Warren Mosler: The question is, “How do you turn litter into money?”

So, I take my business cards out here, and these are twenty dollars a piece, if anybody wants to buy any. No? Any takers? No? Okay. [00:00:19]

All right, well if anybody wants to stay after and help clean up the carpet and tidy up the room, I’m going to pay one per hour. Or five per hour, or whatever, one per hour. Anybody want to stay and help? Okay, not a lot of takers. [00:00:30]

Then I add one more thing: Look, there’s only one way out of here and there’s a man at the door with a nine millimeter machine gun. Okay? And you can’t get out of here without five of my cards.

Now things have changed. I’ve now turned litter into money. Now, you will buy these, you will work for these things if you want to get out. The man at the door is the tax man and that’s the function of taxes. Stephanie talked about how taxes do it. But you can recreate that… [00:01:08]


There’s a currency that’s circulating at the University of Missouri Kansas City that we started way back called the buckaroo because we wanted to replicate a currency for the students to understand National Income accounting and how a currency works and that it doesn’t matter if you are a small open economy and what they did is that you need something like twenty buckaroos a semester to be able to get your grades in the economics classes. [00:01:37]

The way you earn buckaroos is that you can do public service, community service, at some of the local institutions whether it’s the hospital, the police department or helping out locally. And they pay one per hour. Back ten or fifteen years ago, whenever these were started, they were worth… And they were freely exchangeable. So you would have to go earn your buckaroos. You’d have to have twenty of them to pay your taxes, your buckaroo tax. [00:02:09]

But you didn’t have to earn them. You could buy them from other students, you could do work for them. Nobody really cared what you did for them, you just had to somehow get buckaroos to turn in. Just like you have to pay your taxes here and whatever you do to get your money. [00:02:23]

So, the students would go to work and they would earn these things and at the end of the year, the first year, I did the accounting at the Post Keynesian Conference for the buckaroos and it went something like this: The total tax was a thousand buckaroos across the classes. Students came and earned eleven hundred buckaroos. And they paid a thousand for taxes. The School ran a deficit. They spent eleven hundred but they only collected a thousand. Did that affect their credit rating with the rating agencies or anything? Of course not.

Now notice the school’s deficit… [00:03:01]


So, they spent 1100 and they only collected 1000, they ran a deficit that’s equal to the student’s savings. That was their first lesson in National Income accounting: The government’s deficit equals non-government savings of financial assets. To the penny. [00:03:26]

Parents would take some… Was it a problem that more community service was being done than was needed to pay the tax? Of course not. [00:03:35]

And it’s being going on for years this way.

The other interesting thing is back then when students bought and sold them from each other they were about five dollars a piece. Today they are going for fifteen dollars a piece. Did this currency appreciate? No, it’s been fixed to the value of one hour of student labor for fifteen years. What happened is that the price of student labor in dollars has changed and in euros has changed. And this particular buckaroo has outperformed the S&P 500 over that period of time by a very wide margin. It was the best investment vehicle out there. Was it meant for that? No. It’s an internally stable currency. It was defined as the value of one hour of student labor and it stayed the value of one hour of student labor the whole time. [00:04:19]

It happened to appreciate because other currencies… it was a small open economy. All kinds of currencies are traded there. It doesn’t predominate. But it works and it continues to function for what it was originally intended function which was provisioning the community with student labor — to move labor from the private sector to the public sector. And of course to teach National Income accounting and how a currency works to the students. [00:04:44]


What is money?

We’re not on the gold standard, but we think we are and we think like we are as evidenced by “balanced budgets,” “balanced trade,” “Federal trust funds and reserves.”

There is no such thing as a government saving in it’s own currency. [00:05:14]

Think of the University with the buckaroos. You still all remember the buckaroos I was just talking about? The value went from five dollars a piece to fifteen dollars. The School has an infinite amount of them. Does that mean the School is infinitely wealthy? No. Was the School collecting them from these students to get the buckaroos to be able to pay them? No. [00:05:33]

It had a zero interest rate policy — It did not pay interest on these excess hundred buckaroos that were out there. Did that cause hyper-inflation? No, the currency gained in value. It appreciated. It didn’t go down in value. And do we see that happening in the real world? Sure. We’ve had Japan with a zero interest rate policy for twenty years. It’s been one of the strongest currencies in the world. With the lowest interest rates. [00:05:59]

Again, if the School needed to anticipate paying buckaroos out the next year or the year after should they start trying to run a surplus, collect more than they spend so they’d have them to give out later? There is no such thing as accumulating a reserve in your own currency when it’s a floating exchange rate like that. [00:06:18]

Could they even run a surplus? On day one they couldn’t. How are they supposed to collect more than they spend? They have to spend them first and then collect them. And if you look closely at the Federal Reserve and how the accounts clear, that happens with our government. You guys who are in the markets, you know that on the days when we buy treasury securities, when we’re paying for those forty four billion dollars in notes that were just sold — in the old days anyway, now we have excess reserves — but two years ago the Fed would have to come in and buy securities the same day that its selling them because it has to do repos to add the money so we can buy them back. [00:06:54]

Okay. The P word.

There are three ways to spend with a gold standard: tax financed, debt financed and money financed which was called “printing money.” Tax financed was easy. You taxed and then you’d spend. Debt financed you’d sell bonds and then you’d spend. And the last way was “printing money” and that’s where the term “printing money” comes from. It has no application to whatsoever with today’s currency arrangements but it’s still used and it still has the same connotations. [00:07:21]

The reason they used to debt finance was because if the government spent by printing money and didn’t sell bonds to get that money back — that was a convertible currency, you could get gold from the treasury, you could cash it in. So they were always at the risk of running out of reserves and going broke and that type of thing. So any government deficit spending had to be…. and that’s why the rules that Randy was talking about that are left over from the gold standard include the requirement that Treasury borrow money before it spends. Inapplicable with today’s currency arrangements. [00:08:00]

We’re still on the gold standard thinking. What’s the evidence?

