Monday, November 28, 2011

From the comments: technical details on MMT

In a recent post I said that
A country that runs a fiat currency doesn't "borrow", it prints and unprints money whenever it spends and taxes. If it issues bonds, it is to change the term structure of extant pre-printed currency, not to print more, or "sterilize" outstanding money.
This is technically not true, as was pointed out in comments by JKH. The comments are now about 100, so I wanted to pull out this point.

I've found that the greatest challenge in understanding MMT, or getting someone else to understand it, is that our heads are filled with lots of preconceived notions that limit our ability to see things from a new perspective. As Chuck Norris would say "you cannot fill a cup that is already full".

So I exaggerate and say that a government neither has nor does not have money, and that all spending is printing, all taxing unprinting, so shock the system out of its current paradigm into the new one. Maybe it works for some, maybe it doesn't. I found this helpful in making the leap, but it may not work for others. YMMV.

Technically, the central bank is the currency issuer, while the Treasury is just a user like everyone else. So now the question becomes, to what degree is the central bank part of the Government, and even if the central bank is ultimately a creature of Congress (in the US) then Congress needs to actually enact legislation that would combine the CB and Treasury functions to make the Federal Government proper a true "currency issuer".

Thanks to everyone, but JKH especially, for their comments.


Blogger geerussell said...

In reading a lot of material and comments in the MMT blogosphere it seems to me there's a lot clarity in distinguishing between voluntary and operational constraints.

The operational boundaries described by MMT stake out what's possible and what the consequences are of various policy choices are.

The idiosyncratic voluntary constraints that each country imposes on itself in the arrangement of its institutions define what subset of that operational space is available.

So there's no conflict in describing the technical accounting within a country (treasury = user, Fed = issuer) and the MMT description of the country as a currency issuer.

The same reasoning applies to all such voluntary internal constraints, the debt ceiling for example.

A country can always choose to do less than what's possible.

3:30 PM  
Anonymous Anonymous said...

Winterspeak, I was hoping, in your words, you could explain why you view the more accurate operational viewpoint to still yield the same conclusions as would a world where the CB and Treasury are consolidated (and thus why you don't mind using the technically inaccurate terminology).

We were arguing whether the implicit belief that the Fed may one day lend directly to the Treasury was important, or whether this isn't necessary, and instead, buying on the secondary markets is only necessary. Then why is buying on the secondary markets necessary? Does it have to do with reassuring markets that demand exists for the debt and/or does it have to do with providing liquidity to banks etc etc?

4:01 PM  
Blogger winterspeak said...

wh10: I think this is a rich area for discussion, but I don't think it helps people get over the hump from being out-of-paradigm into paradigm. I could be wrong here.

But fundamentally, what I come down to is this: fiat currency is an extension of sovereign will. If you are a sovereign, you can tax. If you are not, you cannot. And if you can tax, then you can print the money needed to extinguish that tax obligation.

Beyond this point, all constraints are self-imposed, and if a sovereign is truly Sovereign, then any self-imposed constraint can be self-unimposed as well. But the US is a system of checks-and-balances, all of which are self-imposed, all of which are (sort of) popular.

But there are very few truly Sovereign countries in the world. Even before Greece joined the eurozone, it had difficulty collecting taxes. Therefore, it may be sovereign, but it is a weak or partial sovereign. Most of the third world, though nominally sovereign, are in fact a mix of governments, war lords, 1st nation NGOs, local militias, local strong men, etc.

If the CB refused to lend to the Treasury, then I could see the Treasury retaliating by re-writing what the CB was mandated to do. So I could see a CB asserting its independence by being a reluctant lender, or demanding tithe for its forebearance (as the ECB seems to be doing) but I also don't think they will go so far as to provoke their dissolution.

5:00 PM  
Blogger winterspeak said...

geerussell: the debt ceiling is a great example. what's a ceiling that is always raised when required?

this does not change the technical point that there is a ceiling there.

5:13 PM  
Blogger Tom Hickey said...

Aritcle 1, Secions 8, 10 establish the federal government as the monopoly issuer of US currency. through the enumerated powers of Congress. There can therefore be no question as to who the currency issuer is. The question is whether Congress can delegate the power of money creation to a central bank.

the dispute over strict and loose construction of the Constitution began at the beginning of the Republic. Strict constructionists argued that Congress could only exercise powers explicitly granted in the Constitution. Loose constructionists argued for implied powers, that is, any unmentioned power justifiable for the exercise of enumerated powers. A central bank is not mentioned in the Constitution, and strict constructionists opposed its establishment as exceeding the exceeding powers of Congress.

The question of money & banking was hotly debated at the inception of the country, when key institutions were being set up. Alexander Hamilton was the first secretary of the Treasury and his views, coincident with Robert Morris, prevailed over Southern opposition when a compromise was made to move the US capital from New York to Washington in exchange for their approval of the establishment of a central bank that would issue bonds to finance government deficit expenditure instead of funding itself with direct issuance per Article 1, Section 8.

The question now is not where currency sovereignty lies. The Constitution answers that. It is rather to whom has Congress delegated it. The answer is the Federal Reserve. The obvious next question is what is the Federal Reserve and how owns/controls it.

This is one of the hottest items in US politics right now, and there are many answers. The one that is going viral is that the Federal Reserve is privately owned and the owners are international bankers. Conspiracy theory, to be sure. But it is dominating the debate at the moment.

We need a clear, definitive and simple to understand presentation of both the law governing the Federal Reserve and an articulation of its operations in order to clear up this rampant confusion.

5:20 PM  
Anonymous Anonymous said...

Winterspeak, thanks, but I am still unsettled.

First I agree, the ability to tax is crucial.

But I don't view the argument that self-imposed constraints don't count because they are unnecessarily self-imposed as adequate to explaining why, for example, the US doesn't behave like Greece.

An actual argument for this would be that it is because mkts believe the US is willing to make the necessary changes if need be.

But I don't think that's the right argument, at least according to my potentially wrong reading of Fullwiler.

I think it has to do with the Fed's ability to set interest rate expectations on govt debt, which translates into demand for US debt. I could be wrong here. But in any case, I don't see why we need consolidation of Fed and Treasury to do this.

5:52 PM  
Anonymous Anonymous said...

The Treasury is necessary as the agency providing the "full faith and credit" of the US. They are not a "user" in the sense that the residents of the nation are users of the currency. They are an "operator", but so is the central bank.

The central bank is not necessary unless it is important to maintain an appearance of the primacy of private control over the currency.

So, in this sense, the CB is a "user". Currency can be issued without a CB, but it cannot be issued without the Treasury (state agency).

5:53 PM  
Blogger bosscauser said...

I think you still have it a little too complicated.

My understanding is that when Congress passes an authorization, the President confirms it by signing it, and sends it over to Treasury to credit the Central Bank accounts.

The Central Bank then credits all of the thousands of bank accounts in the system of everyone listed as payees.

In effect, creating a government deficit on it's spending side but a credit on the public's side.

The payees access the accounts and pay their bills in which the money created becomes taxable income as the money passes from hand to hand.

To reiterate, as the money is spent it becomes taxable until it all goes back to the Treasury where it ends up back where it started after an indeterminate time limit.

This indeterminate time limit, as alluded to above, is known as "THE BUDGET DEFICIT" which destroys political careers and makes grown men wet their pants.

(Some of us recognize this as part of public savings + money in circulation so have mercy on them they know not what they do!).

Now, I'm just a wayward right winger so if I screwed up in this explanation it's because of too many years of economic propaganda. LOL.

P.s I buy bonds for my retirement because the good old U.S.A can never go involuntarily bankrupt!

And for the government it's "free money".

12:52 AM  
Blogger Ralph Musgrave said...

The basic rules that should govern money and debt creation are thus.

1. There is no good reason to separate monetary and fiscal policy. To do so is always distortionary. For example to boost an economy just via interest rate cuts is to boost just via entities that are reliant on short term loans rather than long term loans or equity. That makes no more sense than implementing stimulus only via those with red hair.

Abba Lerner advocated having the government / central bank machine (GCBM) simply create money and spend it when stimulus is needed.

