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The FT gets jiggy with tax driven demand for currencies

August 21, 2011

Strange things are happening in the world – people are paying attention to MMT.

Chris Cook goes all MMT on us:

He talks about:

  1.  Money as tax credits,
  2. The myth of taxing first and spending second
  3. why the money multiplier is false.

This is straight up MMT.  People like Nick Rowe think that MMT is accounting identities.  It isn’t. Rather, MMT requires understanding the accounting identities along with their obvious implications.

If you assume government out of existence, you’re getting the accounting wrong.  You’re assuming money as tax credits out of existence, and the base demand for money out of existence.  Therefore you cannot make any reasonable statements about interest rates, no matter how good the model.

Note this isn’t Nick’s fault – its the mainstream theory’s fault.  He’s just great at explaining stuff, so the faults of the mainstream become 100% clear.

I am working on a longer post on this topic that points out exactly where and how the mainstream gets the accounting wrong.

Back to Chris Cook. They call it the fiscal theory of the price level, but it’s 95% MMT.  And the reason this idea is getting traction is because MMTers are everywhere.

[Update:  originally mistook Chris Cook and Clive Crook. Reading/Writing prior to a party yesterday at top speed!]

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  1. Mattay
    August 21, 2011 at 3:21 pm

    Not only that, but a lot of the material comes verbatim from things I have read multiple times on different MMT blogs.

    Tying the debt ceiling back to the gold standard, the Bernanke-Sean Duffy dialogue, dollars are destroyed/burned (like using a frequent flyer mile) when taxes are paid, etc.

    It’s clear that he is reading the MMT blogs.

    • Mattay
      August 21, 2011 at 3:34 pm

      Never mind, I was thrown off by “Clive Crook” – it’s actually Chris Cook, a known MMTer:

      “Chris Cook is no sign that MMT is going viral. He is one of the original Gang of 8 chartalist economists and good friend of Michael Hudson, one of the economists at U of Missouri KC, and thus belongs to roughly the same perspective as Mosler, Wray, and other MMT’ers.”

      • TC
        August 21, 2011 at 10:28 pm

        I was too.

        Still, it’s the longest post by Izabella Kaminsky. In the FT. And Cook is in the asia times. IK is doing sector balances. She mentiones MMT by name.

  2. Clonal Antibody
    August 21, 2011 at 5:12 pm

    That is a discussion taking off from Chris Cook’s Asia Times article ” A very Secret Agent” of July 27. I believe it was talked about some in MMT circles.

  3. Clonal Antibody
    August 21, 2011 at 5:18 pm

    I have also come to the conclusion that the current method of funding Social Security and Medicare is inadvertently responsible for the high US spending on National Security, and therefore responsible for the US foreign adventures! Let me know if you need me to clarify!

    • TC
      August 21, 2011 at 10:31 pm

      lol – you’re probably right. It only took me about 60 seconds, but that’s after you said it. It’s the initial idea that counts. Never would have crossed my mind otherwise.

      Here;s the chain. Payroll taxes considered separate from general fund. Therefore not counted as surplus/deficit on one hand, but considered social program by everyone. Since it runs a surplus, allows greater spending on other areas. Defense is huge, so it gets this huge boost to spending it would not get if SS was part of general fund.

      • Clonal Antibody
        August 21, 2011 at 11:53 pm

        If we look at the FY ’12 spending pie, we find that

        The main items of govt spending are (highest first)

        1) Defense 25%
        2) Healthcare 23% (primarily Medicare and medicaid)
        3) Pension 22% (primarily Social Security)
        4) Welfare 12% (primarily Food Stamps, unemployment and SSI)
        5) Interest 6%
        6) Education 3%
        7) Transportation 3%

        These items together account for 94% for the Federal Budget

        Healthcare and Social Security account for 45% of Federal outlays. These are always paid for by a dedicated tax, that produces surplus revenues. So these items can never account for the Federal Deficit. The deficit has to be produced from other spending.

        As per MMT accounting, the deficit is necessary to fund net private savings and interest.

        In the pie above interest accounts for 6% – but this is only the interest paid on government issued Tsy’s.

        What are these so called savings? We have previously discussed that interest on bank loans has to come from GDP growth, and in the absence of enough growth, it has to come from the government deficit.

