FAQs – Finding the Money

Frequently Asked Questions

If the government doesn’t need my money, then why am I paying taxes?
Should we still tax the rich? (Yes! And more!)
Does the US Federal Government need to sell Treasury bonds(securities)? What about Interest Rates and ‘debt sustainability’?
Does it matter whether Congress spends first or taxes first?
Does GDP have to grow in order to provide economic well-being, improved public services, and to pay back the ‘national debt’?
Why do private banks get to create ‘bank money’, and where does that investment go?
Don’t we need to ‘live within our means’?
Does MMT only apply to the US? What about Eurozone and Global South countries?
What is QE?
What about Weimar, Zimbabwe, and Venezuela? Cases and causes of hyperinflation.
If the US Federal Government is the issuer of the US dollar, then why does it borrow dollars?
Inflation: what is the role of the Fed and interest rates?
Is MMT dangerous? Do we really want our politicians to understand they have the power to create money? Won’t they run amok?
Is Bitcoin the ‘money’ of the future?
Does MMT say money has only ever been created by states?
Try not to use the term ‘money’.

1. If the government doesn’t need my money, then why am I paying taxes?

Taxes are essential! Please don’t get the impression that taxes are unimportant. Taxes are what drive the entire monetary system to begin with. Without a money tax on a population, that population would have little use for a specific currency, and indeed it is unlikely a market could function at all in the way we know it.
In the film Lua Yuille states “the government doesn’t need money, the government needs us to need money”. The government doesn’t need your money in order to pay for train lines or hire doctors, but it needs you to need the currency, which then creates people willing to produce goods and services for sale in that specific currency, goods and services which the government can then purchase (sounds like a market). In effect the tax does transfer and instigate the creation of new real resources for the public sector. In that way Warren Mosler asserts a money tax does provision the public sector with real resources, thus ‘funding’ or enabling public spending.
But understanding why and how we tax, enables us to think about what we tax, perhaps differently. A broad-based tax is essential to drive the currency and move real resources, but the tax code could be much simplified, thereby saving the economy huge costs in private tax accounting, and the complicated system of loopholes the rich are able to exploit. We don’t need a specific tax to pay for a specific program, such as a carbon tax. But a broad-based tax is essential for the functioning of a monetary system as we know it. This is referred to as ‘tax driven money’ and has been in existence for perhaps 5,000 years.
Pavlina Tcherneva refers to the fundamental purpose of taxation, which is to induce the population to work, to grow more food, to build roads, or build aqueducts for irrigation — to produce new real resources for the society or public sector, (or ‘authority’, or ‘center’). She says, “the tax is that motor, that engine of transferring real resources (to the public sector), money is really the vehicle”. In the film Lua Yuille states “The taxation system is what gets the whole monetary system going to begin with”.
A tax is essential in establishing a new currency, and importantly this is where the ‘value’ or the price level of the currency is generally initially determined (although it gets more complex than this): by what the issuer of the currency pays for labor and goods. For instance, at the creation of the Euro, they could have determined the minimum wage would be 1 Euro an hour for labor, or 100 Euros an hour for labor, it would have made little difference, because other prices in the market would adjust to this initial establishment.

2. Should we still tax the rich? (Yes! And more!)

Understanding that tax dollars are deleted, the political narrative shifts from needing rich people to ‘pay their fair share’ to needing rich people not to take more than their fair share of planetary resources. We don’t need rich people’s money to feed a hungry kid or save the planet, but if we want a functioning economy and a functioning democracy we do need to reduce wealth inequality and the ability of wealthy individuals to buy out government officials and monopolize essential sectors of the economy. Indeed if the objective of an income or wealth tax is to reduce inequality and power concentration, then the government should in fact tax more than is needed to simply feed a hungry child or build green infrastructure. Much more.

