the real resources are available—when I say real resources, I mean the land, the cement, the steel, the real things you need to build roads and bridges and airports and schools, whatever it is that you decide you want and need as a people—as long as those things are available, the government, through its power to tax and spend and power to control its currency, can mobilise those resources for the benefit of all.

Certain activities are simply too important to be left entirely to markets and their profit motive, as orthodox economics would have it.  Care for the environment, energy security, healthcare, income security for the elderly and the dependent, and so on, and so on, are too important to be left to market forces.  MMT shows us all that a new and better world is possible.

(c. 26:15)  “Okay, so I’m going to turn to a very important concept in MMT—the use of sectoral balances to analyse what’s happening to the financial positions of different sectors in the macroeconomy.  We’re gonna begin by recognising that deficits are normal.  Capitalist economies, many capitalist economies, run permanent deficits.  Surpluses are rare and fleeting in many large, rich countries in the world.  For some countries, the deficit emerges the ugly way.  The deficit appears because the economy is in trouble.  A recession causes rising unemployment and falling income.  When incomes fall, tax revenues drop off; deficits explode.  You’ve all seen that.  There’s an even uglier way to run a deficit and that is to implement fiscal austerity—recession by design.  And then there are the good deficits, the kind that MMT understands, doesn’t worry about, and supports.  The government can run a deficit by allowing its budget to expand and contract without any arbitrary limit to its size or to the time-frame, under which the deficit is allowed to be sustained.

(c. 28:10)  “With the kinds of policies that I’ve outlined, Job Guarantee and beyond, these may require the government to run deficits most, or even all, of the time.  So, the question is:  Is that good economics?” 

Bonnie Faulkner:  “You’re listening to professor and research scholar, Stephanie Kelton.  Today’s show:  ‘Modern Money Theory Explained.’  I’m Bonnie Faulkner.  This is Guns and Butter.  

Dr. Stephanie Kelton (c. 28:44): “A deficit hawk, we call them in the United States, is someone who is opposed to the deficit on principle.  A deficit hawk often favours what they call ‘sound money,’ a gold standard, a monetary union.  A deficit hawk would legislate rules that mandate balanced budgets at all times.  A deficit hawk believes that there’s no such thing as a good deficit.  And a deficit hawk supports immediate austerity to sharply reduce budget deficits.

“A deficit dove is a friendlier bird.  A deficit dove supports limited deficit spending in tough economic times.  But the doves want the government’s deficit balanced over the business cycle.  Deficits in bad times, surpluses in good times, balanced over the cycle.

“A dove supports rules to limit or constrain government spending.  Think of the Stability and Growth Pact, which allows small deficits, but also expects surpluses over the cycle.  A deficit dove recognises that the deficit is important when the economy turns down and they’re willing to run the deficit in difficult times.  But they want austerity after the economy recovers.  What are they worried about?

“Both the hawks and the doves are worried about the negative consequences of running a deficit.  They are convinced that, at some point, markets will refuse to lend at reasonable rates; interest rates will spike; the debt will become unsustainable; and they think that running large deficits will eventually lead to serious inflation.  Paul Krugman is a deficit dove.  MMT knows better.

“If the government takes advantage of its status as the issuer of the currency, the government could finance its deficit without borrowing at all.  It could be done with no bond sales.  This means no discipline from the bond markets.  No bond market vigilantes.  No solvency problem to deal with.  Interest rates would be lower, not higher, as [Paul] Krugman would suggest.  

“But what about inflation from running the economy too hot?  MMT doesn’t recommend that you run the economy too hot.  MMT recommends using deficits to bring the economy up to full employment, not to push it beyond.  This is a common criticism that we deal with from our critics who say we want huge deficits and beyond full employment and we never want them to stop and they’ll always be large, and, therefore, we must be insane.

“So, they mischaracterise us, so they can mock us.  Functional finance calls upon the government to maintain full employment and price stability.  We are as concerned with inflation, as anyone.  But we don’t view it as a serious problem when the economy is operating far below full employment with lots of available unused resources.  The government has plenty of space to push the economy before inflation should become a relative concern.

(c. 33:18)  “Okay, MMT emphasises that you cannot examine, weigh in on, give opinion to, make statements about the size of the government’s deficit or budget overall in isolation.  You cannot look at just one sector in the economy when we have a multisector economy.  You need to understand how the government’s budget is related to the rest of the economy.  To do this, we need a basic understanding of sectoral balances.  

(c. 34:03)  “So, what did the sectoral balances show?  In any given period, they show whether a particular part of the economy is spending more than its income—running a deficit—spending less than its income—running a surplus—or spending just equal to its income—balancing its budget.  We have to look at three sectors: two internal sectors—domestic sectors—and one external sector.  The internal sectors are your domestic private sector—the combination of all the households and firms in the country put together for analytical purposes—and the domestic public sector—local, state, provincial governments, national government.  Outside of the domestic sphere is the external sector.  This is the rest of the world.  We can call it the foreign sector, foreign governments, foreign households, foreign businesses. 

