Episode 161 – Challenging Critiques of MMT with Yeva Nersisyan

**Every episode of Macro N Cheese has a full transcript and an “extras” page with links to additional resources. Find them at realprogressives.org/macro-n-cheese-podcast/ 

Fadhel Kaboub introduces us to the best people, including Yeva Nersisyan, a Research Scholar at the Global Institute for Sustainable Prosperity who joined Steve to talk about a paper she recently co-authored with Randall Wray, “Are We All MMTers Now? Not So Fast.”  

The Covid pandemic has put MMT in the news, with plenty of critics mistaking stimulus spending with “MMT policy.” This absurdity creates a convenient narrative for detractors: MMT is a failure!  

Our argument was that MMT-inspired fiscal policy is targeted fiscal spending and in particular spending on jobs. Job creation, the job guarantee that Pavlina Tcherneva has been talking a lot about… a jobs policy rather than just indiscriminate stimulus kind of policy. 

MMT economists were not at the table when Covid stimulus policy was being decided, nor were they at the table when Larry Summers and Jason Furman were crafting the inadequate response to the global financial crisis – another missed opportunity for fiscal policy to serve the public good.  

Yeva describes the different government responses to World Wars One and Two, compares Keynesian and MMT-prescribed policies, and lays out the consequences to the states – AKA the race to the bottom – when the federal government shirks its responsibilities.  

In the second half of the episode Steve brings up the roles of the Fed, Treasury, and private banks and asks Yeva to take us through their processes and explain reserve accounting. If you’re at all confused about this, you’ll want to hear what she says.  

Yeva Nersisyan is a Research Scholar at the Global Institute for Sustainable Prosperity and an Associate Professor of economics at Franklin and Marshall College. She received her B.A. in economics from Yerevan State University in Armenia, and her M.A. and Ph.D. in economics and mathematics from the University of Missouri-Kansas City. Her research interests include monetary theory, financial instability and regulation and macroeconomic policy. Yeva has published a number of papers on the topics of shadow banking, fiscal policy, government deficits and debt, financial fragility and instability, financial reform and retirement policy.  

Macro N Cheese – Episode 161
Challenging Critiques of MMT with Yeva Nersisyan
February 26, 2022

[00:00:04.060] – Yeva Nersisyan [intro/music]

Our focus on finance has led to this scarcity, where, for instance, if we had invested in renewable energy when we were dealing with the oil price hikes in the 1970s, we would not be talking about OPEC today. And we’re still talking about OPEC. It’s 2022.

[00:00:23.770] – Yeva Nersisyan [intro/music]

The FED credits my bank’s account. So, it raises the number in my bank’s account, and then my bank raises the number in my account and I wake up one day and there is more money there than it was the day before. And this is how the government always spends. We didn’t discover some new kind of way of spending because of COVID.

[00:01:42.110] – 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.

[00:01:43.090] – Steve Grumbine

All right, folks, it’s Steve with Macro N Cheese. Yeva Nersisyan is with me today, and I’m so excited to have her with me. Yeva is a research scholar at the Global Institute for Sustainable Prosperity and an associate professor of economics at Franklin and Marshall College in Lancaster, PA. She is a graduate from UMKC, which puts her in good company with all the MMTers.

And we are going to talk about one of the very short but very important papers that has been published recently. And this is in response to everyone seemingly being an MMTer. But we know everyone is not. In fact, Yeva and Randall Wray joined together and wrote a paper called “Are We All MMTers Now? Not So Fast.” So without further Ado, let me bring on my guest. Yeva, welcome to the show.

[00:02:38.060] – Yeva Nersisyan

Thank you. Happy to be here.

[00:02:40.330] – Grumbine

So MMT has gone from a tiny handful of people screaming in the wilderness to starting to get its moment in the sun as inflation is high and there’s a lot of people trying to figure out why the economy isn’t working for them. Everybody thinks we’re doing MMT post-Covid style. I don’t think that’s what’s happening right now, and I’m really excited to get your take on it. So why are they dragging MMTers through the mud here?

[00:03:10.990] – Nersisyan

So when the stimulus bills were being passed, of course, MMT was out there explaining that we didn’t have to pay for the spending and explaining how the government spends and so on, as we always do, I guess. But now that seems to be used as justification that somehow it was MMT policy. The stimulus was MMT inspired just because we were saying you can pay for as much of the spending as you want.

It’s not the same thing as those policies being MMT policy. For instance, the stimulus checks. Randy and I wrote something early in the pandemic saying that this was not the kind of targeted spending that MMT was advocating for, had been advocating for, although this was an emergency situation. So in a situation like that, that was probably an appropriate policy.

But in general, our argument was that MMT-inspired fiscal policy is targeted fiscal spending and in particular spending on jobs. So job creation, the job guarantee that Pavlina Tcherneva has been talking a lot about. And she was also advocating a jobs policy rather than just indiscriminate stimulus kind of policy. Also to say that these are MMT policies while MMTers weren’t there at the table coming up with this policy.

And people like Larry Summers or Jason Furman, who were at the table after the global financial crisis, who were crafting the stimulus bill that was so small back then. I blame that small stimulus and the anemic recovery on, say, the rise of Trump and Trumpism and this feeling that the economy isn’t working for people because it wasn’t working for people.

So these people who had a hand directly in this situation that got us into the Trump mess are now saying that MMT should be cast aside and not even talked about because somehow it has failed when MMT policies haven’t even been tried. So the descriptive side of MMT that MMTers have been talking about and the prescriptive side hasn’t really been applied, and now somehow the two are being completed here.

[00:05:24.850] – Grumbine

Guys like Matt Bruenig and Doug Henwood constantly take potshots at MMT. These are lefties that you would like to see helping us. They’re more neoclassical than Republicans in many cases. And the people that you just mentioned, they do their hit jobs. I’ve read more academic white papers as a lay podcast host than these people who make a living as economists.

Within their little cadre, they talk about “MMT bad” and you never see them quote any of the scholarly work. Isn’t this like an abdication of this stature that a PhD economist should employ? To me, this seems beyond just petty. I don’t know what the right word for it is, but it’s definitely not following any of the basic standards that academia is intended to follow. Would that be a fair statement?

