Related:
Bank of England: Money creation in the modern economy
Bank of England: Banks are not intermediaries of loanable funds — and why this matters
Deutsche Bundesbank: How money is created
Deutsche Bundesbank: The Role of Banks, Non-Banks and the Central Bank in the Money-Creation Process (German only, remove the automatically added space near the end of the link)

I intentionally did not list any of the UMKC material nor any of Mosler's work, because people seem to ignore this stuff unless it comes from people/institutions they consider to be authorities in the field. Ergo two of the most important central banks.

Or if you prefer a short video, here's Greenspan taking Paul Ryan to school: There is nothing to prevent the government from creating as much money as it wants and paying it to somebody."

She must feel crazy sometimes. Almost like a movie--"Am I going crazy here? Am I the only who sees what is going on here?"

For those who don't know, she frantically tried to tell Alan Greenspan that he had to control credit access and interest rates before the collapse in 2008.

http://harvardmagazine.com/2008/05/making-credit-safer-html

http://billmoyers.com/segment/flashback-elizabeth-warren-basically-predicts-the-great-recession/

I fear she will go a little crazy at some point; that being right for so long, about something so important---will lead to mind almost cracking. I hope not.

Well, cheers for sticking with it anyway, I really appreciate it.

It's a one hour talk on the deficit in particular, and most of what she says is based on MMT principles that would add another 5 hours to her talk if she were to explain them. With neoclassical economics, you can sort of jump right in, given how they are taught at schools and regurgitated by talking heads and politicians, day in and day out. MMT runs contrary to many pieces of "common sense" and since you can't really give 10 hour talks everytime, this is what you end up with – bits and pieces that require previous knowledge.

I'd offer talks by other MMT proponents such as William Mitchell (UNSW), Randy Wray (UMKC) or Michael Hudson (UMKC), but they are even less comprehensible. Sorry. Eric Tymoigne provided a wonderful primer on banking over at NEP, but it's long and dry.

Since I'm significantly worse at explaining the basics of MMT, I'm not even going to try to "weave a narrative" and instead I'll just work my way through it, point by point.

@notarobot

"Let's address inequality by taking on debt to increase spending to help transfer money to large private corporations."

You don't have to take on debt. The US as the sole legal issuer of the Dollar can always "print more". That's what the short Greenspan clip was all about. Of course, you don't actually print Federal Reserve Notes to pay for federal expenses. It's the digital age, after all.

If the federal government were to acquire, say, ten more KC-46 from Boeing, some minion at the Treasury would give some minion at the Fed a call and say "We need $2 billion, could you arrange the transfer?" The Fed minion then proceeds to debit $2B from the Treasury's account at the Fed (Treasury General Account, TGA) and credits $2B to Boeing's account at Bank X. Plain accounting.

If TGA runs negative, there are two options. The Treasury could sell bonds, take on new debt. Or it could monetise debt by selling those bonds straight to the Fed – think Overt Monetary Financing.

The second option is the interesting one: a swap of public debt for account credits. Any interest on this debt would be transfered straight back in the TGA. It's all left pocket, right pocket, really. Both the Fed and the Treasury are part of the consolidated government.

However, running a deficit amounts to a new injection of reserves. This puts a downward pressure on the overnight interest rate (Fed Funds Rate in the US, FFR) unless it is offset by an increase in outstanding debt by the Treasury (or a draw-down of the TT&Ls, but that's minor in this case). So the sale of t-bonds is not a neccessity, it's how the Treasury supports the Fed's monetary policy by raising the FFR. If the target FFR is 0%, there's no need for the Treasury to drain reserves by selling bonds.

Additionally, you might want to sell t-bonds to provide the private sector with the ability to earn interest on a safe asset (pension funds, etc). Treasury bonds are as solid as it gets, unlike municipal bonds of Detroit or stocks of Deutsche Bank.

To quote Randy Wray: "And, indeed, treasury securities really are nothing more than a saving account at the Fed that pay more interest than do reserve deposits (bank “checking accounts”) at the Fed."

Point is: for a government that uses its own sovereign, free-floating currency, it is a political decision to take on debt to finance its deficit, not an economic neccessity.

"Weimar Republic"

I'm rather glad that you went with Weimar Germany and not Zimbabwe, because I know a lot more about the former than the latter. The very, very short version: the economy of 1920's Germany was in ruins and its vastly reduced supply capacity couldn't match the increase in nominal spending. In an economy at maximum capacity, spending increases are a bad idea, especially if meant to pay reparations.

