Episode 142 – Things That Should Not Be with Scott Fullwiler

There are three different separate things we need to remember when it comes to Social Security and Medicare, and unfortunately, all three of them get blended together in our public discourse … And those three narratives are the financial ability to pay for Social Security, the legal authority to pay for Social Security, and the productive capacity to have a future in which both retirees and workers can sustain the standard of living that’s improving.

Macro N Cheese – Episode 142
Things That Should Not Be with Scott Fullwiler
October 16, 2021

[00:00:04.980] – Scott Fullwiler [intro/music]

It’s wrong to say MMT just wants to print money. No, MMT explains why printing money isn’t actually a thing, but we can always spend and we can control the interest rate on the deficits that we run. That’s what MMT says. The Fed is an agency of the government. And if you don’t believe that, go read the FAST Act from about six or seven years ago, where the treasury basically legally confiscated current and future Fed profits.

[00:00:40.030] – Steve Grumbine [intro/music]

That slams that one shut.

[00:00:40.660] – Fullwiler [intro/music]

Yeah, basically.

[00:01:42.060] – 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.

[00:01:42.700] – Grumbine

Alright, everybody, it is Steve with Macro N Cheese. Today’s guest is friend, metal head and overall smart guy Scott Fullwiler, and he is a research scholar at the Global Institute for Sustainable Prosperity [GISP] and an associate professor of economics at the University of Missouri, Kansas City. It has been a while, Scott. So tell me what else are you up to these days.

[00:02:06.920] – Fullwiler

Hey, Steve. Yeah, I’ve been up to a lot, actually working kind of a few jobs at the same time. So as you mentioned, I teach the macro PhD courses here at UMKC, which is, as you know, one of the two historically academic birthplaces of MMT. And I think it might be the only place you can get a PhD with MMT professors.

And I’ve got a lot of student projects going doing a lot of work on developing countries and such a lot of that in partnership with GISP. And then for the last year and a half, one of the main things I’ve been doing is working with Asian Development Bank. I helped design their database that they put together a year and a half ago to monitor what countries were doing in response to COVID in terms of macro policy.

And then we’ve churned out quite a bit of research, both on that database and various things, including some really interesting stuff, in my opinion, on central bank operations and how central banks interacting with governments did the thing that people like to call monetization, particularly in our case. We looked at this in the Philippines and Singapore and China and a bit in Indonesia.

We actually presented some of that to the Central Bank of the Philippines. Well, we did a number of presentations all over Asia, actually with Asian Development Bank and sometimes with governments and such. But we did one at the Philippine Central Bank, and we had their second ranking person on their monetary policy committee as our discussant. it went really well. It was a lot of fun. So anyway.

[00:03:57.400] – Grumbine

I feel guilty asking you to come on here with all that cool stuff you’re doing because we’re going to talk about some boring stuff today.

[00:04:04.010] – Fullwiler

No, it’s all good.

[00:04:05.320] – Grumbine

I think I remember seeing writings from 2010 and up. Stuff that you’ve addressed so many times. It almost has to feel like Groundhog day every time you get asked, right.

[00:04:16.620] – Fullwiler

Oh, well, actually, it’s great when I get asked because I don’t get asked that often. And it’s one of the things about the Internet age is if you’re not the most recent person to write something nobody knows you wrote it. So…

[00:04:29.460] – Grumbine

Well, your writings in particular really impacted me, especially on banking. And you’ve been a core part of my understanding of MMT, because I grew up on New Economic Perspectives. And so a lot of the stuff, the Levy Papers, CFEPs, you’ve written prolifically. I don’t know how anybody can forget you.

[00:04:51.040] – Fullwiler

Oh, thank you.

[00:04:52.770] – Grumbine

So let’s jump into the deep end. I’m going to call this podcast “Things That Should Not Be,” in kind of a hat tip to Metallica, our love for metal, but also the fact that these things are things that we should be past. They should not be. I want to start off with the myths of Social Security in terms of it’s going to go broke. We can’t afford it.

We can’t give people a standard, decent living wage. We haven’t given people a COLA. The message is constantly let’s lift the cap on Social Security FICA payments. And I guess let’s just start out with what is Social Security? How did it come about? Why was it structured the way it is that kind of thing to get the historical underpinnings, and then we’ll jump into why things are the way they are.

[00:05:43.220] – Fullwiler

Well, okay. I haven’t written on some of that stuff for a long time. Definitely. I try and keep up with it, and I understand the operations quite well and such, and it doesn’t change a lot from year to year, except CBO and the trust funds kind of come out every year with their updated estimates of the so called solvency of those two programs, which is tragically hilarious, I guess I would say.

I’m going to do kind of the Cliff Notes version of the history, I think, which is basically in the 1930’s, we set up a system whereby individuals would pay a tax out of their earnings and they pay a certain percentage. It’s currently up to about seven and a half percent, something like that, out of your 1st $125,000 of earnings a few years ago.

So it’s probably a bit higher and your employer pays a similar amount. Some of that goes to Medicare, but most of that for Social Security. And then from that revenue is the legal authority to pay Social Security benefits. Somewhere along the line, actually, it happened multiple times. Nobody really freaked out about it until the early eighties.

The program revenues were less than the programs outlays. And so periodically they would raise the tax rate to cover that. The other thing they started doing is sometimes the revenues coming in would be in excess of the outlay. And so they would save those in a trust fund and I put that in quotations, because that’s not really what happens when we’re talking about the currency issuer, that they’re putting funds into a trust fund to draw down later, at least in the financial sense.

But then in the early eighties, there were estimates that when the baby boomers started to retire, that the revenues would be woefully inadequate. So they had this Greenspan Commission that was put together to figure out what to do. And I believe the tax rate was increased and the excess was put into, again, the so-called trust fund.

These are the trust funds we are aware of today. They have the trustees of the Social Security, Medicare trust funds that then keep track of how large the trust funds are relative to what the outlays are going to be. And so, there comes a day where the revenues are permanently less than the outlays. And so then they draw down the trust funds and then have a number of assumptions with the trust fund, there’s some legal interest rate that’s paid on the funds and the trust funds.

So then it’s kind of like if you were to have a portfolio of investments and you were drawing down more than what you were earning each year, right? That eventually you would use it all up or in the real world, an individual might die first, of course. But society we’re not thinking of it that way because society hopefully doesn’t die. But eventually it all gets drawn down.

That gets adjusted because the revenues themselves can start to rise at some point in the future, because if you look at the distribution of the age of the population, the baby boomers are kind of a one time blip going through. And so once they’re through, the distribution changes a bit again.

So it’s a matter of do the trust funds survive that to some degree. So, anyway, that’s sort of the way that the average person, the politicians, etc. Look at it. Of course, it’s not the way we really look at that within MMT, though.

