Episode 157 – Foundations with Warren Mosler

Macro N Cheese – Episode 157
Foundations with Warren Mosler
January 29, 2021

 

[00:00:03.050] – Warren Mosler [intro/music]

You didn’t hear that when we ran a $5 trillion deficit for COVID. You didn’t hear one word about taxes or how you’re going to pay for it for that initial 5 trillion. They weren’t afraid of the government bouncing checks. They were concerned about causing inflation. But that’s a major victory for Modern Monetary Theory.

[00:00:24.990] – Warren Mosler [intro/music]

Right now, we can go to a permanent zero rate policy. The Treasury will never pay any interest again. The Treasury can go to only three month bills. There’ll never be any Treasury bonds or securities, for all practical purposes to speak of. And we can get to where we want to be overnight without any change in institutional structure.

[00:01:43.460] – Geoff Ginter [intro/music]

Now, let’s see if we can avoid the apocalypse altogether. Here’s another episode of Macro N Cheese with your host, Steve Grumbine.

[00:01:43.720] – Steve Grumbine

All right, this is Steve with Macro and Cheese. Today’s podcast is Warren Mosler’s webinar to the Green Party describing Modern Monetary Theory. Why does this matter? Well, for years, Real Progressives has worked with various economists in an attempt to get Modern Monetary Theory into the Green Party.

And over the years, we’ve had varying levels of success, but ultimately dating back to the time where Steve Keen and Michael Hudson and Pavlina Tcherneva and Fadhel Kaboub and others; Warren Mosler spoke with Stephen Zarlenga and the American Monetary Institute. We have witnessed an overarching divide over the nature of the Federal Reserve, over an understanding of what the national debt is and what it means to be a sovereign issuer of currency.

The divide, while seemingly small, is actually quite large in the sense that it is a deal breaker for many. So the understandings that Warren Mosler paints in this presentation are absolutely vital to understanding the way actual monetary operations work, not only in the United States, but really around the world.

One of the most important aspects of this is it shows us that all the incredible insights and all the incredible policy proposals from the Green New Deal to health care and student debt elimination, et cetera, can all be achieved, including reparations. But without an understanding of how a modern money economy operates and how the Federal Reserve, as a creature of Congress, works hand in glove with the Treasury to get money out the door for the government to provision itself, none of these policies will ever come to be.

So it’s with great honor that I present this to you. It’s a wonderful, wonderful discussion. Now let me just say also up front, after the presentation, Warren took questions from attendees. We’ve included some excerpts from the Q and A here, please go to Real Progress in Action on YouTube for the full two hour session where you can hear all the back and forth. So without further ado, I bring you Warren Mosler.

[00:04:18.810] – Ramona Massachi

Hello, everyone. Thank you for being here. Welcome Green Party. I love you guys. I want to introduce Warren. Warren Mosler is an American economist and theorist and one of the leading voices in the field of Modern Monetary Theory (MMT). An entrepreneur and financial professional, Warren Mosler has spent the past 40 years gaining an Insider’s knowledge of monetary operations.

He is the author of The Seven Deadly Innocent Frauds of Economic Policy, which you can download for free. And we’re going to send you all a link of a lot of his work. And it’s all free online. And welcome, Warren. Thank you for being here.

[00:05:03.250] – Mosler

Good to be here. Thank you. So what I’m going to give you is a base case for purposes of analysis. If you can understand this model, then all your questions should fit in with this model and everything else you see in the world. Underneath it all, this is what’s going on. So I use example in the 1800s, when the British wanted to force the domestic populations in Africa to grow coffee and the French did the same thing.

So how did they do that? People who were living there already had a life. They were already living a non monetary existence. The last thing they wanted to do was go down to some British coffee plantation and work. Okay, so what the British did was create a scrip currency. I’ll call it the Crown. Just simplicity. And it could be anything. It’s just a scrip.

And they imposed a hut tax on all dwellings payable in that scrip. And it might be ten scrips a month or something like that, 50 scrips a month. They impose a hut tax and the British Navy was there, the military was there. If you didn’t pay the tax, they burned down your hut. So it was enforced and it was enforced with violence. And scrip could then be earned by working at the coffee plantation.

So let’s review this. The public purpose behind what the British were doing was to grow coffee. They levied a tax. They put a tax liability on everyone’s house. That caused lots of people to be looking for work or look for some way to earn scrip so they could pay the tax so their house wouldn’t be burned down. And people looking for paid work who can’t find it because at that point they couldn’t find it because there wasn’t any.

It’s just a tax liability. Nobody has any yet. Those are called unemployed. And so the hut tax created unemployment. People looking for paid work for the further purpose of the British then being able to hire those people who wanted to work for scrip and they would then get paid and then they could pay their tax. And if they wanted to earn extras. That was fine. The British didn’t particularly care.

Anybody wanted to come down and work for scrip, they pay them. And so some of those scrips were used to pay tax and the rest were just saved. That became the money supply in that local economy. Now, knowing that, here’s the MMT money story. Now, the mainstream textbooks tell a story about barter and that type of thing, I’m not saying it happened or it didn’t happen, but I don’t find that particularly useful for anything.

This is the money story that I tell and it describes today’s currencies and how they work. Number one, the state desires to provision itself. The US government today doesn’t want to grow coffee, but they want people serving in the military. They want public education. They want public health and a legal system, that type of thing.

