Modern Money
If you’re trying to understand modern money theory or you want to explain MMT to others, this is the episode. Economist L. Randall Wray explains the basics and debunks the myths that hold us back.
Steve’s guest is noted economist L. Randall Wray, one of the early developers of modern money theory. As many times as this podcast has talked about MMT, it’s always topical. In fact, just last week, Elon Musk discovered 14 magic money computers in government agencies!
So, Trump had to hire the richest man in the world who hired who knows how many hundreds of young tech kids to discover what we’ve been saying for 30 years, which is that Congress appropriates money, and then the computers keystroke it into people’s accounts.
There’s no mystery about this at all, but they think they’ve discovered not only something that people didn’t know, but something that’s, oh, it’s so scary. It’s nefarious that the government uses computers to increase the size of people’s accounts. Well, that’s spending. That’s the way it’s done.
Clearly, this is a good time to revisit the valuable insights of MMT and look at the implications for building a society that serves its people.
This episode dives deep into the fundamentals, debunking misconceptions about government spending, the role of taxes, and the myth that the US government can run out of money, like a household.
Randy and Steve talk about changes in the economy due to financialization, and the difference between budget constraints and inflation constraints. Randy explains why we need to look at the history of debt in order to understand money. He talks about banking, including transactions between the Federal Reserve and the Treasury.
The conversation breaks down complex concepts into relatable terms, sometimes with a touch of humor.
Illustrating the creation of currency, Randy describes an imaginary scenario in which the fictional characters Robinson Crusoe and Friday devise a currency to facilitate barter.
Randy: So, they come up with the idea of, ‘hey, we can use seashells as a medium of exchange.’ And this is where money came from. It was Robinson Crusoe and Friday. Okay, think about this a little bit. It’s pretty bizarre. We’ve got Crusoe and Friday marooned on a desert island. I can think of two much more likely scenarios. Okay, one, Crusoe came from Europe. What do Europeans do when they come across native people?
Steve: Kill them.
Anyone with an interest in how the economy truly operates will learn something from this episode.
L. Randall Wray is a Professor of Economics at the Levy Economics Institute of Bard College, and Emeritus Professor at University of Missouri-Kansas City. He is one of the developers of Modern Money Theory and his newest book on the topic is Understanding Modern Money Theory: Money and Credit in Capitalist Economies (Elgar), forthcoming in spring 2025.
Recent books on MMT include Making Money Work for Us (Polity, November 2022), a companion illustrated guide, Money For Beginners (Polity, May 2023, with Levy Institute graduate Heske Van Doornen), and the third edition of Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems (Springer, 2024). He is also the author of Why Minsky Matters (Princeton, 2015) as well as the author, co-author, and editor of many other books.
Find more of his work at levyinstitute.org
FULL TRANSCRIPT with EXTRAS
Steve Grumbine:
00:00:43
All right, folks, this is Steve with Macro N Cheese. I have not talked to Randy Wray in a few minutes. Randy Wray last put out a couple great training books, Making Money Work for Us.
A very, very introductory book, Money for Beginners, that we covered here as well. He had Heske van Doornen who did the art for it, and we did book clubs with this stuff. It was really, really great.
And it’s still there on our website. It’s still there on our YouTube channel. We’ve been doing these recordings since 2015, 2016, to put it in perspective.
So we’ve got a decade plus of materials written and video and audio for you to check out.
My friend Randy Wray, who has been a guest many times on the show, even before we were doing Macro N Cheese, when I used to do the old video recordings on YouTube, we would do the side by side pictures and so forth. Just a great guy and one of the people that really made the idea of what happens when the government taxes.
He was the one that really brought that to life for me. His work in New Economic Perspectives was where I cut my teeth, the Modern Money Primer, which then turned into his book, Modern Money Theory.
It’s a really, really incredible book. I recommend going out and getting it as well. I recommend getting everything he’s written.
You can get a lot of his white papers right there on Levy [Institute] College’s website. So let me just introduce L. Randall Wray.
Randy is a professor of economics at the Levy Economics Institute of Bard College and emeritus professor at University of Missouri, Kansas City.
He’s one of the developers of modern monetary theory and his newest book on the topic is Understanding Modern Money Theory, Money and Credit in the Capitalist Economies, which is done by Elgar and it’ll be coming out this spring. So without further ado, let me bring on my guest, Randy Wray. Welcome, sir.
L Randall Wray:
00:02:39
Hey, good to be back.
Steve Grumbine:
00:02:40
Absolutely. I’m really thrilled. It’s funny, the timing of this is absolutely perfect.
We just had Yeva [Nersisyan] on discussing DOGE and lo and behold, Elon Musk out of some…it felt like the Twilight Zone.
He’s like, “Hey, we found 14 magic money computers” and you know, wow, what do you know he somehow or another sort of discovered MMT by accident. Like, sort of. I’m not going to give him any credit there because I think that he’s still going to butcher it like crazy.
But what was your take on this, what you saw? He discovered “14 magic money computers.”
L Randall Wray:
00:03:15
Oh, yeah, hilarious.
So Trump had to hire the richest man in the world who hired who knows how many hundreds of young tech kids to discover what we’ve been saying for 30 years, which is that Congress appropriates money, and then the computers keystroke it into people’s accounts.
There’s no mystery about this at all, but they think they’ve discovered not only something that people didn’t know, but something that’s, oh, it’s so scary. It’s nefarious that the government uses computers to increase the size of people’s accounts. Well, that’s spending. That’s the way it’s done.
Steve Grumbine:
00:03:55
It is hilarious because I think that one of the things you asked in one of your oldest articles, at least oldest that I’ve read, right, was “What is money?” And you ask, “Have you seen it? Can you see it?” You know, kind of thing.
And the idea that the money is a unit of account, an inch, a pound, a meter, volume, the liter, whatever you want to call it, metric if you’d like, but it’s still just a unit of measure. And the idea of where do taxes go? I don’t know, where do points go on a scoreboard when you put them up and take them away?
And you know, where do numbers go on a calculator? I think is the one you said in the one. I can’t remember. I feel bad. I should have this, like, total recall because I read it so many times.
But for those people that are just stumbling into this because they read about Musk finding “14 magic money computers,” and forgive me, because I know you’ve done this probably over a million times and probably at least 200,000 with me alone. Give us just an introduction to modern monetary theory or modern money theory, whichever way you want to say it. Help us understand what MMT is.
L Randall Wray:
00:04:59
Okay, well, it started out really focused on the government spending and what are taxes are for and how does the government really spend. Plus, in the very beginning it was describing what goes on.
And you know, Warren Mosler came on [now defunct Post Keynesian Thought] PKT Network in January of 1996, and he was asking that question, and of course he knew the answer, but he was saying, “Does anybody else understand this?” And a few of us said, “Well, yeah, he’s saying it maybe in a slightly different way”, but I knew all the balance sheets.
I’d been teaching that since the late 80s.
How does the government really spend using the tax and loan accounts at about a thousand private banks to keystroke, throw credits onto people’s balance sheets? I knew all of that and I knew that taxes just reverse that. They take it away, wipe it off your balance sheet.