[00:09:21.320] – Grumbine

We hear we can eliminate FICA altogether, that this funding mechanism is largely not real.

[00:09:30.690] – Fullwiler

Right.

[00:09:32.190] – Grumbine

Help me understand why we have FICA and why we don’t really need FICA and what we can do about it.

[00:09:38.720] – Fullwiler

Okay. So originally, the idea behind FICA was that if people feel like they’re paying into it, that Social Security will be politically protected as a result, because people feel like it’s their retirement that they paid into, which is definitely true. That narrative is a strong one in the public.

But of course, there are programs that we don’t do that for, that are also very popular and hard to cut, like national defense, right? It’s not as if the reason why we continue to get national defense spending is because somebody feels like they’ve paid into it and they owed it or something like that. That’s just spending that’s allocated every single year.

There’s no trust fund or something like that. So the funding through FICA was politically an attempt to have people feel they had buy in and they’d be much harder to cut. And one thing I like to say is if you look at the data, the historical statistics on poverty rates among the elderly, they decline dramatically once you get Social Security going.

It’s well known that Social Security keeps a substantial percentage of elderly individuals out of poverty. As I like to say, it’s probably the best example we have of throwing money at a problem and solving the problem. So anyway, do we need it? What I like to say is there are three different separate things we need to remember when it comes to Social Security and Medicare, and unfortunately, all three of them get blended together in our public discourse and various narratives, you hear they are not kept separate.

And those three narratives are the financial ability to pay for Social Security, the legal authority to pay for Social Security, and the productive capacity to have a future in which both retirees and workers can sustain the standard of living that’s improving. Like I said, all three of those get mixed together. So you see the financial ability to pay being confused for the legal authority to pay or productive capacity as such.

So anyway, the financial ability to pay, of course, is unquestioned, right? If you’re the currency issuer, it’s unquestioned. In the quote from Alan Greenspan that Warren Moser and Stephanie Kelton like to post and a number of people now, right? Where he was asked a question by Paul Ryan about individual accounts for Social Security during the George W. Bush administration and was obviously expecting his Ayn Rand fellow traveler to validate what he was suggesting there with individual accounts.

And of course, he went the other direction, much to Paul Ryan’s dismay and said that there’s nothing to keep the government from creating as much money as it wants and making sure that Social Security is solvent, etc, etc. And that it can always pay its bills. So, financial ability to pay is never questioned. And then, of course, there’s a second thing that Greenspan said, which is about the productive capacity, which is the question.

You can create the money but do you have the ability to create real goods and services for retirees and the people that are not retired to be able to continue to improve their standards of living because, of course, as we know, if you just spend to give retirees a certain standard of living and you don’t have the productive capacity for everyone to have that you’re going to get inflation unless you reduce somebody’s standard of living through taxation or some other means.

At least in a general sense, there’s, of course, a number of different ways that can go. And so what people don’t understand is the revenues from FICA and the trust fund have nothing to do with the other two. They have nothing to do with the financial ability to pay. They have nothing to do with the productive capacity.

They’re all about legal authority to pay Social Security and to pay for Medicare. So the revenues that come in and the trust funds are the places where those programs have legal authority to draw their spending from, except for the Medicare Part D, right. Which has legal authority to dip into general revenues or the general budget, which changes everything, of course.

[00:14:21.620] – Grumbine

Yeah, indeed.

[00:14:22.800] – Fullwiler

Nobody talks about whether that one’s going to be insolvent. Of course, the trustees actually have tried to head that one off. And so a few years ago, they started to estimate what those outlays are going to be. And if it were to be maintaining a trust fund, would it be solvent? So they try to keep the fear going. So the revenues and the trust funds do not fund Social Security. They provide legal authority to pay for Social Security now and in the future.

[00:14:51.310] – Grumbine

What does that mean, legal authority? Just so everybody’s good.

[00:14:55.760] – Fullwiler

Basically Congress has said the revenues that come in and the trust funds are the two places that you can draw your spending from. Okay. So if the revenues that come in one year are $500 billion and the trust fund is $5 trillion and the spending on the program is supposed to be, I don’t know, $700 billion, right? So there’s a 200 billion dollar deficit in the revenues. And this is just FICA we’re talking about.

[00:15:24.800] – Grumbine

Sure, yep.

[00:15:25.460] – Fullwiler

Then they would get the other $200 billion and write down the trust fund by that amount. So it would go from $5 trillion to $4.8 trillion. So that is basically how they generate the legal authority. And so supposedly this means that if that trust fund didn’t have the $200 billion in it, that then we wouldn’t cover that full $200 billion, right?

And actually, let me point out here, just even on a legal authority thing, if we were to even assume that that was something that wasn’t changeable, which of course, it is, because, of course, every year it involves changing laws. And every year, the budget itself is a law that’s written, right?

So it’s not as if laws can’t be changed, but the narrative that we hear and that people take from the public discourse or a lot of people take from it is that Social Security isn’t going to be there in the sense that you won’t get anything, right? Even if you were to keep the same system of legal authority and not give Social Security, Medicare any more legal authority then they currently have, after whatever date it is that the trust funds are completely marked down, you would still have the revenues to cover, it depends on different estimates, but it’s somewhere between 65 to 80 percent of the promised spending, right?

So there’s going to be Social Security there. Even if they don’t change anything, you probably get somewhere around three fourths of what you were expecting to get, but it would still be there, even if they change nothing. But the thing is, I remember, it’s the early two thousands, and George W. Bush was President.

He went over to the Social Security Administration and he wanted to see the trust fund. And he said something along the lines of, well, I went and I saw the trust fund. There’s nothing there. It’s just a bunch of paper, just a bunch of IOUs on the paper. And people were talking about that like, holy cow, our retirement is in jeopardy.

And I remember giving a public presentation about that. And I said, I’m curious what he thought he was going to find, right. Do you think there’d be, like a big sock with a bunch of money in it? What was you think it was going to happen?

[00:17:36.290] – Grumbine

Fat stacks.

[00:17:36.930] – Fullwiler

Yeah. What do you think money is? This is the funny thing people think money is. I don’t know. You see a bunch of gold bullion there? I’m not sure what he, so that’s what you would find. Those are IOUs. That’s what bonds are, right.

The issue that he was raising is Social Security trust funds do not provide the financial ability to pay for Social Security. They don’t because they’re just legal authority to pay for Social Security. But by the same token, you can’t use the trust funds as an argument against the ability to pay because, of course, we have the financial ability to pay. Always.

The thing that I also like to say to illustrate how silly the trust funds are is when we get to the day, we may already be there. I can’t remember I haven’t kept up on this for the last few years. But where revenues from Social Security aren’t big enough to cover outlays and they have to draw down Social Security trust fund.