[00:06:23.950] – Nersisyan

Well, maybe they think it’s beneath them to go and read more about MMT, and they just have this sense of what MMT is and it let’s print and spend. So instead of tax and spend, MMT is just print and spend. And we all know that cannot be true for a variety of reasons that’s going to lead to a bunch of problems and so on.

People like Paul Krugman, for instance, they keep saying, well, whenever we say this is MMT and then MMTers say, no, that’s not MMT. I’m thinking, yeah, because you’ve never actually read what MMT is. Maybe you’ve just read a blog here and there and then you haven’t even consulted the literature that’s out there. And now you are complaining that we are complaining that you don’t know what MMT is.

The only mainstream economist who had done a little bit of work, surprisingly, was Greg Mankiw. He read apparently the macro textbook by Mitchell, Ray, and Watts, and he wrote a whole paper about it. His critique wasn’t very strong, but at least he’d done something. He read the textbook, Greg Mankiw, of all people.

And I had high hopes for Paul Krugman early on because he was the first one who seemed to want to engage and he as a sort of a new Keynesian and politically a Liberal who didn’t mind this stimulus spending and so on. He seemed like the right person to have as an ally. But that didn’t end up that way, unfortunately.

[00:07:55.990] – Grumbine

Robert Reich is not an economist necessarily, but he talks about the economy all the time and he says things that are completely incorrect. But he’s got the people’s hearts and minds. And so millions of people hear a Robert Reich story or the Richard Wolff story, and both of them couldn’t get this stuff anymore wrong. Do they really see it as beneath them as well?

I don’t think that’s the case with Richard Wolff, for example. I know people that have worked with him behind the scenes. He knows what MMT is. But when he gets on shows like with Chris Hedges “On Contact”, they completely butcher it. Quantitative easing, Petro dollar, you can debunk. And then they purposely twist this stuff. We’ve got millions of other people who they have more access to than we do.

And the reason why I’m saying this  is because I’m going to go into your paper. You start off talking, here we are again with the inflation story popping up. We’re back in the spotlight for all the wrong reasons. But isn’t this kind of an opportunity for us to explain? Yes, we don’t have the platforms. They do. We’ve got a pretty activist culture that is pushing this all around the world. Is this all loss or is this an opportunity?

[00:09:12.850] – Nersisyan

Well, there is another short paper coming, actually, which point by point tries to debunk the current critiques against MMT. And like you said, this has been done so many times before, and that’s why it’s so frustrating, in a sense, to read people like Paul Krugman and see that they keep misrepresenting things and say, well, but we have already addressed that, and not just once. It’s been addressed many, many times.

And it’s not difficult to do your homework and to see that those things have been addressed. People like Rick Wolff, I always thought he was sympathetic to MMT. I haven’t seen his more recent stuff. I can’t speak to him misrepresenting it. But overall, I think this is an opportunity. And you’re right, there is this activist MMT base. And this is one of the reasons why the academics sometimes get pissed at MMT, because they’re like oh, they’re all these activists that swarm somebody who says something about MMT, and oh my God, that’s such a bad thing.

That’s the way they are representing it. I think it’s a good thing, right? We have all these people who can set people like Paul Krugman and Larry Summers and others straight in a sense, and they can use the work of people like Randy and Stephanie to do it because the work is out there. There’s a lot of it out there.

[00:10:31.690] – Grumbine

The thing I love about MMT, some of the larger revelations that come from this knowledge was that money is the least important thing it’s really about “can you resource it”? And what are the real impacts? And as an activist, as I speak of MMT, I don’t speak of it in terms of yield curves. I speak of it as in real impact to real people.

And I think that one of the tough things for the sensitive ears of many of those academics is that we’re not here talking about some esoteric thing. We’re talking about friends that have died from not having healthcare. We’re talking about drug addiction because we’re so depressed in this neoliberal isolated world that we can’t break free. And so we’re the ones who are taking this knowledge and say we found something to help us.

And they’re not just standing in the way of sectoral balances being understood or stock flow consistent modeling. They’re standing in the way of a child getting food or someone having shelter. And so I think that when you see academics get angry at activists, they’re trying to get angry at activists for all the wrong reasons. They don’t understand that we’re really referring back to the real impacts, the real resource constraints that MMT has the lens to show how we can alleviate it. What do you think is the rationale for trying to point at activists in this way?

[00:11:57.270] – Nersisyan

Yeah, I’m not really sure. I think it’s, again, a way to denigrate MMT in that it’s not this academic thing. So basically saying, oh, it’s not this high academic difficult, complex model, and that it’s simple enough that people can actually understand. When for me, that would be an advantage of an economic model. That it’s simple.

It applies to the real world so people can actually understand it, while from an academic perspective, they might be looking at it as, oh, it’s not actually theory. So I think Larry Summers in his recent comments, was basically implying that, right. That it’s not a serious economic model. We’re not getting published on the pages of the American Economic Journal and so on.

So for that, we need to be discounted. But you’re exactly right that these are not just abstract models which the conclusions that you come to with your models have implications for people’s lives. And we saw that with the Covid pandemic. And I think if you compare it to the 2008 recovery, you have a tale of two recessions you had a major financial crisis, and then we had this anemic recovery after that.

So the unemployment rate didn’t go back down to its pre financial crisis levels until 2017, when officially the recovery had started in 2009. So the recession had officially ended in 2009. It took us until 2017 to get back to those unemployment numbers we had before the recession. In the current case, the unemployment rate climbed up, of course, by a lot.

But then it came back down pretty quickly as well. So I was listening to Jason Furman on the Ezra Klein Show and he was saying, well, we could have still done the stimulus, but maybe if we hadn’t done it so quickly, it would take longer for the unemployment rate to go back down. But then we wouldn’t have as much inflation because right now his argument is that the inflation is because of too much demand and so on.

And I’m thinking, yeah, but that extra percentage point or two of unemployment is actual people who don’t have jobs and they don’t have a way to earn their livelihood. Right. So for you, that might seem like, oh, it’s in your economic forecasting or predictions or your model is just a two percentage point higher unemployment rate, but it’s actual people we’re talking about; and, of course, the resource question, even if you were to blame MMT for the inflation.

So let’s say it was MMTers who designed the three stimulus bills and we were the ones who did it. And now we have inflation. Even if the inflation, assuming (it) was caused by the stimulus, that would still validate MMT. I just don’t understand how people are saying that MMT should be out the door because we have inflation.