In any case, interest rate adjustments are a pretty hopeless way of regulating economies. See p.22 here:

and here:

2. There is no point in government borrowing if it has to pay a significant positive real rate of interest because GCBM can always print.

3. Merging fiscal and monetary might seem to result in politicians getting too near the printing press. In fact the decision as to whether a boost aggregate spending can easily be left to some committee of economists (like the Bank of England’s Monetary Policy Committee), while decisions as to what share of GDP is allocated to public spending and how that spending is split between defence, education, etc are clearly political decisions and can and should be left to politicians.

1:14 AM  
Blogger JKH said...


I’d recommend you read the Lavoie paper as well, if you haven’t already done so:

He makes a general point regarding “consolidation” with which I agree, and have been hammering on for some time. I’d say that the idea of “consolidation” is a mirage, unless you are prepared to back it up with an institutional representation of what is meant by it. Although Lavoie doesn’t put in quite in such terms, I think that’s the effect of what he’s saying. My comments under your previous post support this theme, including explicit approaches for operational adjustments within the existing institutional arrangement. Your post here seems to acknowledge something along these lines. Simply put, I think the concept of consolidation implies explicit institutional consolidation in order for the concept to be meaningful. Anything else is hand waving.

Conversely, the most informative template for discussions of the actual monetary system we have should delineate its deconsolidated components. Lavoie definitely agrees with this. In this regard, the Fed is the currency issuer and the US Treasury is not. (Lavoie does not refer to such terminology.) Treasury is a currency user under actual institutional arrangements. Congress could change that, but why describe the world as it might be to the exclusion of the world as it is?

Similarly, the ECB is a currency issuer and the Greek Treasury is a currency user.

(In fact, some MMT’ers do refer to the ECB as the currency issuer. Why not be consistent in terminology and meaning, as it applies to the same level of institutional structure for the two monetary systems? It’s also a heck of a lot easier to specify operational fixes for the EZ when you describe things this way, which is probably why MMT went down this path.)

If both the Fed and the ECB held, and in some way exercised or could threaten to exercise, unlimited authority for reserve issuance as a replacement for Treasury bond issuance (e.g. QE.), there would basically be no difference in the technical meaning of solvency for the US and Greek cases. It is that simple. And under current institutional arrangements and rules, if the Fed didn’t have that sort of ultimate operational power, there’d be nothing to prevent a Greek situation happening in the US, in theory.

(MMT sometimes refers to short date bills as a substitute for reserve issuance. That’s OK too, but not quite so pure as the reserve solution.)

Returning to the point on consolidation, another way of achieving the desired solvency characteristic in the case of either the US or Greece is to combine the central bank and Treasury functions at the institutional levels. Given reserve issuance capacity within the existing institutional configuration (or short date bills), it isn’t entirely necessary. And there is no such institution now, anywhere. So let’s not describe the world as if there is.


There are parts of Lavoie’s paper that I regard as unnecessary. He spends a lot of time on T account explanations for the monetary system. In my view, there is nobody better than Scott Fullwiler in explaining the monetary system through T accounts specifically. I became immediately circumspect about Lavoie’s critique of MMT when I first saw the paper, to the degree that he found it necessary to illustrate his concerns using T account architecture. But after reading the paper, my conclusion instead was that these illustrations weren’t really necessary in order to explain the substance of his critique.

4:39 AM  
Blogger JKH said...

Euro zone example:

At a level of vague consolidation, one may be tempted to make such statements as the US is a currency issuer, and Greece is a currency user.

One implies by this that Greece is not a currency issuer. But that contention can be easily proven to be false, and useless, due to a similar ambiguity inherent in vague consolidation:

First, it is indisputable that any central bank is the issuer of notes and reserves. For the purposes of any reasonable discussion that relates to the importance of the meaning of currency issuance, it is also essential that the concept include the capacity of the central bank to issue reserves. This should be obvious. That is the critical safety valve that provides assurance in matters of solvency, etc.

The Greek central bank is an issuer of Euro reserves on its own. A very graphic illustration of this is the way in which the TARGET system works in Europe. As an example, Greeks may withdraw their deposits from Greek banks and put them in German banks. This has happened as part of the European crisis. When it happens, Greek banks lose Euro reserves and German banks gain them. The same reserves as a liability of the Greek central bank drop and the same reserves as a liability of the German central bank increase. The ECB balances this mismatch by issuing a TARGET balance claim to the German central bank and entering a TARGET balance claim of the same amount on the Greek central bank. These TARGET balances aren’t central bank reserves. They are one level higher in the hierarchy of money. TARGET balances are in effect “super reserves”. They are the type of money that settles reserve distribution across a network of constituent central banks.

While TARGET can resolve fundamental balance sheet mismatches due to European capital flows, it does not resolve the associated surplus and deficit reserve positions that result at the respective central banks. These positions are resolved by the central banks themselves. In this case, the German central bank will drain surplus reserves through normal operations, and the Greek central bank will add reserves through normal but opposite type operations.

The point here is that the Greek central bank creates reserves under its own steam. That means the Greek central bank is a currency issuer at this level. Note that this is a regular operational requirement of the Euro system in the context of such Euro capital flows, and not some extraordinary intervening policy edict passed down by the ECB per se.

And in this explicit sense it becomes somewhat useless (once again) to claim that “Greece is a currency user”, because the idea is ambiguous and unhelpful at such a level of vague consolidation.

5:45 AM  
Blogger Anders said...

Sorry if I've missed this point being addressed elsewhere, but it seems to me that MMT doesn't need to characterise the govt as a currency issuer (ie 'artificially' consolidate the govt + CB) to make the point.

The two building blocks are (1) the "reserve drain" concept which means clearing banks will always be willing to buy new govt bonds as long as they are priced above the rate paid on reserve balances, and (2) the idea that all central banks will see it as within their remit to keep interest on excess reserves at a rate which is consistent (ie low enough) with the govt achieving fiscal sustainability?

5:49 AM  
Anonymous Anonymous said...


This is extremely helpful. I almost get what you are saying.

What I don't quite understand yet is why the Greek National Bank can't issue unlimited reserves in replacement of Greek bonds. Is it just against the rules? The Lavoie paper, as do you, mentions that the Greek National Bank can issue reserves to banks as needed in unlimited quantities (Lavoie uses a 1.5% rate). This I believe is collateralized. Does the Greek National Bank not take Greek Bonds as adequate collateral? What in effect is the difference between this and OMOs or the discount window in the US? Ramanan is telling me that it isn't done in the same force in the EU.

If this is the case and an adequate explanation, instead of the ECB, is it possible to grant more power to the Greek National Bank and make it an unlimited buyer of its bonds? Would this be enough to settle the crisis? I think Lavoie is getting at this in his last paragraph in the EZ section but it is unclear to me.

The other question I have is, as Fullwiler stresses, you can't indiscriminately buy bonds without dropping the interbank lending rate to the IOR. To my knowledge, there isn't IOR in the EZ, though the interbank lending market doesn't seem to exist for southern countries in the EZ anyways; thus they only have access to what seems to be a discount window type facility at their home banks. I presume, that if a CB floods the system with reserves by buying bonds, these will at some point need to be drained to support a positive interbank lending rate? And at some point, when solvency concerns disappear, and one of the CBs makes a credible commitment to setting interest rates on govt bonds, the price of the bonds will return to reflect the expected path of ST lending rates?

6:20 AM  
Anonymous Anonymous said...

Of course, the drain won't be needed if the IOR is set to the target rate (though here it is unclear to me if the target rate is set by the ECB or the CBs in the individual countries). If there is only 1 rate, it seems it would need to be set by the ECB, and thus it is the ECB that needs to be impressing upon markets what term structure it wants to defend across sovereign bonds... There seems to be some difficulty with allowing country CBs to set interest rates on bonds while at the same time complying with interest rate and reserve management at the ECB level... Probably can only have one or the other...

6:24 AM  
Blogger Hugo Heden said...

Peter C. on comments too:

7:03 AM  
Blogger JKH said...


Lavoie says:

“In general, we know that the European central bank and its national central bank will provide central bank money on demand. The problem in the eurozone is not that money is exogenous. Money there is clearly endogenous. The problem is entirely linked to the rules that forbid or that strongly discourage the ECB and the national central banks of the eurozone to purchase government securities on primary or secondary markets.”