3. Does the US government need to sell Treasury bonds?

Good question. No. There is no financial necessity for the US federal government to issue bonds, notes, or bills (collectively ‘Treasury securities’), but it is current operating procedure. At the end of a given time period, Treasury accounts for the difference between the number of dollars spent by Congress into existence, and the number eventually taxed back. This number is referred to as a deficit (or surplus). So in effect, the moment Congress authorizes a new spending bill, and that bill passes appropriations, that is the moment new dollars are authorized and created when the Federal Reserve credits the bank accounts of contractors like Lockheed Martin or social security recipients on behalf of Congress. So the government spends first, essentially creating ‘cash’ or ‘green’ dollars- really digital dollars.
If the government spends 100 ‘green dollars’, or cash, into the economy and taxes 90 back, that means the government has a deficit of 10 and the non-government, or private sector, has a surplus of 10, in ‘cash’/digital dollars. Now the government says, ok I ran a deficit of 10, so I need to issue Treasury bonds in an equal amount. So it holds up $10 in Treasury bonds (or bills or notes), call them ‘yellow dollars’. Effectively US dollars that pay some interest. Whoever in the private economy ends up holding the $10 in green dollars (‘cash’) can now trade those up for $10 in yellow interest-bearing dollars. It’s effectively like moving your money from a checking account to a savings account that pays some interest. We can see this process does not in fact involve the federal government “borrowing” dollars from the private sector in order to spend. The spending happens first, when new dollars are created, and then the bonds are voluntarily offered after the fact.
At that point we can ask, why issue the bonds at all? The interest offered on the bonds is effectively a give-away of newly created free money, to people who already have money, in proportion to how much they have. As Warren Mosler refers to it, ‘a basic income for the rich’. Perhaps interest is deserved by investors who take risk, but there is no insolvency or default risk on Treasury bonds in US dollars from the sovereign issuer of the US dollar. It is a ‘risk-free’ asset.

Some counter that without issuing the Treasury securities, government spending in ‘cash’ would cause hyperinflation. However there are a few key points to remember. Firstly, the government spending has already taken place, and what matters for inflation is not so much the money supply, but spending, and what those dollars are spent on. Whether that spending is increasing inflationary pressures, or perhaps even decreasing inflationary pressures, it is important to look at the economic sectors and real resources affected by the spending. Second, Treasuries are easily convertible back to cash whenever someone wants to spend. Thirdly, whether those dollars end up held as savings in the non-government sector as green dollars or yellow dollars, does not in general affect the overall desired savings rate versus spending rate in the private sector. If the federal government decided to stop issuing Treasuries tomorrow, it doesn’t mean all of a sudden households would start spending more of their money versus saving for retirement, a house, education, etc. (And saving does not add to inflation, only spending does). In fact, the act of replacing cash (dollars which pay zero interest), with Treasuries (effectively interest bearing dollars), could in fact be more inflationary, because the federal government is then creating additional dollars to pay the interest (new deficit spending), adding to the savings of the private sector (which could eventually be spent, depending on savings/spending desires).

What about interest rates and debt sustainability?

As the overnight interest rate is clearly a policy choice, currently set by the Federal Reserve, we could either choose to leave the interest rate at zero, thereby eliminating much difference between Treasury securities and ‘cash’, (as the interest rate is highly ineffective at curbing inflation anyway, contrary to textbook claims), or… Congress could decide to change current practice tomorrow, and stop issuing Treasury bonds altogether, (or allow Treasury overdrafts at the Fed). The current bonds outstanding would be ‘paid back’ over time by swapping the ‘yellow’, or digital dollars back from your savings account to your checking account, leaving you with ‘green’ dollars, or ‘cash’. But importantly the thing we call the “National Debt”, the sum total of Treasury bonds, bills, and notes outstanding, would roll off over time to zero, and the much maligned Debt Clock would disappear. Along with the interest payments on the debt, currently closing in on $1 Trillion a year, and rivaling defense spending.
The federal government would certainly still run a deficit in most years and those deficits would accumulate, they would simply be accounted for as liabilities on the Fed’s balance sheet, where cash and reserves are currently accounted for, rather than on the Treasury’s balance sheet. (Not that the difference is materially important). It makes little economic difference whether we choose to issue Treasury bonds or not, it would be mostly a semantic choice. However, the government would probably want to plan for an alternative financial asset, a ‘synthetic’ treasury security if you will, that could be used by financial markets which currently use Treasury bonds as the basis for their functioning.
Some may call this form of government spending ‘overt monetary financing’ or ‘money-financed’ spending rather than ‘bond-financed’, and claim that this would be inherently inflationary. But the important thing to remember is that Congress always effectively spends dollars first, it does not borrow them in order to spend. So whether the private sector then chooses to hold those surplus dollars from the government in the form of a checking account or a savings account, does not have much effect on the desired savings versus spending rate in the private economy and its relationship with inflation. What matters with regards to inflation is how much spending the government authorizes and on what, not whether those dollars end up held as cash or bonds.
So the perception that some spending is ‘bond-financed’ could lead to the erroneous belief that that spending would not be inflationary. Which could lead to more irresponsible fiscal policy, rather than more responsible. Indeed, the act of issuing the bonds may in fact be more inflationary than simply spending the ‘cash’, because it involves the government creating more new money to make the interest payments to bonds-holders. Today, because the Federal Reserve has set the interest rate at 5%, this means Congress is now creating an additional $1 trillion every year to pay to bond holders, which could potentially add to total spending in the economy and inflation, if those bond holders choose to spend their new income. After all, it is spending that leads to inflation, not the ‘money supply’.