(c. 35:20)  “So, we have three sectors and two rules.  The two rules are that all three sectors cannot be in surplus at the same time.  And all three sectors cannot be in deficit at the same time.  These are not my rules.  These are the rules of accounting.  One person’s surplus is another person’s deficit.  The only way for one sector to run a positive balance is for at least one other sector to run a negative balance.  You might think of having three coins: heads is positive, tails is negative.  Hold three coins in your hand and flip all three, if they all come up heads, throw it out; it won’t work.  If they all come up tails, throw it out.  You can have two heads and a tail—two surpluses and a deficit—or two tails and a head—two deficits and one surplus.

(c. 36:38)  “Balance sheet rules apply.  Instinctively, we probably think there’s something inherently better about being in a surplus position. But, remember, we can’t all be in surplus at the same time.  It defies the laws of accounting.  At least one sector must be in deficit.

(c. 37:09)  “Here we see the government sector on the left and the non-government sector on the right.  The non-government sector includes domestic households, domestic firms, and the rest of the world, everyone who’s not government.  If there’s a surplus in the government sector than, by definition, there is a deficit in the non-government sector.  If the government is in deficit, then, by definition, the non-government sector is in surplus.

(c. 37:57)  “Two choices: two heads, one tail; two tails, one head.  Which one’s better?  The private sector needs to be in surplus almost all the time.  As a general rule, the private sector cannot survive in a deficit position.  Households and firms, as users of the currency, cannot continually spend more than their income.  At some point, even the financial wizards of Wall Street will run out of credit-worthy borrowers who are looking to borrow more.  When that happens, asset prices go sideways; sales soften; jobless claims go higher; and the economy turns down.  Government budget moves into deficit automatically, the ugly way.

“The private sector cannot create net wealth for itself.  Businesses, banks, and households together can borrow and lend, but every asset is offset by a liability from someone else in the private sector.  The assets and liabilities cancel each other out.  We can’t create net financial assets internally by ourselves, as a private sector.  Net financial wealth must come from outside the private sector.  

So, where do surpluses come from?  Remember that a surplus means that your income exceeds your expenditure.  A deficit means you’re spending more than your income.  Any one of these sectors—the private sector on the left, the public sector and the foreign sector on the right—any one of them can be in deficit or surplus, but they can’t all be in deficit or surplus together. 

“If the government sector is running a deficit, it tends to add to the private sector’s surplus. 

“If the rest of the world is running a deficit against Italy, that means Italy has the surplus.  Either, a government deficit or a trade surplus will increase the private sector’s net wealth.  This is—for those of you who might’ve wondered where the equation came from—it comes from the national income accounting.  I’m just showing you, so that you know I’m legitimate.  You just move identities around.  Trust me, okay?   

(c. 41:42) “On one side of the equation, you see where our nation’s income comes from.  I call that sources of income.  On the other side of the equation, you see how we use our income.  Sources and uses have to be equal.  We can set these equations equal, move terms to other sides, and write this equation here.  Which is the important equation for us?  

(c. 42:10) “This is the difference between what the private sector is saving and spending.  This is the difference between what the public sector—the government—is spending and collecting.  This is the difference between what the rest of the world is buying from you—your exports—and what you are buying from them—imports.”

Bonnie Faulkner:  “You’re listening to professor and research scholar, Stephanie Kelton.  Today’s show:  ‘Modern Money Theory Explained.’  I’m Bonnie Faulkner.  This is Guns and Butter.”

Dr. Stephanie Kelton:  “I mentioned that if the private sector is going to be in surplus, it requires at least one other sector to be in deficit.  This is the actual data for Italy.  The red line on the bottom shows the government’s budget balance.  You can see that in every year, since 1996, the Italian government has run a deficit.  You can also see that the bigger the deficit in the government sector, the bigger the surplus in the private sector.  Indeed, they almost look like they move exactly opposite to one another.  You could even say that as the government goes down, you go up.  That’s a different way to think about the government’s deficit.  I’m not making it up.

(c. 44:08)  “Here’s Ireland.  It looks similar.  As Ireland’s government deficit exploded, so did the accumulation of financial assets—savings—in the private sector.

“Greece: similar.

“Spain: as deficits increase—here’s Spain at more than 10% deficit to GDP and here’s the Spanish private sector in surplus.

“Germany: Germany runs surpluses on occasion.  But what happened to the private sector?  As Germany’s budget moved in to surplus, you can see here in this period where the German budget was in surplus and the private sector was driven into deficit, not some place the private sector usually spends much time because the private sector can’t survive in deficit.  