What do they do? Well, they go to Social Security Administration? Take some of those IOUs and goes to the rest of the government and cashes them in the Treasury, I guess, and cashes them in. Say, it’s the $200 billion, like we were saying. So then the question is, what does the treasury do? Right? Well, the treasury has two things they can do.

If the treasury has $200 billion sitting in its account, it can say there you can have those $200 billion in our account. You can send checks out from that or if the treasury doesn’t have it, the treasury will issue government bonds to do that. And then what I like to say is, well, what would they do if there was no trust fund and they had a 200 billion dollar shortfall?

Well, they go to the treasury and say, hey, we got to spend $200 billion and we have authorization to spend it, right? Suppose they had authorization to spend it. That was the other assumption there. The treasure would say, well, if they have $200 billion, say her, you can have those $200 billion and you can send your checks from that.

And if they didn’t, they’d issue government bonds to do that. My point being, it’s the exact same thing with or without the trust funds. Operationally they do the exact same thing. If there’s no trust fund they spend from the Treasury’s account or the treasury issues bonds, and then they spend from the Treasury’s account.

If there is a trust fund, they spend from the Treasury’s account or the Treasurer’s bond, and they spend from the Treasury’s account, there’s no reason to have a trust fund whatsoever does nothing other than legal authority.

[00:19:59.680] – Grumbine

This is like me standing on top of a toilet with some aluminum foil on my head.

[00:20:05.490] – Fullwiler

No idea where this is going.

[00:20:07.330] – Grumbine

A toothbrush in my ear and maybe a snow cone in my other hand, and saying, if I don’t do this, then we can’t pay Social Security payments. Is that fair? They’re like, equivalent, are they not?

[00:20:21.680] – Fullwiler

It’s really weird, but it’s fair.

[00:20:23.580] – Grumbine

I was going for weird because I want people to realize how absolutely preposterous it is.

[00:20:30.110] – Fullwiler

People should know. I’ve seen you do that, by the way.

[00:20:32.520] – Grumbine

That’s right, only on weekends. I try to reserve it for weekends. So ultimately, we’ve determined that trust funds are not real. They’re not anything that funds the actual programs. Ultimately, we still haven’t done anything to do with funding it. Everybody’s under the assumption that their hard earned FICA dollars are paying for Social Security, just like any other tax. It’s being deleted, basically. Functionally, it does nothing.

[00:21:01.640] – Fullwiler

Right. And this is where we get into some of the politics on the left, where MMT has a real difference, which is the left likes to say, well, we have to maintain the fiction that FICA pays for Social Security and Medicare because that’s what keeps the popularity for them. Right? And my response is, you know, choose your least favorite program, right? On the left it’s frequently national defense or something.

So, if we pretended that we funded national defense with a specific tax and a specific trust fund that was built up for years where that tax was higher than national defense spending, and then we were able to show that the revenues plus the trust fund for national defense was not going to be sufficient to cover national defense expenditures, do you think it’d be easier or harder, politically, to reduce national defense spending? It’d be a hell of a lot easier, it would seem to me.

[00:21:55.690] – Grumbine

Yeah, absolutely. Yes.

[00:21:56.920] – Fullwiler

And so the idea that FICA is what funds Social Security and the trust fund is what provides funds for Social Security makes it, I think, a lot easier to make cutting Social Security part of the national debate, because that’s the only reason it’s part of the national debate. I don’t think anybody’d be talking about cutting Social Security if they didn’t have the so called lack of funding for Social Security sitting there.

[00:22:21.940] – Grumbine

So what we have is a social construct that allows us all to feel like we’re paying in. We have a system in place that actually has been shown to be very popular and very effective at limiting poverty, especially in the elderly. And we have an ongoing debate, much like our next subject, which is going to be the debt ceiling.

[00:22:44.860] – Fullwiler

Okay.

[00:22:45.400] – Grumbine

But it’s like the annual rite of passage where we wax poetic about how bad this is going to go. FICA is an extremely regressive tax to begin with. It doesn’t have an actual funding aspect to it either.

[00:22:58.780] – Fullwiler

Yeah, absolutely.

[00:22:59.450] – Grumbine

FICA hurts the poor, does it not?

[00:23:02.140] – Fullwiler

Oh, absolutely. It’s always frustrating to me when we have these tax debates nationally, and we hear about how much taxes the one percent pays. They pay, I don’t know how much percent, etc, etc. But those debates are always within the context of federal income taxes, right? And it completely ignores FICA and a number of other taxes, like at the state and local levels, which a lot of those are also regressive.

Sales taxes, property taxes are typically not progressive. And so the federal income tax is like the main progressive tax we have in the entire tax code. And you’re kind of rigging the debate to only talk about on federal income tax if you want to talk about how much total tax burden the super rich pay or whatever.

So FICA is extremely regressive. And for I don’t know how many people I think the number used to be somewhere around 30 percent or so of individuals that pay more in FICA taxes than they pay in federal income taxes. And on top of that, of course, your employer’s paying basically the same amount that you’re paying, which you’re basically adding a seven and a half percent addon to your labor costs as well.

So it seems like if you wanted to design a tax that would limit demand for goods and services and reduce hiring, you couldn’t have designed something more appropriate for that than the FICA tax, as we have. I suppose what you could do is have it be a higher rate. That would probably do more of it. But they’ve increased the rate multiple times.

[00:24:38.140] – Grumbine

So at the end of the day, Social Security can be funded on its own. It’s self funding, self fulfilling program that doesn’t require FICA taxes at all. And the fight over raising the cap is largely performative. It’s symbolic. It’s carrying on a very regressive state, and the MMT position on FICA tax is to eliminate it. Would you agree with that?

[00:25:06.320] – Fullwiler

Yeah, I would. Absolutely. With all the taxes. That’s one of the very first ones on the chopping block for us in a perfect world. And honestly, I think you’d get more productive capacity out of that. And so that’s the real issue with Social Security. Financing is not an issue. Legal authority is not an issue. We can change legal authority anytime we want.

We have legal authority written into the code fairly perversely. Aside from Medicare Part D, I think it is that says it can draw in general revenues and such. So, those two are non issues and those are the issues that are always brought up, right? The issue is productive capacity and FICA reduces productive capacity. I think it’s hard to argue that it doesn’t.

[00:25:50.310] – Grumbine

Let’s take that one final step. Reducing productive capacity, I’m assuming because you’re pulling money out of the economy.

[00:25:58.800] – Fullwiler

Well, yeah. And it’s two things. It’s whose money you’re pulling out of the economy. It’s the people 16 to 67 that are earning less than $120,000 or whatever it is a year. Right now, of course, a good deal of that spending goes to retirees and retirees spend it, too. But the priorities are different, etc. And of course, the money doesn’t go to retirees.