4. Does it matter whether Congress spends first or taxes first?

Yes! Although it may look like a cycle in which dollars are coming in and dollars or going out of Treasury accounts at the Fed, it is very important who has the decision making power and ability to spend in the first instance, especially when the nation is in a recession/depression, pandemic, emergency, or war. Although taxes do need to be collected eventually, it does matter whether they need to be ‘found’ and collected first, or if they must be collected after the government act of spending. If in the Great Depression the federal government had to go out and ‘find money’ by taxing or borrowing from the population before it could spend on massive public infrastructure investments and employment, it would have found it nearly impossible to do so, with households holding very little savings in cash, which they needed for basic survival. And following the Great Depression, how could the federal government have possibly found enough money to pay for the mobilization required for WWII? It would have been simply impossible.
Likewise it matters today whether global south nations are expected to go out and “find the money” through taxing and borrowing before they can invest in green energy infrastructure, education, and healthcare, from a population that has received very little in the way of public investment thus far.

5. Does GDP have to grow in order to provide economic well-being, improved public services, and to pay back the ‘national debt’?

Nope. In fact most countries in the global north seem to be experiencing ‘uneconomic’ growth rather than economic growth. Meaning the costs of GDP growth, such as pollution, ill-health, cancers, incarceration, and natural resource devastation, are greater than the benefits. An alternative measure of human/societal well-being sometimes used is the Genuine Progress Indicator or GPI. GPI accounts for improvements in health, longevity, happiness and many more metrics, while also accounting for the costs of economic throughput. When GPI is compared with GDP growth on a graph, for the US they trend the same until about the 1970s, when GDP continues to grow, but GPI flatlines.

IMAGE OF GRAPH:

GDP growth is no longer contributing to increasing the well-being of humans in certain global north countries, or making us richer, but could instead be making us poorer (through pollution, cancers, ill-health, incarceration). So if all this GDP growth added since the 1970s has not increased the well-being of the majority, while allowing the rich to accumulate the benefits, and the majority to bear the costs, is it necessary for GDP to continue to grow in order to simply have the tax revenues to pay for essential public services like water, infrastructure, transit, healthcare, education, and housing? Would we go into recession with mass unemployment if GDP growth dipped below zero? How would governments pay back the ‘national debt’ plus interest?

If tax revenues are going down, we can still provision the public sector with increasingly high quality transportation, healthcare, and education, if there are people willing to do the work and resources to mobilize. Money is the organizing tool we can use to help manage real resources within planetary boundaries.

The story of money presented in the film reveals money not as a scarce resource itself, that governments must go out and find before they can spend, but as a public utility and an organizing tool for the real resources of a society. In order for societies to responsibly manage our carbon budget, or ‘live within our real resource means’ then we need to think much more seriously about budgeting our real resources to live within planetary boundaries, rather than monetary budget limits.

For example today in April 2024 we are experiencing the worst global coral bleaching event due to record high ocean temperatures (which is receiving very little headline news, but some). As reefs provide habitat for about a quarter of ocean life at some point in their life cycles, and provide at least $2.7 Trillion in economic value per year, how are we accounting for protecting and preventing this real and economic loss? Can we as a society simply not ‘find the money’, the appropriate accounting measures, to protect these real and scarce resources, thinking that the money we would spend protecting them is somehow more precious than the real resources themselves?

6…Side question detour: Why do private banks get to create bank money, and where does that money go?

Importantly the money story also reveals the essential role of the public sector in creating not only money, but the market as well. Most capitalist nations have essentially granted ‘private’ banks the privilege of extending public credit on behalf of the currency issuer. According to Robert Hockett and others, these banks operate more as ‘franchises’ of government; creating credit for households to borrow to purchase homes, or start businesses. The role these banks are supposed to play is as a local credit check to determine whether it is a good idea to make the loan to a particular individual. In the past this may have made more sense, when local banks had personal relationships and knowledge about their customers in smaller towns and cities. But today, the bank does little more than run an automatic credit check to determine whether or not to make a loan. And for this service they earn the exorbitant privilege of collecting interest on loans, (and interest on reserves from the Fed) making them the most profitable ‘private’ businesses in the whole economy.