They need to provision themselves with mainly labor, but also lots of outside goods and services. So how do they do that? What they do is they impose a tax liability. And if we get into income taxes and other taxes, it gets complicated. But it works exactly the same for purposes of the money story as if it was a property tax, the same way the British imposed a property tax.

I’m going to assume here a property tax for purposes of the example, to have a base case for analysis, then we can modify it for other taxes. If you want to. The state imposes a tax liability and let’s say it’s a tax on everybody’s house. This tax liability now creates people who are sellers of goods and services now seeking the state’s currency, which is the tax credit that they needed to pay the tax, or else you’re going to lose your house in exchange.

So what we’ve done is that the state’s imposition of tax liabilities in the first instance creates unemployment by design. And what I’ll say right now is that is the source of all unemployment. It’s not robots or anything else. It’s tax liabilities. But if you think back to Africa, before there were tax liabilities from the British, there was no unemployment. There was nobody looking for paid work.

There wasn’t a currency. So you’ve got to have a tax liability currency as a tax credit. The tax liability creates what we define as unemployed people, people looking for paid work. For the further purpose of number four, the state then hires the people that the tax caused to become unemployed. The state buys the goods and services that it desires. It hires the soldiers, it hires public health workers.

Then taxes can be paid and state securities purchased. If people earn more than enough pay the tax, those dollars are still sitting in bank accounts. They can be used to purchase Treasury securities if they want. So that is the money story, and that is the core behind MMT. Now, what’s new about this? What we have is a sequence; tax liability, unemployed people getting hired, getting paid, and then they’re paying their tax.

If you look at all the mainstream economic models, they’ve got the sequence backwards. They see the government getting tax money first so that it can then pay people to work. That’s completely backwards. It’s caused their models to not come up with the right answers. Their models don’t reflect reality of what’s going on. So at the very core of their models, we picked up a couple of errors.

This is a big one. They’ve got the sequence backwards. Every congressman thinks they have to get dollars by taxing to be able to spend. And what they don’t collect in taxing, they have to borrow, to be able to spend. So you had President Obama going to China, our bankers to make sure they would buy our bonds so that we had the money to spend on healthcare.

You had Paul Ryan talking about, with all this debt, we could become the next Greece, not be able to borrow the money we need to spend, and therefore be on our knees to the IMF begging money so that the government can spend. They’ve all had it backwards. If you look at the last couple of years, that’s all gone. You didn’t hear that when we ran a $5 trillion deficit for Covid.

You didn’t hear one word about taxes or how you’re going to pay for it for that initial $5 trillion. They weren’t afraid of the government’s bouncing checks. They were concerned about causing inflation. But that’s a major victory for Modern Monetary Theory. We’ve been saying, look, the government is not going to bounce checks, it’s not going to run out of money, it’s spending first.

All the dollars to pay taxes come from the government through its agents the Federal Reserve,  the banking system. They’re all agents of government. And the government has to spend first before the money is out there to pay taxes or buy bonds. So the idea of running out of money is not applicable. The idea of becoming the next Greece is not applicable.

If you look at that situation that the British set up in Africa, they weren’t taxing people to get the money to spend. They were taxing them so that they would come down to the plantation to earn the money so that they could get paid and then pay the tax. So sequence is critical. You have to understand sequence to understand it. And it’s gotten through to Washington.

At least to the extent where all they’re concerned about now is whether overspending will cause inflation. They’re not concerned about bouncing checks. And so that’s a major change from several years ago. And without that change brought about by MMT, largely popularized by Stephanie Kelton in her book The Deficit Myth and originally getting a job at the Senate Budget Committee that was headed by Bernie Sanders at the time.

That’s what started this change in understanding that allowed us to get through COVID without a financial crisis. The other thing MMT adds or it’s really part of the same thing if we recognize that the currency is a simple public monopoly. When you have a monopoly, you don’t have normal markets functioning. All market theory assumes there’s no monopoly functioning because if there is, they’ve got to change it all and they have to modify it to take account of that monopoly.

Well, the currency itself is a monopoly, which means you have to modify everything and take account of the currency being a monopoly before you can do anything else in your analysis of the monetary economy. So as I said before, the funds to pay taxes come from the state. The Africans needed the scrip that only came from the British to be able to pay their taxes.

If they could have created the money themselves, they never would have gone to the coffee plantation. But you can’t. The whole thing is coercive and it’s forced and there are strict laws against counterfeiting. There have to be or it doesn’t work. State spending precedes the payment of taxes and the purchase of state securities. State spending is limited only by what tax liabilities cause to be offered for sale. So when the British imposed hut tax, how much could they spend?

Well, whoever showed up at the plantation looking for work, they could afford to pay them. Maybe the total tax was 1000 scrip and 1000 Crown and people showed up and earned 1500. The British can afford to pay them. They’re not limited by how much they’re going to pay in taxes later. That doesn’t make any sense. So once you understand it, you can see why the money that’s paid in taxes is not some kind of a limit on the amount government can spend.

The amount of things that are for sale is a limit. If nobody had shown up the plantation looking for work, the British couldn’t spend anything. If nothing is offered for sale in exchange for US dollars, the federal government can’t spend anything. Their limit is what is offered for sale. Taxes create things to be offered for sale. It creates an environment where things are offered for sale.