You reduce one group spending, you increase transfers to the other one. But the point is you don’t have to do that, right. The issue has more to do with you can do both if you have the slack in the economy to allow both to happen, right? And that would provide opportunities for businesses to expand capacity, right? When you’ve got a restaurant, when do you expand capacity? You expand capacity when you’ve got a lot of customers, right?

[00:26:52.740] – Grumbine

Right. Yes.

[00:26:53.620] – Fullwiler

So it works that way for most everything. So that’s one way that the tax limits capacity. The other way is it’s a tax on hiring workers.

[00:27:04.290] – Grumbine

So it stands in between us and full employment as well.

[00:27:08.420] – Fullwiler

Yeah. It doesn’t help.

[00:27:11.540] – Grumbine

Okay. So, to put a bow on Social Security. Number one, we’ve determined again, that FICA does not actually fund Social Security. It gives legal authority, which that in and of itself is nothing. We could change that anytime we like.

[00:27:27.650] – Fullwiler

Change it. Yeah. That’s what Congress says if they write laws. Right.

[00:27:30.320] – Grumbine

That’s right. Exactly. And number two, the fight over raising the cap is largely performative. It really doesn’t have any impact on funding. And number three, we determine that FICA is an extremely regressive tax that harms the poor. And we should get rid of it because Social Security can be self-funding just by simply changing the funding authority.

[00:27:52.840] – Fullwiler

Yeah and FICA, also, in the context of the trust fund being drawn down and outlays for the baby boomers from Social Security being more than the revenues. It also provides political coverage to those that want to get rid of Social Security to talk about reducing it or getting rid of it.

[00:28:09.260] – Grumbine

And they always seem to get more than enough help there, don’t they? So let’s move on to the next thing that should not be. And that is the debt limit. Right? We’re about to head into this now. I just spoke with Rep. John Yarmuth the other day and he talked about how this is one of those anachronisms that we really don’t need whatsoever.

And that the few countries in the world that have one, none of them operate the way ours does. But in the United States, we’ve got yet again, another political hot potato that we keep in the way just to prevent us from serving the people, it seems like. What’s the story with the debt limit?

[00:28:45.320] – Fullwiler

Well, it’s another one of those tragically hilarious things that we do. It largely creates a way for the minority party if they’re politically savvy. And we have one party that’s politically savvy in one party that isn’t, for a politically savvy minority party to take a pound of flesh out of the majority party.

And that’s what we’re seeing now is their attempt to do that because we’ve set this ceiling on the debt, which effectively means they vote twice for their budget, because when they make their budget each year, when they set spending and taxing priorities, they end up with an estimate of what the increase in the debt is going to be because they have a projection what the deficit will be.

And if they didn’t like the increase in the deficit, if they thought it was going to be too high, they could vote against the spending and they could vote against the tax policy each year. But instead they voted for it. And then the debt ceiling comes up and they have the exact same debate all over again. So you basically end up voting twice on the budget, except the second time again, the politically savvy minority might be able to take a pound of flesh.

And first off, like you say, it’s dumb on the face of it, of course, because there’s no reason to have a debt ceiling for the currency issuer. It’s dumb because we know the government deficit is the non-government sector surplus. So you’re basically putting a limit on the note and government sector surplus, which is also dumb.

The debt ceiling has those problems with it. But on top of that, even if you thought a debt ceiling was a good idea, what we count in the debt ceiling is ridiculous. In particular, two things that we count. First one is the Social Security trust fund and Medicare trust funds. Those run about $6 trillion right now. The thing about those is they’re counted as the national debt in the debt ceiling, and most people count them.

You know, when you hear that $28 trillion figure that’s including that 6 trillion. But when we turn around, we start talking about Social Security and Medicare, we talk about those as if those are savings, Social Security, Medicare, and we want the bigger, right? So, on one hand, we want them smaller because they’re debt and that’s bad.

On the other hand, we want them bigger because they’re funding Social Security. They’re providing as we just explain, legal authority to spend for Social Security, Medicare in finance. What we’d say is the trust funds are both an asset of the government and a liability of the government. And depending on what suits us, which debate we’re having, we talk about is if it’s a liability or an asset, right?

When we talk about Social Security trust fund and protecting Social Security, we talk about is if it’s an asset. When we’re talking about the national debt, we talk about the trust funds is if they’re liability. In any basic finance and accounting framework, what you do when you have something that’s both an asset or liability is you ignore it, you delete it.

It’s the exact same thing on the asset side and the liability side. So if you’re doing any kind of evaluation analysis, you don’t count it. So that’s the first thing that $6 trillion shouldn’t even be in there. And we could say it another way. Social Security and Medicare are part of the government. And it makes no sense to put Intergovernmental obligations into the national debt and count them as the national debt as something that can be defaulted upon by the government.

It can’t be defaulted upon in the same way that the government could default on Treasurys that a bank is holding or something like that. The government can always roll it over and write a new IOU to itself. Secondly, the Federal Reserve has about $5 trillion in Treasurys.

And again, some people don’t like to talk about this, particularly some on the left. But the Fed is an agency of the government. And if you don’t believe that, go read the FAST Act from about six or seven years ago where the treasury basically legally confiscated current and future Fed profits.

[00:32:48.920] – Grumbine

That slams that one shut.

[00:32:50.630] – Fullwiler

Yeah, basically. And also at the time confiscated a sizable percentage of the Feds equity. Anyway, so the Fed is holding $5 trillion Treasurys. There’s no reason again to count those. First off, at least $two trillion of them, about $2.15 trillion of that is what the Fed bought to replenish reserve balances when banks purchased more vault cash, right?

You and I go to the ATM machine or the bank and we withdraw from our bank account. Banks see a depletion of their vault cash. So they go to the Fed to get more vault cash. They pay for that with the reserve accounts at the Fed. As those reserve accounts are drawn down, the Fed typically will replenish those then in order to achieve its interest rate target.

And of course, it’s done its interest rate target differently since 2008. But if it were ever able to get back to so called normal procedures, this is what it would continue to do. But as those reserve accounts that are drawn down, the Fed would buy a treasury bond. And that would add back those reserves that were depleted when the banks purchased more of vault cash and paid for it with those reserves.

So what happens is prior to 2008, the vast majority of the Fed’s balance sheet on the liability side was paper currency, and on the asset side was Treasurys, because those are the things that drove the Fed’s balance sheet. Everything else was kind of a small amount and would fluctuate and such. And so we’re at about $2.15 trillion in currency right now.

And so for all intents and purposes, that $2.15 trillion will be something that the Fed would keep forever and Treasurys on its balance sheet as well. Those aren’t going back to the private sector to be held. And then there’s another $3 trillion-ish that the Feds holding because of its various quantitative easing operations in such over the last ten plus years.