But in this system, who has the decision-making power over money creation, and where that essentially public investment goes? Little bank lending today goes to new ‘productive’ business ventures, and indeed most goes simply to bidding housing prices higher and higher. Countries such as the US, Australia, Canada, and the UK are experiencing unprecedentedly high housing costs, while no one points the finger at banks as the driver of these rising house prices, (along with the corresponding historically high household private debt levels).

And in a world with planetary boundaries and inflationary pressures, is private profit a sufficient metric to justify investment through bank money creation? Just because a casino can produce private profit, or a new gas pipeline will produce private profit, should those projects be immediately given credit, while public priorities like healthcare, public transportation, scientific research, and education languish for lack of investment?

If we are analyzing and rightly scrutinizing any new public spending proposal from Congress for inflationary potential and real resource use, should we not also scrutinize private investment and spending in the same way? And should both not be subject to some objective of public benefit towards well-being, rather than simply GDP growth?

Back to GDP growth…

Thus, it is possible to continue increasing human well-being, health, and happiness, while GDP, resource throughput, or carbon use, goes down. Especially if we take into account current wasteful spending in the private sector that could decrease without a loss in quality of life or well-being (even though it might piss off one or two individuals who had stood to gain).

Doughnut economics postulates the economy could best be envisioned as a doughnut shape. Two concentric circles where economic activity takes place above the resource use needed for sufficient basic human needs, and yet below the resource use that breaches the planetary boundaries of carbon, nitrogen, and phosphorous cycles, ocean acidification, biodiversity loss, etc.

If we have that vision for a sustainable objective, money is not the obstacle; money is one public organizing tool that can help us achieve that doughnut vision.

7. Don’t we need to live within our means?

Let’s be conservative and frugal with our real resources and carbon, but let’s not be frugal with our money, if it helps us to conserve resources. For example, there are certain spending projects which may cost a lot of dollars, but not necessarily a lot of resources. For instance employing people who are currently unemployed to restore ecosystems, or enforce laws protecting fisheries and forests from illegal harvesting, or caring for the young and old. And then there are projects that may seem not to cost many dollars, but cost a lot of resources, like flying or driving in a country with infrastructure built to do so.

Indeed, let’s budget much more responsibly. Let’s live within our carbon budget. Let’s “live within our means”: let’s live within our real resource and carbon means. Those are the deficits and debts and budgets that we should be centering in all our public debates. But our ‘means’ are not defined by the number of dollars the government can go out and find, they are determined by our planet, and our ingenuity to thrive and continue to increase quality of life within those real limits.