MMT has been saying that inflation is what we should worry about with too much government spending. Right. So too much spending does not lead to higher interest rates. It does not lead to default. It can lead to inflation. And so we don’t have higher interest rates. We don’t have a default. What we have is inflation. And the “real resource” thing: I think Covid makes it crystal clear that it is about resources.

Earlier on, it was about masks and PPE and ventilators and so on; the real stuff, and it didn’t matter that we had the money. Right? Right. The government could throw the money at it, but we didn’t have this stuff. Or we are exporting things like cars and fuel and so on, and we are complaining that there isn’t enough of it. Well, if there isn’t enough, why are we exporting it?

So this idea that exports are in real terms a cost and imports are a benefit, which Warren Mosler has been saying all along. That’s so crystal clear right now. And I can bring so many other examples where you can see that it’s all about the real resources. And so in this case, the supply chains and how strained they have been and how fragile they have been.

And all of that was exposed with Covid and those fragile supply chains that allowed corporations to achieve lower prices and higher profits and so on. Those things have broken down. And so we are dealing with the consequences of that.

[00:16:23.810] – Grumbine

If I were writing policy for Medicare or access to college, I would know that there would be some sort of a policy step by step approach to ensure the real resources are there to provide for the actual program that I’m seeking to create. And we have created a false scarcity narrative in the US based on a lot of bad lack of foresight, focus on finance versus resources. You’ve got long lines at shipping ports.

This is a resource constraint that is part of infrastructure, at least partially anyway. And Medicare, there are places where it’s 2 hours to drive just to get basic services. We don’t have the clinic support. We don’t have the infrastructure to just randomly roll out Medicare for all without actually planning for it. We’ve got more hedge fund managers than we do doctors and nurses.

So help me understand, if you are rebutting some of the complaints about MMT, how might you explain to them what you would have done differently to resource for these moments. To not wait until a pandemic hits. How might you explain that?

[00:17:42.050] – Nersisyan

Well, I think you hit the nail on the head when you said that our focus on finance has led to this artificial scarcity which we are dealing with right now. I would add to that the focus on finance, but also this idea that the government cannot participate in the economy in any meaningful way and that the only way it is okay for the government to do anything is either by tax cuts or this kind of stimulus spending that gives money to people and then lets the chips fall where they might because it allows the demand to just flow wherever it will go.

And that’s not how we always did policy. If you think about the New Deal, we didn’t just say, well, we’re just going to spend money and that’s going to create employment. We said, no, we need to build a dam or we need to build a tunnel or we need to build schools. And as we are doing that, we also provide incomes and jobs. In a sense, that was because we didn’t have the Keynesian theory that said, well, you can just spend and then there will be impact on income, right?

So the government had to think of things to do because we didn’t have unemployment benefits, for example. We didn’t have the infrastructure to just do this kind of indiscriminate spending. And so that’s why spending was more targeted and more direct. But our focus on finance has led to the scarcity where, for instance, if we had invested in renewable energy when we were dealing with the oil price hikes in the 1970s, we would not be talking about OPEC today and we’re still talking about OPEC.

It’s 2022. So had we done all of those investments and not worried that oh my God, we don’t have the money to pay for them then we wouldn’t be in the situation where energy prices are going up and that was contributing to a lot of the inflation. And energy and housing price increases account for about four percentage points of those 7% that we see. So energy, transport, and housing. So a lot of it has been driven by oil prices and so on.

So there is that. On the question of health care workers, of course, even right now you could say healthcare is scarce. So just because we don’t have a Medicare for all doesn’t mean health care isn’t scarce. You brought the example, people cannot afford it. So for them it is very scarce. I think with Medicare for all it might also be scarce at least initially for people who can afford it.

And that’s where it seems like, oh my God, it’s such a big problem because people who can afford it are not going to be able to buy it because people who couldn’t afford it previously now are able to buy it with government assistance. But of course this goes back to my point that I was trying to make earlier that you do need some kind of planning and I guess the P word is like the S word, right?

You cannot say it. You cannot say government and planning in the same sentence. That’s dangerous. But you do need some kind of plan. And that’s why if you think of a New Deal kind of framework where you have a comprehensive approach to policy where you have free education or cheaper education and then that might alleviate some of your bottlenecks in the medical field because healthcare workers don’t have to be settled up with 150-200 thousand dollars debt.

Doctors don’t have to have that much debt when they go into medical school and then even nurses and other like medical assistants and so on, you can train them and they can be very useful in trying to accommodate the larger demands for health care. But of course if you do have Medicare for all over time you might actually need less care.

[00:21:20.750] – Grumbine

Ooo! Yes.

[00:21:21.250] – Nersisyan

Because if you don’t take care of your health problems and it accumulates and then it becomes a bigger problem to solve. While if you could go and see your primary care doctor maybe you would have taken some steps earlier and then it wouldn’t become a bigger problem to solve. So in a sense, if you don’t invest in it then you have to deal with bigger issues in the future and that’s what we are dealing with. We don’t invest in things that matter and then we have bigger problems down the line.

[00:21:49.620] – Grumbine

Absolutely. Infrastructure, the big orange cones in the road. Pennsylvania: famous for its road projects. Right? And so when you think about infrastructure, expanded highways, maybe high speed rail, different means of transporting goods and services that maybe are off the beaten path. So we’re not dealing with major oil spills in places where kids are going to school.

Pennsylvania is a perfect example of the very unsexy infrastructure bills that need to be passed but that aren’t passed. What are your thoughts in terms of the very bad choices that are left for States to deal with? Since we don’t have federal policy nailed down, it seems like we have to understand the currency-issuer/currency-user model. What are your thoughts on that?

[00:22:42.380] – Nersisyan

Yeah, that’s a very good question. There is a lot of push for States to do things because at the federal level, things are not working. So in California, for instance, there has been talk of single payer, some kind of Medicare for all, and then, of course, there’s all these calculations of how much taxes have to be raised.

So even people who actually would support something like Medicare for all, when they see how much taxes actually have to be raised to pay for it, then they’re turned off by it. So I think it’s the wrong approach to send these things to the States. State and local governments are financially constrained, and the more of these liabilities they have, the worst things become in times of recession because they have all these liabilities that might be fixed and then their revenue starts falling.