Why did the Democrats cut Medicare? Why did the Democrats raise taxes? Why did the Democrats visit China?

I’m using Democrats for… I can’t remember the word… emphasis. It’s not that hard a word to remember is it? They tell me it gets worse, I just turned sixty last year. I’m using Democrats for emphasis. I happen to be running as part of the Democratic Party.

Why did the Democrats form the bipartisan committee to report back on ways to reduce the deficit? Why did the Democrats put Social Security and Medicare on the table? Why are we here? Right? [00:08:44]

Gold standard thinking. They think the government has run out of money. It’s not because they are worried about inflation, although they are or they might be. They think the government is spending now limited by how much it can borrow from the likes of China, leaving that debt to our children to pay back. We’ve all heard this many many times. We’ve seen President Obama, Secretary of State Clinton, Treasury Secretary Geithner go over to China to negotiate with our bankers to make sure everything is okay because they believe we are dependent on them to fund everything from Afghanistan to health care. [00:09:19]

How does a non-convertible currency work?

Well, we’ve already gone through this. Does anybody need a repeat on turning litter into money? [00:09:31]

In the first instance, what is the purpose of a currency? And what — I’ll just not go into the history, we’ve already heard that, but even with my example, with my cards, why was I doing that? It’s because I wanted to get the carpet clean. I wanted to get resources from the private sector to the public sector, I wanted to provision the public sector. Why does the University of Missouri put this buckaroo tax on, why do they, what’s the point of that currency? It’s to provision the public sector. [00:10:00]

There are a lot of ways that — there are ways this has been done in the past. One is through a command economy where you just conquer somebody, take the slaves, and they do the work for you to provision the public sector. You used to wake up with a lump on your head and you’d be in the British navy; that was a popular way to provision the public sector. We pretend to be more civilized today with our monetary economy, where we impose a tax, with a man at the door with a 9 mm to enforce it, and then show you what you have to do to earn the money to pay the tax. And that’s how we provision our public sector. [00:10:36]

Unemployment fundamentals: Unemployment is people looking for paid work. Taxes create unemployment. None of you were looking for paid work for my business cards when you came in the room. None of you were looking for paid work, work that paid in my business cards, until there was a guy at the door who won’t let you out without five cards. The first thing that happened by requiring that tax is you all became unemployed, as we define it. People looking for work who couldn’t find it, who need to get paid in that particular currency. The students were not unemployed until the school imposed a tax on them in buckaroos. Suddenly they needed, they were all now willing and able to work to get buckaroos to be able to pay the tax. In the first instance the point of taxes is to create unemployment. [00:11:26]

We take people out of the private sector, we get their time out of the private sector with taxes. Government spending then employs those we just unemployed. The whole point of unemploying you with my cards in the first example was to be able to then employ you to get the carpet cleaned when we left, otherwise why am I doing this? I didn’t tax you because I needed my money. The whole point of getting the students unemployed with the buckaroos was to get student labor to help out in the hospital. They didn’t do it for the currency. The whole point of taxing to create unemployment is to then use those people in the public sector. If we’re going to tax, and then not hire all of them and leave 20 million people looking for paid work who can’t find it, and because of our monetary system can’t support themselves, and we’re destroying our entire social fabric, why are we doing this? We should lower the taxes. You’re going to do a certain amount of work for me based on how many cards you need to pay in taxes. If I don’t want all that work I just cut the tax, and you’ll go away. You’re not going to be here beyond what you need to pay the tax and to net save. You’re going to lose a few in the wash, the parents are going to take some home as souvenirs. [00:12:39]

Unemployment is the evidence that the budget deficit is too small, that the government has not spent enough to cover the demand to pay its own tax, plus any residual savings demand that comes from that tax liability. Unemployment can always be eliminated with a fiscal adjustment. You either cut the tax and the people go away, or go ahead and hire them to do what you wanted them to do, which is the reason you started the tax to begin with. [00:13:03]

We’ll save the questions for later. [00:13:09]

Monetary operations: The federal government neither has nor doesn’t have dollars. Government spending: how do they do it? Just like Chairman Bernanke said, they just mark up the numbers in our bank account. It doesn’t come from anywhere; it doesn’t use anything up. Government taxing: they simply mark down numbers in our bank accounts. They don’t get anything; they don’t pile anything up. [00:13:37]

Deficit spending: That means the guy in Treasury has changed more numbers up than the guy at the IRS has changed numbers down. There’s a difference between the two, and it’s called the deficit. We can call it whatever we want. The national debt is that difference from the beginning of time, 13 trillion dollars. [00:13:58]

Everybody says, you know what you forgot? You forgot about inflation; you forgot about what can happen if you overspend. So I just want, I don’t want anybody to say that, so I’m doing this. They’re going to say it anyway. [laughter] There are some reporters in this room; they’re going to say this, but, look, my conscience is clear, I threw the slide up. [laughter] [00:14:19]

Now after the government spends, they don’t just throw it out the window, they could, then it would be in cash, but what they normally do is put it in a checking account at the Federal Reserve. It’s called a reserve account because it’s the Federal Reserve Bank. (All right, I’m doing the second one first.) Reserve accounts are checking accounts at the Federal Reserve Bank. They call them reserve accounts, the Federal Reserve Bank, they give it a fancy name and then when people say, well, our reserve balances went up, they sound professional, but all — they’re just checking accounts. [00:14:47]

The national debt — okay and there’s another kind of account at this central bank, at the Federal Reserve Bank, called Treasury securities. They’re savings accounts. That’s already been covered, I’ll just leave it at that. You give them money; you get it back with interest; that’s called a savings account. [00:15:04]