(c. 45:20)  “Here’s the United Kingdom, Japan, and the United States.  The large deficits that have been run since the downturn in the economy following the financial crisis, huge deficits that have terrified the hawks, have helped the private sector rebuild and repair their balance sheets by adding to their financial savings.  This makes for a good deficit.  The reason that the two lines were not perfect mirror images in the last set of graphs was because I didn’t include the foreign sector.  I just wanted to focus you in on the relationship between the public sector’s deficit and the private sector’s surplus. 

Here is a complete picture for the United States.  Every area in red shows you the US government’s budget position.  Anything that falls below zero indicates a public sector deficit.  You’ll notice that the U.S. government is almost always in deficit.  The blue represents the private sector’s balance.  You’ll notice that the private sector is almost always in surplus.  The green represents the foreign balance.  It’s been quite some time since the US ran a positive trade surplus.  You can see a few back in the early years.  We are now running trade deficits, sometimes, fairly substantial ones.  And that reduces the private sector’s surplus. 

So, let’s focus in on a specific period of time.  The period in the late 1990s and early 2000s when for the first time in decades the US government ran budget surpluses.  You can see those surpluses where the red goes into positive territory.  These years here represent government budget surpluses.  Many people would inherently think that would be a good thing.  It shows fiscal responsibility.  Not only did they balance the budget, but they put it in surplus.  Meanwhile, our current account deficits were huge.  The rest of the world was running large positive balances against the US.  That reduced US private- sector savings.  Surpluses fell.  It pushed the private sector into deficit on an unprecedented scale.  The private sector went from surviving above the zero line to being pushed below zero.  And the private sector remained there for a period of years, spending more than its income, borrowing to do it.  And it was all fueled by a massive bubble economy that ended in recession, which drove the public sector’s balance back into deficit where it belongs. 

(c. 49:16)  “Okay, the last part that I want to introduce this morning is the Financial Balance Model.  We are very excited in the MMT world about this model.  It was developed by a friend of ours, who is an outstanding economist.  His name is Rob Parenteau.  He writes on the New Economics Perspectives blog.  And he came up with this model.  And it is the framework that allows us to compare all three sectors’ budget positions in a graph.  Economists like graphs.  So, in fact, it’s how you gain credibility in our world.  So, one must use models and graphs.

(c. 50:15)  “The vertical axis measures the public sector’s budget position.  If the government is in surplus, we’ll be in the top half of the graph.  If the government is in deficit, we’ll be in the bottom half of the graph.  The horizontal axis measure’s the current account, the foreign balance

“If you’re on the right half of the graph, the current account is in surplus. 

“If you’re on the left half of the graph, the current account is in deficit. 

“The dashed line shows the private sector’s financial balance set at zero. 

“So, every point along the dashed line is a point where the private sector has no surplus and no deficit—spending equals income.  Above the dashed line, the private sector is in deficit.  Remember what I said:  The private sector cannot survive in that territory.  Below the dashed line, the private sector is in surplus.  Okay?

(c. 51:39)  “For a country that issues a sovereign currency, fiat money, no fixed exchange rate, the world is your oyster.  You can be anywhere in the graph.  There are no rules or reasons that you can’t be located anywhere.  But remember the diagonal line, anywhere above that is unsustainable for the private sector.  So, the only sustainable space is below that line, the green line. 

“What about here for countries that use the euro?  Where are you supposed to operate?  Well, if you’re playing by the rules, your deficit is not supposed to exceed 3% of your GDP.  So, we put in a lower bound at 3%, negative.  This is the space that’s available—in theory.  What about countries in the Eurozone that run current account deficits?  Remember that current account deficit is every where to the left of the vertical line, but you can’t go below 3%.  So, countries with a current account deficit, they get that rectangle.  Countries that run current account surpluses have a different space.  A country with a current account surplus can put its private sector in surplus with a smaller public sector deficit.  

“Here’s the situation for a country that uses the euro and also runs a current account deficit.  Can you see it?  It’s a small space.  This is the space that you are given to work with.  Anything above the dashed line means a private sector deficit.  It’s not a sustainable space for you, for any of us.  You must be below the dashed line.  But you must also be above the red line.  But because you’re running a trade deficit, you’re also to the left of the vertical line.  You get only to play in that little triangle.

(c. 54:30)  “So, lets talk about what’s happened to Italy.  Germany has crushed many members of the Eurozone through its labour policies that began in the early 2000s.  Marshall [Auerback] talked last night about the Hirsch Commission and in Agenda 2012, which was Chancellor Schröder’s economic miracle, whereby Germany ‘reformed’ its labour markets by reducing the power of their labour unions and their craft guilds making it easier for their employers to fire people at will, cut unemployment benefits, so that German benefits last about half as long as benefits in the US.  They were harsh ‘reforms.’ And as they were being implemented, unemployment, initially, increased.  It hurt the German economy, but not for long because that pain was soon transferred to others. 