So that’s all consistent with the Greek central bank being an operational currency issuer of the Euro. The Greek central bank is part of the European system, so it’s also consistent with the idea that the ECB is the umbrella central banking currency issuer. The Greek bank is effectively a branch operation, but still issues Euros in response to local conditions, to a point, as in the TARGET example above.

It’s also consistent with the ECB setting policy for the entire system of national central banks. That policy includes “self-imposed constraints” on intervention in government bond markets.

And that’s what Lavoie says the problem is, and he’s right.

The same problem might exist someday in the US IF, under “similar” financial circumstances, the Congress stepped in and prohibited QE.

In both cases, the central bank is the currency issuer, under some governing authority.

You have a number of detailed questions there on operations which I don’t think I can cover here. In general, there are going to be some existing “self-imposed constraints” on EZ CB asset activity, which become constraints on balance sheet size and liability issuance. That doesn’t mean the CB system isn’t a currency issuer as per my example. In any event though, without going into detail, the ECB and its NCBs have the ability to control the short term policy rate floor.

7:04 AM  
Anonymous Anonymous said...

Thanks JKH.

7:08 AM  
Blogger STF said...


I appreciate your points and am in general agreement with most of your arguments thus far. But in the latest instance you are getting bogged down in a misinterpretation of what "operational" means in MMT. As I expalined in my piece on "operational realities," this term is about hierarchy of money and decision making. As I wrote there:

"The tactical logic of operations as employed by MMT’ers is (a) general, in the sense that the purpose is to consider a “pure” fiat system under flexible exchange rates, or a state government that is a currency user, and so forth—in a general sense, not specifically referring to any particular nation or state, and (b) particularly concerned with a hierarchy of authority and thus a hierarchy of “money”."

As such, your statement that "So that’s all consistent with the Greek central bank being an operational currency issuer of the Euro" is not an accurate criticism of MMT since it is misusing "operational." Neither the Greece government nor the Greek cb is at the top of the hierarchy of authority in the EMU; thus, the Greek cb cannot be a currency issuer under MMT.


8:05 AM  
Blogger Ramanan said...


"This I believe is collateralized. Does the Greek National Bank not take Greek Bonds as adequate collateral? What in effect is the difference between this and OMOs or the discount window in the US? Ramanan is telling me that it isn't done in the same force in the EU."

Don't think I said this. What I meant was that the Fed's open market operations is not comparable to LTROs (i.e., even though the Eurosystem calls LTROs as open market operations).

In a non-crisis like situation, banks are fully lending each other and the Eurosystem decides on the amount of MRO/LTRO based on this. During the crisis, since the needs of the banking system increased as a whole, the ECB expanded its LTRO. (as in it asks banks how much they need etc, rather than deciding on one number).

The Greek NCB will accept as much collateral as allowed by the "collateral standards". The problem is insufficient collateral.

The Eurosystem as a whole has been fully accomodative.

Also, the Grece NCB in consultation with the Greek government decided to use the "Emergency Lending Facility" (ELA) when banks went into a situation in which they didn't have enough good quality collateral to make use of the Greece NCB's lending operations.

Also on your point on floor, according to the ECB,

"The interest rate on the deposit facility normally provides a floor for the overnight market interest rate"

8:14 AM  
Blogger Ramanan said...

I agree with JKH about Greece NCB and the currency issuer status.

Just one example: the Greece NCB can print Euro currency notes and there is no limit on this. The reason it is so is because, there cannot be an excess of supply of money over the demand for it and reasons along those lines.

Given this, it is not appropriate to say that the Greece NCB is not a currency issuer.

8:25 AM  
Blogger STF said...

This comment has been removed by the author.

8:28 AM  
Blogger STF said...


that's fine, but that's your definition, not MMT's. Your definition of currency issuer relates to the actual tactics whereas MMT's is based on institutional structure and hierarchy of authority driving these tactics. My point is then that you are certainly welcome to your own definition, but recognize that MMT is at least being internally consistent in its application of its own definition. My objection was to JKH's use of "operational" in critiquing MMT, since he used the term in a way that is inconsistent with how MMT would use it.

8:41 AM  
Blogger JKH said...


Thanks - I must go back and re-read your operational piece again to see how it compares overall with what I’ve developed here.

Unfortunately, I wasn’t thinking so much of your specific MMT use of that word here, so I can see how that confuses things, because you do use it in a specific way. The way in which I had intended it would distinguish between the ECB as a policy setter for quantitative easing as an example, versus the Greek NCB issuing reserves in the normal course of correcting a reserve outflow through TARGET, for example. The latter is more of automatic necessity than policy driven, but it’s definitely responding to Greek specific conditions. I wasn’t intending a deliberate conflict of meaning with your use, although I can see how that could be the result. The example is a bit of a stretch in any case. I’ve sort of driven yet one more level down below categorizing the “main” central bank as the currency issuer (e.g. Fed and ECB) and applied it to the “satellite” central bank of the Greek NCB in this case. It’s a bit of stretch, but I’m really trying to make the point that I prefer granular distinction between treasury and central bank functions where that exists, to better understand the options open for monetary policy.

It’s an interesting word. I used to think of a continuum of “policy, strategy, and operations” in my work in general. I think that’s pretty consistent with the hierarchy idea. And it’s consistent with operations being executed by those who do not necessarily design the policy. The use of the term "operational" was obviously fundamental to your piece (it is in the title), so I'll revisit that and get clearer on it.

8:46 AM  
Blogger Ramanan said...


Will wait for JKH's reply on your comment. So this is a bit parallel.

Deutche Bundesbank's Monthly Report March 2011, calls the Eurosystem decentralized

"The resulting TARGET2 (net) balances hence arise from the cross-border distribution of central bank money within the Eurosystem’s decentralised structure."

The ECB is an institution which takes decisions but various members of the NCBs also take part I guess - though there is some amount of non-transparency, I imagine, since the minutes won't come out till 2016(?). Otto Steiger had an article on this in the book in honour of Basil Moore.

Also, till about 2005 or so the NCBs would settle among themselves but it was later changed to settling at the ECB. But this is a minor change, I believe.

In all a decentralized system, in my opinion.

8:48 AM  
Blogger STF said...

JKH and Ramanan,

Yes, the use of "operational" in MMT without defining it for years has become problematic, so I gave it a go in that piece.

FWIW, in my own methodological training, I was always taught to use "policy, strategy, tactics," with the understanding the tactics and "operations" or "operational details" were roughly the same.

8:57 AM  
Blogger JKH said...


Yes, agree re tactics and operations.

9:16 AM  
Blogger JKH said...


I’ve got your paper open in front of me, but haven’t yet delved into it fully.

Before I do that, in the interests of logic and language clarification, see if the following question is useful:

Does/could the phrase “operational currency issuer” mean anything to you? If so, are any of the following operational currency issuers:

a) The United States government
b) The US Congress
c) The US Treasury
d) The Fed
e) The EZ parliaments collectively (as represented on the ECB board)
f) The ECB
g) The Greek central bank

I’m not sure I’ve got e) specified exactly right, but I think you get the idea.

My own answer would be d), f), and g), in the context of how I think about the word “operational”.

But your specific meaning may be quite different.

Meanwhile, I’ll review your paper in more detail.

9:18 AM  
Blogger winterspeak said...

JKH: I am not familiar with the Lavoie paper, but will check it out, thanks for the tip!

STF: Thank you for your clarification re: "operational".

wh10: I believe that self-imposed constraints count--but I also acknowledge that these are laws of men, not laws of Physics.

9:28 AM  
Anonymous Anonymous said...

Winterspeak- this is what I mean, taken from Fullwiler

"In other words, since the outcome is roughly the same in all three cases, it really doesn’t matter if the Treasury receives overdrafts in its Fed account or not—if it can sell its debt at roughly the Fed’s target, then there is no economically meaningful difference from the Treasury’s perspective between the government enabling itself to obtain an overdraft and the government forbidding itself from doing so. That self-imposed “constraint” is really not a constraint at all even if it is never abandoned."

9:59 AM  
Anonymous Anonymous said...