So tax liabilities are the cause of unemployment. Is there any other? I’ve asked Marxian economists, did Marx understand the cause of unemployment? They said, no, you are correct. Tax liabilities is something he missed. So we’ve made a contribution to Marxist theory as well. And this last one, which is a little obscure, but if you think about it, it’s not so obscure.

The price level is a function of prices paid by the state when it’s spent. What does that mean? What is the value of a scrip. One unit of the scrip, or let’s say a Crown. They call it the Crown in Africa. Well, if people showed up to work and they paid one Crown a day, that’s enough to establish value when they take those things back home because somebody else who wanted to pick berries and didn’t want to go work in the coffee plantations, he still needs a Crown or he’s going to get his house burned down.

And so there’ll be an exchange between people who go to work to earn extra, who don’t want to pick berries. But there’ll be some sense of maybe one day’s work is worth one bushel of berries or however many you can collect. So if you get paid one Crown for working one day in a coffee plantation, the guy picking berries that takes all day is one bushel would be worth one Crown, approximately.

The market will sort that out. There’s what they call double coincidence of wants. That’s called relative value. So once you know it takes one day to earn a Crown in the coffee plantation, now you know what everything else is worth. Maybe a day’s work of babysitting is only worth half a Crown because that’s a pretty easy job. But people work that out.

Now, if the government decided to pay two Crown a day instead of one, now you only have to work half a day to earn a Crown. So a Crown is only going to buy half a bushel of berries. The only information on absolute value, what a Crown is worth, that goes into the marketplace comes from the British setting that price. The market can’t do that because it’s a monopoly.

And they teach you in Economics 101 when they teach monopoly, the first day, monopolies are price setters. And there’s no dispute in mainstream economics when there isn’t any competition, when there isn’t a market, when you’ve got this stuff and somebody else absolutely needs it, you set the price. It’s not a competition or barter or anything else.

You have absolute power to set the price depending on how bad they need it. If they don’t care if the house gets burned down, then you can’t set any price. But if they care about their house getting burned down, you can set the price. So the way that translates into economic talk is that the price level is a function, of that means it depends, on prices paid by the state when it spends.

And that is true today as point of logic, there’s no way around it. And none of the people who talk about inflation have yet incorporated that into their discussion of where prices come from. But the mainstream has taken note of it and it’s starting to work its way into their models because they didn’t have a theory of where prices came from.

It hadn’t occurred to them that the currency itself is a monopoly, in which case they would immediately recognize it as price setter. And they’re beginning to do that. We’ve got the government up top, which could be the British. It’s the thing with the taxing authority or it’s agents that have taxing authority. There’s the economy down there.

And you say what’s flowing up to the government are goods and services. What’s flowing down to the economy are US dollars that’s the sequence. The next sequence is they pay taxes and those might as well be thrown into the garbage because it doesn’t have any value to the government. They just want the goods and services which they get because you have a tax liability.

You need their money, you go to work for it, they pay you. If they could trust you to throw it in the garbage instead of paying it to them, fine. But they can’t trust you, or at least they can’t trust me. They probably trust all of you. And so they collect taxes, but they don’t have any use for them. And if you actually pay your taxes in actual cash, if you’re a waiter and you’ve earned a few thousand dollars tips and you’ve got an old $20 bills and pay your taxes with it, the government will give you a receipt, say thank you very much, and they’ll send it off to the shredder and somebody will shred the money.

You can buy bags of shredded money in Washington. Nobody else does that except the government. If you pay me with all the 20s, I don’t send it to the shredder, but the government does. It’s in a very different position. Now over at the Fed. What’s going on there? The government spends more money than gets used to pay taxes. That’s called the government deficit.

They might spend 8 trillion and only 4 trillion gets used to pay taxes. The other 4 trillion, where is it? Well, it’s in the economy and it’s being held at the Fed for people in the economy in three forms, cash reserves and securities. The Fed can change the mix of all those, but they don’t change the total. Total is the difference between the dollars the government spent and how many were used to pay taxes. Okay.

And all the dollars that the government has spent that haven’t been used to pay taxes sit in that little warehouse called the Fed. And it’s not wrong to call that the money supply in the economy, the net money supply in the economy. That’s the money supply that supports all the business activity in the economy, all the cash in your pocket, all the reserves for insurance companies and savings and pension funds.

That’s where all the net financial assets in the economy are as savings. And that’s a little model. That’s exactly the same as what I showed you with the British. The British tax the economy. Goods and services flowed to the plantation. People went there to work. They were paid. They then paid taxes. If the script was old and dirty, they’d throw it away. Otherwise they might use it again. It doesn’t matter.

They have a big box of those things that don’t cost them anything. And the rest, they didn’t have a Federal Reserve. They just had pockets to save their money or maybe under the mattress or something like that. That’s where all the savings. So it’s the exact same thing. Now, I’m going to answer some of your questions immediately. This is called real personal consumption expenditures.

This is consumer spending personal. And it’s how much money people spend. It goes back to 2018. You can see it growing over time at a pretty constant rate and then Covid hit, and it dropped dramatically. And then the government gave us stimulus checks added onto our unemployment compensation. And personal income went way up with more personal income than ever.

Okay, yet look what happened to spending. It only came back slowly. It’s only gotten back to about where it was. So when people say, did all this $5 trillion of deficit spending that was given to people caused overspending? Not really. We’re not even spending what we would have spent before if this Covid thing hadn’t happened. What it did do was it made it more difficult on what’s called the supply side, things offered for sale.