And we know that somewhere around $2 trillion of that the Fed will probably keep forever because of the large increase in liquidity requirements that bank, especially the largest banks, have had imposed on them by the post 2008 / 2009 changes in financial regulation. So we basically got $4 trillion or so in Treasurys on the Fed’s balance sheet that will stay there forever, never go to the private sector.

There’s no reason to count that against the debt ceiling. Even if you think the debt ceiling is useful. That was a bit long winded. So anyway, there’s about $10 trillion-ish that shouldn’t even be there in the debt ceiling. And in fact, when people talk about the national debt, they shouldn’t talk about that $10 trillion either. It’s not functionally a part of the national debt that is held by the private sector. It was not part of net financial assets created.

[00:36:12.260] – Intermission

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[00:36:37.950] – Grumbine

Scott the whole thing. Once again, another bit of shadenfreude. You’ve got all these different things that are making up what constitutes what’s being counted against the debt limit, which we’ve seen is absolutely ludicrous.

But I guess the question is, why does this continue to keep coming up? What is the point of this? Is this yet again, another opportunity for people to snag that pound of flesh, as you say, or was there some reason for this at some point, what was the initial rationale for even having the silly thing?

[00:37:11.680] – Fullwiler

Yeah. So the history part – I’m vaguely familiar. I think if I were to say something, I’d probably end up being wrong or I miss something. So I’ll just say it’s a symptom of the fact that we don’t talk about the national debt correctly. Right?

We don’t talk about a currency issuer correctly, because even on shows on the so-called Left with Trevor Noah, people like that, they’ll talk about the debt ceiling and its relationship to the national debt, as if the debt ceiling might be protecting us from running the national debt that’s too large or something like that.

So I think without the fiction that there’s a national debt to worry about, there wouldn’t be any reason to worry about a debt ceiling.

[00:37:54.900] – Grumbine

You made a statement – and I want to make sure I’m in the right because I’ve said this for as long as I’ve been an MMTer. And that is that the national debt is nothing more than the sum total of every untaxed dollar in the economy to the penny since the beginning of time. It seems to be a pretty simple statement. And yet there’s a lot of hand wringing. What does it actually mean?

[00:38:19.200] – Fullwiler

What does the national debt actually mean? That’s a narrative for sure. And it’s not wrong. If you were to dig in, there’d be a few other parts. But it really isn’t much different than that, right? That it’s the accumulation of past deficits. Deficits are spending that hasn’t been taxed, right?

[00:38:38.680] – Grumbine

Sure.

[00:38:39.480] – Fullwiler

Or spending beyond taxation. That’s the vast majority of it. So as I said, because the deficit is the non-government sector surplus, a debt ceiling means it’s also a private sector surplus ceiling. If you were to call it that, maybe I don’t know if that narrative would change things at all.

[00:38:57.040] – Grumbine

It very much does, because I think that that might be a new way of framing things. I really like that. I think that’s something that should be ferreted out. We’ve got this thing out there. I know Rashida Tlaib, one of the very few Congress critters that have come out and said, hey, maybe we should mint a trillion dollar coin and this is going a ways back.

I know Rohan Grey had worked with them and others, but here we are again, we’re now at the debt ceiling and the concept of the coin to address this has come up again. Talk to me about the trillion dollar coin.

[00:39:33.140] – Fullwiler

Okay, actually, before I do, maybe direct people’s attention – Rohan, since you mentioned him, sent me a link a few days ago. It’s an article in The Hill by the law professor named Brian Galle, G-A-L-L-E. From September 24, basically arguing that the debt ceiling law can’t really be interpreted to include the two things that I suggested should be in there.

He might only be talking about the Fed part and not have mentioned the trust fund part, but anyway, the point being maybe under the current text of the law, we are already five to $10 trillion below the debt ceiling. So getting to the coin – the coin back in the days with Warren Mosler’s blog, moslereconomics.com.

2010/2011 something like that; a commenter named Beowulf, who we now know is Carlos Mucha, who is a very innovative legal mind, pointed out to the rest of us the text of this law about the Mint, which allowed printing platinum coins in whatever denomination as a way to get around the debt ceiling. And it’s important to note that under current law, the main point of the coin is to get around the debt ceiling.

It’s not necessarily the sort of thing that is required for any other purpose. You can certainly use it for other purposes. And you mentioned Rashida Tlaib. There was the ABC Act – I believe it was – about a year and a half ago that was going to be sending everyone $2,000 a month, and it was going to be funded by printing two one trillion dollar coins.

Now, that was different because that one was specifically saying in the law that the coins would be minted and they would be worth a trillion dollars. So you didn’t need the earlier law.

[00:41:27.060] – Grumbine

Got you.

[00:41:28.710] – Fullwiler

So that was a way to clarify all of that. The thing that people don’t understand about the coin – banking, finance, national debt, sort of things, as we know, the quality of our national discourse, even in the financial press, is largely terrible, and I don’t necessarily blame all of them. If we had better introductory textbooks on this stuff that got some of these things right, we might have a better discourse because that’s what all those folks are learning.

But anyway, the coin is not something that circulates in the private sector. It’s something that is purely deposited in the Treasury’s account at the Fed. It’s actually not deposited in the Treasury’s account, but it’s taken to the Fed. The Fed holds it as an asset and credits the Treasury’s account. Then the Treasury can spend from that account without issuing bonds.

[00:42:22.810] – Grumbine

Okay.

[00:42:23.380] – Fullwiler

But it doesn’t even need to do that. All I would have to do is, for instance, use those balances to pay off the Social Security trust fund. Right? Or use those balances to pay off the Treasurys that the Fed owns. Right? The funds from the coin wouldn’t necessarily ever have to be spent into the economy. It could simply be ultimately to replace Treasurys held by the Fed or replace non marketable IOUs held by trust funds.

[00:42:50.860] – Grumbine

Should we make this coin maybe the size of your pinky nail, like the tiniest of your toenail? The tiniest thimble. [laughter]

[00:42:59.720] – Fullwiler

Right.

[00:43:01.200] – Grumbine

What do you think would be the bigger poke in the eye? A tiny, tiny, tiny little coin or like a giant coin that has to be stood up on a stand or something like that. [laughter]

[00:43:11.250] – Fullwiler

Well, I know which one would be harder to steal, but it honestly doesn’t matter, because if it’s something that you can even say right on it: this is purely for Intergovernmental transactions.  If you wanted to. The other thing that people understand is there’s nothing in this that allows the government to spend more than the Congress authorizes.

It’s purely about getting around the debt ceiling and spending what’s authorized without having to issue bonds. Now, the other thing that people understand about that, and some economists are starting to understand it is when the treasury spends without issuing bonds it’s not what people normally think of as printing money.

That sort of thing actually doesn’t really happen in the economy, because when you spend without issuing bonds, you just create Central Bank reserves. But when you do that, you would push the supply of reserves beyond banks’ demand for them. Banks’ demand for them is driven by Fed liquidity requirements and their payment settlement needs.