Off topic, but JKH, you've been summoned-

10:20 AM  
Blogger JKH said...


I've progressed enough to understand why my question above would be counterproductive in the context of how you mean "operational" in your paper. Although it does make sense in my use of the same word, so I'll come back later to try and wrap that up.

10:47 AM  
Blogger JKH said...

thanks, wh10

um, I think


10:49 AM  
Blogger Garth A Brazelton said...

I posted this similarly in a previous post so I'm reposting here since it's fresher.
The commenting has been really useful for me and I'm glad this discussion is being had. But I saw most of the discussion regarding style vs. substance / factuals vs. counterfactuals only on the spending side. Even if you agree that consolidating treasury with CB does not take much away from reality.... What is MMTs answers on the tax side? Taxation is entirely political, so if taxation was ever needed perhaps due to a 'overheating' by the government that barrier seems to me very real and very un-ignorable. It calls into question the real ability (I hate to use the world 'operation' which may cause confusion here) for the 'government' to raise taxes when needed economically.

11:00 AM  
Blogger winterspeak said...

jkh: don't do it

11:18 AM  
Blogger winterspeak said...

garth: since taxes are progressive, they tend to go up during booms ("overheating") and collapse in recessions. Government spending tends to be similarly counter-cyclical, so deficits increase in busts naturally.

I see taxes changing quite often, so I don't think it's the barrier you do. And if a government cannot government, then it's a problem regardless of whether you are on a gold-standard, cowrie-shell standard, or paper money standard.

11:20 AM  
Blogger Garth A Brazelton said...

Automatic stabilizers may not be a sufficient solution to all problems though.

Taxes do change quite often, but for political reasons usually - and sometimes not in the direction that MMT might say should happen.

I realize this is less a problem with describing the economy a la MMT and is more of a question regarding functional finance's normative prescriptions, but since it seems many MMT seem to think their descriptions favor a functional finance choice, I think it's important to test that assumption.

11:37 AM  
Anonymous Anonymous said...


Your point is taken, but what matters for 'overheating' is more accurately spending relative to taxation.

I know you want to talk about taxes, but you can also reduce spending relative to taxes if the economy is overheating.

Can we take any lesson away from what's happening today?

You have an environment where society has forced upon itself spending cuts due to inflation/hyperinflation fears when inflation doesn't even exist.

Why assume, if we actually have inflation, society will all the sudden not care about it and not adjust the spending/tax balance?

11:44 AM  
Blogger geerussell said...

I'm more than willing to test the possibility that government may fail to function properly when we climb out of the hole--by climbing out of the hole.

The prospect of failing to manage prosperity doesn't make depression any more palatable.

11:45 AM  
Blogger Garth A Brazelton said...

I suppose I'm wondering out loud if perhaps MMT might be better served, in terms of being 'heard' more, by either dropping functional finance altogether right now when talking about MMT or addressing concerns head on. It might help reduce the likelihood of it being dismissed out from the link WH10 posted above

11:45 AM  
Blogger Garth A Brazelton said...

This comment has been removed by the author.

11:52 AM  
Blogger Garth A Brazelton said...

Or perhaps a better question is, what is the difference, in real terms, b/w MMT and what most economists already believe if you take out functional finance discussion? Isn't everyone (economists) in agreement that there is no technical constraint and that the only tradeoff to spending is inflation - under certain conditions?

The only major point of disagreement I see regarding the descriptive aspects of MMT and mainstream is that from a mainstream perspective net savings has to fund a budget deficit, whereas from MMT perspective, the budget deficit creates net savings. But does that causality difference matter absent a discussion about functional finance? I think the answer is that it does matter to discourage Minskyian bubble formation. It means the government by holding up budget surplus as a holy grail may in fact be driving the economy to bubble formation. Yes? Shouldn't that be what is stressed first? Shouldn't that be what tries to get people on board?

1:05 PM  
Blogger winterspeak said...

Scott: Do you have a link to your paper on operational realities? Sorry -- cannot find it : (

1:38 PM  
Blogger Hugo Heden said...


It's one of Moslers mandatory readings.

1:52 PM  
Blogger JKH said...


I’ve written so much recently that it’s difficult to refer back to bits and pieces. I’ll try to summarize.

I’ve used “operational” in a generic sense, not the specialized sense you’ve defined for MMT purposes. There’s a fine line between criticizing MMT and interpreting an understanding of monetary operations in a way that doesn’t quite match the MMT expression of it. In doing so, one may use language that has a generic meaning apart from any MMT specialized meaning, and that should be permissible. I’ve defined both “currency issuer” and “operational” (implicitly) for my own purpose in this way.

A good deal of what I’m seeking is the construction of logic and language around monetary systems. Some of this has to do with seeking symmetry across different cases, where available. The two systems I have in mind are the US and the Euro system. Most in MMT would suggest they are not comparable, and this is reflected in how MMT assigns classifications for currency issuers and users. That’s probably the source of some disagreement.

Put concisely, if the description of the ECB is that of a currency issuer, I’d like to see the Fed described as a currency issuer as well. This is based on an institutional view of the definition. I’ve written enough about this earlier.

My understanding is that MMT has developed the definition of currency issuer with a view to ultimate authority. If Congress is the one that passes the authority to the Fed, then “the US” is the currency issuer, I believe, according to MMT.

The problem I have with this is that MMT also describes the ECB as a currency issuer (correctly in my view). Yet the ECB no more creates its own authority sui generis than does the Fed.

If I were forced compare using your terminology, I would see both the US and the Euro system as being specific cases. And fitting again to your terminology, I would see the same general case upstream from each. There is a defined authority that sets out the rules of the game for each. The Euro is different mostly for the fact that the authority is a collection of nations, not a single nation, and the interface of the CB is with a collection of Treasuries, not a single Treasury. But with that said, the issue of dealing with “self-imposed constraints” becomes comparable. The process of relaxing constraints to get to the general case is comparable. I’m not sure you’d disagree hugely with this. It’s what I wrote in more detail earlier.

So where MMT seems to delineate “currency issuer” according to national control, I would delineate it according to institutional execution, over which there is an authority that may be either national or supra-national. And I would expand what MMT would conceptualize as the general case to include the additional variable that specifies a single nation or multi-nation authority. Given that authority, of either type, the issue of delegating specific constraints that depart from a general or base case or conversely the issue of deriving the base case back from the specific case becomes a similar process for both the Fed and the ECB. And dealing with interest rate control and solvency questions becomes comparable as well. As I’ve already said, there’s no more reason to doubt Greece’s solvency in the defined general case for the ECB than there is to doubt US Treasury solvency in the defined general case for the Fed, given the same fiscal assumptions as correspond to Greece’s current fiscal position.

Finally, I have nothing against a consolidated view at all. In fact I promoted the wisdom of the consolidated view going back several years. And I still do. I’d just like to position the logic and language and construction of it as I’ve described already.

Hope that brings us closer together in understanding any differences, and that I haven’t misstated/ omitted anything critical in this summary.

3:44 PM  
Blogger Ramanan said...


Somewhat tangential to this, but still related to the whole topic and what may be going on in your mind.

Some Post-Keynesians such as Sergio Rossi and Louis-Philippe Rochon have used Augusto Graziani's concept of money to argue as a corollary to argue that even the State is bound by the rule for money - that it's use is regulated so as to grant no agent a privilege of seignoriage.

The phrase "seignoriage" is used by different people in different ways so there is one sense to the above usage.

Any opinion, offhand?

4:31 PM  
Blogger JKH said...

Not sure I understand the reference, Ramanan.

I'm not terribly clear on seigniorage, but I don't much time thinking about it. It's one of those words. I usually think of it simply as central bank profits, roughly speaking. But central bank profits in the consolidated view (oops!) are a more a measure of an opportunity benefit in the reduction of fiscal costs when the CB holds government debt. I guess when it holds gold, the seigniorage is more of a stand alone measure of profit.

4:42 PM  
Blogger JKH said...

And I guess the ECB overdraft system profit is more stand alone as well.

4:45 PM  
Blogger Ramanan said...


Okay will try to come back some other time, when I can put it well in words.