But he had this framing that I thought was very simple and maybe we could get through to people because you can’t get to a blackboard and draw the balance sheets for average people. You can subject students to that, but you can’t explain it that way to other people. And Warren had a very, very good, simple way to explain it.
Steve Grumbine:
00:06:18
When I stumbled onto this thing, I think the very first paper that I read, which was one of the blog posts from the NEP [New Economic Perspectives] stuff. Well, actually I think I did read Seven Deadlies [Seven Deadly Innocent Frauds of Economic Policy] before I read this, but the one that was What are Taxes For?
And I ended up backing into the first part, which was the one where you trounced Doug Henwood.
L Randall Wray:
00:06:38
Oh, yeah. Yes, good old Doug.
Steve Grumbine:
00:06:40
The guy writes for Jacobin and basically mocked this whole debt-free money and what are taxes really for? The idea that do we need taxes and understanding tax-driven money. That was the first time I had ever even considered that.
And I had had an MBA already. Like I had already gone through graduate school and I’d never even heard of tax-driven money. I’d never heard of state theory of money.
I’d never heard of Abba Lerner, I’d never heard of functional finance. All this stuff was left out of grad school. Not one bit of it made it through. So it was like this big awakening. I think he’s still out there, Doug.
I wonder if he’s kind of come to his…
L Randall Wray:
00:07:20
He actually is. He wrote something, I responded, you’re still alive? Anyway. I mean, I’m not trying to be cruel. No, yes, he is still alive and he is still writing.
Steve Grumbine:
00:07:30
Is he writing the wrong stuff though? Has he come on board yet? I wonder.
I have to figure that out because I mean, you know, it stinks. You have these fellow travelers that are largely sympathetic to the things you’d like to do. Largely sympathetic.
You know, they want balance, they want equality, they want workers to have rights, they want society to be good. And lo and behold, they have bad economics. They don’t understand the way the money system works.
And so you end up being mortal enemies accidentally because they will fight tooth and nail that “No taxes really do finance this stuff. You’re lying. Stop that.” Just a crazy kind of dividing line that the MMT sword presents when people are unfamiliar with it.
It’s just a real challenge to overcome that. Anyway, so with that in mind, you know, because you started with what, like five people? I mean, maybe?
L Randall Wray:
00:08:23
It took a while to get up to five, I think. A very, very small amount of people.
Steve Grumbine:
00:08:26
I mean, I look at the Post-Keynesians today and they still have not quite gotten on board with this, have they? It’s still a mystery to them.
L Randall Wray:
00:08:34
Yes.
Steve Grumbine:
00:08:35
They’re still asking about, well, “Is it a good time to borrow money at interest rates” and stuff like that. I don’t understand what the disconnect for them is.
L Randall Wray:
00:08:43
Yeah, well, I think there are a couple of things. So one is progressives do like taxes because they want to reduce inequality.
Steve Grumbine:
00:08:53
Sure.
L Randall Wray:
00:08:54
And some of them accuse us of overlooking the role that taxes could play in reducing inequality. But we don’t. Of course not. Others just fear that, well, if politicians understood this, then they would ignore taxes as a means to reduce inequality.
But personally, I don’t worry that much about it, in part because I’m an academic and I think we need to tell the truth. I’m not going to tell lies just because it might be politically expedient.
Politicians do that all the time, I understand that, but I’m not a politician, so I have to tell the truth. And I think that academic economists who are writing for journals and so on should not say things that are politically expedient.
So I think that’s a big part of the problem. Most economists have not gotten into the details of how governments really spend. So that’s a big problem.
When we first started this in 1996 and I started writing my first book, Understanding Modern Money, I wrote to some Canadian Post-Keynesians because I knew how the US did it, but I didn’t know, is this common? How does Canada do it? Do they have the equivalent of tax and loan accounts at banks and so on? Does the Treasury keep an account at the central bank?
And it turns out, yeah, they do. But those economists did not know. They said, well, I think maybe there’s a paper by somebody from the Bank of Canada on this.
And so I got a hold of the paper. Yeah, they do. It’s exactly the same. And we found out over the years that everybody does it this way. It’s partly because they haven’t dug into it.
But we’re going on 30 years now, and even if they don’t want to make the effort they can read our stuff. They don’t have to take the initiative to look at how their government really spends.
And also as Post-Keynesians, they do understand that there is this logic that [economist John Maynard] Keynes taught us and that we teach even to undergraduates.
And I don’t want to get too much into macro theory, but what Keynes said is that spending has to come first, logically, before income, because spending creates income for somebody. And that’s true of the private sector. It’s also true of the government sector.
Now, Keynes, in his General Theory, the most important book, didn’t really talk about government spending much. He was focused on investment spending by firms and consumption spending by households.
And he said that firms have to spend first, investment, to create income that can end up as saving in the private sector. The injection of investment into the economy creates income that can then be saved, which is a leakage out of the economy.
And he made this argument. And the funny thing is, all Post-Keynesians who are followers of Keynes as well as many other economists, understand this.
So investment first then saving. And all we are saying is that this is also true for government spending and for taxes.
Government spending puts money into the economy, taxes takes it out. So logically, it has to be spend first, then tax. We’ve been saying that for 30 years and I don’t think we can get into this.
I don’t think that logic alone is enough. Okay, we need to go deeper into the description and theory and the paradigm and all of this deeper stuff to make sure we’re right.
But the logic at least gets you started. Okay, well, if the government has to spend first, put the injection in before we can pay our taxes, leakage out, how does it work?
Okay, but at least that’s where you start. You start with the logic, then you go to the description of how they do it.
Steve Grumbine:
00:12:59
When you talk about that, I think it is probably the most mind bending thing because we’ve been convinced that the government can go broke, that the government as an entity is like a household. And this has been said so many times it’s almost painful for me to ask you this. But I think it’s important.
That household analogy is what sticks in people’s brains. ‘The scarcity of money, the inability to pay bills, the having to really, really tighten our belts and pull ourselves up by our bootstraps.’
And of course, ‘government savings is a good thing because the government can go broke.’ And yet at the same time, we understand that the government has unlimited means, it has no financial constraints.
It may have an inflation or a resource constraint, but there’s nothing preventing it other than bad outcomes for just spending whatever it wants to.
So to start with that concept that the government isn’t waiting for your hard earned tax dollars to finance green energy or finance free college, let’s say, or building citizens basic services, you know, free at the point of service to the individual, paid by the government, whatever.
These grand ideas that come out every four years and politicians trot them out and people get excited only to be laughed at by the establishment that says, “How are you going to pay for it? Where are you going to get that money from?” So there’s a lot going against it, has nothing to do with logic.
It’s got to do with what they’ve heard, what they’ve been indoctrinated with, what schools teach to some degree, and also just what is everywhere at the water cooler, you name it.
And every one of these debates we watch for presidents and politicians is filled with pay-fors, filled with nonsensical things that have no bearing on the real world, but they play on people’s minds and hearts and they get us this kind of DOGE nonsense that we’re dealing with now. Help me understand how MMT theorists and developers, what the logic of changing that around.