People weren’t working, ships weren’t sailing. And so there weren’t as many things offered for sale. And costs went up. We had tariffs. There were the Trump tariffs, which was the worst thing I could imagine. And then President Biden doubled down on those, which was again bad. And it’s government policy to make prices higher.

So there are a lot of things that made prices higher. But it wasn’t some dramatic increase in spending with things that were happening on what’s called the supply side, the costs of things that were offered for sale. And I think we are ready to take questions.

[00:21:48.730] – Audience member #1

Thanks so much for your presentation, Warren. I’m running for State Senate as an Independent in Massachusetts on the North Shore. And I’m going to use language from Stephanie Kelton’s book, The Deficit Myth, which you haven’t directly referenced here, but hopefully it translates fairly readily. My question is, how can state officials and candidates be advocates for or build policy around MMT as representatives of what’s called a currency user, not a currency issuer in Stephanie Kelton’s book.

[00:22:18.150] – Mosler

Okay, so that’s critical. The understanding that the States got together and gave all this authority to the federal government to be used for public purpose. And now the government got it backwards. They got the sequence backwards, and they’ve got the wrong concerns right. And they’re not acting for public purpose. And, let’s give them the benefit of doubt and say they’d like to act in public purpose.

They think they are, but they have other fears and concerns that you know and I know now that are misconstrued. We’d like to get them straightened up. So it’s up to the States to form alliances with other States and get together in Congress with representatives, have the state governments work with your congressional representatives, get them squared away.

People like Elizabeth Warren should be able to understand this. She seems pretty smart, went to college and all that. And you’ve got to get them on board. So you have to do everything possible to get your federal representatives on board to do their job and make sure that they’re not over taxing you for the amount of spending that they want to do.

So if they want to do $5 trillion in spending, they automatically think that means 5 trillion in taxes. Well, it doesn’t. To the extent that there’s net savings desires in the economy, that might mean only 4 trillion taxes or 3 trillion. So if they want to tax 5 trillion, fine. But then they’re going to have to spend six or 7 trillion. There’s got to be a difference so that the economy has the ability to net save.

So they have to understand that you don’t just match that up, and that’s how you do it. And so it’s not that hard to understand. You’ve read The Deficit Myth, they can understand it. And so it’s incumbent on you to get your representatives and get with other state representatives to get their representatives on board to understand this.

And when Massachusetts was an independent state before 1776, sure, you had your own scrip and you could do this. In fact, you did do it. I think you had a $5 million issue of your own scrip back then and understood this, and that’s exactly what you did. But you ceded that authority to Congress. We’ve made our bed. Now we have to sleep in it.

[00:24:28.870] – Audience member #2

Thank you so much for having us. I appreciate the time. So I previously received a response from you detailing some of the conflicts that the GPUS platform and MMT have, and you welcomed me to share those responses. So I will be sure to do so promptly. What I’d like to expand on is maybe with a brief overview that you’ve had with the GPUS platform in your mind, what were some of the most important factors that Greens need to be considering if we want to reframe our platform with MMT in mind?

[00:25:03.130] – Mosler

Okay. So I’ve also done a brief piece where I rewrote the preamble and the values in line. And so what I tried to do was keep the real values there, keep the real emphasis of the preamble there, but eliminate the counterproductive aspects of monetary operations that somehow got their way into the originals. And without those things in there, I think it’s much more powerful, more focused, and more to what you want to get done in real terms.

Number one, you want to save the planet. Number one, you want to see certain human rights enforced. And so I attempted to do that. And so I urge you to look at both of those pages I did. And if you have to have something specific, I don’t have it in front of me right now. I can address it. I know you start off with balancing the budget because it was leaving debt to our grandchildren?

[00:25:52.320] – Audience member #2

Correct. That’s in our platform.

[00:25:54.070] – Mosler

Yeah. So once you understand the sequence that the government spends, first, all the public debt is that the dollars the government has spent that are still out there and they haven’t been used to pay taxes. And they’re just dollars that can be used to pay taxes or tax credits. There’s nothing to be paid off. What we call the public debt are those dollars that are in Treasury Securities, which are savings accounts at the Federal Reserve Bank functionally just time deposits at the Fed.

They give them a fancy name called Treasury Securities. And when they come due, those dollars are shifted from those accounts at the Federal Reserve to let’s call them savings accounts to checking accounts at the Federal Reserve. And then your money when it comes due, it’s gone from your savings account at the Fed to your checking account.

They say, okay, what do you want to do now? So all paying it back means is shifting it from one account at the Federal Reserve to another. It’s like if you have a savings account at a commercial Bank, let’s say you have a one year savings account and the commercial bank owes you that money. So it’s their debt. So bank of America, JP Morgan might have $2 trillion of debt, money that people have in savings accounts.

Okay, when it comes due what do they have to do? The money goes from your savings account to your checking account, and then the same thing is happening at the Federal Reserve. So that’s how they pay off their debt. Now if somebody said like, we want all the banks to pay off their debt, that would mean somehow they would charge everybody a big fat fee and everybody’s money would be gone because that’s the money supply.

The money you have in the bank accounts is the money supply in the economy. A growing economy needs a growing money supply. Why would you want a federal money supply to go to zero? It happens on the 15th of every month when Treasury securities mature. The Fed does what they call debiting securities accounts.