Btw, something that might interest you:

Took me a while to understand but seems like a nice wild theory!

4:56 PM  
Anonymous Anonymous said...

JKH, I have to think about it more, but I think I really appreciate the alternative or added angle of the executing factors. It does make clear (at least to someone like me who hasn't yet fully adopted the consolidated view) parallels between different monetary systems. It also pinpoints, in a variation of the non-general case, where exactly the ability to set the interest rate on govt debt comes from.

6:27 PM  
Blogger JKH said...


Glad to hear it.

The institutional view and the consolidated view aren't necessarily in conflict, in my view, provided they are juxtaposed properly.

The normal institutional view is that of separate TR and CB functions as institutions. (TR is more a "department", but effectively has its own institutional identity, separate from the CB) This is the factual view, i.e. what exists in fact.

The normal consolidated view SHOULD be that of combined TR and CB functions as a single institution. Among other things, such a consolidated single institution features accounting changes such as the elimination of the TR account at the CB. This is a counterfactual view.

Both views are useful. But one is real and the other isn't, from the perspective of actual institutions that exist in fact. The counterfactual view is valuable as a contingency concept.

And what I've called the institutional view really includes both the unconsolidated TR and CB institutional arrangement as the factual, and the consolidated TR/CB institution as the counterfactual. The institutional view thus embraces both the factual and counterfactual. Better to classify the matrix of terminology in this latter way.

7:02 PM  
Anonymous Anonymous said...

Right. Like I said, I need to think about it more, and understand better where Fullwiler is coming from on this, but I think I agree this is compatible and potentially synergistic with the consolidated view. At the very least, being able to clearly describe the factual seems like a good thing...

7:16 PM  
Blogger STF said...


I'm in agreement with most of that and am trying to pinpoint in your statements my disagreement. Let me try with this:

"Given that authority, of either type, the issue of delegating specific constraints that depart from a general or base case or conversely the issue of deriving the base case back from the specific case becomes a similar process for both the Fed and the ECB. And dealing with interest rate control and solvency questions becomes comparable as well. As I’ve already said, there’s no more reason to doubt Greece’s solvency in the defined general case for the ECB than there is to doubt US Treasury solvency in the defined general case for the Fed, given the same fiscal assumptions as correspond to Greece’s current fiscal position."

The problem here for me is there IS reason to doubt Greece's solvency if you leave it up to Greece alone. Therefore, Greece is not a currency issuer, the ECB along with its supranational authority sit above Greece. To have no doubt of solvency in those terms, Greece would have to opt out of the EMU regime and go back to the drachma.

On the other hand, there is no reason to doubt US solvency because the Fed cannot unilaterally decide as the ECB can without the US govt being able override that, unlike Greece, within the same monetary regime. In that case, the Fed cannot be the currency issuer aside from the more trivial understanding that the monetary base is its direct liability. But that's like saying that the controller's office of a business is who does the business's spending--yes, technically that office carries out those operations, but only on the orders or at the pleasure of management. In the EMU, the ECB and whatever authority rests above it are the management. Not so in the US. If a general framework doesn't account for this sort of hierarchy, it's not explaining much, in my view.

Similarly, if the ECB takes on a loss in capital, does that loss go to Greece? I don't think so, but I could be wrong. Whereas, if the Fed takes a loss, that goes directly to the US govt--Beowulf recently pointed out that this was made more explicit legally of late. You can't be the currecny issuer if you're not at the top of the hierarchy.

Otherwise, I have no problem with what you've written.

Please let me know if I've misinterpreted--it's late and I have much less time these days than normal to engage in this discussion. Unfortunate, as it's hitting exactly where my own primary contribution in MMT lies.

9:54 PM  
Blogger NeilW said...

"To have no doubt of solvency in those terms, Greece would have to opt out of the EMU regime and go back to the drachma."

Are we sure about that? What is the legal restriction, enforceable by the Greek courts, that would prevent a Greek prime minister from simply instructing the Greek Central Bank to issue Greek Euros.

At European level there is very little power to enforce the rules - that's why you have accounts failing to be signed of and countries violating directives left, right and centre. Enforcement of European laws is akin to Greek enforcement of tax legislation.

It seems to me that the Eurozone is really just a complex currency peg and that all a particular country's central bank need do to end the parity with the ECB. They could decide to clear 2:1 with the ECB as opposed to 1:1

The you would end up with Greek Euros and Other Euros much as you have Canadian dollars and US dollars.

10:10 PM  
Blogger STF said...

Neil . . . that's fine, but then Greece still isn't the currency issuer under the EMU. You said yourself they'd have to opt out with Greek Euros.

JKH . . . addendum . . .you write "Yet the ECB no more creates its own authority sui generis than does the Fed." I just can't go there at all without completely redifining what a currency issuer means, and from my perspective, the term isn't very useful if hierarchy of authority isn't at the core of the definition. The ECB could refuse the Greek govt's demands to buy Greek debt. The Fed could not do the same if the US govt so demanded. And if I'm wrong about Greece (perhaps the Greek CB can be so instructed, for instance, thoug this seems at odds with at least the spirit of the EMU, if not the laws as I've seen them interpreted till now), then that just means from my view that the ECB isn't the currency issuer, which still leaves me at odds with your view, for what it's worth.

10:23 PM  
Blogger NeilW said...

"Neil . . . that's fine, but then Greece still isn't the currency issuer under the EMU. You said yourself they'd have to opt out with Greek Euros. "

I really said they could alter their peg - a devaluation in the same way as the Gold Standard - where a Greek issued Euro could then be worth less than a German issued Euro. Much as a Canadian dollar has a different value to a US dollar even though they are both called dollars and in the distant past had the same root.

Is it perhaps the case that it just looks like there is one Euro because there are a load of pegs in place, but the operational reality is that there are 17 central banks all of whom are operational currency issuers running a discretionary peg with each other via a convenient clearing house?

Perhaps more simply, what's the operational difference between a Gold standard/currency peg and the EMU given that the ECB is acting as a clearing house rather than a 'real central bank'?

12:00 AM  
Blogger JKH said...


“I have much less time these days than normal to engage in this discussion. Unfortunate, as it's hitting exactly where my own primary contribution in MMT lies.”

I can certainly appreciate that.

To pace this, I’ll leave something here this evening, and try and make it succinct.

One point before then. You said:

“I just can't go there at all without completely redefining what a currency issuer means, and from my perspective, the term isn't very useful if hierarchy of authority isn't at the core of the definition.”

Let me be very clear on this. Redefining the meaning of currency issuer, and without hierarchy at the core, is exactly what I want to do.

I mentioned to you some time ago that I had some ideas on how I would present the monetary operations component of MMT, if it were up to me to present the same subject matter on my own terms. That’s what this is about. And I'll try and explain why I think this approach is useful when I leave my comment this evening.

So I think it may be useful to distinguish between “STF MMT” and what I might refer to as the “JKH Transform”, at least for now and for want of a better description.

That way, I'd like to make it clear that my objective is not to meddle with the inner conceptual workings of MMT. I want to present an alternative way at looking at monetary systems. It doesn’t build on MMT; it doesn’t distort MMT; it’s a view that is distinct and separate from MMT in terms of its logical structure.

Hopefully we can agree on an understanding of the two different views, without coming into conflict with the years of work you and others have done to develop the MMT view.

And this is a good point to emphasize that I’ve always agreed with just about 100 per cent of the facts of how the monetary system works as you have written about them.

However, different people can agree on the facts, but differ on how best to capture those facts in a logical superstructure.

And we’re going to differ on that.

But hopefully we’ll able to agree as much as possible that we understand the difference between the two views, even if we differ on which one is the best.

6:00 AM  
Blogger JP Koning said...

I've been lurking the comments, but JKH @ 7:02 PM is pretty good. One is real from the perspective of actual institutions, one isn't, and there seem to be a lot of misconceptions among MMTers about which one is real.

"The Fed could not do the same if the US govt so demanded."

There is some historical precedent for this. The Fed and Treasury got in a nasty battle in the late 40s and early 50s because the Treasury insisted that the Fed continue to commit to set long bond rates. The Fed revolted, made the spat public, and the Treasury backed down. That was the end of pegged bond rates.