How do you present the government as the currency issuer and the state and local governments as currency users and people as currency users? That kind of paradigm of issuer versus user.
L Randall Wray:
00:15:07
Yeah, you mentioned the scoreboard. And it’s pretty clear that the scorekeeper at a baseball game is not going to run out of runs. But he follows a rule.
He doesn’t just keystroke credits to the home team so that they can win the game. There’s a rule that will tell him when he can award runs to the home team and he follows the rule. Okay? The same is true for government spending.
We have rules about what the government can do. We go a little more deeply into those rules.
But I mean, everybody knows this, that there is a budget and Musk is running wild on this and that holds the government accountable. So the Fed, which is the government’s bank, follows the rule and it only credits people’s accounts when the government is following the rules.
And then it will credit my Social Security account, okay? Because I’m old and I worked at least 40 quarters, so I get Social Security, there’s a rule, and I get the credits.
Can the government run out of those? No, no more than the scorekeeper. Okay. Now households. Can households run out of credits? Okay, well, who makes payments for the households? Their bank?Okay, Chase, I will write a check to make payments. Now someone might accept my check. I have not actually paid that person. What I’m doing is ordering my bank to pay that person.
And as long as I’m following the rules and they follow the rules, that person will get paid by my bank. And of course they’re not going to be paid directly. Their bank will receive a credit and they will credit that person’s account.
So the banks make payments to each other following rules. Can I run out of that? No, I can’t. You know, we always say, well, households can go bankrupt, they can run out of money and so on, but think about it.
What if your bank passed a rule because you’re a nice guy, we’re always going to make the payment for you, Would you run out? No. Okay, now we have rules on banks. We won’t let them do that, but we could change the rules and then, yes, they could keystroke those credits.
So there’s no physical limit to it. We just have rules. And the rules on the government are different from the rules on you.
You have a limited lifespan, you have limited wealth, you have limited income. And we use all of those things to formulate the rules that the banks will follow. In your case, the government is different.
It doesn’t have a known lifespan. It may last hundreds of more years. We don’t know for sure.
And we have rules about what Congress has to do and whether a President can weigh in on this to allow the government to spend. So we have to get away from this idea that there is some physical constraint on ability to spend. We put constraints on the ability to spend.
There’s nothing natural about it. We decide in what circumstances.
Are you able to simply write checks or flash your iPhone at an inductive coupler in order to take home some groceries? We decide the rules.
Steve Grumbine:
00:18:10
You know, when I think about the rules, fiscal rules versus rules of God, right? God has spoken this into existence and therefore it shall always be versus fiscal rules. You know, like selling bonds and other limits.
Like in the EU [European Union], they have deficit limits that they seem to be waiving in the spirit of US military, Keynesian style. But they’re all rules that are man-made.
They’re rules which shows that the dollar or the ruble or the yen or the yuan or the pound, whatever, these rules govern their unit of account because that unit of account is a state creature. It’s a creature of the state and it’s a creature of law.
Help me understand what the separation point is from the base case of MMT meeting fiscal rules. Because I think people confuse like for example the TGA, the Treasury’s General Account. This is basically an overdraft protection that is a creature of law. It’s not a creature of God. It didn’t come down from the sky like some sort of iron ore properties of nuclear fission or anything like that.
It’s a rule, it’s a man made rule that someone decided as part of the legal framework for building out the government and the monetary system. Help me understand what is the difference between the rules and the base case of MMT. Where do they separate and what connective tissue do they have?
L Randall Wray:
00:19:48
Yeah, so that particular rule says that the Treasury is supposed to have a positive balance in the TGA and the central bank is not supposed to make payments that would put it into a negative balance.
Now we know that during the course of the day, of course it goes negative because there are just billions and billions of dollars of payments every day. And you don’t want Treasury checks to bounce.
So the central bank goes ahead and makes those payments and expects the Treasury to level up by the end of the day. They’re not supposed to have overnight overdrafts. Does that happen? Yeah, it probably does.
I don’t know, maybe Musk will discover that it happens once in a while. But obviously it doesn’t make any difference to the government’s ability to make those payments.
And then we have rules about how the Treasury can get positive balances.
A really obvious way to do it, that the central bank would just give them a credit and the Treasury would hand some kind of an IOU over to the central bank. This is allowed in some countries. It’s been allowed at some times in US history.
So essentially it’s just an internal accounting in which the Treasury owes the central bank. No big deal. It allows the Treasury to make those payments and the central bank gets to balance its balance sheets.
It’s got an asset, it’s got a liability, it’s easy enough to do.
And probably the listeners have heard about the trillion dollar coin idea, which is that because everybody’s so worried about government debt, why don’t we stop issuing the bonds, which is what we count toward the government debt and toward that debt limit that we keep approaching. It used to take us a few years, now we approach it all the time.
So we’ve always got a potential crisis where the Treasury will not be able to make payments of interest on the outstanding debt, let alone make the payments for my Social Security and so on. We keep approaching that. Why not just have the Treasury mint a trillion dollar coin, the Fed can hold that and go ahead and make the payments?
Works perfectly. Anyone who understands accounting understands completely that this would be perfectly fine. But so far they’ve not been able to do that.
The Treasury could also just sell a bond to the central bank and the central bank could hold the bond. And again, this is allowed in some countries, but we don’t allow it.
With some exceptions we have in the past, but for the most part we don’t allow it. Instead, what we say is, Treasury, you can sell a bond to any bank in the world, domestic, foreign, any bank in the world, even central banks.
You just can’t sell it to our central bank. Okay, what kind of sense is that? Seems pretty crazy to me.
So the Treasury could just sell the bond to the central bank, our Fed, and the Fed would then give them the credit and allow the Treasury to make all the payments as they come due. So it is a rule. Rules should serve a useful purpose.
I don’t see any useful purpose in saying Treasury, you can sell a bond to anybody in the world except our Fed.
Steve Grumbine:
00:23:00
That’s just crazy. It is crazy.
You know, and one of the things that I always ask, and I don’t want to go down this rabbit hole too far, but it is coming up right now with them looking at Social Security.
Why in the world doesn’t the government, if they’re going to maintain the silly nonsense of the [Social Security] trust fund, if they’re going to keep the ruse alive, why not just take whatever payments that are coming through and then issue an appropriate level of government bonds to keep growing that number so that it’s always growing at some rate and just keep it solvent? Why doesn’t it do something like create a debt instrument that always keeps it $1 over whatever the needed amount is?
It doesn’t make any sense to me other than it’s a political opportunity to play games. This is another rule, another part of the law that doesn’t really have to be. I guess take a shot at that for a second, if you don’t mind.
L Randall Wray:
00:23:48
It’s a legacy of the original Social Security Act and what FDR, Roosevelt, was trying to do. He was trying to sell a social program originally to take care of retirees. And in the Great Depression, I think they had done surveys.