Cash is the exact same information as your checking account but it’s written on a piece of paper, so instead of getting your balance on a computer screen or bank statement, you get to carry it around with you; it is a bank statement. Cash is just a bank statement. It says a hundred dollars; it’s the same thing, it’s a thing you can use to make payments to the government for taxes. [00:15:26]

Once the government has spent, that money appears in one of those three forms. So if the government spends without taxing, just spends, that’s called deficit spending, say on day one the government just spends a hundred dollars, it’s going to be one of three places. It’s going to be cash in circulation, or in a checking account, or in your savings account, somebody’s savings account. There’s no other choice: the dollar has no other existence, other than those three places. [00:15:36]

And all of this equals the world’s net savings of dollar financial assets. There are thirteen trillion dollars or so in the savings accounts and checking accounts and cash equal to the penny to the cumulative deficit spending. That’s how much the government has spent and stuck into those accounts, but hasn’t yet taxed and taken out of those accounts. Spending puts the money into the accounts; taxing takes it out. If you put it in and don’t take it out, it’s a deficit; it’s our savings; it’s held by you, me, China, whoever owns Treasury securities. [00:16:28]

A little diagram to explain it here: to see how it works, just to make it graphic, that I did a long time ago. It appears in Randy’s book Understanding Modern Money. Up at the top, you have (I’ll do it from here so I have the microphone I guess). In the middle you have the non-government sectors; that’s all of us, everybody except the government. Now let’s start at the bottom: the government imposes a tax. We have to pay this tax or we can’t get out of the room; we’re going to lose our house and our car. When I say tax, just think of a property tax, because that’s easy. If you start thinking of an income tax, what if you work, what if you don’t work, it works, but you’ll lose track of the rest of what I’m saying. Trust me, it does work, but think of it as a head tax or a property tax, just to keep it simple. [00:17:19]

So the government levies a tax, and now we need the money to pay the tax. Notice I have taxes going out — down into the drain. I don’t circulate them back. There is no such thing. We ship real goods and services to the government — the government’s doing this because it wants to provision itself — and the government gives us the money we need to pay the tax. Goods and services to the government, money to pay the tax, some gets paid in taxes, some gets saved. Where does it go? It goes to the tin shed in Canberra — the warehouse over on the right. In Australia, it’s this tin shed; over here we’ve got a big concrete building. And that’s how it’s held: it’s held in one of those three forms: cash, reserves, or Treasury securities. All that Fed operations do is shuffle around the difference between cash reserves and Treasury securities. When the Fed buys securities from the private sector their securities go down and their cash reserves go up. When the public wants more cash the reserves [sic] go down and the cash goes up. The total is always the same; it’s always equal to the deficit. [00:18:28]

The only place that net financial assets can come from is government deficit spending. This is all accounting; no theory, no philosophy; ask anybody at the CBO, and they’ll say, yeah, that has to add up to the penny, or we have to stay late and find our arithmetic mistake.

So last year the government spent a trillion and a half dollars more than it taxed, that money went into the warehouse, it’s now held as Treasury securities, reserves, or cash, otherwise known as savings, and sure enough last year savings went up by exactly that amount, to the penny, when you include all the non-government sectors.

Deficit spending adds to our savings. I think I just said that. [00:19:05]

Now, we’re going to walk through an example that’s going to take intense concentration here, so are you ready? Okay, we’re going to assume you’re the only person in the economy — we’re going to personalize this — and you happen to have a hundred dollars in your checking account, and the government wants to deficit-spend a hundred dollars to hire you as a consultant. Washington hires a lot of consultants, so I figured this is as good a thing as any of what deficit spending is — what money’s spent on. [00:19:33]

First thing they do is they offer for sale — we can start in anywhere, but I’m going to start with them offering a Treasury security — they offer you a hundred dollars worth of Treasury securities, and you say okay, I’ll buy it. Because you buy it at auction, you get to choose your interest rate, and the highest bidder gets it — the lowest bidder gets it, the highest — lowest yield, highest price. So you say yeah, I like that yield on that Treasury security, I’m going to buy it. So you just took your hundred dollars out of your checking account, it goes into your savings account, called a Treasury security. [00:20:04]

Have you lost anything? Has the government taken away your money? No. I’ve never heard anyone say, ah, I wish the government would pay off these Treasury securities so I could get my money back, and I don’t think anybody else has either. They are money; in fact it’s better than money, or you wouldn’t have bought it; it’s voluntary. [00:20:20]

So now you still have your hundred dollars, it’s just in a savings account instead of a checking account. Now the government “has the money”, in their mindset, to pay you your consulting fees. So you go in and you give them some advice, and they pay you a hundred dollars, and they put it in your checking account. You now have the new Treasury security, and you’ve got the hundred dollars back in your checking account, and nothing is crowded out. It has nothing to do with loans, deposits, banking, anything; it’s just a self-contained thing. It has no effect on any other part of the private sector. And if you remember my previous example, the government spent more than it taxed, you held it in a warehouse, and you held it in a the form of a savings account: you had a checking account; now you have a checking account and a savings account. [00:21:06]

Government deficits add to savings, to the penny. The deficit clock could be renamed the savings clock. This has already been covered — the same thing.

Fiscal sustainability review: Spending is not constrained by revenues. Spending is changing numbers up; putting numbers into our checking accounts. Taxing is changing numbers down, taking numbers out of our checking accounts. Borrowing is moving numbers from our checking account to our savings account. There is no numerical limit to any of this. Paying interest is changing the number up in our savings account. The government can always make any payment of dollars it wants to make. This is all we’re talking about; it’s a nominal system; we’re talking about there are no nominal constraints. [00:21:56]

The risk is inflation, and not insolvency or not-solvency; there’s no solvency risk.