Let's try a longer version. Your point, I assume, is that an increase in the money supply leads to (hyper-)inflation. That's Quantity Theory of Monetary 101, MV=PY. Amount of money in circulation times velocity of circulation equals average prices times real output. However, QTM works on two assumptions that are quite... questionable.

First, it assumes full employment (max output, Y is constant). Or in other terms, an economy running at full capacity. Does anyone know any economy today that is running at full capacity? I don't. In fact, I was born in '83 and in my lifetime, we haven't had full employment in any major country. Some people refer to 3% unemployment as "full employment", even though 3% unemployment in the '60s would have been referred to as "mass unemployment".

Second, it assumes a constant velocity of circulation (V is constant). That's how many times a Dollar has been "used" over a year. However, velocity was proven to be rather volatile by countless studies.

If both Y and V are constant, any increase in the money supply M would mean an increase in prices P. The only way for an economy at full capacity to compensate for increased spending would be a rationing of said spending through higher prices. Inflation goes up when demand outpaces supply, right?

But like I said, neither Y nor V are constant, so the application of this theory in this form is misleading to say the least. There's a lot of slack in every economy in the world, especially the US economy. Any increase in purchases will be met by corporations with excess capacity. They will, generally speaking, increase their market share rather than hike prices. Monopolies might not, but that's a different issue altogether.

Again, the short version: additional spending leads to increased inflation only if it cannot be met with unused capacity. Only in an economy at or near full capacity will it lead to significant inflation. And even then, excess private demand can easily be curbed: taxation.

As for the Angry Birds analogy: yeah, I'm not a fan either. But all the other talks on this topic are even worse, unfortunatly. There's only a handful of MMT economists doing these kinds of public talks and I haven't yet spotted a Neil deGrasse Tyson among them, if you know what I mean.

@radx

I tend to see controlling the quantity of money along with the interest rate as a valid way for central banks to influence the economy when necessary but I admit in or after crises they are generally almost useless. Economics being a social science is always going to be notoriously unreliable in both prediction and in isolation the causes of a prior event, some would say almost useless.

Controlling purely the interest rates on overnight bank deposits for banks at the central bank (what setting the rate is, as opposed to the commonly held belief that the central bank dictates lending and borrowing rates) is if anything of little impact. These rates can be at 0% and if banks consider economic prospects poor, that will not cause them to lend any further.

Such was the case in the US in the immediate years after '08. i would argue the only action to have real economic impact was the buying up of distressed mortgage securities by the Fed. The parts of QE1, 2 that involved injecting money into the banks basically just led to them investing in low risk securities and earning interest (effectively just sitting on it) because they were not willing to risk lending it.

While I'm not a big fan of ceding authority to a largely independent organisation, I have to admit that since central banks have become independent, inflation in those countries has become a thing of the past. Now granted they get things wrong (e.g. Greenspan inflating the '08 bubble) but their main advantages is being willing to take measures that cause short term pain but long term gain. I don't think any elected politician would have been willing to take the measures Volcker did to curb inflation for example. In fact, while he was at the Fed, Reagan's government effectively inflated the Savings and Loans bubble.

So Tsipras promises to sell half the government cars, and one of the three government jets, and that the politicians will set the example of frugal living. Despite these and other promises Greenspan, and almost everyone else, is predicting the Grexit.

I only found a single solitary article that was positive, and I'd be a lot happier if I thought he might be right - http://www.theguardian.com/business/2015/feb/08/greece-debt-deal-not-impossible

I found another quote that I liked, but unfortunately I can't find it again... it was something along the lines that as Syriza are promising a budget surplus it's time to stop calling them radical left: They're really centre left.

The only radical thing about them is their promise to end the kleptocracy and for the budget cuts to include themselves (in my experience this is extremely rare among any political party).

Existing infrastructure. All those oil refineries, transportation, just for starters. People make money from every level of production from drilling to selling the finished products. Then we have the dirty secret around everything we do: if it does not produce waste, it's not profitable. Fusion will render a lot of investments moot. Investments that are tied to finances, the structures are not free, they cost money to build and so they are worth something. Even thou everyone knows that free energy is our only hope, it's a death sentence to the big oil. Even if they are controlling it; the unit price of electricity will drop and EVERYONE in the chain loses money. Except the end user. Not even if we double or triple or 20 times exceed current energy consumption, it's gonna make less money. Or so they think, the world is full of business models that really does not work anymore.

I just to think "it'll get better, someday". It just have to. But Mr Fusion is not ready in 2015, that's more than sure, it's fixed to be so. And there is no conspiracy here, just follow the money where it goes and for 100% sure it ain't flowing towards free energy. No one is keeping secret to fusion locked away somewhere, if it works, they will start to use it. But they sure can delay the progress long enough for those Greenspan mates to die wealthy..