They change the numbers down, they credit the Reserve accounts, they change the numbers up. They ship the money from savings to checking. There are no taxpayers in the room, and there are no grandchildren in sight. It’s got nothing to do with that. And so unfortunately, the word debt carries these other connotations, and they’ve been jumped on by politicians for a long time.

But if you notice, in the last two years, we’re hearing a lot less of that. And it’s because most of them now have read Stephanie’s book. Most of them have somehow figured out basic monetary operations and that this is not the issue they thought it would be, though some of them are still saying this thing about leaving debt to our grandchildren, it’s gotten a whole lot quieter, and hopefully that will go away in the next year or two.

So everybody knows this. It’s gone away. If you’re left out there with this one of your platform things, you just lose your credibility. It just looks foolish. And like the trains left without you, and it doesn’t serve the purpose of saving the planet and it doesn’t serve the purpose of social equity. So given those two purposes, you’ve got every reason in the world to drop that.

And get it so it’s in line with how it actually works. And by the way, look, I’ve visited the Fed for many years, and visited the Bank of England and all the staff people, the senior staff, their financial professionals who actually do the work. They agree with me 100%. There’s nothing even to discuss, Vince Reinhardt, who is head of monetary affairs at the Fed under Greenspan, who was his right hand man, and under Chairman Bernanke, who was his right hand man. He helped me write some of my speeches. There’s nothing in here that’s not factual information about how monetary operations work.

[00:29:15.380] – Audience member #2

Thank you.

[00:29:53.070] – Intermission

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[00:30:20.790] – Audience member #3

Very interesting list of banking proposals that you wrote some years ago. And your proposal for the Treasury was really interesting, but I’m afraid I didn’t quite understand it. It says I would cease all issuances of Treasury securities. Instead, any deficit would accumulate as excess reserve balances at the Fed. My guess was that you were saying the money would be directly transferred to the Treasury. But if you could please elaborate on that very interesting proposal. Thanks.

[00:30:51.790] – Mosler

Here’s how spending works. Congress authorizes spending. Trillion dollars to send out checks to people, $1,400 checks or whatever it was. The Treasury then instructs the Fed to make the payments, and they then credit the accounts of all the appropriate member banks, which might be Bank America, JP Morgan, or Wells Fargo, that correspond to the people who are getting the checks. Right.

And those accounts get a credit balance in them. So they Mark them up by a trillion dollars, and then they Mark down the Treasury’s balance by a trillion dollars. Now, if the Treasury balance was zero, that would make them minus the trillion. And the current policy is for the Fed not to do that. It’s not a law. It’s just a policy. It actually doesn’t make any difference whether they do it or not, but they don’t do it.

So there’s a policy that says you can’t do that. So what the Treasury does is they go out and sell Treasury securities to the economy. That trillion dollars that the Fed just credited to all the member banks is then used to buy a trillion dollars of Treasury securities from the Treasury. The Fed debits the bank’s trillion dollars from their reserve accounts.

The money it just debited, it now shifts it into their savings accounts called Treasury securities. And then they credit the Treasury for the trillion dollars, now it gets back to zero. And they have certain days of the month they do that, and there’s some smoothing out things that go on. But that’s fundamentally what’s happening underneath it all. So what I’m saying is the Fed is a bank it has got a spreadsheet.

It’s got all these member banks have lines on the spreadsheet, and it just credits their line by for as much they’re supposed to get, this total of a trillion dollars. Those are called reserves. That’s all we have to do for spending. We don’t have to then have those reserves get used to buy Treasury securities and then ship those reserves from reserve accounts to securities accounts. There’s no reason to do that.

Now there was a very good reason to do that when we were on the gold standard. When you’re on the gold standard, those reserves can be cashed in for gold and the Fed can run out of gold, but today you can’t do that anymore. The only thing you get for a $10 bill is two fives. You can’t get the gold from the government. You have to go on the market.

And so it doesn’t matter to the Fed or the Treasury or anybody else whether those dollars are in reserve accounts or in securities accounts. So it’s an anachronism from the gold standard. So I’m saying there’s no longer any reason to do that. So all we have to do is Treasury instructs the Fed, lawfully, Congress says spend a trillion. They tell the Fed to go ahead and credit the accounts for a trillion.

That makes sure that Treasury has authority from Congress. They then add the trillion to different member bank accounts as appropriate. Let the Treasury go minus the trillion on their books for accounting purposes. And that’s it. They’re done. And so what we’re left with is the economy holding a trillion dollars in reserve accounts instead of previously, they would have been holding a trillion dollars in securities accounts.

Nothing else changes. Nothing changes for the economy. For inflation, anything. It’s just the dollars are shifted. More recently, what I’ve said is to do this, you need a major change in policy where you have to allow the Treasury to go negative, and you’ll get these debates in Congress about whether that’s printing money and whether it’s causing inflation.

We can get to that point without going through any of that process, even though it doesn’t matter. They think it matters. We can avoid all that by just limiting the Treasury to sale of three month Treasury bills and forget all the long term securities, because three months Treasuries are functionally the same as reserves overnight accounts in the money markets and everywhere else.

Nobody trades them, nobody’s making any money on them. There’s no volatility. So if we just say to the Treasury, look, you can’t sell anything longer than a three month bill, then we’ll be, for all practical purposes in the same place as if we tell them we just run excess reserves and allow the Treasury to go negative.