There are self-imposed constraints on this process. There’s a budget process, which tells the guy at Treasury, you can’t spend whatever you want, you can only spend what’s been approved. There are debt ceilings; there are no-overdraft rules; there are all these silly things left over from the gold standard, when it mattered, because back then, if they didn’t do it right, people could cash the money in and take the gold supply, which would be a default situation. [00:22:29]

So now we can get to the main thing, to why we’re here: is Social Security broken? Well, we have to define what broken is: first, what’s the public purpose? What’s the presumed problem; what is the real problem?

Public purpose of Social Security: Well why do we do this? To provision seniors at a level that makes us proud to be Americans. [00:22:53]

What’s the problem with Social Security? Are seniors taking their Social Security money and flying in private jets to the Super Bowl and staying in the box seats? No. [laughter] If the problem is that they’re living at too high a standard of living, I can understand that. If the problem is that, look, we’re feeding our seniors and that food, we really need it for the soldiers in Iraq, or in Afghanistan, and so we’re going to lose the war if we don’t starve our seniors, I can understand that. We’re producing 8000 calories per person per day; there’s no reason to limit the intake of our seniors. We have a housing problem, which is vacant homes in record numbers; there’s no reason to have them out on the streets. So what happens if we provision them too low; well then they’re eating out of garbage cans and we really don’t like those images on European TV where suddenly they think they’re better than we are — and Australian TV. [laughter] [00:23:46]

So the idea is, the public purpose is to provision our seniors at some minimum level, or some level, which I’ll call a minimum, at a minimum that makes us proud to be Americans, and not at some level that’s too low where we’re embarrassed or a level that’s too high so it’s embarrassing. [00:24:03]

Collective provision versus individual provision: our seniors are not happy when they have to tap their children for money, no matter how much money they have; it doesn’t make them feel good, and it doesn’t make us feel good. And it makes us all feel better to know that — and it gives the seniors a feeling of independence to be getting the money from the government collectively, and then spending it, even though they know it’s coming from us — it’s taking, it’s consumption that we are forgoing for them to consume, whether you want to look at it in real terms or in nominal terms. It’s certainly not the actual money, we know that, but it is still a shift in provisioning, and it allows — I believe — I like collective provisioning versus individual provisioning. I just think it’s a much better way to do things. You might disagree; that’s fine. That’s a political choice. So what is the presumed problem? Are they living too well, which is what I was just talking about? Are the opportunity costs too high, that is, are they using resources we need? And the answer to those are no. [00:25:02]

Is the trust fund a limiting factor? Absolutely not.

The trust fund is a record of what we’ve done. Every time we tax and the man at IRS changes down the number — at FI — wherever the guy is, I don’t even know where that guy is — but whenever he changes down the number on our checking account, he changes the number up on the Social Security trust fund — why? Because those two balance and then he knows, okay, this went up a hundred, this went down a hundred and ten, wait a minute, we’ve made a mistake, oh no, this is a hundred, hundred and — okay, we’re in balance, I found my mistake, I can go home. When somebody changes the numbers up in our checking account to make a Social Security payment they change the number down in the Social Security trust fund. Now they have something to balance against. Now we also have a formula for paying out benefits, and that trust fund helps us with the formula a little bit, because we have individual records.

But it’s not “the money”. The government never has or doesn’t have “the money”; there isn’t any such thing; those are not dollars. “Accounting” means a count; it’s record-keeping, it’s a record, it’s not a constraining factor. If it goes negative, it goes negative; a light doesn’t go on and — you know — something breaks open and Bill gets drowned in the flood. [00:26:09]

The real problem, which has already been discussed — but I’ll just tell it my way for a second — if there is a real problem, is the dependency ratio. That’s the ratio of workers to retirees, is the real problem, not the money. If, in thirty years, we’ve got three hundred million people retired and one guy left working, that guy’s going to be really busy. [laughter] Doing all the laundry, growing all the food, manufacturing all the Poligrip for us to keep our teeth in. And so, what do they say, and the mainstream economists agree, they say, therefore, we’ve got to make sure everybody’s going to have enough money to pay this guy, but, uh uh, that’s not going to matter. [00:26:51]

Mainstream economists also agree that the only real thing that will be useful fifty years from now is knowledge and education. We can build cars now and put them away for fifty years, but that doesn’t work. There’s hardly anything that we can build now, actually physically, plant and equipment, that’s going to be of any value fifty or a hundred years from now. The one thing that we have, that people left us from fifty or a hundred years ago, is our technology, our know-how, our software, and that type of thing. It’s not the hardware.

However, because we think it’s a money problem, we think the problem is these guys are all going to need a lot of money, because look at how high the prices for laundry services are going to be when there’s only one guy doing it for three hundred million people, we need to cut back and sacrifice today and run surpluses and tax more than we spend, put twenty percent of our people out of work, and, ironically, the very first thing we cut is the only thing that they would agree they’re going to need, which is education. [00:27:48]

More on Social Security: The trust fund is record-keeping. Social Security contributions are regressive taxes that function to reduce take-home pay and aggregate demand. Why is a Democratic administration supporting a tax that taxes those people at the lowest income levels the most? It’s not even a fair tax, it’s completely regressive. Why are they doing that? They’re not trying to do that, it’s not their agenda. They believe we’ve run out of money. [00:28:20]

Social Security payments are progressive distributions that add to take-home pay and aggregate demand. Why are they cutting these? Why did they just cut 500 billion out of Medicare? Not because they think we shouldn’t have it, or because they think there’s something wrong with a progressive distribution to help aggregate demand. Because they think we’ve run out of money.