"To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble."

Paul Krugman, 2002.

Remember "The New Economy"? particularly how new-fangled, computerized market analysis would do away with the old laws of economics altogether? That was the idea that guided US economic policy in the Clinton era.

Greenspan was a big proponent of the idea, although apparently he did at one point have his doubts. I don't know how much that ideology informed policy after the dotcom crash, and how much of it was just a desperate attempt to keep the US economy from tanking altogether, but the crisis was successfully weathered, or postponed until 2008...

Ayn Rand's Influence on Alan Greenspan
In The Age of Turbulence, Alan Greenspan describes the influence that Ayn Rand had on his intellectual development.

Ayn Rand became a stabilizing force in my life. It hadn't taken long for us to have a meeting of the minds -- mostly my mind meeting hers -- and in the fifties and early sixties I became a regular at the weekly gatherings at her apartment. She was a wholly original thinker, sharply analytical, strong-willed, highly principled, and very insistent on rationality as the highest value. In that regard, our values were congruent -- we agreed on the importance of mathematics and intellectual rigor.

But she had gone far beyond that, thinking more broadly than I had ever dared. She was a devoted Aristotelian -- the central idea being that there exists an objective reality that is separate from consciousness and capable of being known. Thus she called her philosophy objectivism. And she applied key tenets of Aristotelian ethics -- namely, that individuals have innate nobility and that the highest duty of every individual is to flourish by realizing that potential. Exploring ideas with her was a remarkable course in logic and epistemology. I was able to keep up with her most of the time.

Rand's Collective became my first social circle outside the university and the economics profession. I engaged in the all-night debates and wrote spirited commentary for her newsletter with the fervor of a young acolyte drawn to a whole new set of ideas. Like any new convert, I tended to frame the concepts in their starkest, simplest terms. Most everyone sees the simple outline of an idea before complexity and qualification set in. If we didn't, there would be nothing to qualify, nothing to learn. It was only as contradictions inherent in my new notions began to emerge that the fervor receded.

One contradiction I found particularly enlightening. According to objectivist precepts, taxation was immoral because it allowed for government appropriation of private property by force. Yet if taxation was wrong, how could you reliably finance the essential functions of government, including the protection of individuals' rights through police power? The Randian answer, that those who rationally saw the need for government would contribute voluntarily, was inadequate. People have free will; suppose they refused?

I still found the broader philosophy of unfettered market competition compelling, as I do to this day, but I reluctantly began to realize that if there were qualifications to my intellectual edifice, I couldn't argue that others should readily accept it. [...]

Ayn Rand and I remained close until she died in 1982, and I'm grateful for the influence she had on my life. I was intellectually limited until I met her. All of my work had been empirical and numbers-based, never values-oriented. I was a talented technician, but that was all. My logical positivism had discounted history and literature -- if you'd asked me whether Chaucer was worth reading, I'd have said, "Don't bother." Rand persuaded me to look at human beings, their values, how they work, what they do and why they do it, and how they think and why they think. This broadened my horizons far beyond the models of economics I'd learned. I began to study how societies form and how cultures behave, and to realize that economics and forecasting depend on such knowledge -- different cultures grow and create material wealth in profoundly different ways. All of this started for me with Ayn Rand. She introduced me to a vast realm from which I'd shut myself off.

From The Age of Turbulence, pp. 51-53. Omissions from the text are shown with bracketed ellipses. All other punctuation and spelling is from the original.

http://www.noblesoul.com/orc/bio/turbulence.html

These are the words I hope never to hear from the nuclear regulator:

Greenspan Future NRC spokesperson: I made a mistake in presuming that the self-interest of organizations, specifically banks power corporations and others, was such as they were best capable of protecting their own shareholders customers (and the American public).

Bill Moyers can be trusted. And he's saying this: Greenspan and Clinton fucked up, big time.

A. We have been running counter-cyclical deficits. You can say what you want about the "shell game", which I btw don't agree with as a characterization, in the mid to late 90's, but compare that to the deficits run post 9/11. There's a marked difference. Compare George W. Bush deficits of the mid 2000's to what Obama has done. When the economy tanked, deficits grew, not stayed the same or shrunk.

http://www.usgovernmentspending.com/include/us_deficit_100.png

I completely agree with you we have failed to run surpluses when the economy has been prospering. That is absolutely the case, but you definitely see swelling of deficits in response to recessions in the chart above. That's a Keynesian idea, even if it is shared with the monetarists.