6:56 AM  
Blogger winterspeak said...

JP Koning: Link?

7:35 AM  
Blogger geerussell said...

" One is real from the perspective of actual institutions, one isn't, and there seem to be a lot of misconceptions among MMTers about which one is real."

Both are real, what you're describing is a difference in scope.

Meaningful, useful things can be said about a generic sovereign state, the United States, the Fed and Treasury.

Picking one of those levels of detail for a specific discussion doesn't invalidate the others.

7:39 AM  
Anonymous Anonymous said...

This comment has been removed by the author.

8:36 AM  
Anonymous Anonymous said...

On the question of seignorage, here's how I understand it:

If any entity has the power to both issue and spend currency, then their seignorage profit is the difference between what it costs to produce the currency and the value of the goods and services they receive when they spend it. Since modern money is very cheap to produce - sometimes requiring only a few computer keystrokes - the opportunity for seignorage profit is enormous.

As Minsky said, anybody can try to issue their own money, but the trick is getting people to accept it. But if we had a privatized system in which some private banks had successfully established their own currencies in broad use, then they would have the opportunity to make seignorage profits. If we all used Goldman Bucks conjured up on Goldman Sachs computers, then in principle Goldman Sachs could conjure up some Goldman Bucks in its own accounts, and then spend the money on office equipment or executive bonuses. However, presumably private currency issuers would have to exercise some discretion in the amount of seignorage they reap, because if they were careless they could destabilize their currency and cause a flight out of it to some competitor's currency.

Governments use a variety of tools to preserve their monopoly power over currency issuance. In the US, I believe the government can shut down any private monetary operation that starts to look like a threat. (It's interesting that they din't move to shut down bitcoin.)

Also, the tradition of central bank independence removes some of the controversial issues surrounding seignorage. Central banks are limited in what they can buy with the money they create. They can only buy other financial assets. A financial asset is attached to a monetary cash flow. But for a central bank, the cash flow is meaningless since its balance sheet is more-or-less an accounting fiction. The bank is an effectively infinite source and sink of currency. Thus while the currency coming into the bank and going out of the bank is a very big deal indeed for the currency users who receive and relinquish that currency, it makes no difference at all to the CB itself.

8:38 AM  
Blogger Oliver Davey said...

JKH: So where MMT seems to delineate “currency issuer” according to national control, I would delineate it according to institutional execution, over which there is an authority that may be either national or supra-national.

Isn't the problem in the EU that there isn't such a supra national authority? I.e. it's not a matter of national vs. supra national, but of whether the political (fiscal) authority sits above or below the monetary authority (and possibly whether it is central or decentralised, which may determine its effectiveness). in any case, I think it is wrong to make the MMT (or any) general case dependent on the existence of a nation state.

1:03 PM  
Blogger geerussell said...

"I think it is wrong to make the MMT (or any) general case dependent on the existence of a nation state."

It seems to me that MMT strongly suggests a consolidation of monetary authority, fiscal authority and political legitimacy at the level of the nation state is the only way to get a functioning government that can react to crisis.

Chop off any one of those three legs and you get a wobbly semi-sovereign arrangement that topples in crisis as we have in the EZ with monetary authority divorced from fiscal/political and fiscal in a tug of war while political legitimacy evaporates at an alarming rate.

2:10 PM  
Blogger Clonal said...


You said,
Technically, the central bank is the currency issuer, while the Treasury is just a user like everyone else.

I do not believe that this is legally true in the US. In practice, the Treasury could be "acting" as a user. But I do not believe that there are any legal constraints to the Treasury being the issuer of "money" -- See the Beowulf discussions on the "platinum coin."

The Treasury can issue "Treasury Notes" though constrained by a Civil War era law to issuing no more than $350 million. But the Treasury can also issue an unlimited amount of coinage to meet its legal requirements as determined by the US Government's spending obligations. After the passage of the "Platinum Coin" act in 1996, even the physical limitations of coinage "metal requirements" were eliminated.

2:50 PM  
Blogger Ramanan said...


My own view is that if the coins were to circulate, its usage will be regulated.

The coins circulate because of the volitional decision of individuals to use them.

I think a commentator VJK made some nice points at Mosler's blog, although at the time, I was somewhat indifferent to his views.

3:03 PM  
Blogger Clonal said...


Large denomination platinum coins almost by definition will never circulate. Their transfer from the Treasury to the Fed will result in a set of book entries, crediting the Treasury with "X" dollars and putting an asset (the platinum coin) on its books, the asset itself, into its vaults, at any of the Fed branches.

The main purpose of using the platinum coin is to do away with the fiction that the US Government is a user of money that it itself creates.

3:38 PM  
Blogger STF said...

JP Koning . . . have you ever heard of this thing called the Federal Reserve Act?

5:50 PM  
Blogger STF said...

This comment has been removed by the author.

5:52 PM  
Blogger Clonal said...

JP Koning's comment relates to the Fed Treasury Accord of 1951

From the wikipedia
The 1951 Accord, also known simply as the Accord, was an agreement between the U.S. Department of the Treasury and the Federal Reserve that restored independence to the Fed.

6:07 PM  
Blogger STF said...


I have no problem whatsoever with you or anyone else designing an alternative approach. As you state, and just like Marc, we have the same understanding of how things work, just a different view on how to present this. I would say that I don't think Marc would necessarily disagree with the general view MMT'ers take of currency user vs. issuer; he has a problem with the consolidated Tsy/CB, but that's not the same thing. I don't use the latter in my own research, but I do find the former very useful in many circumstances.

Regarding changing the definitions of currency issuer and currency user, I'll just say that from the perspective of Post Keynesian economics and from the perspective of my own systems-based approach to social science research, the very words imply a hierarchy of power. If one is an issuer and another is a user, there is by definition a power relation at work.

For me, to ignore that ignores what is most significant. And the record of MMTers using this very basic understanding to make predictions, including 10 years or more ago in some cases how the EMU would go down (as Cullen Roche pointed out recently), just with this basic general viewpoint, speaks for itself. Any alternative would have to be able to meet or beat MMT's record in prediction to be more useful. MMT'ers are not after elegance, they're after prediction and policy analysis.

And there's the additional element of simplification--not to go all Milton Friedman on you, but . . . :)--currency issuer vs. user can be taught, understood, and used to predict rather easily even at the principles level (I've done it), whereas the daily operations of a cb and a tsy are a completely different matter (I've done that, too).


6:12 PM  
Blogger STF said...

This comment has been removed by the author.

6:13 PM  
Blogger STF said...

Clonal and JP,

Ask Beowulf who would have won if the Tsy had not allowed the Fed to get it's way and it would have gone to the courts. During the coin seigniorage debates, he made it rather clear who was in charge.

6:14 PM  
Blogger beowulf said...

Yup, Uncle Sam has a lot of guns under his jacket-- National security grounds (the President can use War Production Act to act through any federal agency-- including the Fed), conflicting powers clause in Federal Reserve Act (ties go to Tsy), unitary executive constitutional argument, 14th Amendment issue--

Short of the Fed bribing judges, I can't imagine a circumstance where Tsy loses a court battle.

6:49 PM  
Blogger Clonal said...


Totally agree with you on the "Accord" -- However, the politics of the accord makes for interesting reading.

6:58 PM  
Blogger beowulf said...

Having said that, Tsy and the Fed are usually on the same page (they both would prefer debt service keep on keeping on). As fond as I am of platinum coins, maybe amending the law to allow Tsy electronically US Notes a split second before spending them is a better way to go.
Either way, the govt minting/printing money is something the public can understand (and naturally should be eased into, start by funding net interest that way).
By contrast, overdrafting a reserve account sounds like (and probably is) legalized check kiting.

7:38 PM  
Blogger JKH said...


Thanks for your 6:12. Understood.

I spent some time today recapping my alternative view, so I’ll post it here for completeness. It follows next in 3 parts.

Given your long work on the MMT view of things, I’m obviously not expecting your “buy-in” on this view. But I’d be interested in your thoughts, should you find the time and be so inclined.

7:43 PM  
Blogger JKH said...