So I’ve more recently in the last 15 or 20 years in proposing we have a permanent zero rate policy and limit the Treasury to three month bills. To do that, the Treasury has an Office of Debt Management. They decide whether they want three month bills or six months or one year or ten years or 30 years. They’re always changing it. So Treasury can just say, all right, we eliminate the three month bills.

[00:35:09.240] – Mosler

It doesn’t have to go to Congress or it doesn’t have to be any debate, nothing. And the Feds already got a zero rate policy. They can just vote at their meetings to leave it there permanently, and that’s it. Then we’re done. So right now, we can go to a permanent zero rate policy that Treasury will never pay any interest again, the Treasury can go to only three month bills.

There’ll never be any Treasury bonds or securities for all practical purposes to speak of. And we can get to where we want to be overnight without any change in institutional structure. Does that help?

[00:35:39.370] – Audience member #3

It sure does. That was great. Thanks so much.

[00:35:40.960] – Mosler

Sure.

[00:35:42.990] – Audience member #4

Question had to do with China and other countries that hold a lot of US dollars. And you’ve commented time and again that basically they have the dollars, but that’s it. But doesn’t that present a potential inflation problems, especially when they use those dollars to go buying up property?

[00:36:03.810] – Mosler

Yeah. So look, Apple Computer has $250,000,000,000 in state of California, Teachers Retirement Fund has a trillion dollars or something like that. Then insurance companies have billions and trillions of dollars. So the public debt is 28 trillion. That means there’s $28 trillion out there. The government has spent haven’t been used to pay taxes. There’s somebody’s savings out there.

And if everybody spent all their savings at once, yes, they’re going to drive up prices until they run out or until it stops, let’s put it that way. So that’s always the case. So China is no different than anyone else with savings, where that’s certainly a possibility. As kids, we used to say, what if everybody in China jumped up in the air at the same time? Would that throw the Earth off its axis?

Well, it might, I don’t know. These are always things that can happen. Paradox of threats. What if nobody spent anything for the next month? What would happen to the US economy? The GDP would go to zero. Well, is that a risk? Yeah. Okay, so China having these dollars, it’s one of those risks that they go out and try and buy new cars or something with it. I guess.

You got to remember, the reason they’re collecting these dollars is to keep their currency and their wages competitive, which they are. The labor costs are a lot lower over there, so they can net export to us. And so if they decide not to have them anymore. That would be a decision not to be able to net export to the United States anymore.

And while that would be for the benefit of their macroeconomy, it’s totally against their ideology right now. Their politics and their exporters are the ones in control who get the profits from this at the expense of the macro economy. So it’s pretty far fetched that this would happen. And if it did, you just wind up redenominating. It means for every car they sold us for $30,000.

If they want to go to the US and spend the money and buy cars, they got to pay $100,000. So in real terms, who’s winning? They sell us cars for 30 and buy them back for 100. They sell us 25 million cars and get back five or something. So what that’s a victory for us, sort of. In real terms, it doesn’t hurt our real wealth. It’s disruptive, but it doesn’t hurt our real wealth.

[00:38:15.870] – Audience member #4

Thank you.

[00:38:18.570] – Mosler

But there’s another interesting thing, and I’m going to bring this up because it’s a Green Party and nobody talks about it. But one week after Covid, we had a massive drop in demand. Spending dropped dramatically everything else. And all we did was give up non essentials. At the same time, emissions dropped 50% approximately, globally. And you could see China from space for the first time.

This is a huge victory for being green like nobody could have possibly imagined. How do you cut emissions 50% in one day? But we did, and we did it by cutting out non essentials. Now, how essential is it to cut out emissions? If that’s somewhere up on a high priority list? Maybe these other non essentials were less essential than cutting emissions. Right.

There’s no dialogue, no discussion. So for the next year, we work diligently to bring back these non essentials and restore our emissions to prior levels and even exceed them. And now we’re looking at ways to cut the growth of emissions so that ten or 20 or 30 years from now we can have levels far higher than what we had a year or so ago through direct conservation.

Now, I’m not saying these nonessentials none of them should have been brought back. Or maybe I am. Personally, I’m saying none of them should have been brought back. If they’re not essentials, nobody was dying. We have enough food to eat. Why are we bringing these back if we’re risking life on the planet? But we did. Maybe there was a response from the Green Party, it sure didn’t get to me.

So maybe the public relations didn’t get through. But anyway, I have to get this out there. I don’t know if that makes me too extreme for you guys or what, but we can do all this through conservation. And I’ve gotten off your question a little bit, but I think it makes a point there that we’re worried about these price increases we can bring back the supply of all these things. We can unclog the ports.

We can restore China at full exports in Vietnam and everywhere else, and they can go out and burn more coal and build all these things to send to us. We can restore our services. People can drive to go out to eat every day and burn more gasoline just like we did before and bring the prices down. I mean, what kind of a victory is that? It’s not my idea of victory.

And if you look at this inflation we’re talking about, we’ve had a one time adjustment of about 6% in the price level from depressed prices of the year before with forecasts that’s all going to go back down. That is a one time event. The long term forecast from the Fed, from the Congressional Budget Office and from the free market, so to speak, Treasury securities is where somewhere is still in the 2% long term range, maybe two and a half.