        Private credit creation, and charging of interest on it, of necessity require economic growth. This would not be the case with public banking. A “no growth” sustainable economy is only feasible with interest payments going to the government – (Another topic for another day!)

        Going back to the deficit – the deficit has to come from a spending area other than those items covered by the “covered” expenses. This leaves defence and homeland security as the major items with which to create a deficit!

        We could theoretically cut defence spending by eliminating the SS and Medicare taxes. I believe that the negative effects on the economy will be balanced out by the stimulative effects of the payroll tax cut!

        • TC
          August 22, 2011 at 9:54 am


          Yep – I don’t know if you’ve read any Bucky Fuller, but he calls this stuff “killingry”. Does it really add to our standard of living? Tyler Cowen is asking the same question over at Marginal revolution.

          The only segments large enough to absorb the necessary deficit spending are SS, Medicare, Defense and homeland. Since SS and Medicare are largely self funded, the necessary deficit spending must happen in defense. This level of deficit spending is what the market “demands”, so it happens.

        • beowulf
          August 24, 2011 at 1:15 am

          SS is off-budget both for SS FICA taxes (12.4%– tempor. 10.4%– of first $106k of wage income) and SS benefits paid . Medicare FICA is 2.9% of wage income uncapped and starting in 2013, income over $250k will be taxed at 3.8% on wage (“earned) and capital (“unearned) income.
          The 2013 change is ostensibly to help fund Obamacare, I think the real reason was someone was looking ahead. If the US ever replaces the income tax with a VAT, the Medicare FICA surtax on wage and capital income over $250k could be expanded to full 15.3% FICA rate to continue taxing capital gains even after abolition of income taxes (if they included unrealized capital gains, it’d actually raise more money than taxing realized gains at 35%).

          But I digress. I wanted to point out that Medicare taxes and spending are on-budget. Medicare FICA only raise $200 billion but “healthcare spending” is $800 billion a year. Medicare FICA only covers Part A, hospital coverage. A combination of general revenue and recipient premiums (75/25 split usually) fund Part B provider and Part D drug benefits (Part C is “corporate welfare for private insurers”, officially “Medicare Advantage”). Medicaid is paid out of general revenue, but requires states to pony up $175 billion a year, a state has to pay its share or lose all federal Medicaid funding.

  4. August 21, 2011 at 5:22 pm

    Chris Cook and Clive Crook are not the same person.

  5. Max
    August 22, 2011 at 1:41 am

    “A “no growth” sustainable economy is only feasible with interest payments going to the government”

    Theoretically no – it just requires bankers and capitalists to spend their income. If they don’t want to consume (that is, if wealth accumulation is a form of consumption for them), then there’s a problem.

    • Clonal Antibody
      August 22, 2011 at 9:34 am

      You are not correct on that. It is a simple matter of accounting identities. The banks cannot create the money for interest payments – nor do they have any interest in doing it. Thus the money to pay interest has to come from somewhere – remember you have to pay your interest in “money” not in “cows” or “widgets” that you may produce. Thus your product has to be monetized. The bank cannot produce new money to specifically buy your product. That money has to be loaned into existence, and then repaid with interest.

      If all the interest earned by the bankers is spent back into the economy, that engenders growth. That is the whole reason why growth is considered to be essential to an economy. Without growth, interest to savers becomes infeasible, other than by government deficits. Continued interest payments even by the government in a “no growth” economy would be inflationary, and would penalize the “poor” (non savers) and and favor the “rich” (savers.) In a fiat currency regime, societal “monetary” savings become unnecessary. Inventory stocks are still a good thing – whether by individuals or business – but they are not “savings” – saving is foregoing spending money “currently” in preference for spending that money in the “future”. The money has to be spent if you want to accumulate an inventory of any “consumable or durable item.” Any “investment” of this saving that envisions a “return” with profit, of necessity requires economic growth!

      • August 22, 2011 at 2:01 pm

        There will always be growth, because we get better at doing things with the same stuff. There just won’t be as much growth because you won’t be able to use primary resource exploitation.

  6. August 23, 2011 at 9:50 pm

    A brief clarification, Chris Cook is not an MMTer known or unknown but he broadly accepts the precepts and will most likely IMO become an MMTer.

    Good post by the way.

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