Why are they contributing to the unemployment problem? Who is unemployed? We just grew at 5% for a quarter, at six percent, maybe another five percent this quarter. That’s very high real growth. Well, who’s getting all that real wealth? It’s sure not the people who’ve been losing their jobs or seeing real wages fall. It’s not the lower income group. Well then, who is it? It’s somebody else. [00:29:00]

We’ve seen a Democratic, populist administration preside over the largest upward transfer of real wealth from low-income to high-income people in the history of the world. That is not what they were elected to do, and not what they intended to do. It’s because they don’t understand the monetary system and monetary operations. It’s not even theory. They don’t understand actual operations. [00:29:21]

Oh — [laughter] — sorry, I forgot about inflation. [laughter] To get out of a hole, first you have to stop digging it, as they say, or you can’t fall out of a ditch. Yes, when you buy everything that’s for sale and use up all the excess capacity, the excess demand can drive up prices. And you can even drive them up a little bit in the meantime. But you do get supply-side considerations as volume goes up, prices per unit volume come down, you gain efficiencies. So it’s not clear that you’re going to get all that much, but certainly inflation can be an issue. It’s certainly not the case now. Right now if you look at core CPI the risk is deflation, not inflation. If you look at housing prices I don’t see a lot of inflation risk in that market. Will you suddenly gap from today’s prices to hyperinflation because somebody spent an extra dollar? Of course not. That’s not how it works. [00:30:15]

If you look at the worst financial collapses in the last twenty years, let’s look at Mexico in approximately 1995, I forget the dates. The peso was three-to-one, something like that, three and a half to one, absolute collapse, the currency up in smoke, no faith in government, no faith in everything, and it went to nine. They had about a sixty percent drop. It didn’t drop to zero, the peso didn’t go to a million-to-one. Russia totally collapsed. The ruble machine was shut down. Everybody turned out the lights, pulled out the plug, and left the central bank for six months. The ruble went from 645 to 28, a seventy-five percent drop. It didn’t hyper-inflate, or do anything like Zimbabwe, or Germany, which Marshall explained, which were entirely different situations. So even in situations far more extreme than anything we can imagine, which were fixed-exchange-rate regimes blowing up, which we don’t have, you don’t get sudden jumps in inflation; there just is no such thing. [00:31:13]

What happens if Social Security checks get too high? What happens if we are over paying? How would we know? Well, unemployment would get too low from all the spending, whatever that means. The economy would grow too fast, whatever that means. Seniors would be living too high. Prices would start going up, we’d start seeing the inflation. And then what happens? [00:31:35]

Well, then the option to raise taxes or cut benefits might make sense. Right now it doesn’t make any sense. It only makes sense if you think we’re running out of money because we’re running a deficit. (I’ve got to race on, I’ve got to get to China….) Not because the government doesn’t have the money, but because spending no longer makes sense. It’s a political choice. [00:31:53]

Why are Social Security Cutbacks ‘on the table?’ Only one reason. Our leaders don’t understand the monetary system. They don’t know spending is not constrained by revenues. The think that to spend waht we don’t tax we have to borrow from the likes of China, for our grandchildren to pay back. It’s all a tragic mistake of epic proportions. [00:32:11]

Let’s talk about China for a minute before I get to the Euro zone.

How does China get their dollars? They don’t start out with any dollars. They sell things at Walmart and Kmart and in Target and in our department stores. And they get paid and their money goes into their checking account at the Fed. Technically, that’s part of the national debt. We now owe China that money. Well, what do we owe them? We owe them a bank statement that shows how much they have in their checking account. Then our debt management people take over, at Treasury, and they auction off Treasury securities and China buys Treasury securities. And what does the Fed do? They move the money from China’s checking account to China’s savings account at the Fed. And now we owe China all that money with all that interest and how are we ever going to pay them back? How are we going to pay back the whole 13 Trillion in savings accounts? Just like we do every week when 10s of Billions come due: we transfer that balance plus interest back to the checking accounts at the Fed. Paid debt paid back. They have three choices with what they can do with that checking account: leave it alone, put it back in the savings account or spend it. [00:33:26]

Well, what if they spend it? Well then they go buy something, I don’t know, euros from Deutsche Bank or something. And then we transfer the dollars from their account to Deutsche Bank’s account and European Central Bank transfers euros from Deutsche Bank’s account to China’s account. There’s all these other countries that are doing the same thing. [00:33:44]

So, what is the problem? What are we leaving to our children and grandchildren? They’re just going to need one accountant like we do to debit and credit these accounts. The whole thing could be done on one spreadsheet. You could run that whole part of the Fed with about $100,000 out of your budget if you wanted to. There’s nothing to it. [00:34:04]

People say, “Well, what happens if China dumps all their dollars and the dollar goes down? Whatever are we going to do?” At the same time, the same people are saying that we need China to revalue their currency. Their currency is under valued by 50%. On the one hand they want us to revalue their currency up, which means have the dollar go down by 50% and on the other hand they are panicked over what will happen if the dollar goes down by 50%. Guys, you can’t have it both ways. Figure out what you want.

I don’t have time to get into it, but it’s not a problem either way. (How am I doing here? I’ve lost track of time.) [00:34:42]

What’s wrong with the euro zone?

The UK, the US, Japan are not the next Greece. We’ve talked about this, I’ll just review a bit quickly. Greece is not the issuer of the euro. Greece has to have money in its account or its checks will bounce. Same with all the other member euro nations. The euro nations are revenue dependent like the US States, businesses and households. [00:35:02]

Think about the United States in the last two years if we had all the states, but we didn’t have the US Treasury. We had the Federal Reserve Bank, but we didn’t have the US Treasury to run a deficit. When the treasury ran a deficit of one and a half trillion last year, all that money went to the states and the people in the states. That wouldn’t have happened. Instead the slowdown and collapse would have forced up the deficits of the state governments because they would have been making the unemployment payments and they would have been losing the revenues. [00:35:38]

Could they have sustained that kind of deficit spending without collapsing? California is ready to collapse and their deficit is only something like 5% of GDP or maybe a little less depending on how you measure it. No way.