There isn’t an inflation situation right now. There’s been a one time adjustment to some supply shocks not caused by overspending, caused by supply side issues that are working their way out. How important is it to get the supply side back up to restore all the harmful emissions that go with it? I’d like to see the Green Party take a position different from the other two parties, at least for me.

That’s what I’m looking for. If you don’t. If we don’t, then we’re going to wind up with the same nothing percent we’ve always had. Because there isn’t any difference. Am I in trouble now?

[00:41:35.430] – Massachi

No, you’re not in trouble at all. This is kind of why we’re doing this, because we want the Greens to win.

[00:41:44.050] – Mosler

Let’s look at the real wealth of the country. The real wealth is all the real stuff. We produce domestic goods and services. And so the higher the level of domestic employment, the more real stuff we make. That’s the stuff we can eat and drink and drive around and play games on our computer. That’s the real wealth that we make.

All the goods and services, that’s the haircuts we get, that’s the people cooking us dinner, all this stuff, right? That’s our pile of stuff. Now you want your pile of stuff to be as large as possible, apart from the fact that it’s producing emissions for the moment, because that’s your real wealth. So everything we import as to our real wealth, that makes the pile bigger.

Everything we export makes our real wealth smaller. The level of the currency doesn’t change our real wealth. If the dollar goes down, we still have everything we produce domestically, plus what we import, minus what we export. So what it does affect is distribution within the economy. So there’s winners and there are losers, but the total stuff is still there.

And a real wealth is highest when we’re at full employment. So the reason to get the full employment from an economic point of view. And from a pure self interest point of view, economic benefit is to be at full employment because then we’re getting the most stuff. We have the biggest pile of stuff we could produce domestically. It’s higher. Now, all I hear from so many proponents is it’s immoral to have unemployment.

It’s a human right to a job. It’s all this. What about the idea that we’re losing enormous amounts of real wealth to unemployment? The losses from unemployment by not having everybody employed in any given year right now are higher than the real losses, not human life, but the real goods and services from the destruction of every war in the history of the world combined.

We’re giving up that much real wealth, that much standard of living by being at less than full employment. Now, who’s against that? When you understand that, now it’s okay. Well, what do we have to do to get there? The biggest gains we can make is to get to full appointment. So now when we talk about these proposals to get full employment, you’ve got everybody listening, not just the people who think it’s a human right.

And again, I back that stuff 100%. But when you limit it with that or when you lead with that, you’re leaving out a lot of people that would otherwise be on your side. We’re not against that. But that’s not enough for them to come into the tent because they’re worried about all these other things that don’t exist, like it’s going to cause inflation or something like that.

Those people earning money is going to make me poor because there’s going to be less to go around. It’s not true. It makes everybody better off. Okay. Every Tea Party member is better off when there’s full employment. And so all the moral hazard of full employment isn’t there if you do it the right way that they imagine. Instead everybody is better off. So all my proposals and explanations lead with these universal things that bring everybody in to these, what I call purely progressive programs.

And I’ve given the same talk to Jamie Galbraith’s left wing communists in Paris one week, and they are all in favor of it. And then Dallas Tea Party right wing nutcases next week and they’re all in favor of it. I know it has universal appeal and I’m not going to get everybody’s agreement on gun control or anything like that. But on these economic things, I know I can.

[00:44:59.590] – Virginia Cotts

So, Warren, I hear you speak about how the government sets prices, but how does the price setting of monopolies fit in there? Because we know that there are certain industries, like energy that just set prices abusively. So how does that affect all of this?

[00:45:22.110] – Mosler

Okay, so I agree with you, and so does Teddy Roosevelt, right, Republican, mainstream Republican who was a big trust buster who broke up Standard Oil and broke up all these people for exactly that reason. And I agree with that 100%, although there’s an argument on the other side. In general, I agree with Teddy and what he did 100%. And it sounds like you do too.

And so what you have from an economic point of view is when you don’t have sufficient competition to keep margins in line and to keep prices in line and to create value in line, then it serves public purpose for the government to regulate that to one degree or another, to make sure public purpose is being served. Absolutely. And they’re not doing it.

And you have the Republicans got those departments in Washington that are the regulatory agencies that are supposed to be looking into this and deciding who to prosecute for antitrust and who not to. Your Congressmen should be looking at the same thing. Which industries have sufficient competition where we don’t need to worry about them?

You don’t have to regulate every gas station. You got two gas stations across the street from each other and they compete. That’s not the problem. The problem is you have one oil company or if you’ve got the Saudis. Now when we have a foreign monopoly setting price now we have a problem with diplomacy.

[00:46:44.350] – Audience member #5

So I was wondering people often, particularly politicians and the news and whatnot they equate the economy with GDP. And I’ve heard a variety of criticisms of this, first from Mariana Mazzucato, and her criticism is basically that GDP includes the FIRE sector since the 70s or 80s, and they shouldn’t be part of GDP.

And from Michael Hudson, he has an even stronger critique. And I’ve heard some criticisms from you on using GDP statistics. In part from what I’ve heard from you would be tax compliance costs. Right. These people, they’re basically doing useless work and it gets added to GDP.

And so I was wondering if you might be able to elaborate on this to what degree you think GDP statistics are useful or whether there’s another statistic that’s useful to look at. This is just something that’s been bothering me a lot, particularly since reading Michael Hudson’s criticism. Thank you.