8. Does MMT only apply to the US? What about Eurozone and Global South countries?

Glad you asked. Modern Money Theory seeks to accurately describe the way modern monetary systems currently work today based on their constructed institutional framework. So MMT describes how monetary systems work in what some call ‘fully monetarily sovereign’ nations such as the US, UK, Australia, New Zealand, Switzerland, Japan, China, Norway, etc. These are countries which issue their own national currency, the public or ‘national debt’ is denominated only in that currency, and they have floating exchange rates. MMT can also describe countries which operate with less sovereignty, perhaps they issue their own currency, but they have large foreign denominated debts in say US Dollars, Euros, or Renminbi, such as certain countries in the Global South. Or perhaps they peg their currency to a foreign currency through a currency board, or perhaps they have given up their own currency all together, such as countries in the Eurozone- Greece, Germany, Italy, Spain; or those in West Africa who use the CFA Franc, a currency union pegged to the Euro; or Ecuador and El Salvador who use only the US Dollar.
Countries that have ‘full monetary sovereignty’ can never run out of their own currency and face no risk of default or bankruptcy. For them, the limit on government spending are real resources (including labor) and pressure on those real resources that might causes unwanted price increases (inflation). This gives those countries a lot more policy space to deliver new spending in a downturn or recession (even when tax revenues are declining), ensuring full employment; or to respond to an environmental crisis, war, or pandemic. However real resources still need to be thoughtfully managed in these countries, especially with respect to the essentials of food and energy. If a nation is reliant on high imports of these and other essentials, inflation and exchange ratios can become undesirable. Thus prudent economic policy would not involve a nation saving its own currency in a ‘rainy day fund’ so it has money to spend in an emergency, (it is in fact impossible for a currency issuer to save its own currency), but would involve investing more in the present in the infrastructure and real capital which can produce sustainable, renewable energy and food for the nation for generations to come.
This perspective also radically shifts the ‘economic development’ paradigm imposed on or ‘recommended’ for global south countries. They are told they are poor, have no money or savings, and thus must get ‘money’ to invest in modernizing their countries. So they must export to get Dollars or Euros. It is true Global South countries need to acquire some foreign currency to import things they cannot produce, such as medicines or technologies; but if a nation has the land, has the real resources, and has unemployed labor willing to work (which most do) there is no reason why those governments cannot spend their own currency domestically to build up sustainable food and energy sources and improve human wellbeing. Given they can enforce taxation in their own currency and spend in that currency, they don’t need to get US Dollars to pay a local farmer to grow more sustainable food. Or to re-tool the domestic transportation infrastructure of a nation, and leapfrog to more sustainable public transport built for local use, rather than the infrastructure built from a legacy of colonialism and continued exploitation where all roads and infrastructure lead to export ports, for example.
The Eurozone experiment shows the risks of giving up your own currency. Perhaps economists forgot that money is a creature of law, and intrinsically a political issue, as they attempted to separate money issuance from a political authority, figuring a market and a central bank are all you need. MMT economists immediately warned European countries were now introducing the risk of individual nations defaulting on debt in a downturn or recession, forcing national governments to rely on taxing and borrowing in order to spend, and thus making them susceptible to bondholders who could in fact increase the interest rate for government borrowing, as they did to Greece raising the interest rate over 30% in 2015. (Analogies claiming the US could become Greece during the Euro crisis were always confused, because you cannot compare a currency issuer with a currency user, and yet the comparisons persist).
The result for Greece and all other Euro nations has been the imposition of austerity; cutting public spending on jobs, and privatizing or selling off essential public infrastructure like energy utilities, water utilities, ports, train lines, and roads, you name it. (The result of this is playing out as expected- higher costs to society and lower quality outcomes). How could Greece be expected to recover from a recession which is a downward spiral of spending, as businesses lose customers, they lay off workers, who then have less money to spend at businesses, who then must fire more workers, in a downward spiral that cannot end until someone is able to spend. The Greek government was forced to contribute to this by cutting spending as well, firing public employees, in an effort to balance a budget which will never balance if unemployment worsens and therefore tax revenues decline.
The question is whether a nation can be politically sovereign without having monetary sovereignty. Euro nations are currently between a rock and a hard place. Although the ECB temporarily relaxed the limits on debt and deficit spending during the covid pandemic, averting a repeat of the repercussions of the Global Financial Crisis, those Maastricht Treaty rules and debt limits are coming into effect again. And indeed, it would not be fair to leave no rules on deficit spending for individual national governments to decide on their own, without considering the whole of Europe. One solution involves political integration of Europe, a federal government for Europe with similar powers as Congress in the US to tax and spend. Right now the ECB acts almost as a federal government in its rulemaking, it is simply un-elected and non-representative of the diversity of the Eurozone.
Or other solutions may allow the zone to muddle through. The question is simply will they be able to make the green and social investments desired by their populations to avert climate catastrophe, or will they continue with their hands tied behind their backs, as fossil fuel infrastructure projects that promise private profit can always receive funding from banks who have been given the power to create credit and ‘bank money’ through lending.

9. What is QE?

Quantitative Easing: the thing that the Federal Reserve and other central banks did after the ’08 Global Financial Crisis that was heralded as being potentially hyper-inflationary. Although sometimes referred to as the Fed “printing money”, QE is simply the reverse process of the federal government selling Treasury bonds. Going back to the description of how the federal government sells bonds… say Congress spends $100 and taxes $90 back, so there is a federal deficit of $10. Current rules state the Treasury must now sell bonds (or bills or notes) equal to that amount, so they sell $10 in Treasury bonds, or yellow dollars, and take back the $10 green dollars in cash. (Or put another way: they move $10 from your checking account to your savings account). QE involves the Fed purchasing some of those Treasury bonds. So the Fed purchases the yellow $10 bond by giving you $10 green dollars back. (They move the credits back from your savings account to your checking account.) Yes, they are giving you ‘cash’, but in exchange for an asset you already own. (An asset created by Congress spending). It is an asset swap, it is not the equivalent of ‘helicopter money’ or Congress deciding to spend new dollars into existence through a specific spending policy such as increasing social security payments or hiring more construction workers or teachers. (The Fed does not have spending powers, which lie with Congress, but it has the power to lend and purchase assets).
With QE after ’08, the Fed did get more ‘creative’ by purchasing additional private assets besides Treasury securities, such as ‘mortgage backed securities’, in exchange for cash. This is still supposed to be an asset swap, or the purchase of an asset, but it can get hairy in terms of how the Fed values that asset if it is not a Treasury security.
Once the Fed purchases a Treasury bond, it is the equivalent of the Treasury never having issued it in the first place.