They found a shocking one third of all seniors in the United States had no means of support whatsoever. No savings, no family to take care of them. They were begging, basically. So he created the Social Security system to take care of seniors.
But there was a great fear of socialism. So to make it palatable, he said, this isn’t socialism. This is insurance. You’re going to pay in through the payroll tax, you and your employer.
And then when you retire, it will have built up funds and it will be just like a private retirement system. You’re going to get back based on what you paid in. Okay. It actually did not accumulate a trust fund back then, a significant one anyway.
But over the years, what we did was we added other beneficiaries.
So we added basically widows and orphans, dependents, people with disabilities, and people who had very short work lives, maybe because they got a disability on the job. And so about a quarter of the recipients today did not have a meaningful work life. And so that put a bigger burden on the program.
Also, people are living longer. Part of the reason why the retirement age was set at 65 was because working class people didn’t live longer than 65.
But if you were unlucky enough to live longer than 65, we’re going to take care of you. Okay? But longevity has increased. It’s not increasing anymore, unfortunately, but it has increased.
And so anyway, the number of retirees, plus we had demographic changes. We used to have, when I was a kid, 3.7 children per family, and now we’re more like 2.
So anyway, there are fewer workers that are paying taxes relative to the number of retirees and so on. So in the 80s, President Reagan set up a commission headed by [then-future Federal Reserve Chair, Alan] Greenspan, and they raised the tax rate and started building a big trust fund.
So it’s only since the 80s that we built this big trust fund. And that was supposed to get us through this demographic change, the baby boomers.
It’s now estimated, you know, the date changes, but at some point that trust fund is going to zero out.
And the tax revenue is projected not to be sufficient to cover the benefit payments that are being made, in part because the demographics, also in part because the economy is not doing very well and workers wages are not going up. And all of those things impact the amount that’s going in.
And so we’ve had for now, 40 years of this worry and these threats that the program’s going to go bankrupt. Now, we know that taxes don’t really pay for the Social Security benefits.
We know that the government can make all those benefit payments as they come due.
Even Alan Greenspan said that when he was asked before Congress by Paul Ryan, who expected that Greenspan would say, “Oh yeah, this program is going to go bankrupt.” He said, “No, it will not. We can make all the payments as they come due, we just print up the money.” I don’t like that terminology.
We credit accounts, we can make all the payments as they come due. And Musk says, “I looked at the program. It’s a Ponzi scheme.” It can’t be a Ponzi scheme. It’s a government program.
The tax revenues really don’t pay for the program. We can keystroke all the credits as they come due. It’s an ongoing program. It’s nothing like a pyramid scheme.
Steve Grumbine:
00:27:38
This is the guy who supports crypto, right?
L Randall Wray:
00:27:41
Yeah. So, you know, it’s a legacy, the way that FDR set it up. It is a way that the program was sold and that is now outdated.
I don’t think there are too many people except the crazies who think Social Security is socialism, that the communists are taking us over because we have a retirement system that takes care of the elderly and also people with disabilities and also the dependents when a retiree dies. It’s perfectly acceptable. It’s probably the government’s most popular program according to polls, year after year after year.
So we could dispense with this story that you’re paying in, you’re going to get your money back with interest, just like a private retirement system. It’s different.
Steve Grumbine:
00:28:33
They could be literally giving people $5,000 checks right now. As long as the economy was structured in such a way that the goods and services we need are there and available.
That was the shocking Greenspan comment that I don’t think Paul Ryan was expecting to hear. I don’t think he was expecting that at all.
L Randall Wray:
00:28:50
That’s right. This is always the question about government spending. Money is not the question. The question is, do we have the resources available?
If not, can we increase the resources in order to take care of the elderly?
Steve Grumbine:
00:29:05
That sounds like central planning, though, Randy.
L Randall Wray:
00:29:08
We don’t even need central planning. We just need honest analysis of our social retirement system. Even the trustees own reports, if you forget the dollar numbers and look instead at the growth of labor productivity and so on, we’re going to have more than enough stuff to take care of retirees for the 75 year planning period that the Social Security trustees use. For the next 75 years, we are absolutely fine. Labor productivity, if it grows at the relatively slow pace that has been growing for the past 40 years, even at that slow pace, we’re going to have more than enough resources to take care of the retirees. Even with the demographic changes and so on in real terms, there is not a problem.
But this is always the question that should be asked for government spending. What about those Covid relief checks? The only question should have been, “Will we have enough stuff for people to buy without causing inflation?”
The question was never, “Can the government find the money to send out the checks?”
And I think if we had done that analysis, we might have said for the second round, you know, maybe we are going to face a problem of supply constraints. I think the first round of checks were perfectly fine. They got saved, people were able to pay bills and so on.
The second round of checks should have been based on need. They should not have sent me checks. For example, Yeva [Nersisyan] and I wrote a piece worried about inflation.
And I think it did play some small role in the inflation period that we had. But the point is, that’s always the question you’re asking. Stephanie Kelton always says this.
Instead of budget scoring dollars, what you want to do is score every new spending proposal or tax reduction by its inflation potential. That’s what you do. You don’t worry about the money.
Steve Grumbine:
00:31:08
That was something that I read in NEP many, many moons ago.
It may have been you, for all I know, it may have been Scott Fullwiler, that we should not have a budget constraint, but we should go with an inflation constraint. You know, back in 2018, we were all at the, I believe it was the MMT Conference.
And you wrote a blog post shortly thereafter, right around the time of the conference, about what you include in MMT. And you wrote a lot of stuff about the history of MMT and so forth at the beginning, but at the end of it, you gave 10 points.
And I just wanted to know if we could go through that real quickly because I think that this is really good foundational stuff. I got it right here in front of me. And you started off with, what is money?
We’ve kind of talked about this a little bit, but you said money is an IOU denominated and socially sanctioned money of account. In almost all known cases, it is the authority, the state, that chooses the money of account.
This comes from [Georg Friedrich] Knapp, and Keynes, Jeff Ingram and [Hyman] Minsky. Can you talk a little bit about that?
L Randall Wray:
00:32:09
Yes. So most textbooks and most people, when you ask them what is money, they’re going to immediately go to functions. It’s a medium of exchange. Okay.
We begin with the money of account. That’s the fundamental characteristic that we would identify. It’s a measuring unit. And it was a huge intellectual leap to come up with this.
How can you compare things that don’t have any obvious physical characteristics that are similar, say, a bushel of wheat and a goat. How can you compare those two things? Well, money allows us to do that. It’s a measuring unit. What’s it measuring? It’s measuring the money value.
And it most likely was created to measure debt and credit, as far as we go back in time. You didn’t mention Michael Hudson. Michael Hudson’s very important on this for looking at Mesopotamia, which may well be where money first originated. It was created as a way to measure what the temples owed the temple workers. And Keynes had a period, he called his period of Babylonian madness.
He was reading everything he could read just before 1919 on Mesopotamia, and he said that, you know, it can’t be a coincidence that the names for the money of account from Mesopotamian times up to the present day were derived from a measuring unit used for grain: wheat, barley, rice. Depending on which part of the world you’re looking at. All the money units names came from that. It’s not that grain was a money.