That’s what’s happened in Europe. They put themselves in this situation. They’ve been in true ponzi. Ponzi is when you have to pay somebody back from getting the funds from the next person.

The US government, Japan — Japan with 200% debt to GDP is not in ponzi — they don’t pay people by getting the money from somebody else. They just change the numbers up like we do. That is not ponzi. Ponzi is when you have to get it from somebody else.

Europe has put themselves in ponzi from day one. And we’ve been pointing it out from day one. Now, ponzi works on the way up. Madoff went a long time before he collapsed. So did Stanford. It’s on the way down where it all comes apart.

We’re seeing the back end of this coming apart. [00:36:27]

And we’re seeing the dilemma they dealt with at the beginning when they set this thing up. And that was how do you balance the idea that you don’t want moral hazard risk for all your individual members. If the central bank would guarantee all their debt, they would have no debt problems. However, then it would become a race to the bottom. Whoever deficit spends the most wins. Whoever inflates the most wins. It would be an instant recipe for immediate hyper-inflation. You have to have some kind of constraints. So, they had two constraints. They had the growth and stability pact which said you could only run 3% deficits which at the time we said and they knew was unenforceable. Because you enforce it with fines. That’s just unenforceable because if you are allowed to run any deficit you want and you get fined, you just run a larger deficit and pay the fine. It doesn’t make any sense at all. [00:37:19]

The other thing they did was they left the nations as financially independent like the US States. That made the market forces enforce it, but again, market forces don’t come in right away. It’s only when things are on the way down. So, on the way up they were okay. As soon as things started turning down with a vengeance like they did this time and suddenly the game’s up and they’ve got some serious problems.

Now they’ve got answers. They could just have their banking system loan to these… buy all the government debt and not haircut… allow banks to buy all they want. Just to pass a rule that says banks can buy all of them. But then they’ve got their moral hazard issue. Now they’re back to whoever deficit spends the most wins. [00:37:57]


The shoes will have to fall. They don’t have credible bank deposit insurance. If Greece goes down and people realize they are going to lose their 50,000 euros in their bank account, the rest of Europe can be in a big problem. They are already having runs on the banks and it gets a lot worse. It shuts the whole payment system down.

There is no credit worthy government entity to act counter cyclically…

Thank you very much, I’ll turn it over to questions. I do have a proposal for the euro zone which I’ll save for question and answer if anybody wants to hear it. That way I’m not using up my time. [laughter and applause] [00:38:37]

Session 3: Q&A [00:39:04]

Maurice Sanders [??]: Just a quick question for you, Warren. When you describe the moral hazard in the Eurozone, would your description then be different if there were a political superstructure to encompass all those nations in one political structure?

Warren Mosler: Yeah, if the deficit spending was done at the new fiscal authority, call it the European Parliament, then you don’t have the race to the bottom. It’s when you split things up, it makes them compete with each other. For example, if you have federal pollution control laws you don’t have a race to the bottom, but if you have state pollution control laws then the state that allows the most pollution gets the most business. So yeah, that consolidation would take care of it. [00:39:53]

Joe Bongiovanni, Kettle Pond Institute: When you floated your proposal on your blog about the European central bank paying out a trillion dollars, I asked you the question, “Is anybody going to issue any debt to do that?” And eventually you answered me back and said, “No, there would be no debt issued.” Am I right about that?

Warren Mosler: It’s just a payment. It’s not a loan, it’s a payment.

Joe Bongiovanni: So, does that hold true for deficit spending by us, then? That is to say, our central bank, when we’re going to deficit spend, can they also just make the payment without issuing any debt? [00:40:33]

Warren Mosler: What I’m saying is, if the federal government pays you money, it can either pay you money or loan it to you. If it pays it to you, you have no debt. If it lends it to you, you have a debt. So when the European central bank pays… makes a per capita distribution of a trillion euro [to] the member nations, it’s not added to their debt, they don’t owe it back to the European central bank. When the Federal Reserve makes a payment, it goes into someone’s checking account. We can call that a debt, if we– it’s how you define which account that money is in. We don’t count that as… [00:41:13]

Stephanie Kelton: It’s like helping our state governments.

Warren Mosler: Right, right. But if the Federal Reserve makes a payment to anybody, whether it’s a payment to the state of Connecticut or a payment that goes out and buys a box of pencils, it goes into somebody’s checking account. It goes into a reserve account at the Fed, through your member bank. We don’t call that “debt.” It’s only when we move the money from the checking account to the savings account that we call it “debt.” So, what’s called “debt” at the Federal level I would not call it “debt.” I never would have called it “debt” from the beginning. It used to be called “debt” because we owed the gold that were in reserves. Once the gold was gone, it’s no longer debt, it’s payment in kind. It’s just a store of nominal wealth for the other guy. It’s not a debt. The European central bank hasn’t started on a gold standard, so they don’t automatically call something debt that isn’t debt, so they don’t have the problem of creating debt when they spend. It’s a little bit of a technical answer, but the answer is that a payment from the European central bank is not booked as debt anywhere, because the never have booked it as debt. We book it as debt because we have a gold standard tradition that caused us to book it as debt. It’s both– they’re all the same thing. [00:42:29 ]

Unidentified: Question for Warren Mosler: since I’m a foul-mouthed leftist blogger, I’m going to frame this as polemically as I can. Speaking to the question of the Tragic Mistake theory, is there a reason to choose the theory of the Tragic Mistake, as opposed to a theory that this is a deliberate act of policy that’s meant to cause as many people as possible to suffer and die? How would I choose one theory as opposed to the other? [00:43:01]

Warren Mosler: I forget the saying, but it’s better to presume innocence than to– how does that go? You know, my book up there that I’ve got, called “The Seven Deadly Innocent Frauds,” it’s John Kenneth Galbraith’s last book. “The Economics of Innocent Fraud,” and he said it more eloquently than I did, but it’s the idea that when you presume innocence, you’re making a much stronger statement than imputed guilt. [00:43:31]

Unidentified: You would have evidence to back this up?