10. What about Weimar, Zimbabwe, and Venezuela?

According to this Cato Institute study there have been over 50 cases of hyperinflation and counting worldwide. Textbooks tell us that hyperinflation is always caused by ‘the government printing too much money’. However it is very important to distinguish between causes and effects, and to look at the real resource shocks that underlie many cases of hyperinflation.
In Weimar Germany, Germany had just lost WWI, the Treaty of Versailles was signed in which Germany was forced to pay incredibly high reparations for the war in gold. At the same time much of Germany’s productive capacity: factories, farms, and infrastructure were destroyed by the war, while France directly occupied a part of their territory with the most industry. It was thus impossible for Germany at the time to produce enough real resources to export in order to pay reparations, and to feed their population. So prices of food started skyrocketing from the supply problem, which caused government payments to go up, and the printing of money to supply the increasing prices. An inherently unsustainable situation. If it is impossible to feed your population, and export to pay reparations at the same time, something has to give.
In Zimbabwe, Mugabe came to power and carried out quick land reforms in which colonial landowners were quickly removed from farms, which, along with severe drought, led to a severe drop in food production. This led again to skyrocketing food prices, the need to import food, and hyperinflation. In Venezuela, thanks to a legacy of colonialism, much of the economy was geared towards export, namely the production of sugar, other commodities, and of course oil. Oil accounted for 95% of export revenues, and between 2012-2020 those oil revenues dropped in value by 93% thanks to US sanctions and falling oil prices. Venezuela conversely imported roughly 2/3 of their food supply, and thus no longer had the foreign currency from oil to import food, leading to skyrocketing food prices and hyperinflation, with severe malnourishment and a humanitarian crisis.
A common thread here shows the enormous importance of essential real resources to a nation’s economy– namely food and energy. Responsible economic policy could do well to take note that food and energy crises often underlie economic crises, and thus consider the strategic production of these essential resources domestically.
In summary, none of the examples listed in the Cato paper include a democratic government attempting to run a full employment policy, deciding to print too much money, and therefore causing hyperinflation. We find instead severe supply shocks, food shortages, wars, coups, and political collapses as proximate causes.

11. If the US Federal Government is the issuer of the US dollar, then why does it borrow dollars?

It doesn’t. Again it is simply current procedure for Treasury to “borrow” the same amount of dollars Congress has deficit spent. But this doesn’t mean borrow the dollars to use, it means issuing Treasury securities (bonds, bills, notes) equal to the number of dollars Congress has deficit spent. Or put another way, replacing the cash IOUs, or ‘green dollars’, with Treasury security IOUs, or ‘yellow dollars’. It is effectively the same as moving the dollars Congress has spent from a “checking account” in the non-government sector, to a “savings account”. Treasury bonds are an artifact left from the gold standard, and pre-2008 Treasury bonds also played the role of draining reserves in bank reserve accounts at the Fed in order to allow the Fed to raise the interest rate above zero, to whatever the level of their policy choice. But today the Fed simply pays interest to banks on the reserves they hold at the Fed by the number of the Fed’s desired interest rate. (Typing free digital dollars into banks’ accounts to establish the interest rate above what it would more ‘naturally’ be on a risk-free asset: zero). Or government could choose to sell bonds to encourage consumers to save in the present and delay current consumption, such as with the “patriotic saving” policy of WWII. But this would usually not be a long term policy choice. (See Question 3 for more detail.)