[00:47:43.130] – Mosler

They have their place. They’re useful for comparisons. But when you look at the detail, probably two thirds of the economy is people digging holes and people filling them in or worse, the financial sector is almost entirely parasitic. At least 95%. Medicare for all would save $500 billion a year, 5 million jobs would be lost and redeployed to something useful.

Rather than doing advertising and marketing for insurance companies, it doesn’t have to be done. And going to a permanent zero rate policy gets rid of all those bond traders. I have proposals for the stock market that gets cut that casino down from by 90% and still facilitates real investment the way we want it to. So this is like critical, critical for the Green New Deal and saving the planet.

Because what we need is people to do things. It’s not about creating jobs. There are more green jobs that need to be done and there are people to do them. And so we’ve got to get them somewhere. And we could probably redeploy two thirds of our jobs without losing anything useful in the areas like I just talked about. And that’s in real terms has to be done.

And then we can show you how to do it in monetary terms, because all those sectors that they talk about are supported by some government policy, some legislation that causes all this stuff to happen. One of the deadly innocent frauds is that we need savings to have money for investment. So we have all these savings incentives. You put money in your pension fund, you don’t have to pay taxes on it until you take it out 50 years.

And so that creates these huge pools of money that we have all these money managers operating. Then Wall Street hires the best to feed off the rest, which is all our pension funds. We get these enormous disparities of income and things that don’t exist in nature but exist under this institutional structure we’ve set up. Kind of like a lottery, right.

We’re looking at public purpose, like how to do the Green New Deal. The GDP numbers aren’t particularly helpful, but if we’re looking for what’s the potential tax base? If we’re trying to tax income, well, then it’s helpful, but I don’t really need that information anyway.

[00:49:51.490] – Audience member #5

If I do a small follow up politically, I sort of imagine I agree with the point about the GDP. And if you want to save the environment, conservation, you mean. That kind of fits quite in with the GDP argument. But I can imagine politically, once this stuff becomes a little bit more mainstream, I think the logic on this is right.

There’s going to be a political fight with people to say, well, yeah, we could do these policies, but look at what will happen to GDP if we do this. GDP will cut in half, and that’s terrible for the economy. And it’s obviously kind of nonsense. But politically, that just sounds like it’s going to be a big slog.

[00:50:25.510] – Mosler

GDP is income, right? Sales and income, same thing. Yeah. Someone’s purchase is someone’s income. So when we do a Green New Deal, we’re not going to reduce total income. So we’re not going to reduce GDP. The composition is going to change dramatically. That’s not going to get reduced. We’re going to have more people working, similar pay, say in real terms just for a number. And so GDP is going to go up.

[00:50:48.790] – Audience member #5

So with the Green New Deal, where it’s investment based. But what you’re saying about conservation say you just tell 30% of people what you do is a waste of time. Just stay home and we’ll get rid of the taxes so people won’t need the tax compliance. I think on the official statistics that would drop GDP, even though there’s no real change in wealth.

[00:51:06.240] – Mosler

Well, if we do that to 30 million people, we’re going to need 40 million to do what we need to do for the Green New Deal to do as possible. We can always use more people in education, medical research, University professors. How many research assistants would they like? People can go watch performances. How much more that can you do?

How many people can you tie up in that sector? It’s like unlimited. How much software can you write? That’s all paid work that will show up as GDP if it’s done properly. So it’s just a measurement. There’s no reason to think that we’d have fewer people working at the end of the day, but every reason to think that the participation rate will go up by ten full points.

We’ll have that many more people working and at least maybe 15 Because it’s all useful stuff and because they’ll feel like they’re part of the team that’s doing something important and not just somebody who’s stuck with some job they don’t like, but a useful number of what’s going on. Not everybody feels that way, of course, but overall it will.

[00:52:05.650] – Cristina

What’s stopping Congress from closing all private banks or perhaps banks that have basically been proven to manipulate mortgage loans. Leading to the mortgage crisis, the financial crisis of 2008, as well as currently involving themselves in discriminatory practices when it comes to refinancing loans.

[00:52:34.220] – Mosler

Yeah, okay. Nothing is stopping Congress from doing that. At one point they had Bill Black as a regulator and he put a thousand people in jail for doing that. So it’s entirely up to them whether or not they want to prosecute or not. And these are our elected officials making that decision. There’s absolutely nothing stopping them. It’s entirely in their control.

Under the Federal Reserve Act, the regulatory categories are. The acronym is Camels, C-A-M-E-L-S. Capital Assets and the M is Management. They can fire the management anytime they want, penalize and prosecute them. They have full authority to do that.

[00:53:10.210] – Cristina

Thank you. That brings us directly to the argument that basically banks are creatures of Congress.

[00:53:16.810] – Mosler

Yes. There’s no question about it on a legal basis. That’s how it was set up. That’s why they’re there. And chairman Bernanke said I take my marching orders from Congress, when people ask.

[00:53:28.750] – Massachi

All of Warren’s work is free So you can access it and read it and contact us and ask questions. Thank you, everybody.

[00:53:39.130] – Mosler

Okay, thanks. Bye.

[00:53:40.590] – Massachi

Have a good night.

[00:54:05.740] – End Credits

Macro N Cheese is produced by Andy Kennedy, descriptive writing by Virginia Cotts, and promotional artwork by Andy Kennedy. Macro N Cheese is publicly funded by our Real Progressives Patreon account. If you would like to donate to Macro N Cheese, please visit patreon.com/realprogressives.