Those are pretty fixed. And so if you run much of a deficit at all, you’re going beyond that demand curve, which simply means – I mean, if people can envision supply and demand in their head – you got a supply and demand curve, and now you shift the supply curve to the right of the entire demand curve. What happens? The price falls to zero.

Unless you put in a price floor and then the price falls to the price floor. Central banks operate with a price floor, which is called interest on reserves. And so what would happen is when the Treasury spends without issuing Treasurys, you would simply end up with interest-bearing Federal Reserve balances going into bank accounts.

And it’s functionally the equivalent of issuing T bills. Short term Treasurys, because it’s basically an overnight interest-bearing account. And so you’re not printing money. It’s the equivalent of spending and issuing really, really short term interest bearing debt, is effectively what it is. And that’s really all you can do.

That’s as close as the government can get to printing money. It’s as close as the central bank can get to printing money, in the real world. Printing money, dropping money from helicopters kind of stuff is not something that happens operationally in the real world. It’s not something that really can happen operationally.

You have helicopters and you could go drop money, but the average person would grab a bunch of money, maybe punch the person next to you so you can grab more. I don’t know. But there’s only so much of that you want to spend right now. You take the rest to the bank, right.

[00:45:56.950] – Grumbine

Sure.

[00:45:56.950] – Fullwiler

First off, people who recognize when that happens, that’s not monetary policy, that’s fiscal policy. You’ve increased income, right? You’ve reduced the net worth of the government, increased the net worth of the private sector when you do that. A private sector surplus, in other words, which is not what monetary policy does.

That’s fiscal policy. Anyway, if you had more cash than you wanted to spend right now, you’d take to the bank, you’d put it in the bank to get a deposit, maybe turn that into a CD. Whatever. The bank very quickly would have too much vault cash. It would go to the Fed, sell this vault cash to the Fed. It would get reserves.

It would get credits to its reserve account at the Fed as payment for the vault cash. Those reserves, those extra balances in the reserve account, would earn interest. And now we’re going back to where we started, where you basically issued T bills. Basically issued interest bearing overnight balances.

[00:46:49.550] – Grumbine

The Fed is always remitting their profits back to the treasury.

[00:46:54.540] – Fullwiler

Yeah. Great point.

[00:46:55.900] – Grumbine

And with that in mind, interest on reserves changes in a very different way now doesn’t it? They’re making money, so to speak, off of that, they’re going to remit it back to the treasury regardless. Correct?

[00:47:06.640] – Fullwiler

Yeah. Again, economists have just started to figure this out. Not all of them understand. The general public doesn’t understand this by and large. But there’s really no way around, ultimately, the cost of the Fed’s interest payments to banks coming back to the Treasury. Because the Fed, as you said, it pays its profits, send its profits to the Treasury.

This was part of legally confiscating the Fed’s profits. Now, the Fed used to send most of its profits anyway, just wasn’t legally required to. In other central banks, there’s a similar arrangement. So, when the Fed pays interest on reserves, all that means is that reduces its own profit so it sends less back to the Treasury, while the treasury receives less from the Fed, but it didn’t have to pay interest of its own.

So really, the reduced payment from the Fed is really the equivalent of having paid the interest in the first place. So it can issue bonds itself into the private sector and pay interest on them, or it can not issue bonds, and you’d end up with Federal Reserve being the one with the reserve balance circulating, paying interest, and the Treasury would end up with those costs anyway.

[00:48:18.610] – Grumbine

Okay. So what I’m hearing – and I just want to be crystal clear for everyone. Not only have we gone through the Social Security myth of funding and FICA, we’ve gone through the debt ceiling now, and we realize largely it is brinksmanship. It’s not real.

And we’ve also determined that instead of looking at the national debt as the national debt and start looking at it as our private savings. We also realize that minting of this coin is not really about spending money. It’s really more a matter of inter-banking dollars, so to speak.

[00:48:55.690] – Fullwiler

Intergovernmental.

[00:48:56.720] – Grumbine

There you go.

[00:48:57.460] – Fullwiler

Now it could be spending, right? Like in the ABC Act it was. Right? It could be. But the context that “mint the coin” was developed was about getting around the debt ceiling only.

[00:49:11.000] – Grumbine

Okay.

[00:49:11.730] – Fullwiler

But yet, it could be. And the point of doing it would be to show politically that you could do it, that the government isn’t finance constrained, right? Or revenue constrained, or constrained by how many Treasurys it sells.

[00:49:22.610] – Grumbine

Exactly.

[00:49:23.080] – Fullwiler

But even when you do that – that’s the thing people don’t know – is even if you do that, again, first off, you can’t spend more than Congress approves. But Secondly, you did not print money because you did not get around paying interest on the reserves that were created.

It’s effectively just shortening the maturity of the debt that’s issued down to being basically overnight. But the Treasury is still going to ultimately have the interest cost of that. Right.

[00:49:50.580] – Grumbine

We also tack in what I’ll call automatic stabilizers – the things that are already budgeted, already agreed to by Congress to spend, and that the debt ceiling is like a second referendum on whether or not the spending that was already authorized is going to be paid for. It’s kind of ridiculous.

[00:50:12.300] – Fullwiler

Yeah. And it’s entirely political, which a lot of things are, of course. Let me just also point out the point that we’re making about you can issue Treasurys to cover the spending, or you can have the central bank issue reserves, and you’ll still have to pay interest on those reserves then.

This is what’s behind our response to people that say MMT is about printing money. We don’t argue that you need to print money when you spend. We don’t even say that that’s the way things should be done. If we did, it was in the context of getting around the politics of it, right? Pointing out that we’re not finance constrained.

Operationally, though, we have never cared precisely because we know there is no such thing. That it all ends up being interest-bearing debt. As long as you’ve got a positive interest rate target. Whether it’s issuing bonds or not, you end up either with Treasurys outstanding or overnight interest-bearing central bank reserves that the Treasury ultimately pays for.

There’s no way around it. Those are the two possibilities operationally. And so that’s why it’s wrong to say MMT just wants to print money. Now, MMT explains why printing money isn’t actually a thing, but we can always spend and we can control the interest rate on the deficits that we run. That’s what MMT says.

[00:51:39.120] – Grumbine

With that in mind, I guess the real question comes down to – we are led to believe that the national debt is something that is going to be passed on to our children. It is some horrible boogieman. As long as I’ve been alive, it’s been a thing. It’s especially been a thing in the last 25, 30 years. With the national debt largely being not a thing, tell me what the national debt fight is all about. What is the national debt and why doesn’t it matter?