It was that everybody understood what a mina was or a shekel, and they used that name as the money unit, the money of account. And they could then record the debt and credit in that term, and that continues up to the present day. So money account is primary.
And the question is, could a Robinson Crusoe and Friday have come up with a money of account? You know the story of Robinson Crusoe and Friday. This is what the textbooks teach and the way that most people learn about how money was created.
Okay, Crusoe and Friday. Somehow they get marooned on this desert island, right? And each decides to specialize.
So Friday specializes in gathering coconuts, and Crusoe specializes in catching fish. And then as long as there’s a double coincidence of wants, you know, Crusoe wants a coconut and Friday wants a fish.
They can set up a market and they start bartering. It becomes inconvenient because what if one day one of them doesn’t want what the other has?
So they come up with the idea of, hey, we can use seashells as a medium of exchange. And this is where money came from. It was Robinson Crusoe and Friday. Okay, think about this a little bit. It’s pretty bizarre.
Okay, we’ve got Crusoe and Friday marooned on a desert island. I can think of two much more likely scenarios. Okay, one, Crusoe came from Europe. What do Europeans do when they come across native people?
Steve Grumbine:
00:35:39
Kill them.
Intermission:
00:35:42
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L Randall Wray:
00:36:05
Okay? And Crusoe’s all alone on the island and, you know, eventually he ends up like Tom Hanks castaway, you know, babbling to a Wilson volleyball.
He goes crazy. Or the other is they say, hey, let’s cooperate. Let’s support each other. Let’s work together. Let’s see if we can survive. No, no.
They decide they’ll have a market or. Okay, now here is one that I’ll admit MMT is used. I think it’s also very implausible. Okay?
A colonizer with a gun comes in and he forces the native people to work for dollars to pay a tax. Okay? That’s the origins of money. Taxes drive money. Well, hold on a second. The native people have another option, which they kill him.
Steve Grumbine:
00:36:48
Yeah.
L Randall Wray:
00:36:49
Or they go hide rather than working to pay the tax. But also, think about it. This guy who arrives has a gun. He came from a pretty advanced civilization somewhere.
He must have been used to money already. They’ve got factories, they’re producing guns. So it couldn’t be the origin story of money. Okay?
Now the story that colonists impose taxes and drive currency is true. So I’m not denying that [the hut tax,] it’s logical. There are historical examples, but that could not have been the origins of money.
I don’t buy it at all when he already came from a capitalist economy that already was used to money. So we have to look somewhere else for the origins of money. And I think that [Michael] Hudson‘s story is the correct one.
Money was a money of account invented by authorities in temples to keep track of what they owed to the workers in those temples. That’s where it came from. It didn’t come out of markets, it didn’t come out of taxes. It came out of a system of accounting.
Steve Grumbine:
00:37:58
So that brings me to your second point, which you touched on a little bit. But I think it’s really important given where you just ended right there.
“Taxes or other obligations, fees, fines, tribute, tithes, drive the currency. The ability to impose such obligations is an important aspect of sovereignty. Today’s states alone monopolize the power.”
This comes from [Georg Friedrich] Knapp,[Alfred Mitchell-] Innes, [Hyman] Minsky, and [Warren] Mosler. I’m just reading what you wrote there. Is there additional there?
I mean, obviously the imposition of the tax is the concept that it drives the monopoly power of that currency. It makes you need the currency. So you have to do something to get the currency.
L Randall Wray:
00:38:38
So I would still stick with that. That doesn’t tell us how money originated.
And it also doesn’t really get into how difficult this to do to get to our modern monetary system, where I think what you just read describes very well the way that the monetary systems work today.
But if you look back in time, it was extremely difficult to get this power, this sovereign power, to impose taxes and ensure that your liabilities would be accepted in payment. So when you dig into monetary history, what you find is this was a very difficult thing to do, which helps to explain these strange anomalies.
If you look back in history. Why is it that many governments, all the way back to Greek times, coined precious metal?
Why did they put precious metal in if all you needed was a tax obligation to get people to accept your IOU, which could be written on paper, it could be a tally stick, why were they using precious metal? Why did we have these hundreds of years of wars fought in Europe by and for gold or silver? Fought by gold or silver.
In other words, the payments were made in gold and silver. And what were they trying to do? Get gold and silver? Why did Columbus get sent off to find the New World? The whole purpose of the trip was gold.
He makes that clear. I read the first log of Columbus. It’s fascinating. Strongly encourage everybody ready to read it.
Where he writes near the end of the book, to Queen Isabella, Right? As you know, the whole purpose of this trip was to find the gold. Well, although he didn’t really find it, he said, I’m going to take a second trip.
We know where the gold is now.
It’s very funny because he went from island to island, and so the people on the island would have a little bit of gold, but hardly any, and they would give it to him. And so he’s collecting it, but it’s nothing, you know, it’s not what he needed. Oh, by the way, why did they want the gold? It was for the Crusades.
It was to go fight in the Middle East. So anyway, he’d go to the island and they say, “Oh, no, we don’t have gold on this island. It’s on the next island over.”
Maybe partly because they just wanted to please him, but partly because they wanted to get rid of him. So he’d go to sail off to the next island, same thing.
And so eventually, you know, they run out of time and they decide they got to get back.
The whole trip he’s afraid of a mutiny, sails back with a little bit of gold, and then he goes on the second trip, you know, went through all of this to get gold in order to coin it so they could fight the Crusades. Why did gold and silver play such a big role?
Well, the reason was because it was extremely difficult to impose those obligations on the population and especially on hired mercenaries who were fighting the wars for you. What if you lose? Your debt is not going to be any good. The only thing that’s going to be good is gold.
So they had to, in a sense, monetize gold because they didn’t have the power to impose the taxes. They didn’t have sovereign power like we imagine that kings did.
Because as I said before, you know, the alternative to paying the tax is to kill the person who’s trying to impose a tax on you or revolt against that person. So development of the kind of monetary system that we’re used to was extremely difficult. And Britain was the first place to finally develop it.
And it took them about 400 years. And during that 400 year period, they tightly pegged the currency to precious metal in order to increase faith in their monetary system.
And then finally they could get off gold. So the historical story is very complicated. It’s not a simple matter of ‘I’ve got the power, I’m going to impose taxes.’
You have to be able to impose it and collect it, and that’s difficult.
Steve Grumbine:
00:42:41
Well, that attacks number three and four of your list here. So we can skip those, but I’ll read them just so everybody understands that you said, “Anyone can issue money. The problem is to get it accepted.
Anyone can write an IOU denominated in the recognized money of account. But acceptance can be hard to get unless you have the state backing you up.” That is Minsky.
And the fourth one, you said, “The word redemption is used in two ways. [1] Accepting your own IOUs and payment, and [2] promising to convert your IOUs to something else, such as gold, foreign currency or the state’s IOUs. The first is fundamental and true of all IOUs.
All our gold bugs mistakenly focus on the second meaning, which does not apply to currencies issued by most modern nations and indeed does not apply to most of the currencies issued throughout history.”