B. Yeah, I'm sure. Granted, LOL @ Ballmer from time to time.

D. Individuals may be skeptical of the FDIC right now, but we're speaking of the influence systemically of the FDIC. This past financial crisis was all about a credit crisis. Part of why the recession occurred occurred was an eroding of available credit due to pervasive fear and mistrust, a lot among banking institutions of each other. The last thing we needed was a run on the banks, and that was very largely avoided. The FDIC was a huge reason for that. Had there been, more banks would have gone under, and banks still surviving would have been even more irrationally tight on lending. That would have been absolutely disastrous. There's little doubt in my mind we would have seen 20% unemployment.

>> ^bmacs27:

A. Lol at counter-cyclic budget deficits. I know they played that whole shell game with social security in the 90s, but other than that, I don't think we've really been running many counter-cyclic Keynesian surpluses. The other thing to remember is that monetarism is a derivative of Keynesian theory, so it isn't surprising that they have some overlapping prescriptions. I guess I would push my argument further by stating that Greenspan is broadly considered a monetarist, and he pretty much ran the economy over that interval. Teh maestro.
B. Heh, you sure about that? "I LOVE this COMPANY!!!!!!!"
C. I think we pretty much agree here without getting to wonkish.
D. My GF is in ING. It's now capital one, so she's likely leaving it. Pretty much I wish your average bank was much smaller than they are today. Also, I wouldn't be so confident in that FDIC insurance. The FDIC itself is in some dire straights. Also, they just moved all that bad Merrill paper into FDIC insured subsidiaries of BoA so that they could borrow against the deposits at better short term rates to support it.

A. Lol at counter-cyclic budget deficits. I know they played that whole shell game with social security in the 90s, but other than that, I don't think we've really been running many counter-cyclic Keynesian surpluses. The other thing to remember is that monetarism is a derivative of Keynesian theory, so it isn't surprising that they have some overlapping prescriptions. I guess I would push my argument further by stating that Greenspan is broadly considered a monetarist, and he pretty much ran the economy over that interval. Teh maestro.

B. Heh, you sure about that? "I LOVE this COMPANY!!!!!!!"

C. I think we pretty much agree here without getting to wonkish.

D. My GF is in ING. It's now capital one, so she's likely leaving it. Pretty much I wish your average bank was much smaller than they are today. Also, I wouldn't be so confident in that FDIC insurance. The FDIC itself is in some dire straights. Also, they just moved all that bad Merrill paper into FDIC insured subsidiaries of BoA so that they could borrow against the deposits at better short term rates to support it.

Yeah, feel free to slap that video in the face of anyone who ever says Peter Schiff is awesome and/or infallible.

The Krugman predictions of stagnation and disinflation were right, crackpot predictions of Weimar/Zimbabwe-style hyperinflation were dead wrong.

I'm a bit curious how Schiff spins his utter fail.

In reply to this comment by dystopianfuturetoday:
Peter Schiff *Failboat.com.org

In reply to this comment by NetRunner:
Definitely one to mark down:

Schiff says we'll have a crash of our economy driven by hyperinflation by the end of the year, or maybe in 2010.

Krugman (who unlike Schiff is a Nobel prize winning economist) also predicted the problem we're having now, and says if we don't do something even bigger than an $800bn stimulus, we're in for a deflationary problem, just like the Great Depression.

Clearly, someone will be proven right, even if disaster ensues.

Flim-flam artists like Schiff should know better, if the problem now is because Greenspan made the interest rate too low in 2002 then the real problem is that our current 0% interest rate will cause a new asset bubble that will collapse, so he should allow for a much longer period of time for it to gestate, like say Obama's second term, 2014 or so.

But that wouldn't get him on the TeeVee machine to throw bricks at Democrats as often.

Peter Schiff *Failboat.com.org

In reply to this comment by NetRunner:
Definitely one to mark down:

Schiff says we'll have a crash of our economy driven by hyperinflation by the end of the year, or maybe in 2010.

Krugman (who unlike Schiff is a Nobel prize winning economist) also predicted the problem we're having now, and says if we don't do something even bigger than an $800bn stimulus, we're in for a deflationary problem, just like the Great Depression.

Clearly, someone will be proven right, even if disaster ensues.

Flim-flam artists like Schiff should know better, if the problem now is because Greenspan made the interest rate too low in 2002 then the real problem is that our current 0% interest rate will cause a new asset bubble that will collapse, so he should allow for a much longer period of time for it to gestate, like say Obama's second term, 2014 or so.

But that wouldn't get him on the TeeVee machine to throw bricks at Democrats as often.