[00:52:15.490] – Fullwiler

Well, of course it matters in relation to inflation, right? But it doesn’t matter in the sense that the currency issuer doesn’t have to worry about its financial obligations the same way that a currency user does. Right? If you had a printing press in your basement, would you care how much your debt was, right? That’s basically it.

Now the thing is, we’ve also been led to believe – and this is where the criticisms of MMT come from, from the mainstream. The mainstream will accept that when faced with it, right? They generally wouldn’t accept it unless somebody put it in front of them, right? They generally keep saying the narrative about government has to borrow, etcetera, etcetera.

But once they’re faced with MMT, their response is, “oh, yeah, we already know that.” That’s how they get around that. And then the next step for them is yes, you can print money, but it’s inflationary. That adds jet fuel to the spending. Right?

And that just shows their lack of understanding of operations, because as we just were explaining, there’s no difference between, quote/unquote printing the money and issuing Treasurys, because either way, you end up with interest-bearing liabilities outstanding. And so the point is then also, that you can control the interest on that. That is a policy variable. It depends on how much monetary sovereignty you have.

[00:53:38.190] – Grumbine

Sure.

[00:53:38.190] – Fullwiler

How much control you have over that interest rate. But when we’re talking about the rich countries – because the other ones would take a bit too much to talk about the caveats and such and the opportunities they have, frankly – but if we’re talking about the rich countries of the world, this is pretty much standard.

This pretty much works for all of them. It’s not a USA thing. It’s not a reserve currency issuer thing. Australian central bank was just pegging interest rates on their debt. Japan pegs interest rates on their debt. A number of countries ran really, really large deficits over the last two years, and their central bank was accommodating a large percentage of this – Canada, the UK.

This isn’t just a USA thing. And now those countries also understand, if they didn’t before – or at least their central bankers understand – that monetizing the debt wasn’t a thing, right? They basically replaced Treasurys with interest-bearing central bank liabilities that the government ended up paying the cost of servicing. So back to your point in terms of what the burden is…

Another thing people don’t understand, again, if you control the interest rate on the debt, then you can set the interest rate low enough that the interest payments aren’t inflationary also. That’s the only thing that the mainstream has a response to, which is, well even a lot of our heterodox economists that have neoclassical economics envy behind a lot of their thinking is, well you set the interest rate below growth, you eventually get inflation because the interest rate is too low, you get too much credit creation, etcetera, etcetera.

And the problem with that is there’s all kinds of things you can do to slow down the creation of credit without manipulating the overnight interest rate, and without messing with interest paid on the national debt. You can set those two things separately.

And this is something that really MMT thinks about – and I haven’t seen hardly anybody else talk about that. So if you split those two things up, you really don’t run into that issue anymore. Meaning you can keep interest on the national debt low, and you can manage credit conditions by manipulating debt service to income ratios or loan-to-value ratios, or any number of things in the credit markets.

New Zealand even thought about experimenting with tax rates added to interest rates to basically create an even higher interest rate on mortgages as something that the central bank could manipulate to adjust interest rates on mortgages over the business cycle, or when there are bubbles, or something like that.

So anyway, there’s ways – that’s just one of them – there’s ways that the central bank could more directly influence interest rates without having to raise its interest rate target and affect interest on the national debt.

And economists just haven’t understood the monetary system well enough – and it’s not even part of their models, generally – in order to have enough creative thinking about how to have more independence and policy space in running fiscal policy and monetary policy and get rid of these deficit phobias and such, that don’t and shouldn’t apply to a current issuer.

[00:56:45.740] – Grumbine

Let me ask you one final question. So if I sell a Treasury, let’s say a six-month treasury at X percentage rate.

[00:56:54.430] – Fullwiler

Are you the government?

[00:56:55.680] – Grumbine

Well, the Fed. Whichever one makes up the national debt. Okay? That percent of interest that I would be paying out on that particular debt instrument is the interest on the debt, correct? That’s where the interest is coming from. The interest rate of that specific single bond that I’ve sold.

[00:57:15.590] – Fullwiler

Yeah. That’s the component that adds to it. Yeah. Right.

[00:57:19.060] – Grumbine

Okay. Each one of them may have different terms and conditions, different interest rate. And so the overall interest on this is an aggregate level of all those different interest rates, and their expected payout.

And what I’m saying is that when we go into this, we already pre-fund the interest payments on these things. Do we not do we not already account for that? What was told to me – was that basically the government already knows how much money it’s going to pay off on these things.

[00:57:47.080] – Fullwiler

Well, it does in the sense that when it auctions it off at the auction, the interest rate, that’s the interest it’s going to pay. That’s set. Right? And it already knows what it owes on the stuff it’s auctioned in the past. And what that bond does in the secondary market after Treasury has issued it, doesn’t have any effect on what the Treasury pays.

It only pays the interest rate that it was issued at. I thought where you were going with that might be the fact that you can only settle Treasury options with bank reserve accounts. Banks can only purchase Treasurys for themselves or for their customers at auction using the reserve account.

So you need the reserves to be circulating before the auction, or you need the Fed to lend those reserves to them before the auction. And the way that the Fed puts those reserves out there, historically, has been by buying Treasurys. Right? Well, what’s a Treasury? A Treasury is a previous deficit.

[00:58:43.560] – Grumbine

Right. Yeah.

[00:58:44.430] – Fullwiler

The thing about it is, even if somebody wants to quibble on that point, which I could get way more technical if they wanted to. But the key point is that you do not buy government Treasurys at auction with private sector money. You buy government Treasurys at auction with government money.

[00:59:02.080] – Grumbine

So let’s round down to the very final thing here. And that is a famous MMT thing about ZIRP. Why do we sell bonds at all? What if we introduced a zero interest rate policy forever? What would that do? Why would that matter?

[00:59:18.300] – Fullwiler

Okay. So the bond sales are for interest rate maintenance in terms of their operational function as Warren Mosler put it many years ago. And we see this in many places in the world, particularly developing countries where their central banks do issue securities.

[00:59:34.260] – Grumbine

Right.

[00:59:34.870] – Fullwiler

Which is kind of funny because if the central bank issues securities, everybody knows the central bank can’t run out of money. Right? So we tend not to think of the central bank as issuing debt, right? But that’s exactly what they do.

They issue short term bonds to trade securities, and particularly in countries where they’re dealing with a lot of flows in and out of the country in foreign exchange, they will use issuing their own securities as ways to manage their interest rate target. And that shows you the purpose of government bond sales.

It’s largely the same thing to drain the reserves from circulation. Nobody thinks of central bank debt as being debt, but it should be obvious that when the central bank issues liabilities, you’re talking about an entity that can’t run out of bullets. Right? But they still issue bonds anyway.

They still issue securities anyway. So the fact that the treasury issues securities doesn’t mean that it’s debt in the sense of you and I, because, again, the fact that they issue securities, there’s central banks in dozens of countries issuing those.