So then they have to find ways to cut their spending. So in general, state and local governments tend to be a recessionary force or a deflationary force in recessions because they have to cut their spending because they have balanced budget amendments and so on. The current COVID situation was unusual in that sense that we did recognize that there was this issue, and so we did give state and local governments a lot of funds so that they didn’t have to do this, because otherwise the federal government tries to stimulate the economy.

But state and local government are doing the opposite. So they are working in the opposite direction. But there is, I think, a bigger problem where if you saddle up a state with these bills and then they cannot pay it, then you say, well, you see, this program cannot work. It’s not doable. And so we cannot even try to do it.

If, let’s say California cannot afford a single payer, then what are we even talking about at the level of the economy as a whole? This argument is already used. When you say Medicare for all, look at France, look at Germany, look at Norway, people say, yeah, but those are smaller countries. Why does that matter? They have a smaller economy, right.

And we are a bigger country, we have a bigger economy and so on. So I think the same thing logic could be used here. They would say, well, you see, California couldn’t do it. What hope there is for the US as a whole, which of course, then doesn’t recognize the difference between the currency user and the currency issuer.

[00:24:57.530] – Grumbine

It’s maddening. Every failure, when the government spent something, (they say) “MMT failed,” MMT gets blamed for every possible policy failure that involves “we the people”. If they don’t do it with an MMT lens, then we end up having to explain why their poorly crafted bills and MMT is getting a black eye, which comes back to your paper.

You say, for example, we’re being told MMT calls for helicopter drops of cash or having the Federal Reserve finance government spending through rebooted quantitative easing. If I could have a dollar for every time somebody tries to say the Fed is printing money with QE or some other completely erroneous statement and then, oh, that’s MMT for you.

And trying to debunk this, you have to scratch your head and say, they can’t possibly believe this, do they? But they say it so much they must believe it. Talk to me about why those things are not MMT. And then what is MMT?

[00:26:06.050] – Nersisyan

Yeah, the helicopter drop thing. It keeps coming back around.

[00:26:10.990] – Grumbine

That’s Milton Friedman.

[00:26:12.300] – Nersisyan

Yeah, right. That’s Milton Friedman. And at first it was supposed to be the central bank that would be doing the helicopter drops. And then MMT pointed out that, well, no, the central bank cannot actually do it. So I think the way the helicopter dropping was being used was like a stimulus. So if the central bank just sent everybody a stimulus check, then people would just go out and spend more.

And Friedman’s story was that it would be inflationary and so on. And MMTers were pointing out, well, no, the Fed has no such authority to do that. It has to come from Congress through the treasury. Elected representatives are supposed to make these kinds of decisions and so on. And then this idea that it was all being done somehow in a different manner by printing money as if it was done differently in the past.

So there was this sense that because we’re spending a lot more than we were in the past, we need a new way of financing the spending. And what we were trying to say in that paper is that it’s not a new way of financing the spending. First of all, QE is a non event. QE really has no impact on the economy beyond just a little bit of changes in the interest rates.

But the treasury and the Fed were doing what they had always done. So Congress says you have to send Yeva a stimulus check. And it wasn’t even a check. It was all electronic for most people. And then the treasury says, okay, we have to make this payment to Yeva. And then they will instruct the Fed to do that. Of course, in case of stimulus checks, it would go through the IRS.

But at the end of the day, the Fed credits my bank’s account. So it raises the number in my bank’s account, and then my bank raises the number in my account and I wake up one day and there is more money there, or the number in my account is higher than it was the day before. And this is how the government always spends.

We didn’t discover some new kind of way of spending because of COVID. This is how it was done before. This is how it was done during COVID. And this is how it’s going to be done in the future as well unless we change the procedures. But the procedures weren’t changed. Nothing was different. There were no helicopter drops. Things were happening like they were happening before.

And I think there are two ways in which this idea of printing money and helicopter drops is counterproductive. The first one, and Bill Mitchell has talked about this, is that printing money is seen as a negative thing. And this is why I think critics invoke this idea of money printing, because then they can say, well, think about the Weimar Republic, think about Zimbabwe or Venezuela, where you will be carrying wheelbarrows of actual cash to the store to buy anything.

You’re going to order two beers at the bar because you don’t know when you’re done drinking your first one. The second one will be more expensive, that kind of thing. So there is that idea. And the second one, I think, is to say that these kinds of measures are only appropriate for emergencies, so that if we say, wait a minute, we did all of this, we were able to create a vaccine for a disease we didn’t even know existed two years ago.

What else can we do if we take this approach to policy? And if you say, well, no, it was okay for this emergency situation, we could do the helicopter drops, but now that we’re back to normal, we cannot do that anymore. So I think this idea that it was something that was new, that was only appropriate in times of crisis, then prevents us from saying, well, let’s apply the same logic to other things and let’s see what else we can accomplish if we don’t think of finance as a constraint.

[00:30:03.270] – Intermission

You are listening to Macro and Cheese, a podcast brought to you by Real Progressives, a nonprofit organization dedicated to teaching the masses about MMT or modern monetary theory. Please help our efforts and become a monthly donor at PayPal or Patreon, like and follow our pages on Facebook and YouTube, and follow us on Periscope, Twitter, Twitch, Rokfin, and Instagram.

[00:30:54.130] – Grumbine

The story of the Buckaroo and how to create a currency really are very relevant. I think those are eye opening to even describe what the dollar is. You mentioned Warren Mosler and exports and imports. The money story, I think is a really important aspect of MMT, understanding that it’s a tax credit. You continue talking about what MMT is through that lens.

[00:31:19.460] – Nersisyan

Right.  And in a sense MMT demystifies money. And this demystification and simplification is something that we talked about earlier that the mainstream says, well, no, we cannot mean that. It cannot be simple like that. At the same time, they misunderstand what we are even trying to save. So I do a similar thing with Buckaroos in my classes. I call them Franklins for obvious reasons.

[00:31:44.080] – Grumbine

(Chuckles.) Right.

[00:31:45.430] – Nersisyan

And the first day I go to the classroom and I show them this sheet of paper that has four Franklins on it, and they look terrible. I’m not good at design, not a creative person in that sense. I guess that’s why I went into economics. So I asked them how much they would be willing to pay me for that sheet of paper.