Warren Mosler: Which?

Unidentified: Why should we presume innocence, based on the record of the last thirty years or so? [00:43:44]

Warren Mosler: Only as a point of logic, that you’re better off presuming innocence. As part of the argument.

Unidentified: As a rhetorical tactic?

Warren Mosler: To say the person is… I’m not sure how to… Yeah, sure, as a rhetorical tactic, you presume innocence.

Unidentified: As a foul-mouthed leftist blogger I can completely accept that.

Warren Mosler: Presuming innocence is more powerful, is a far superior rhetorical technique. Especially if it’s something that’s really simple to understand, because then you’re really throwing the onus on the other guy: “You’re either a complete idiot, or you’re subversive, which is it?” [00:44:31]

Bill Mitchell: Someone asked me at lunchtime whether the European leaders knew about options to solve their current issue, and I said to them that if you read the documents, and the debates going back to the Delors papers, and then subsequently, you will be left with the unambiguous impression that they know all the options. Most recently, the German Finance Minister was interviewed and it was in German, I couldn’t find it in English. I was going to try to put it in the English version, but it was in German, but fine. [00:45:19]

And what he said in the interview was that when they framed the common currency system, they had a choice. And they had a choice to add elements that would have made the current crisis much less a crisis. And those elements were a system to deal with asymmetric shocks, in other words, a fiscal redistribution system; and also, as Warren said, a single fiscal authority. And he said that that was debated, and if you go back to the original debates you see the debate there. And they chose, as an explicit choice, to exclude those characteristics from the system, the very characteristics that would have made the current crisis significantly less severe. They chose explicitly to exclude them from the system. [00:46:25]

And as soon as the common currency came in, Germany then introduced their so-called Hartz reforms. And these were reforms that — because previous to that, they were able to maintain their export competitiveness through exchange rate movements. Once they lost that capacity because of the common currency, they had to work out another way to stay one up on the other countries, and so they brought in the significant deflationary measures in their labor market: casualized significant sections of their labor market, reduced workers’ real wages and conditions, the whole Hartz agenda. And these were all very explicit choices and decisions they made within the context of the institutional system they were setting up. They knew the alternatives. And they knew that once the crisis hit, then the weaker countries — in a trade sense — would melt down, as they are. So, I’m not so sure I agree with Warren in emphasis. I think that they…

Warren Mosler: It’s rhetoric, though, just rhetoric. [00:47:32]

Bill Mitchell: I understand the rhetoric. I think that I prefer to say that they aren’t innocent. They took an ideological decision. They were scared to death. There’s a cultural animosity within Europe stemming back to the Latin and the Germanic cultures. The second World War’s had an incredible influence on the way they’ve structured the evolution of the European community, and now the EMU, and the ideology surrounding all of that led them … The Germans dominate, they don’t trust the Italians and the Spanish, and particularly the Greeks. And they set up a system that would punish those countries in the event of a crisis, and they deliberately did it, and they know the options. They know all of the options that could reduce the pain, but they don’t want to do it.

Warren Mosler: There have been statements out of Greece that they owe us these loans for war reparations. I’ve got my book here that I brought some copies of, which you can download for free at, or you can buy for $10. Shameless promotion here. [00:48:41]

Bob Hahl, Kilowatt Cards: You said that, and it’s pretty clear, that raising taxes reduces demand for goods and services, but it also seems to reduce other kinds of things like greed, or power, unbalanced power — very rich people have enormous influence. I think back to the situation after World War II when the upper tax rate was 90%, and people always talk about that as if there were a lot of people paying 90% marginal rates, and I don’t think very many, if anyone, ever did. I don’t think anyone made that much money. What happened was, faced with a choice, if you’re an employer, of taking money out of your company and giving 90% of it to the government, or distributing some of it to the workers instead, and getting something for it, that that was a better choice. And so I can understand the idea of lowering taxes, but at the same time you’re also unbalancing society, and you’re letting people accumulate so much money and we don’t know what kind of crazy thing they’re going to do with it.

How do you control that? We don’t let people keep bazookas and land mines to protect themselves, but we’re letting people get rich enough to compete with countries. [00:50:03]

Warren Mosler: Second amendment. No, those are all very legitimate political decisions. Those are political decisions. Those are the consequences of policy, but it doesn’t mean the government’s going to run out of money.

Unidentified: How does that jive with the notion that tax rates should be used to regulate aggregate demand?

Warren Mosler: We didn’t say tax rates–

Unidentified: Ok, taxes. The tax code has been used to redistribute income, and in my opinion, right now it has been hijacked to favor upper-income households. Now we have huge income inequality in this country, so again, how does that jive with this notion of regulating aggregate demand? [00:51:02]

Warren Mosler: There’s a bigger problem with that, because what also tends to happen is people wind up with the same after-tax money, so when you raise tax rates, and let’s say wages stay the same, tax rates go up, and government stays the same size, that means the higher incomes go high enough to adjust for the taxes. So after the Clinton years, you see, “Oh gee, look, we collected an extra trillion in taxes because of the higher rates.” Yeah, but those people earned an extra $5 trillion in income. So, it’s a moving target as well. There’s a lot of intuition, I guess we called it, and illusion as to what’s going on, when you dig down into it. Everything government does has distributive consequences, and those should be the first and foremost political decisions, not whether we’ve run out of money or not, or whether we’re going to borrow from China. [00:51:52]

What these myths have done is taken our eye off the ball of what I would consider are the important decisions. I did a paper with Randy and James Galbraith, we gave it to the GAO and FASB on sustainability, and we said, “Look, the problem is 100% of your time, money and effort is going into figuring out government solvency, and none of it’s going into the inflation problem. So what you’ve got is 100% of your resources going into the thing that doesn’t exist, and nothing going into the thing that could actually be a problem.” And that’s indicative of what’s going on at all levels of government, because they don’t understand the monetary system. [00:52:31]

Unidentified: But this is more than hypothetical, more than just political, we are talking economic. Income inequality is an economic issue that is challenging… In my opinion, it’s one of the biggest challenges to our democracy.