This comes from Innis and Knapp and is reinforced by Hudson and[Farley] Grubb‘s work as well as Margaret Atwood’s great book Payback, Debt and the Shadow Side of Wealth.
Now you do come into another one. This is really important. And this is number five, which is “Sovereign debt is different. There is no chance of involuntary default so long as the state only promises to accept its currency in payment. It could voluntarily repudiate its debt. But this is rare and has not been done by any modern sovereign nation.”
L Randall Wray:
00:44:02
Eric Tymoigne has a very interesting paper at the Levy Institute. He’s looked back all the way to Plato to find the recognition that redemption alone can drive a currency.
I mean redemption for taxes and other obligations, and finds that they recognize this. Many, many people recognized it all the way back to Plato’s time. The taxes could drive a currency.
There were questions about whether it was a necessary and a sufficient condition. But the problem was that it was very difficult to enforce the tax. So that was the barrier.
Once you are able to enforce that tax, then everything else follows. But we shouldn’t skip over how difficult that can be in the modern developed world, of course, there’s no question about this.
There’s no question about the government’s currency payments by the government being accepted. We will all accept the US dollar in America. In the developing world, it’s not quite so simple yet.
There may well be certain kinds of payments that require foreign currency. Maybe property sales would require foreign currency. But yes, I’ll stick with all of those things with the caveat.
Steve Grumbine:
00:45:26
Understood. Well, this next one is a little bit long, so if you’ll forgive me, I’m going to read it. But I think it’s really, really powerful. And it also gives me an opportunity to call out my friend Mat Forstater.
Number six was:
“Functional finance should be functional to achieve the public purpose, not sound to achieve some arbitrary balance between spending and revenues. Most importantly, monetary and fiscal policies should be formulated to achieve full employment with price stability.
This is credited to Abba Lerner, who was introduced into MMT [scholarship] by Matt Forstater. In its original formulation, it’s too simplistic, summarized as two principles:
[1] Increase government spending or reduce taxes and [2] increase the money supply, if there is unemployment, do the reverse if there is inflation. The first of these is fiscal policy and the second is monetary policy.
A steering wheel metaphor is often invoked, using policy to keep the economy on course. A modern economy is far too complex to steer as if you were driving a car.
If unemployment exists, it is not enough to say that you can just reduce the interest rate, raise government spending or reduce taxes. The first might even increase unemployment.
The second two could cause unacceptable inflation, increase inequality, or induce financial instability long before they solve the unemployment problem.” And you said, “I agree that government can always afford to spend more, but the spending has to be carefully targeted.”
And you just address this, by the way, over the COVID conversation.. “The spending has to be carefully targeted to achieve the desired result. I’d credit all my institutionalist influences for that, including Minsky.”
It’s a lot there. I mean, it kind of says it all. But what are your thoughts on that now?
L Randall Wray:
00:47:12
Well, I would say especially Minsky. Minsky was very close friends with Abba Lerner. I think Minsky’s kids thought of him as basically their uncle. They were close family friends.
Lerner was a mentor for Minsky.
But Minsky did deviate because he had an institutionalist training from University of Chicago, which will sound surprising that that was an institutionalist place, because that’s where Milton Friedman came from. But in Minsky’s day, it was an institutionalist department. So he said, you can’t drive the economy. He dismissed the steering wheel.
Spending has to be targeted. And Minsky advocated employer of last resort rather than what’s called priming.
Just military industrial spending will not get you to full employment because the inflation will take off and you’re going to slam the brakes on long before you get to full employment. So he advocated employer of last resort, what we now call the job guarantee, as targeted spending to get you to full employment.
And Lerner did not have the understanding of the financial system and what the central bank does that Minsky had.
Lerner thought, like many economists of that time, the central banks, you know, determine the money supply and they could increase the money supply, reduce the money supply in order to affect the interest rate. Minsky knew a lot more about the financial system.
And we know that central banks don’t have any control over the money supply, but they do have direct control over the interest rate. So it’s not a matter of increasing the money supply in order to affect the interest rate.
The Fed just announces a lower interest rate target and the interest rate immediately will go there.
So, anyway, there are caveats, but the general argument that government spending and taxing, as well as central bank interest rate setting, ought to be functional. That’s what policy ought to do.
Any policy of government should be functional in the sense that it is helping you achieve some purpose rather than trying to balance your budget or balance your trade account. That’s not functional. Neither of those.
Steve Grumbine:
00:49:31
Yeah, agreed. And, you know, this conversation is making me feel sane for the first time in a couple months. So I really appreciate it.
Number seven, you kind of just touched on. It’s almost as if you wrote this, Randy [haha]. So, I mean, it plays right into it. But I’ll read it for everybody’s purposes.
Number seven was: “For that reason the JG or Job Guarantee is a critical component of MMT. It anchors the currency and ensures…” Think about this. Instead of the gold standards, the labor standard, right? So it anchors the currency.
That was my little ad there. I’m sorry, I didn’t mean to add to your words here.
But it “anchors the currency and ensures that achieving full employment will enhance both price and financial stability. This comes from Minsky’s earliest work on the employer of last resort, from Bill Mitchell‘s work.” And that’s our first time pulling Bill out here.
“Bill Mitchell’s work on buffer stocks and Warren Mosler’s work on monopoly price setting.” I would say Bill would say that that comes from Michal Kalecki or Kolecki or however you say his name.
You want to add anything about the JG before we move on?
L Randall Wray:
00:50:35
So, and this really gets to theory goes, you know, beyond the logic, beyond the description into theory and really into paradigm. What determines prices? And I know sometimes MMT people [Mosler] have said the government determines prices by the price it pays. Well, I am going to disagree with that.
The government cannot determine all the prices. Money’s value is determined at the aggregate level.
And both Keynes and Marx argue that if we’re going to analyze a capitalist economy, there are only two measuring units that make any sense to use. One of those is the wage unit. So it’s sort of the wage for average labor, let’s say in the United States, that’s $30 an hour, okay?
That’s our wage unit.
And then the quantity of labor hours that are employed over the course of the year, you multiply that wage unit times the number of hours, you’ve got the value of output as a whole. And in a sense, it is that wage unit that is determining the prices.
Now, prices for individual things that are bought and sold are complexly determined. But there is a rationale to it. I won’t go into it, but if the government can help to stabilize that wage unit, it’s going to help to stabilize prices.
And if the Job Guarantee program can act like a buffer stock, as Bill said, then you can help to stabilize wages, and that’s going to help to stabilize prices. Because the wage unit is sort of the fulcrum on which rests all the prices in a capitalist economy.
And if the money wage is going up, all the prices are going to be going up and the value of money is coming down. Okay? So we can use the Job Guarantee program as a way to stabilize that wage unit and help stabilize prices.
In the old days, and many gold bugs still believe this, it was thought that, well, what you will do is stabilize the price of gold and that will stabilize the value of money.