Most of the students don’t even offer me anything. Some who are a little bit suspicious thinking, okay, maybe there is something to it. They’ll say, okay, I’ll give you $5 or whatever. And then when I don’t get many offers, I say, well, now you have to pay me a tax of 25 Franklin’s by the end of the semester. Each week, you can earn two at most.

So their weekly three hour class, if they participate, they earn those two Franklins every week. So that’s four Franklin sheets of paper, that were useless to them just a minute ago, now becomes two weeks of their labor, right? Basically. And now it’s valuable to them. And now they’re like, “can we buy the sheet of paper now?” Well, no, it’s too late for that. But yes, that’s the idea that money is the state’s IOU.

And you use that to pay the government back. And misunderstanding that money is an IOU is at the source of a lot of our problems. There was a thing with Jon Stewart and Thomas Hoenig. Did you see that?

[00:33:08.550] – Grumbine

I did. So bad.

[00:33:09.960] – Nersisyan

(Hoenig, the President of) the Federal Reserve Bank of Kansas City (made a comment), and Jon Stewart is like, why can’t we print money and pay the debt? And Hoenig, he’s like, well, even if we did that, that money is still our IOU. And Jon Stewart wasn’t understanding what it means for money to be the IOU, because when people think of IOUs, they think of something that is convertible into something else.

So a treasury bond is going to be converted into currency. And so that’s easy to see that it’s debt that now is paid when it’s converted into something else. Because our currency is not tied to gold, then it cannot be converted to gold. And it’s hard to see how it’s a liability that it’s also an IOU. And then that’s where MMT comes and says, well, first, the most important thing about the IOU is that you have the right to return it to the issuer in exchange for them extinguishing your own debt to them, like taxes.

Okay. And that’s difficult for people to wrap their head around. I found that they don’t seem to understand that money, like currency, let’s say cash, they don’t understand that it’s an IOU because it’s not convertible into something else. So this idea that for the IOU, the most important characteristic is redemption. How do you redeem it?

That’s what’s difficult for people to understand. And so that’s why you have people like Hoenig saying, well, money is not backed by anything. And it’s just a trust that I trust that you will take it and that you trust that somebody else will take it as if it’s like cryptocurrency, because that’s what cryptocurrency is. The only way you would buy it is because you think there is a bigger fool who would take it off your hands, hopefully at a higher price.

[00:34:51.860] – Grumbine

Yes.

[00:34:52.350] – Nersisyan

And they seem to think that that’s what money is, too, which is, of course, not the case. And that’s what MMT tries to explain.

[00:34:59.710] – Grumbine

I want to run this frame by you. I say congressional spending at the federal level is the birth of a dollar. Congressional taxation is the death of a dollar. And that’s the full life cycle. To me, that seems like the easiest way for me to explain that circuit. Is that a fair statement?

[00:35:18.510] – Nersisyan

That’s very good, actually. Government spending creates the currency and then taxation destroys it. And like you said, it’s the full life cycle. Just like you could say the same thing about banks. When banks grant loans, they create money. When loans are repaid, that money is destroyed.

[00:35:35.290] – Grumbine

So I’m going to get back to your article. It said, this is not MMT, which provides an analysis of fiscal and monetary policy applicable to national governments with sovereign, non-convertible currencies. It concludes that the sovereign currency issuer (1) does not face a budget constraint as conventionally defined. (2) cannot run out of money.

(3) meets its obligations by paying in its own currency, and (4,) can set the interest rate on any obligation it issues. And here’s the thing. Current procedures adopted by the treasury, the central bank, and the private banks allow government to spend up to the budget approved by Congress and signed by the President. No change of procedures, no money printing, no helicopter drops are required.

Modern governments use central banks to make and receive all payments through private banks. And so the idea that the US government borrows money from banks to spend, like, in other words, we need to finance our next war. “Hey China, can you buy some of our bonds so that we can fight you?” Once you say it out loud, you realize how ridiculous it is.

But this is the going narrative. I’ve seen Paul Krugman say it. Let’s demystify the idea that the government needs to borrow from its central bank. That term, I think, is what throws people off the idea of borrowing. I don’t like that term. I wish we could find a better one.

[00:37:04.370] – Nersisyan

I think you’re right. Exactly. And I tried not to call it borrowing. Just say issue bonds, because it is a choice for the US government to issue bonds or not. Now, given the kind of economy we have where our financial system is built on treasury bonds and our retirement system is built on treasury bonds, because a lot of the pension funds own a lot of the treasury bonds, the 401K are invested in treasury bonds.

So we couldn’t just stop issuing treasury bonds tomorrow because of all these reasons. But it’s not for the financing reason. The treasury bonds aren’t issued to borrow money. And what MMT says is that you cannot borrow money which hasn’t yet been spent. So going back to my example with Franklin’s, I do offer bonds to my students, but if I offer them bonds on the first day of class, they couldn’t buy those bonds because they don’t yet have the Franklins because I haven’t yet spent them into existence.

The same way, if I told them the first day, you have to pay me your tax today, they will all lose that 10% of their grade for participation because they don’t have Franklins to pay me their taxes. So you have to first spend for there to be the money with which taxes can be paid and bonds can be purchased. And that leads MMT to conclude that bonds are not a borrowing operation.

They are simply a way for the government to withdraw the money that it has injected into the economy through its spending. And it’s not doing that to prevent inflation; it’s not that, “oh, there’s too much money. There’s going to be inflation, so we have to withdraw the money with bonds.” It’s to keep the interest rate at a nonzero level, because by offering an alternative to just money sitting in a checking account, by offering an interest-earning alternative, it then sets the interest rate in the economy.

Now, because the Fed already pays interest to banks on the accounts that they have at the central bank, we don’t even need to issue bonds to maintain interest rates at a nonzero level. The Fed can raise interest rates without doing anything with bonds. So it can raise interest rates without the treasury offering an interest-earning alternative to checking accounts, because the Fed is already offering that alternative.

It’s offering this interest-earning savings-like account to banks that have their account at the central bank. So we could stop issuing bonds. It’s a voluntary operation for the US Treasury, it’s not a borrowing operation.

[00:39:42.370] – Grumbine

You said something very important. Your students can’t buy a bond until they have their Franklins, but China buys bonds.

[00:39:49.790] – Nersisyan

Right.