So ZIRP. First we have to recognize when MMT says ZIRP or zero interest rate policy, we are referring to the very short-term interest rate, the overnight interest rate. We are not necessarily suggesting that every interest rate in the economy should be zero. In fact, we’re not suggesting that. We’re not suggesting that people be borrowing for a mortgage or something like that at zero percent.

That’s not what would happen. We’re simply saying the short term rate – really zero isn’t necessarily where it has to be, it should just be really low, is our point – short term rate should be really low and permanently there. And central banks should use other means to influence credit creation to influence, constrain, encourage credit creation.

But what happens with the zero interest rate policy? Even the mainstream understands that when you run a deficit and you don’t sell bonds and the interest rate is zero, even Paul Krugman says this. This isn’t exactly the way I would say it, but I’m going to say it his way just because it reinforces the point that we’re not saying something that everybody disagrees with.

When you issue bonds at 0%, the mainstream view is that your bonds are earning the exact same as money. Or to say it a different way, money is earning the exact same as bonds. So money basically becomes like a bond, or the central bank reserves becomes like a bond, and you no longer get the jet fuel effect that they expect in their regular models.

What they don’t understand is there’s only two ways to have deficits without bond sales, either ZIRP or you pay interest on reserves, either one of those in their own framework mitigates that so-called jet fuel effect of printing money that they assume will happen when you don’t sell bonds.

[01:02:29.910] – Grumbine

But ultimately, the concept of a zero interest rate policy, though, would allow us to not worry about bond sales. We sell bonds for a host of reasons. A lot of people find a nice, safe, secure interest-bearing savings account to be a great investment.

I know that a lot of retirement in 401Ks and pensions invest in these because it’s a hedge against volatility. That said, there’s also a good reason to maybe not sell bonds. Randall Wray has been saying this for a long time – that we should stop selling bonds altogether. What are your thoughts on that?

[01:03:07.540] – Fullwiler

I think the question of whether or not to sell bonds entails a lot more than just the political narrative around deficits. Okay? So when Randy’s saying that he’s talking to a particular audience and trying to bring home the point that if we didn’t sell bonds, it would be pretty clear that the government doesn’t need to finance itself, right?

As the currency issuer. And so then you couple that with the fact that if you don’t sell bonds, you are not doing anything much different from if you did. In the sense that monetization isn’t something that operationally actually happens. Meaning you don’t add jet fuel to the deficit by not selling bonds. What matters is the deficit, not the financing arrangement, okay?

For macroeconomic impact. So that’s one thing. There’s a separate issue, which is financial systems at their very core in most every country, especially the richer countries, but even in others, run on a day-to-day basis on collateral. The best collateral is the government’s debt. And if you don’t issue bonds, the central bank is probably going to have to do it.

So the point being, the economists are going to have to get a little more creative about this to understand that the real purpose of government debt in the financial system is as collateral. It becomes money. This is why sometimes we talk about Treasurys as being money. It is money.

It’s better than money, because money, meaning a bank account, when you’re talking about the amounts that folks at the core of the financial system are holding, you’re way way beyond what deposit insurance covers. And so the Treasury, the government bond, is effectively the money, and the government bond is the thing that you can sell immediately if you need to get cash.

It’s also the thing that you can use for collateral immediately if you need credit. And it’s the most widely accepted collateral. It’s the collateral that you take the smallest haircut on. And by haircut, I mean, it’s the deduction from your collateral in terms of how much of a loan you can get. Right?

So if you have a ten percent haircut and you have a bond worth a million dollars, you can borrow $900,000. So the Treasurys have the smallest haircut. So in our financial system, we need safe debt for the system to work. Doesn’t mean we need the government’s debt. The central bank can do this.

And as we were just talking about – central banks all over the world, issue debt. They tend not to do it for this reason yet. But we like to say that in fact, if the government stopped issuing debt and the central bank instead issued the debt to manage the financial system, you actually provide a lot more freedom and independence to the central bank. Right?

The MMTers are the real ones that want to provide central banks with operational independence. And people don’t often think of it that way because they talk about us wanting to put the interest rate at zero, right? Again, that’s just the overnight rate. We think central banks actually have a lot more things they could be doing to manage credit creation.

We just don’t think they should be using the overnight rate for it. And in fact, one of the things we think they should be doing is they should be able to have much more direct control over the safe assets. By that, I mean, safe bonds circulating as collateral or financial system having control over the maturity of those having control over the interest rates on those and such.

And the haircuts and other various things. So let me say it another way – there’s no reason why the increase on a yearly basis of the safe collateral that our financial system wants to have has anything to do with the government’s deficit. There’s no reason why those two are the same. But that’s exactly what we do by having the government issue bonds to go with a deficit and the central bank not issue bonds.

Right off the bat you’ve created a good deal of difficulty for the central bank in managing day-to-day workings at the core of our financial system. It would be much more efficient for the government to just spend out of its account, not issue bonds, have the central bank manage the rest of it.

To do that, we have to get rid of the fiction that it’s inherently inflationary when that happens. That means the central bank is captured by the politics of the government. We have to get rid of all of that stuff because that’s where the mainstream of economics – that’s their thinking on that sort of stuff.

[01:07:27.370] – Grumbine

It’s a pretty tall mountain of misinformation to overcome isn’t it?

[01:07:32.120] – Fullwiler

It’s a tall mountain of ideology, I guess I would say.

[01:07:36.610] – Grumbine

Very good.  Well, Scott, this has been insanely informative to me. I wish we had more time. I could keep you on here for hours. This has been a fantastic talk. Three things it should not be – FICA, the debt ceiling, and this concept of a national debt.

And all three of them are silly on their face. And I really appreciate you shining a light in the darkness. And hopefully everybody had an opportunity to learn from this. Scott, thank you so much for joining me today, and I hope we can have you on in the future.

[01:08:12.040] – Fullwiler

Absolutely. I Enjoyed it. Thank you.

[01:08:14.110] – Grumbine

All right, folks, this is Steve Grumbine, Scott Fullwiler, Macro N Cheese – we’re out of here.

[01:08:25.730] – Ending credits

Macro N Cheese is produced by Andy Kennedy, descriptive writing by Virginia Cotts,, and promotional artwork by Mindy Donham. 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.

Mentioned in the podcast:

[39:09] ABC Act Rashida Tlaib

Tlaib, Jayapal Introduce Groundbreaking Bill to Deliver Universal Recurring Payments for COVID-19 Relief

[39:43] We don’t need platinum to solve the debt ceiling crisis Brian Galle in The Hill, Sept 24

[40:17] moslereconomics.com

[40:25] “Beowulf” who we now know as Carlos Mucha

Proposing the Unprecedented to Avoid Default – NY Times

Trillion Dollar Coin

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