In other words, you operate a gold standard where the government stands ready to buy and sell gold, to peg the value of the money, or that’s the way orthodox puts it, or the way we would put it, you’re pegging the price of gold. That’s what a gold standard does. The problem is our economy does not rest on gold. Gold is relatively insignificant.
We need it in our teeth and on our fingers, you know, and some industrial processes, it goes into the production of almost nothing. So you’re not going to stabilize the price system. And the gold standard did not stabilize prices.
What people will often do is they will take the price level of 1800 and then take the price level of 1900. They choose that century because that’s when lots of countries were on the gold standard and they say the price level is the same. It’s true.
In between, over that hundred year period, prices rose rapidly. You had inflation, prices fell rapidly. You had massive deflation. You had inflation in war, you had massive deflation and depressions.
And deflation is much, much worse than inflation. We could go into that if you wanted, but much worse to have deflation. So since then, after the Great Depression, everybody goes off gold.
We don’t have depressions anymore, we don’t have deflations anymore. So the general trend is up. It’s very misleading to claim that the gold standard stabilized prices. It did not.
If you take long enough span of time and choose the endpoints properly, you can find that you end up where you started from. But that’s an illegitimate way to do it.
So anyway, it’s much better to stabilize wages than to stabilize gold prices because labor goes into the production of everything that is bought and sold. Everything that’s produced, that’s bought and sold, labor is involved. And if you can stabilize wages, then you’re stabilizing the price system.
Steve Grumbine:
00:54:44
Thank you. That was fantastic. That’s a great clip right there. Number eight is probably a whole episode in and of itself.
And I think we’ve actually done this one. So I’ll refer folks back to why Minsky matters in a previous episode.
But number eight says, “And for that reason we need Minsky’s analysis of financial instability.
Here I don’t really mean the financial instability hypothesis, I mean his whole body of work and especially the research line that began with his dissertation written under Schumpeter, up through his work on money manager capitalism at the Levy Institute before he died.” If you want to add something to that, you have at it. I’m just not sure where to go with it because it’s kind of broad.
L Randall Wray:
00:55:23
So the economic system is continually evolving.
And what Minsky argued in the early post-war period was that we had reached a stage of capitalism that was relatively stable because we had put the financial system in its proper place, which is extremely constrained.
We constrained it because of all the excesses that led to the Great Depression when the banksters had run wild leading up to the Great Depression, and then we crash and we didn’t want that to happen again.
So FDR, as part of the New Deal, put in place lots of regulations on the financial system that simplified it, that constrained it so that we would not have a financial crisis. Minsky started writing in the 50s, said, yeah, that’s the way it is right now.
The problem is that the financial system is going to innovate in order to get around the regulations and the rules that we’ve got in place.
They’re going to create new kinds of products that are not covered in these rules and regulations and people are going to forget how bad the Great Depression was and they’re going to start taking more risk. So he says, oh, this is normal profit seeking behavior by the financial sector itself and by those who use the financial sector.
So instability will return, financial fragility will return. And it did.
And the problem is that consistently, you can look in detail at how the rules and regulations were changed, but consistently what was done was to acquiesce to the financial system and to legalize what they were doing. Just consistently, people say deregulate, okay, we could call it deregulation.
We just allowed them to do what they were doing as they continually stretched the limits until we got the Global Financial Crisis [of 2008]. And so Minsky’s later work was about all these new innovations.
The beginning of the 1980s, the world had never seen the amount of financial innovations that we had beginning in the 80s. And we started getting really bad financial crises. Savings and loan crisis in the 80s.
At the end of the 80s, all the big banks were probably insolvent. And then we had the dot com bubble and bust. And then finally we had, you know, the mother of all financial crises beginning in 2007.
And we had barely recovered by the time of the first Trump administration. It took a very long time to recover from that. And in the aftermath, we basically did nothing.
And so with recovery, the memories of the Global Financial Crisis fade, just like the memories of the Great Depression faded. And we did almost nothing to try to rein in finance run away. So we have, let’s say, three things going on.
One: the return of risky financial practices. Two: financialization of virtually every aspect of human life so everything gets financialized.
And by that, what I mean is you get debt on top of debt on top of debt. And then I just read that the San Francisco Giants, my team, has sold out to private equity. Oh, we get private equity owning the sports teams. [Yep.]
Anyway, and then the third is: the creation of this Wall Street/Silicon Valley nexus where the most valuable commodity in the world is your data, and that is financialized. Where this ends up, I have no idea, but it is very, very scary.
And now we have Musk in the data of those “14 government computers,” and we have no idea where this is going to go.
Steve Grumbine:
00:59:16
It’s absolutely crazy.
I mean, you know, I know that Lenin is not exactly an MMT founder here, but in his book Imperialism the Highest Stage of Capitalism, he pretty much broke all this stuff down. If you read chapter nine of that book, it’s almost as if you’re reading a newspaper today.
It’s terrifying how the finance world has done this, and a lot of these things, quite frankly, have just kind of been normalized. And boy, oh, boy, it’s terrifying.
Look, there’s two more things here to go through, and I think the important one is your number nine, which is the government’s debt is our financial asset. I’ll finish reading it and you can add to it what you want, but this follows from the sectoral balances approach of Wynne Godley.
“We have to get our macro accounting correct. Minsky always used to tell students, go home and do the balance sheets because what you’re saying is nonsense.
Fortunately, I had learned T-accounts from John Randlett in Sacramento, who also taught Stephanie Kelton from his own great money and banking textbook. It’s all there, including the impact of budget deficits on bank reserves.
Godley taught us about stock flow consistency, and he insisted that all mainstream macroeconomics is incoherent.”
Agreed. Talk to me about sectoral balances real quick.
L Randall Wray:
01:00:27
Well, this was intuitive to Minsky, and I’m pretty sure he’s the one who told me to read this really nice paper by Ritter, who goes through the relation between the balance sheets and the income statements. So I was familiar with that. I did not know the work of Godley.
Minsky knew Godley, and I think that Minsky was part of the reason Godley came to the Levy Institute. So he arrived earlier in the 90s.
It took him quite a while to get the US data into shape that he could use because they put so much imputed stuff in there, it’s not really real data. Anyway, he finally got it so that he could do the sectoral balances for the United States.
And by the time he had done that, that’s when we could see that a crisis was coming. Minsky died in ’96. When I’m talking about ’97, ’98.
And Wynne Godley is warning that the private sector is running huge deficits, unprecedented, nothing like this had happened before, since 1929. And I co-authored a couple of pieces with him because everyone else was saying, “Oh, it’s a Goldilocks economy.”
That’s what everyone was saying at that time. “Goldilocks economy”, you know, neither too hot nor too cold. And the data showed that we had an unprecedented buildup of private sector debt.
And Clinton’s budget surplus was pulling income out of the economy, and households needed that income to service the debt. You know, we could see it coming.
And the basis of the way that MMT analyzes economies, you know, completely changes your view about the role of government deficits in the economy. If you’re a country like the United States that imports more than you export, then you have to have a budget deficit to offset that.