Warren Mosler: Right. But what I’m saying is it’s not getting the attention it deserves because they’re worried things that shouldn’t be getting any attention. We’re not going to get attention to those issues until we get rid of the things that are taking all of our attention, like China, and the budget deficit. If we stop thinking about those, we’d have time in Congress to talk about something else. [00:53:02]

L. Randall Wray: I want to add a couple of things. So, we’re arguing taxes drive money, taxes don’t pay for government spending. So that’s the fundamental point. And then the question is, “What kind of taxes?” And Warren said the head tax is actually the best thing to drive currency from inception. But once we–

Warren Mosler: I said it’s the easiest thing to understand.

L. Randall Wray: It’s also the best thing to drive it. But once we’ve got a monetary economy, then we can use an income tax, we can have an inheritance tax, and so on. So then the question is, “What other things can taxes do?” And so yes, we use taxes to punish certain kinds of behavior, “bads.” And then we can use tax breaks to encourage other kinds of behavior. We could use inheritance taxes to try to prevent accumulation of dynasties of wealth. We could try to use taxes to address income inequality. One word that you said that I don’t like is “redistribution” because we can always raise the income of people at the bottom, without taking from income at the top. The reason is because we don’t really take income and give it, because taxes don’t pay for the government spending. We can always have as much welfare as we want without taxing the rich at all. [00:54:19]

Then just the final point I would make, I’ll just state it as a claim, and I think that you said this: in fact, taxes never reduced income at the top. It does not work. They have too much political power. They get the exceptions written into the tax laws. So you never achieve the 50% tax rates on the rich. So we should think about a different way to prevent income inequality, I don’t think the tax system will work. Prevent the income in the first place, that’s the best way to do it. [00:54:53]

Unidentified: I would like to thank you for this explanation about the European Union, and I have a question. Many things are a matter of politics, and I had… the journalists got a very clear understanding of that yesterday, when there were questions about Greece and how to solve that. There was a clear separation that the President is not going into financial issues, there are so many other things that are coming up, and that are to be discussed with the American Congress, that he said it was not his venue, and my thinking is that at the time the decision was taken that some things were excluded. It was some time ago. The people who are right now deciding about things may have not heard about that, like they were busy doing other things in Europe, like there was Solidarity in power and then the President was then part of the movement. So my thinking is if there is a part of information, and knowledge that can change things, what I see here, there are actually people who could be in power to introduce some new things, new solutions, but they are not available. And because there is so much going on… [00:56:15]

What I’m trying to say is that there should be a stronger voice of these statements that I hear here, just like out there. That may be the case, there are people who could make use of that, and it’s just not available. And I’m used to that as a journalist, because it’s our job to connect certain niches of the society. It might be even the case, right now it may not exist that much, but there was this opposition, this situation between Poland, Germany and Russia. So, there was this German influence at the beginning of the forming of the European Union. It may changed right now, and it may be time to try a little… I’m not trying to tell you what to do, but I’m trying to say what you represent may be really appreciated at the very high levels, only you know there is a way how to get it out there. There may some kind of lack of information. [00:57:22]

Marshall Auerback: I’ll just say, well, you’re a journalist, you can write a story about this. That’s the short answer. The second point, in regard to the American context, is that there have been voices out there. In fact, I would say that virtually everyone on this panel has been amongst those voices. I’ve been reading Bill’s stuff many years, I’ve been reading Randy’s stuff, been aware of the stuff from the Levy Institute for at least the last twelve years, and they have been voices in the wilderness, they have been marginalized. The people that are Obama’s main economic advisors right now are the architects of the crisis in the 1990s — Larry Summers, the Bob Rubin-ites — they’re all in power. The argument at the time was, “This is a financial crisis, and we need experts who are familiar with the markets to deal with this.” And my response has always been, “Well, look, if I go to a doctor, and he botches up my surgery by amputating the wrong arm, I’m not going to go back to him just because he has greater familiarity with my body.” But that seems to be the general consensus, the way things operate.[00:58:33]

In regard to the question on Europe, some of us have been writing about this. I’ve been writing a lot about this. Bill’s written a lot about this. Rob Parenteau has written a lot about this. And we’ve been going to London, and to many places in Europe over the last several months. I’ve been talking about the epicenter of financial instability gravitating from the US towards the European Union because of this euro problem that Warren described so well. And for a while, people couldn’t understand why I had this obsession with this stupid argument, but to me it’s very interesting, because even though we’d like to think about Europe as somewhat a more social democratic paradise than the US is, in fact, it’s neoliberalsim’s last stand. I think the most extreme ideological tenets of neoliberalism are now embodied in the Maastricht Treaty, the stability pact, and if this thing blows up, as I think it might be, this will be the classic over-reach moment, and I think this could be the area where all of sudden people are going to say “Well, some people did actually obviously diagnose this.” I remember Warren last summer saying, “There’s a solvency problem in Germany” and most people saying, “Germany? Are you kidding? That’s absolutely insane.” [00:59:43]

But as this thing begins to metastasize a lot more, I think people are going to say, “What is it that caused this problem, and who is it that actually diagnosed rhis correctly?” So I think in that regard, what’s happening in Europe is very, very significant, maybe in some respects even more signif