12. Inflation, what is the role of the Fed and interest rates?

Oh boy. Obviously this deserves a book-length answer, and fortunately Professor Kelton’s next book will be out soon!
What causes inflation? The old Milton Friedman saying, too many dollars chasing too few goods, includes two parts to that equation, money, but also importantly goods (real resources and labor). Inflation can be caused by an impulse of an increase in demand for a specific good or service, or could be caused by a supply shock to that good or service, causing it’s supply to suddenly drop- such as a drought or flood affecting the food supply, a pandemic affecting production and distribution of many goods and services, or a war, causing an increase in demand and a destruction of real productive capacity (i.e. from bombing).
It’s important to understand what the cause of any inflationary episode is, in order to effectively address it after the fact, or prevent it ahead of time. Congress has given the Federal Reserve, the Central Bank, a dual mandate to manage inflation (price stability), and full employment. They have one tool with which to do so: the overnight interest rate which they set. According to textbook theory, raising the interest rate reduces demand from households and businesses to borrow money to spend, and therefore spending and inflation should go down. There are a lot of problems with this assumption.
Firstly, causes of inflation are usually associated with (or start with) specific sectors in the economy, for example we have had inflation mostly in energy prices (oil), food, and rent, and most households do not borrow to fund this spending. Secondly, raising interest rates increases an input cost for businesses. If a business continues to have customers buying their product, they are not going to stop investing simply because the interest rate is a few percentage points higher, but they do need to pass that cost on in the form of increased prices. Thirdly, raising the interest rate involves the federal government, with our current stock of national debt (total stock of Treasury securities outstanding over $34 trillion) at 5% interest, essentially creating $1 trillion new dollars every year (in deficit spending) to give to bondholders: i.e. giving new free money to people who already have money in proportion to how much they have. As Warren Mosler labels it: “a basic income, but only for the rich”. In so far as some of that new money gets spent, it could contribute to rising prices.
So raising interest rates not only does not have a clear channel to lower inflation, it has many paths which in fact raise prices and inflation. To top it off, the Fed admits they have not been able to find empirical evidence which supports proof that raising interest rates lowers inflation. They have stated they do not have a working model of inflation. So the best working theory they currently use is “inflation expectations”. The vague concept that if ‘the economy’ simply believes the Fed is fighting inflation by raising interest rates (even if raising interest rates actually has perverse real effects) the belief itself will be enough to bring inflation down. (Talk about voodoo economics).
The problem is the Fed doesn’t have many other tools it can use to fight inflation. However there are many other tools and policies which both Congress and the Fed can use to fight inflation, based on what is causing it.
If the cause of inflation is an energy or oil shock, as occurred in the US and other countries in 1973 as a consequence of the OPEC oil embargo when oil prices quadrupled overnight, an appropriate response would be to address the energy sector. Policies that both pull demand away from that sector by reducing demand for energy, working from home, flying less, making public transit free etc. and increasing the capacity of that sector by investing to provide more renewable domestic energy: wind, water, solar, and building more public transit as a much more efficient means of transportation as compared to car infrastructure.
You might be wondering about our recent bout of inflation starting in 2021 after the Covid 19 pandemic. Yes, the US government spent a lot of money, but was that the main driver of the inflation? It’s important to analyze. When looking at the graph below, we can see government spending in the US mostly served to backfill the very abrupt drop-off in private spending that occurred in March 2020.
Graph
It brought total spending back up in line with on trend, not significantly increasing demand, but keeping businesses open and people employed. But at the same time there were supply disruptions. As we know, factories shut down, ports clogged, and shipping backlogged.
But the first number to really affect the CPI inflation print was the cost of used cars, which was caused by a shortage of computer chips and semiconductors. New car factories had to shut down because they didn’t have the chips, and this caused a spike in used car prices. The solution? Raise interest rates across the economy? No. Address the supply of computer chips. And this is in fact what the US government did with the CHIPS and Science Act. With almost all semiconductor chip manufacturing occurring in Taiwan, the new policy has prioritized producing more chips in the U.S. to prevent this bottleneck from occurring again.
Next, oil prices started rising and spiked after the Russian invasion of Ukraine in February 2022. Once oil prices start rising, this feeds into most other goods and services but especially food, which relies on oil inputs not only for production but also distribution.
Lastly with this bout of inflation, we can see a significant amplification of the price increases caused by oil, by the market concentration and ability of companies to continue to set prices higher, even when their input costs were no longer going up, because they had the cover of inflation in the news. Explained in detail by Isabella Weber, this phenomenon of “sellers inflation” is a significant contributor to the recent inflationary episode. Solutions for this form of inflation involve enforcing antitrust laws, buffer stock policies, and strategic price controls in essential and upstream sectors such as energy/oil as soon as inflation starts, and before it has a chance to amplify through the economy.
As we can see in the hyperinflation section, certain sectors of the economy are essential – food and energy, but also healthcare, housing, chemicals and other raw materials. It might be wise to have government involvement in these essential sectors to provide price stability either through ‘buffer stocks’ or other means of market guidance for adequate production of these resources with price stability. Planning doesn’t have to be a bad word, and in fact all corporations plan, but for some reason it is taboo for the government to think ahead.