[00:39:50.240] – Grumbine

And China is not buying them in Yuan. They’re buying them in US Dollars because they have to do something with their US Dollars. They do business in the United States. But I think this is possibly the thing that throws people off, even people that have been doing MMT for a while, that taking money out of the economy is not the issue.

If you don’t have real resources available, in World War II, we didn’t have the infrastructure to produce goods and services at that point because all our factories were supporting the war effort. Talk about that a little bit.

[00:40:26.650] – Nersisyan

So, yes, during the war, of course, there was the issue. And Brendan and I have another paper on this, and we try to relate it to the Green New Deal. But there is a good problem that incomes are going up that’s I guess the only good thing that comes out of the worst situation. But incomes are going up, but at the same time, your real output is fixed, at least at that point in time.

And so if you are devoting a lot of it to the war effort and the war effort is going to take primacy, of course, then there is only a limited amount left for civilian consumption. So Keynes wrote about World War I. And what happened during World War I is that incomes went up and the government didn’t try to prevent the population from consuming those higher incomes, but because there wasn’t more real stuff to buy, then the attempt to spend this income simply inflated prices.

So people had higher incomes, but they weren’t better off in real terms because their incomes were now worth less. The purchasing power has decreased because of inflation. And so during World War II, Keynes was arguing that we need to try to prevent a repeat of that and that we need to somehow withdraw the purchasing power so that people wouldn’t spend it.

And his argument was that, well, it wouldn’t be fair to just tax it away because that would be one way to withdraw it. And instead he says, well, instead of taxing it away, let’s just offer deferred compensation. So basically, we will take it away today, but put it in an account. Of course, it wasn’t being put in any account. You could think of it as a ledger. And there’s a number next to your name.

It’s just record keeping. So that we know that we took so much from you today. And then when the war was over, we could pay you back that amount with some interest. So it was like a savings account and that you were saving it today, you weren’t spending it. And then after the war concluded, then the government would pay that money back to you with some extra interest.

It was called deferred compensation, and it was tried in the UK. Now you could try to achieve something similar with bonds. For bonds, to be effective in withdrawing demand, you need to get people to save who weren’t planning to save previously. So if people were already planning to save and now they’re just going to buy a bond instead of doing something else with that saving, you’re not really making a difference there.

But if you can get people who weren’t going to save to save because of the bond, then you can make a difference and that’s what we did in the US, because we issued bonds with very small denominations. So even the average American could buy it. It wouldn’t just be for rich people and just for banks.

[00:43:10.850] – Grumbine

Right.

[00:43:11.450] – Nersisyan

Because what they wanted is to withdraw demand from the average American. And for that to happen, we had to issue bonds with low denominations. And then, of course, there was all the marketing campaigns to try to get people to buy the bonds. And so that was effective. It was one of the tools. It wasn’t the only tool, of course, there was taxation, but there was also price controls and so on.

[00:43:32.150] – Grumbine

Sure. One of the things that I always say, if I give a trillion dollars to a rich guy and I don’t give any money to the average person, it doesn’t matter how much money is in the economy. That guy is only going to buy so many loaves of bread, gallons of milk might create asset inflation at the top where he might drive up costs of real estate, but it’s not the average.

And so you have to target that. So it’s a distribution issue. If I gave a trillion dollars across all the people, now everyone has pent up demand that they can realize. And now the question is, do we have the real resources for them to purchase?

[00:44:12.190] – Nersisyan

You’re exactly right. And that’s why the idea that you pay for spending by raising taxes on the rich, it doesn’t work in terms of real resources because you raise taxes on the rich. They’re not going to cut their consumption because of that. They’re not going to cut their consumption when you raise the marginal tax rate from 37 to 39.6%; I mean, if you raise it to 70, maybe we can talk about it. But 37 to 39.6%? That’s not going to make a dent.

[00:44:40.410] – Grumbine

No, not at all. So I want to get back to your paper again, because this is where it starts getting tricky. This is where I start fumbling the ball a little bit. When the treasury spends, the Fed creates a bank’s reserves and the bank credits the deposits of the recipient. Taxes reverse that with reserves and the taxpayers deposit debited. This is all accomplished through keystrokes, something government cannot run out of.

Both the Treasury and the Fed can sell bonds in the new-issue and open markets respectively, to offer banks higher returns than they got on reserves. But as MMT explains, since reserves must be exchanged when purchasing government bonds, the reserves must be supplied first before bonds can be purchased. It demonstrates how the Fed provides the needed reserves, even as it upholds the prohibition against lending to the treasury by never buying the bonds directly.

None of this is optional for the Fed. It cannot refuse to clear government checks, nor can it refuse the reserves banks need to clear payments. It is the government’s bank and after all, is focused on the stability of the payment system. So can you explain that? The reserve part of this is the most challenging aspect of MMT in understanding reserve accounting.

[00:46:07.040] – Nersisyan

Yeah. So money takes different forms, and one form it takes, it’s the form of reserves. So if there is a dollar in my pocket, that’s going to be counted on the Fed’s balance sheet as currency. If there’s a dollar at a bank vault somewhere, that’s going to be called reserves. Okay. Now, that’s one part of reserves:  all the cash that’s within the banking system. Another part of it is the balances that banks have at the central bank.

So just like I have a checking account at my bank, banks have checking/savings accounts at the Fed. And the balances in these accounts is what we call reserves. So it’s the IOU of the Fed. It’s a liability for the Fed, and it’s an asset for the banks. So when the treasury has to make a payment, the Fed is going to increase the balance in, let’s say, my bank’s account at the Fed, and that’s called reserves.

So the balance goes up. That means reserves go up, and then my bank will then credit my account. So in my deposit account, I will now have more money than in the past. So again, the number goes up. So you can see the symmetry here, right? In the sense that the bank has an account at the Fed. I have an account at the bank because I don’t have an account at the Fed.

The Fed cannot directly pay me. So the Fed is simply paying the bank and then the bank is paying me. But of course, all of this happens electronically. So paying the bank takes the form of keystrokes. The balance goes up in the bank’s account at the Fed, and then paying me also takes keystrokes. In this case, it’s the bank that’s engaging in these keystrokes.

And then my balance at the bank goes up as well. So anytime the treasury spends, reserves are going to increase, and anytime treasury taxes, reserves are going to decrease because tax payments do the opposite of what I just described. So then what we were saying in the paper is that this is how it works. Reserves go into the system when the government spends.