A summary:


- The US is the currency issuer of the dollar, based on the fact that the US government (Congress) determines the freedom or constraints under which the Fed conducts monetary policy
- Using Greece as an example of the Euro zone set up, Greece is a currency user of the Euro, based on the fact that Greece on its own has no control over the freedom or constraints under which the ECB conducts monetary policy


- The Fed is the currency issuer, based on the fact that it issues notes and reserves in dollars. The US Treasury is a currency user (as are banks and most everybody else).
- The US government (Congress) determines law and top level policy governing the currency issuer and its relationship to the US Treasury
- The ECB is the currency issuer, based on the fact that it issues notes and reserves in Euro. The various EZ Treasuries are currency users, etc.
- The EZ supranational authority determines law and top level policy governing the currency issuer. (I interpret the existing supranational authority as the EU Treaty, the creator of the ECB.)

You and I usually agree on the facts of how the monetary system works. This discussion is about form/style, not substance; it’s about logical arrangement and language. “Currency issuer” is a term I’ve borrowed from MMT, but redefined as described. I’ll use the word “operational” in a generic way. This is not borrowed from MMT in the sense of how you describe “operational realities”, and I want to make sure you don’t think I’m misrepresenting your view in that regard. Rather, I’m using generic language, including “operational”, in what I think is its more general dictionary meaning. There’s a range of other MMT terms or constructs that I’m not going to use, including “general/specific”, “self-imposed constraints”, etc.

So, the Fed and the ECB each conduct monetary operations, consisting of very specific transactions and accounting entries. I describe that sort of process as operational.

The ultimate arbiter of law and related policy for the Fed is the US government. The ultimate arbiter of law and policy for the ECB is the EZ supranational authority, currently the EU treaty. I do not define “currency issuer” in general according to the geography or sovereignty of the ultimate authority. The geography of the authority doesn’t necessarily constrain the policy options that are available to that authority. For example, the supranational authority governing the ECB may choose policy options to deal with Greece that are similar to the policy options that the US government may choose to deal with the relationship between the Fed and the US Treasury. Similarly, the ECB and the Fed have policy options they may exercise within their existing authorities. In some cases, the dividing line between existing CB authority and actions that would require further supervisory authority are not clear. Indeed, a full gamut of policy options is being debated now, in both areas. Again, the currency issuers in this view are the Fed and the ECB, and the ultimate law makers for each are the authorities that govern each – the US and the EU Treaty.


7:44 PM  
Blogger JKH said...


A number of operational options are open to the central bank in either case, PROVIDED it has the authority. These include direct purchase of government bonds at issue, potentially unlimited purchase of government bonds in the secondary market via QE, allowing government account overdraft in its deposit account at the CB, direct crediting of the government account with some corresponding capital account adjustment, and the direct crediting of the government account with some other type of asset adjustment (e.g. platinum coin). This is probably not an exhaustive list, but the general idea is to relax constraints that might otherwise be in place and impede the crediting of either bank reserves or the government account as a way to ensure the unquestioned certainty of the settlement of desired government spending transactions and other obligations. We can add to this list the option of co-operative Treasury action in shortening up the term of the debt it issues so that it tracks very closely to the overnight policy rate of the CB. Finally, we can add the formal institutional consolidation of the central bank and treasury(s), so that the resulting institution becomes the currency issuer. (I recognize that these sorts of permutations of the central bank and/or treasury balance sheets are covered for the most part if not entirely in your strong/weak EMH form of presenting monetary operations, but I’m not borrowing your classification for purposes here.)

Any or all of these options are available as potential policy changes or decisions by the governing authority of the ECB with respect to the Euro or under existing ECB authority. For example, under the appropriate authority, the ECB could credit Greek bank reserve accounts for all government cheques etc. presented by them, without further accounting for Greek government debits through their account with the Greek central bank. Or they could accommodate a decision by the Greek government treasury to start issuing short date bills exclusively at the ECB policy rate. Or they could give the go ahead to the ECB desk operations to commence unlimited buying of outstanding Greek bonds. Etc.

But these are the same type of options that Congress could make available to the Fed in respect of the dollar and the Fed’s arrangements with the US Treasury or which the Fed can pursue under its existing authority as permissible.

Each central bank has the same operational (generic) options, provided it has the authority. So in defining currency issuer and user, I have prioritized central bank operations and Treasury operations. I have not prioritized the nature of the controlling sovereign. On that point, I would simply say that Greece does not have exclusive sovereign control over its currency issuer, although it is a participant at the supranational authority level as well as at the governing council of the ECB itself. This arrangement is an important political difference with the US. But it does not necessarily preclude the availability of a variety of options for the currency issuer (ECB) to “make life easier” for the currency user (Greek Treasury). It just makes the process for making such a change more complicated and difficult.

The value I see in this approach is that it enables common classification of operational options that are available to the central bank (Fed or ECB) in order to tighten or relax various types of constraints on the Treasury user. Indeed, MMT’ers themselves have promoted the ideas of crediting the US Treasury account with platinum monetization, and crediting EZ Treasury accounts with pro rata shares of a trillion Euro credit, ex nihilo. These are comparable proposals at the level of Treasury as a currency user. And it is fair to note that several MMT’ers do refer to the ECB as a currency issuer.


7:45 PM  
Blogger JKH said...


I interpret the MMT treatment of the ECB as a currency issuer and the United States (instead of the Fed) as a currency issuer to be somewhat asymmetric. The ECB did not create itself. It is subject to the EU Treaty. Someday there may be a European fiscal authority and Treasury arrangement that further refines the position of the ECB relative to its supervisory authority. The EU Treaty remains the supranational authority at least until that point. That the ECB doesn’t report into a single national authority doesn’t mean it isn’t accountable to a supranational authority, and either brand of authority is capable of making comparable policy changes for its central bank in that bank’s respective sphere of influence. And both types of central banks as noted are capable of making decisions with comparable effects on their Treasury users, either under their existing authority or according to changes in authority received from above.

The reason I prefer this view of things is that it doesn’t obscure the generic nature of central bank functional or operational capability under appropriate enabling authority. I think it is more important to understand the nature of potential central banking functional capability than how it gets the authority to execute on that capability. I’m less interested to know that Greece alone can’t create the authority to implement central bank action on its own behalf, and more interested to understand the nature of the central bank action that might be feasible should the ECB act on the appropriate authority to do so, newly delegated or existing. The fact that Greece is only a participant in the group of nations that create original authority for the ECB is important. But it is more important to know what can be done. If the right thing can be done, then those who believe in it can fight for it. That fight is happening now in Europe. But you’ve got to know what the technocratic choices are in order to decide which one is right. So that’s my reason for focusing on a common, symmetric technocratic view of both the Fed and the ECB as currency issuers.

Somewhere in previous comments I floated the hypothetical of Greece being classified as a currency issuer. Greece should NOT be classified as a currency issuer in my view. That was merely a passing hypothetical and reference to the complication of classifying such things at the outer margins of EZ monetary operations. The Greek central bank could be classified as a component in the ECB currency issuance function, because it is clearly an operational part of the Euro system of central banking operations. Also, Greek CB operations DO respond to local conditions regarding TARGET, etc., so the Greek central bank does have an element of Greek specific monetary response. But that does not classify “Greece” as the currency issuer, either according to MMT or in my view. It is my view that the Greek Treasury is a currency user. That is also slightly different than what I understand to be the MMT expression of it, which is that Greece is a currency user.

7:45 PM  
Blogger Ramanan said...


"Large denomination platinum coins almost by definition will never circulate."

If you check Mosler's blog .. the book keeping was figured out by me long before it became blog posts and proposals.

It has to first circulate in my opinion. But since it cannot - not allowed.

Don't wish to get involved in a debate .. check comments on Mosler's blog.

12:56 AM  
Blogger Oliver Davey said...