(c. 55:45)  “So, I want you to look at this picture:  Italy, in 1996, was running a trade surplus of more than 3% of your GDP.  You had more fiscal space before the German policies.  And now you have that little triangle.  It doesn’t give you enough policy space without breaking the Stability and Growth Pact rules it is extremely difficult for you to keep the private sector in surplus and the economy healthy.  I would say it’s impossible. 

(c. 56:22)  “Italy makes it into the small triangle, but not often.  Most of the time, though, your deficits have been large enough to compensate for the trade deficits that you run and you’ve been able to keep your private sector in surplus.  But that’s because the rules were broken.  If you had played by the rules, for the last 14 years, you would have been successful three times.

“Ireland would never be successful.  The space is just too small.

“You see Greece.  The triangle for Greece is way up in the corner.  They can’t play by these restrictive rules, either.

(c. 57:05)  “Same problem for Spain.

“Germany, on the other hand does brilliantly, almost every point is to the right of the green line where the private sector is in surplus.  Although, Germany breaks the Stability and Growth rules, like everyone else.  It’s the large current account surpluses that Germany runs, thanks to all of you.  It’s the secret to their success.  It’s why they can run smaller deficits, stay out of trouble.  You are financing it.

Bonnie Faulkner (c. 57:57):  “You’ve been listening to professor and research scholar, Stephanie Kelton at the Summit on Modern Money Theory in Rimini, Italy.  Today’s show:  Modern Money Theory Explained.

“Stephanie Kelton is Associate Professor of Economics at the University of Missouri, Kansas City, Research Scholar at the Levy Economics Institute, and Director of Graduate Student Research at the Center for Full Employment and Price Stability.

“She is Creator and Editor of New Economic Perspectives.  Her research expertise is in Federal Reserve operations, fiscal policy, social security, healthcare, international finance, and employment policy.

“Please visit the University of Missouri, Kansas City New Economic Perspectives blog at  Visit the website for the first Italian Summit on Modern Money Theory at

“Guns and Butter is produced by Bonnie Faulkner and Yara Mako.  To leave comments or order copies of shows, email us at [email protected]  Visit our website at”

Transcript by Felipe Messina for Media Roots and Guns and Butter

fm: Updated 27 MAR 2013 19:07 CST


Guns and Butter – April 18, 2012 at 1:00pm

Click to listen (or download)



Also, please see MMT Summit: A Debate on How to Get Out of the Euro.

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The State, Class, and False Consciousness

MEDIA ROOTS — In order to move from a liberal capitalist society, organised around elite interests, to a socialist political and economic system run by and for working people, the problem of false consciousness among the USA’s working-class must be confronted, argues Dr. Jeremy Cloward of Diablo Valley College in his paper entitled “The State, Class And False Consciousness Within the American Working Class.”



PROJECT CENSORED — In the United States the American working class has seen itself become increasingly involved in fighting imperialistic wars abroad, financing a growing military budget, and losing its social safety net at home yet at the same time regularly acting politically inconsistent with their own class interests.  This has been to the gain of US-based multinational corporations and to the detriment of working people.  Until the working class in the United States realizes that the predominantly corporate-controlled state does not serve their personal and class interests they will not see any significant improvement in their lives.   On the contrary, as long as working people continue to support the two major parties they can expect to see many more years of corporate dominance of the United States political, economic and social system.  The primary issue that working people must address to resolve this problem is the question of false consciousness.

False Consciousness                         

False consciousness is a term derived from the Marxist tradition which identifies a state of mind of an individual or a group of people who neither understand their class interests nor act politically consistent with those concerns.  Karl Marx, himself, did not use the term false consciousness.  However, many who are intellectually aligned with the Marxist tradition trace the concepts’ origin back to a theory first developed by Marx known as commodity fetishism.  Commodity fetishism is the idea that people place a value on commodities apart from the ones which they intrinsically possess.  For example, a diamond, once it becomes a commodity, is not simply a rock with the properties of a rock but instead an object that people value and admire as if the rock possessed some built-in power which makes it different and more valuable than any other rock.

False consciousness as a concept was first used by Marx’s friend and collaborator Friedrich Engels in July of 1893 in a letter to Franz Mehring.  While writing about the concept of historical materialism he claimed that “ideology is a process accomplished by the so-called thinker consciously, indeed, but with a false consciousness. The real motives impelling him remain unknown to him; otherwise it would not be an ideological process at all.”[2]  Thus Engels, in two brief sentences coins the term and argues that false consciousness and ideology (i.e., worldview) are intellectual constructs.

Read more about The State, Class, and False Consciousness.


Photo by Flickr user Steve Rhodes

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