Now, as far as bonds go, when bonds are purchased, the only way they can be paid for, just like with taxes, would be through the state’s own IOUs in this case, reserves. Okay. So you have to pay for your bonds with reserves. And let’s say you’re buying a bond. And from your end, it’s not looking like reserves are being used because you use your checking account, let’s say, and then you purchase a bond from the treasury, and the balance in your checking account went down.

And now you have a bond. But ultimately your bank has to make a payment on your behalf, and that payment is going to take the form of its reserve account balance going down because they’re making a payment on your behalf. So the Fed is going to lower the balance in their reserve account at the Fed. And of course, now the bank owes you less in the form of the deposit.

So the point though here is going back to the Franklins example, right, is just like my students cannot buy the bonds the first day or they cannot buy them until they’ve earned some Franklins which I have spent into existence. In the same way we cannot buy US Treasury bonds unless there has been something like spending or lending that has injected reserves into the system.

So spending we’ve already talked about and that’s one way in which reserves can get into the system. But another way is by the Fed lending reserves, right. So when a bank wants to pay for the treasury on my behalf but it doesn’t have enough reserves, where is it going to go? It can go to other banks, but if banks overall don’t have enough reserves, then they have to go to the Fed because ultimately they cannot collectively have more reserves than they already have.

It can only come from the government, in this case through Fed lending. So we have prohibitions, of course, in the US, and these are pretty recent, recent late 1970s, we have prohibitions against the treasury selling bonds directly to the Fed. But it doesn’t change the fact that reserves have to enter the system before they can be taken out. So, Fed has to lend them to banks which they can then use to buy the treasury bonds.

And in fact, the Fed tells these banks that it regularly works with the primary dealers, about 22 banks that they have to participate at treasury auctions. They have to bid on treasury bonds. They basically have to make sure that the options will be successful and that the treasury can place the bonds, sell them basically as it needs to, because of the rules that it has to sell bonds.

Again, we’ve said that this doesn’t have to happen, but the way the rules are, it has to happen. So the Fed tells them you have to participate in the auctions, you have to buy the bonds. And of course, if they need funds to pay for those bonds because there isn’t enough reserves in the system already, they will turn to the Fed and they will use these bonds as collateral to buy from the Fed.

So they’re borrowing from the Fed to buy the US Treasury bonds. And so what happens is that the Fed issues reserves, the treasury issues bonds, and then the banks may end up with the bonds or the Fed might just buy them off the banks. So in a sense, it’s circumventing the self imposed constraint where the treasury cannot directly go to the Fed. But it’s doing that in a round about way with middle men who are making money in the process, like the banks.

[00:52:02.830] – Grumbine

Yes. The last paragraph of your article, your final parting shot there was, “we hope this pandemic will teach us that in normal times we must build up our supplies, our resources,” right?  “Our infrastructure and our institutions to be able to deal with crises. And we should not wait for the next national crisis to live up to our means.” Excellent closing there.

So this brings me to my final point, but I want to take us to what I think is another major issue, and that is that the Fed remits all profits after its expenses back to the treasury. So let’s say the Fed profits, it then in turn, after it’s paid its bills, gives that money back to the treasury.

[00:52:54.400] – Nersisyan

Right.

[00:52:55.080] – Grumbine

Well, we know we don’t re-spend dollars per se, but in this case, this weird thing is happening. The Fed is taking its profits and giving it back to the government. What happens to those profits once it’s given to the treasury?

[00:53:13.150] – Nersisyan

That’s a good question. It is an accounting move, because on the one hand, you have the treasury that’s paying interest. And of course, with quantitative easing, the Fed owns a lot of treasury bonds. So the Fed is getting a lot of those interest payments from the treasury. And at the end of the year or quarter, however it works, the Fed then turns around and gives that interest payment that the treasury has paid it after expenses and paying, I don’t know, 6% dividend or something like that to the reserve banks, it returns the rest to the treasury.

So for all practical purposes, if the treasury didn’t issue those bonds, nothing would be different because the treasury issued them, the Fed owns them, the treasury paid interest. And the Fed then took that interest and returned that back to the treasury. So it’s as if those bonds were never issued and as if the Fed directly just financed our treasury spending like we used to with like a line of credit, that kind of thing.

Now, all of this happens with the Treasury’s general account, so if the treasury is making a payment to the Fed, the Treasury’s general account is Treasury’s checking account at the Fed, and it’s a liability for the Fed and it’s an asset for the treasury. So if the treasury is making a payment, then the balance in that general account is reduced. And if the Fed is making a payment to the treasury, then the balance is increased.

That’s really the only way the payment can happen between the treasury and the Fed. Like, “I owe you more today and tomorrow I owe you less.” So today, the treasury owes to the Fed, and tomorrow the Fed owes the treasury. Of course, the critics have made a big deal out of this that the treasury has an account at the Fed and the balance has to go up or down. Right.

When taxes are paid, the balance goes up. When spending happens, the balance goes down and so on. And so, MMT crtitics) say, well, MMT is obscuring reality because there is this account and the balance has to be positive, blah, blah, blah. Well, when MMT’s point is that, no, we’re actually pointing out that these two are part of the government, just like treasury isn’t the whole government.

The Fed isn’t the whole government. The treasury doesn’t issue securities, in a sense, on its behalf. They are the United States liabilities. They’re not the liabilities of the Treasury in particular, right?

[00:55:37.100] – Grumbine

Right.

[00:55:38.730] – Nersisyan

So (in) the same way, the liabilities of the Fed aren’t  “the liabilities of the Fed,” they are liabilities of the US government. Reserves are the liabilities of the US government. And so, it’s an asset for the US government; it’s a liability for the US government. And so, they cancel each other out. And that’s what MMT says. And that’s what critics see as obscuring reality, when we think it actually eliminates what’s really happening.

[00:56:04.150] – Grumbine

The real question then is that ultimately, taxes do not pay for or finance spending. But in this particular case, we have a real big spotlight on this that says these two have a consolidated balance sheet. Don’t they? Explain that? Because I think that a lot of people trip over that, and it plays right into what you just said.

[00:56:27.910] – Nersisyan

So in reality, of course, they do have separate balance sheets. Otherwise you couldn’t have a treasury account at the Fed.

[00:56:34.420] – Grumbine

Right.