I think the MMT wording and the ideological filter by which it boils down actual 'operations' into its simplified, consolidated view must always be seen from its stated policy goal of full employment and price stability, with an emphasis on the former. This is clearly a Keynesian scale of measuring where full employment at acceptable price stability is the unquestionable point of origin from which policy failures depart either towards unacceptable rates of inflation or of unemployment. This is also more or less congruent with the Fed's mandate, not so with the ECB's. Furthermore, MMT suggests that this stated goal can only be achieved through a mixture of what is traditionally known as monetary policy, which includes an accomodative stance towards government spending, however achieved, as well as what is traditionally considered fiscal policy, which includes defining a framework of taxation (automatic stabilisers), authorising discretionary spending activity and making sure the level of NFAs outstanding is sufficient to quench 'savings desires'. It does not include prescriptions on how to pro actively influence savings desires, say through trade barriers etc.. All these functions together are needed to define what qualifies as monetary sovereignty under MMT. Hence the conflation of CB and Treasury to make the point.

Now, one can depart from that framework by positing that any such fiscal and accomodative monetary activity is dangerous and inflationary and thus a distinct fiscal authority is superfluous and central banks should stick to a pure price stability mandate (e.g. the current EMU framework), which is just as ideological as the above, just with a neo-liberal tinge.


4:53 AM  
Blogger Oliver Davey said...


Or, arguing more legalistically, one can say that there is nothing technically in the way of a central bank taking over all functions necessary to achieve the stated Keynesian goal, and also concede that indeed in many countries it already does so in a roundabout way, but that legal adjustments to formally authorise such behaviour would first be needed to make it 'true'. The latter is how I read your interpretation of the world, as it starts from a traditional 'independent' central bank and expands technically from there. It also allows for the assessment that, although formally identical, the informal implications of debt may vary from country to country, depending, not on its monetary sovereignty (in the MMT sense), but on its credibility within the international community.

Personally, I think neither of these views are logically false nor should they be mutually exclusive. They are just reflective of ideological preferences and of the starting point of one's analysis, which can be either technically accurate (JKH, Ramanan) or more centred around formal and informal power relations within a currency area (practically accurate, especially wrt the bond markets, MMT would suggest).

The truthiness of MMT lies in the correct prediction of the debtiness of debt which depends on more than just its written definition. But I believe it also depends on more than just the qualifiers as defined by MMT, at least for some countries.

4:53 AM  
Blogger NeilW said...

I'd go the other way - in that the central bank functions should be driven by a committee of legislators reportable to the parliament/congress with the Treasury under the control of the Executive.

The central bank functions should not be authorised by mere bureaucrats but by somebody answerable directly to the populous.

We've seen what a central bank 'independent' of the legislature does - it saves the banks first and foremost.

6:07 AM  
Blogger Clonal said...


From NY Fed's How Currency Gets into Circulation

Putting Coins into Circulation

The procedures for putting coins into circulation are similar to those for currency. The U.S. Mint produces coins in Philadelphia, Denver, and San Francisco, and ships them to the Federal Reserve Banks and to authorized armored carriers, which supply banks that need coins to meet the public's demand.

The distribution of coins differs from that of currency in some respects. First, when the Fed receives currency from the Treasury, it pays only for the cost of printing the notes. However, coins are a direct obligation of the Treasury, so the Reserve Banks pay the Treasury the face value of the coins. Second, large banks in some Federal Reserve Districts participate in a Direct Mint Shipment Program, and receive coins directly from the Mint. In the New York area, there also is an arrangement under which banks that need coins buy them from banks that have a surplus. To promote the arrangement, the New York Fed stands ready to match banks that have excess coins with those that need coins.

Yes theoretically the large denomination coins could get into circulation, but in practice, there will be no demand for them, and so, they will just sit in the Fed Vaults. Note that the Fed credits the Treasury when coinage is received, and not when the coins actually get into "circulation"

7:39 AM  
Blogger Ramanan said...


As I said earlier, I don't wish to get into a debate into this. As far as the working of this goes, what you quoted is not news to me

See my comment here

pointing to a comment written long back.

I just happened to give a view. But if you want to read more about it, read VJK's comments at Mosler's blog.

I will postpone the discussion until I get some time to defend what I said.

7:56 AM  
Blogger JP Koning said...

"JP Koning: Link?"

I'd suggest this one. It goes into excruciating detail, which I find to be very gratifying.

8:41 AM  
Blogger Clonal said...


My read of your comment to STF is that in your opinion, the sale of the platinum coin to the FED would not be subject to the debt limit. I would tend to concur with that reading.

I do not see how you go from there to saying that therefore the sale of the coin to the Fed is therefore not allowed.

9:44 AM  
Blogger beowulf said...

Note that the Fed credits the Treasury when coinage is received, and not when the coins actually get into "circulation"

Right, circulation is irrelevant. A coin become legal tender once its monetized- that is, when the Mint is paid for the coin. After that point, the Mint doesn't care if the coin sits in a Fed vault or a kid's piggy bank.

Immediately afterward, Mint Director Fore held a ceremony on the auction floor to make the Double Eagle legal tender. “In order to monetize it, somebody had to pay $20,” says Redden. “So I stepped down from the podium and gave her $20. The Mint makes a big distinction between coins that are monetized and those that are not. Two Double Eagles are in the Smithsonian, but they’re not monetized. To the government, they’re curiosities, not currency.”

9:48 AM  
Blogger JKH said...


I missed your earlier question:

“Isn't the problem in the EU that there isn't such a supra national authority?”

In my final comments above, I identified that authority as the EU Treaty that created the ECB. That treaty has to be changed in order to effect significant changes in the ECB policy sphere.

That’s not the quite same as a supra fiscal authority, or a supra national treasury.

It’s a good question. There has to be something that corresponds to the authority to approve the kinds of significant changes that might require Congress’s approval in the case of the Fed. The ECB can’t create its own rules without limit.

10:18 AM  
Blogger Ramanan said...


As I had mentioned I was initially indifferent to the idea about circulation. Now I believe I might have been wrong about my earlier comment I linked to.

I have some thoughts going on my mind (based on some reading about money from different sources and literature) on various things right now - I just happened to give a view without explanation. I will catch you sometime on this topic soon.

Sorry for going in a round-about way. I just wanted to highlight that I am aware of all this but may have reached a wrong conclusion.

10:47 AM  
Blogger JKH said...


I re-read all of the comments on this and the previous post, and I think you’ve presented the MMT case for the currency issuer/user taxonomy very coherently in your comments.

I also think what I’ve presented is an alternative interpretation, also coherent.

I see these more as alternatives than right and wrong competitors.

If you do get a chance to post a recap, here’s a point that I touched on and wanted to emphasize again:

One of the things that got me on this theme is that I have considerable time for the way in which Marshall Auerback verbalizes the European situation in the various interviews he does, many with Canada’s BNN network. I might tweak tiny bits of his explanation, if I were capable of meeting his standard of interview excellence, but his overview of it is really very good. Marshall refers to both the US government and the ECB as currency issuers.

What I’ve tried to do is to insert a multi-national authority over the ECB that would correspond to the role of the national authority of the US government in the case of the US. That allows some symmetry in treating the 2 levels in both the US and European case. If one has that symmetry, then one can decide whether or not to label the top level or the second level as the currency issuer. I’ve argued for the operational (my meaning) level of the CB.

Of course, the full symmetry of this approach depends on the legitimacy of identifying that top level in the case of Europe. I’ve identified it as the EU Treaty. I don’t know if that’s the ideal bureaucratic identity to use, but in any event, it does seem to me that the ECB is not in a position to simply re-create its own terms of reference or its own high level policy boundaries on its own. And as I understand it, changing important things require re-opening the treaty. And I would assume those important things include fundamental institutional relationships between the ECB and the set of EZ Treasury functions. Examples of this might include instruction to open up unlimited QE or overdraft capacity for particular Treasury functions, etc. In other words, examples would include the kinds of things that the US Congress might become involved with in the event of the potential for chronic disruption in the normal functioning of the US Treasury under current institutional arrangements.

All that said, the existence of such a multi-national supervisory perspective over the ECB suggests to me that even with the choice of identifying the US as the currency issuer, it would not be consistent to label the ECB as the currency issuer – rather the identified supervisory authority above it.

So there are several issues there – the identification of the multi-national authority that could exercise dispute resolution, mandate changing adjustments for the ECB, and the consistency of applying either of the currency issuer taxonomies we’ve been discussing to both the US and the EZ, given comparable supra-CB authorities (although different in their national versus multi-national characteristic.)

8:22 PM  

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