So that gives you sort of the minimum deficit that you can get away with so that the private sector doesn’t run a deficit. And then you need to have the private sector saving. So the budget deficit by identity is the sum of those two things.
And anyone who is arguing that we need to reduce the size of the government’s budget deficit has to tell us, what do they envision to be the impact on those other two balances? Are we going to magically become a net exporter? I guess Trump thinks we will. I would bet against that.
And then you have to tell us, are you happy with the private sector running deficits, spending more than their income? And again, that is not sustainable. It wasn’t sustainable last time. It won’t be sustainable this next time.
So it just puts front and center that the budget deficit is an outcome. It’s not discretionary. It is what balances those other two sectors.
If we believe that our private sector has any discretion over its balance, that is, can you decide to spend more than your income?
And if we believe the foreign sector has some discretion, can they decide that they want to run a trade surplus against the US so that they can get dollars to protect their currency. We’re describing most Asian countries. Do they have discretion?
If they have discretion, then to that degree we do not have discretion over the budget outcome of the US Government because it is going to offset those other two balances. Where I think everyone will agree there’s at least some discretion in the private sector’s balance and the foreign sector’s balance.
They have some discretion. And to the degree they have discretion, our government does not have discretion.
Steve Grumbine:
01:03:59
Very well stated. This is one of those big light bulb moments when you realize that balance is balance and it’s not the way we think it does.
We have to measure it against the other sectors. And that was a huge wake up call.
This last one, Randy, is probably, I wouldn’t call it the least important, but in reality it’s not all that important. It’s just that the mysterious conspiracies make it so important. Their Last one was 10:
“Rejection of the typical view of the central bank as independent and potent. Monetary policy is weak and its impact is at best uncertain. It might even be mistaking the brake pedal for the gas pedal.
The central bank is the government’s bank, so can never be independent. Its main independence is limited to setting the overnight rate target. And it’s probably a mistake to let it even do that.
Permanent zero interest rate policy [ZIRP] is probably a better policy since it reduces the compounding of debt and the tendency for the rentier class to take over more of the economy.” I credit Keynes, Minsky, Hudson, Mosler, Eric Tymoigne, and Scott Fullwiler for much of the work on this.
I’ll just add from my own vantage point, this as an activist, tends to be the single most misunderstood element of the entire system. The spooky Federal Reserve, which, mind you, may be run by really bad people with really bad intent, who knows?
But at the end of the day, this is the biggest misunderstanding. That they put the Fed over top of the government versus the government over top of the Fed. Talk to me about your final point.
L Randall Wray:
01:05:32
So the Fed is independent in one way, which is we let it set the overnight interest rate, which is the base interest rate in the economy.
So if the Fed raises it from essentially 0 to 5%, which is about what they did, all the other rates are going to go up and it’s going to cause massive problems in the economy. Now the Fed thinks that when it does this, it’s fighting inflation, but that’s extremely indirect.
It might possibly put downward pressure on inflation, but the immediate impacts are that all of a sudden all sorts of debt out there that is being held as assets in the banking system, in pension funds and even by individuals is going to go down in value because the debt issued in the zero interest rate period is probably paying 2 or 3%. So mortgage backed securities, as an example, we’re paying 2 or 3%. Those are all still on the balance sheets of the banks.
And when the Fed raises interest rates to 5%, obviously the capital value of all of those bonds collapses. That’s why we got Silicon Valley [Bank] and other bank problems.
And what the Fed had to do is say, “Look, we’ll continue to buy them at 100 cents on the dollar.” So what we’re doing is moving all those losses onto the Fed’s balance sheet.
So my point is that raising interest rates has a huge impact on the financial sector. Lowering interest rates will increase the value of all that outstanding debt.
And whether or not that has any impact on inflation is extremely indirect. So we let them do that. I don’t think we should. I think we should take interest rate setting away from them.
Most MMT people think that a zero base rate is good. I accept that with a caveat.
I still would have savings bonds for average Americans who want to save for their retirement, for the kids college and so on, or save up to buy a house. Let’s let them buy government bonds that have positive interest rates. I don’t know, 3%, 6%, something like that,
in order to allow them to accumulate the wealth they need for the future. Otherwise zero is probably okay. I’m not absolutely committed to zero.
If we could get Congress to agree that 2% is a good interest rate, I’d be perfectly happy with that. I think what is really damaging is the central bank’s ability to raise and lower it whenever they want. And based on very faulty theory.
Even researchers inside the Fed say that the theory isn’t based on anything. Okay? It’s not based on any empirical evidence.
It’s not even based on good macro theory as to why raising and lowering the interest rates are going to affect inflation rates.
Steve Grumbine:
01:08:26
I really appreciate this. You know, folks, this is probably not everything you’ll ever need to know about MMT.
It’s a large part of it though, and it’s a good entry point, which is what the purpose of, of today’s conversation was.
You know, we’ve got a lot of new eyes thinking about MMT, hearing incorrect things because you’ve got a Trump administration and a Musk administration, if you will, going out and kind of doing some good, bad work, if you will, to help us have these conversations.
So there’s nothing worse than the headline Left that is out there actively saying the absolute worst economic misunderstandings known to man, polluting the airwaves just as much as Trump and Musk. So there’s gotta be a bit of truth thrown in there. Randy, I really appreciate you providing this to us. I see you got a new book coming out.
You want to just quickly tell us about it and when we might expect it?
L Randall Wray:
01:09:18
Okay. Well, my first book in 1990 was mostly on the private part of the monetary system. Looking at banking in detail back in those days. Think back to 1990.
Well, I started writing in ’86. You had to go to a library. There was a government special depository to get the data on banks. Today you get it in five seconds on your computer.
So anyway, I went deeply into the data. I talked about securitization. I talked about stuff that hardly anybody knew about at the time, but it was mostly on the private part.
I did speculate on the origins of money in that book and I think mostly got it right. Then in 1998, the Understanding Modern Money book was mostly on the state’s money. So what I did was combine the two. Updated in terms of both.
The economy has changed, but also updated in terms of my thinking in terms of other work that MMT people have done and combine the two. So that was the purpose of that book.
Steve Grumbine:
01:10:25
Very, very good. Well, we’ll be bringing it out for sure. We’ll put it on our bookshelf as we do all of your work. We really appreciate your time today as well. Folks.
My name’s Steve Grumbine. I want to thank my guest, L. Randall Wray. I’ve always said that because that’s how I got to meet you. And then you’re like, yeah, Randy. So okay.
Anyway, I want to thank my guest, Randy Wray. We are Real Progressives and we are a 501(c)3, not for profit. We live and die on your donations, no matter how small or large.
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End Credits:
01:11:35
Production, transcripts, graphics, sound engineering, extras, and show notes for Macro N Cheese are done by our volunteer team at Real Progressives, serving in solidarity with the working class since 2015. To become a donor please go to patreon.com/realprogressives, realprogressives.substack.com, or realprogressives.org.
This really is a master class in Modern Monetary Theory
Another fab episode. The way I see it is if #ElonMusk of all people can take the time to #LearnMMT, the left can as well. It's as political as 2 + 2 = 4.