[00:56:34.730] – Nersisyan

But in a sense, it’s somewhat of a fiction. This separation is a fiction. And the fact that the Fed turns over its profits back to the treasury shows that it is a fiction. It shows that the Fed is not an independent agency that’s not subject to any kinds of rules, that it’s above Congress. In a sense, that (it’s) its own branch of government, something like that.

No, the Fed has to turn over its profits back to the treasury. And it shows that the Fed is not this independent thing. And so theoretically, then you can consolidate the balance sheet. It’s like a husband and a wife. The husband owes the wife. But if you think of the household balance sheet, then those items are going to disappear. What the husband owes the wife, it’s an asset for one of them.

It’s a liability for the other one. So they cancel each other out. At the end of the day, when you consolidate that into a household balance sheet and the consolidated balance sheet in case of the government then shows that when spending happens, reserves go up, when taxes are paid, reserves go down.

And that’s what’s important, because what’s important is the relationship between the private sector and the government as a whole, which encompasses the treasury and the Fed.

[00:57:55.930] – Grumbine

This was absolutely incredible. So many great chunks of valuable information that I think activists trying to spread the good word will be able to use hopefully in many discussions to come. Yeva, this was amazing. I’m so glad I finally got to have you on. Tell us a little bit about what you’ve got coming up to close us out.

[00:58:16.930] – Nersisyan

Well, we have a couple of things going on. Randy and I are writing a paper on inflation just trying to understand where inflation is coming from, whether it is driven by supply side mostly or is it a demand side issue. And then another follow up thing to that is what the Fed can do about it and the Emperor has no clothes situation where the fed cannot really do what everybody believes the Fed is going to be able to do which is say lower inflation without getting us into a recession.

The fed does not really have the tools to do that. We also have an MMT companion coming up with Elgar. It’s a more academic thing but it’s pretty comprehensive in that we have entries for everything. So the consolidation for example, or the redemption of currency. There are lots of entries on everything including responses to critics and so on and a couple of short things actually on whether MMT was vindicated or not with the corporate’s crisis and so on. So it should be up on the Levy website soon.

[00:59:23.230] – Grumbine

Fantastic. So this is Yeva Nersisyan and I really appreciate your time. This is Steve Grumbine saying thank you all for joining us at Macro and Cheese. We’re out of here.

[00:59:58.650] – 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.

Yeva Nersisyan   Podcast Guest 

Her research interests include monetary theory, financial instability and regulation and macroeconomic policy. Yeva has published a number of papers on the topics of shadow banking, fiscal policy, government deficits and debt, financial fragility and instability, financial reform and retirement policy. 

Associate Professor of Economics at Franklin & Marshall College 

Publications 

L. Randall Wray

A Senior Scholar and a professor of economics at Bard College. His current research focuses on providing a critique of orthodox monetary theory and policy, and the development of an alternative approach. 

Modern Money Primer 

Macroeconomics 

Publications 

Global Institute for Sustainable Prosperity 

An independent public policy think-tank dedicated to the promotion of interdisciplinary research in the service of an improved quality of life for all members of society 

 Website

Pavlina Tcherneva 

An American economist, of Bulgarian descent, working as associate professor and director of the economics program at Bard College

The Case for a Job Guarantee 
Publications 

Larry Summers 

An American economist who served as the 71st United States Secretary of the Treasury from 1999 to 2001 and as the 8th Director of the National Economic Council from 2009 to 2010. 

Website

Jason Furman 

An American economist and professor at Harvard University’s John F. Kennedy School of Government and a Senior Fellow at the Peterson Institute for International Economics.

Blog Entries

Matt Bruenig 

An American lawyer, blogger, policy analyst, commentator, and founder of the left-leaning think tank People’s Policy Project. 

 https://mattbruenig.com/ 

Doug Henwood 

an American journalist, economic analyst, author, and financial trader who writes frequently about economic affairs 

Articles at Jacobin 

Paul Krugman 

an American economist and public intellectual, who is Distinguished Professor of Economics at the Graduate Center of the City University of New York 

 Website 

Robert Reich 

An American public policy professor, author, lawyer, and political commentator. He served in the administrations of Presidents Gerald Ford and Jimmy Carter, as well as serving as the United States Secretary of Labor from 1993 to 1997 in the cabinet of President Bill Clinton 

Website 

Greg Mankiw

An American macroeconomist who is currently the Robert M. Beren Professor of Economics at Harvard University. Mankiw is best known in academia for his work on New Keynesian economics. Mankiw has written widely on economics and economic policy

Website 

Richard Wolff 

An American Marxian economist, known for his work on economic methodology and class analysis. He is Professor Emeritus of Economics at the University of Massachusetts Amherst, and currently a Visiting Professor in the Graduate Program in International Affairs of the New School in New York 

Website 

American Economic Journal 

Publishes papers covering a range of topics in applied economics, with a focus on empirical microeconomic issues. 

Website

Ezra Klein Show (podcast) 

Far-reaching conversations about hard problems, big ideas, illuminating theories, and cutting-edge research with news-makers and power players in politics and media.

Ezra Kein Show podcasts

OPEC 

The Organization of Petroleum Exporting Countries is an intergovernmental organization of 13 countries. Founded on 14 September 1960 in Baghdad by the first five members, it has since 1965 been headquartered in Vienna, Austria 

Milton Friedman 

An American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the complexity of stabilization policy  

Warren Mosler 

An American economist, hedge fund manager, politician, and entrepreneur. He is a co-founder of the Center for Full Employment and Price Stability at University of Missouri-Kansas City. and the founder of Mosler Automotive 

Soft Currency Economics II 

The 7 Deadly Innocent Frauds of Economic Policy 

Jon Stewart  – “The Problem with Jon Stewart” (TV / Podcast) 

Brings together people impacted by different parts of a problem to discuss how people can drive change. 

Podcast referenced in this episode  and the MMT Rebuttal  

Chris Hedges On Contact  (TV) 

Hedges interviews the black sheep of the establishment 

Webpage for show 

Levy Institute 

Founded in 1986 as the Jerome Levy Economics Institute, the Levy Economics Institute of Bard College is a nonprofit, nonpartisan public policy think tank

UMKC 

The Economics department has become a leading voice for what advocates call a “modern” explanation of money. If everyone understood it, they say, it would defuse the nation’s rancorous deficit debate. 

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