MMT centers inflation risk in the federal government budgeting process. It recommends that before legislators approve any new spending proposal, that legislation should be analyzed for any inflation potential. Today the Congressional Budget Office analyzes legislation, but the only information they provide is an assessment of how many dollars the new spending will add to the federal deficit and debt. However, even if new spending is “paid for” with new taxes, it matters what that new spending is going towards, and likewise where the taxes are coming from, to determine for one, if those taxes would be sufficient to prevent inflation. For example, if Congress is looking to pass new spending on expanding healthcare and Medicare, do we have the nurses and doctors to hire, or the facilities to provide care?
If not, perhaps included in that bill should be an investment to train more dentists, nurses, and doctors, to ensure that as spending is ramped up, we have increased the capacity in order to prevent excessive increases in those wages.
Spending should be analyzed for specific inflation potential and likewise specific taxes should be analyzed as to whether they sufficiently offset inflation. For example, a 2% tax increase on the top 1% in the country might indeed produce a lot of revenue to ‘pay for’ something, but that doesn’t tell us whether that specific tax is working to prevent specific potential inflation from a specific spending bill. The top 1% of the population does not spend much of their income to begin with. They save most of it. So to really hit their spending (which is what causes inflation) you would need to either tax the 1% a much higher percent, or perhaps directly restrict specific private spending on specific goods that the government is trying to purchase. This would be a more targeted policy to prevent inflation, and could involve a lower general tax, while accomplishing the purpose or goal of the policy. “Mission oriented budgeting”.
Also importantly we can return to the concept of private ‘bank money’ creation as a factor increasing spending and thus potential inflation in the economy. Here the Fed does have tools which can constrict credit creation and thus spending through qualitative regulations known as “macro-prudential” regulations. Nathan Tankus lays out the opportunities here for creating space for additional public spending on a priority mobilization such as the Green New Deal, by pushing down spending in the private sector, through qualitative and quantitative credit regulations, what he calls “Non-fiscal pay-fors”, in his highly recommended paper “The New Monetary Policy”.

13. Is MMT dangerous? Do we really want our politicians to understand they have the power to create money? Won’t they run amok?

Yes, it is true that with great power comes great responsibility. The hope is that with more accurate information and an understanding of the current monetary system along with real limits, Congress can act more responsibly in its budgeting process. Congress already holds the power of the purse (see the Constitution Article 1, Sections 8 and 9). Every time Congress passes new spending, (whether it is “paid for” or not) that spending holds inflationary potential, and should be analyzed for such, but currently is not. Congress has CBO, the Congressional Budget Office to analyze proposed legislation, but the only metric analyzed is how much the new spending adds to the deficit and the debt. CBO does not analyze legislation for inflationary potential or sustainability of real resources.
With an understanding that resources are more scarce than money, CBO should be re-tooled with additional metrics to give Representatives better information before they vote. Would certain budget priorities then become more or less viable under this alternative analysis? Projects which could cost a lot of dollars, may not in fact use a lot of resources, such as spending to hire people to restore forests and prevent wildfires, care for the young or old, or grow more sustainable food. Then there are proposals which may not cost a lot of dollars, but use a lot of resources, such as further investments in fossil fuel infrastructure and transportation. And then there is spending on defense- that costs a lot of dollars and resources. This spending is not for productive purposes, such as increasing capacity in a country, but is actively destructive. Production of bombs and planes to be blown up in the process of blowing up other people’s resources around the world, is part of the reason why defense spending is some of the most inflationary spending.

14. Is Bitcoin the money of the future?

According to Randall Wray and others, Bitcoin is not a ‘money’: it does not have two sides. It is not a financial instrument that has both an asset and a liability, or an issuer who stands by to ‘redeem’ that currency and thereby qualify what it is worth. Bitcoin is at best a digital asset, which is worth what others are willing to speculate that a digital number with some branding on it is worth. Perhaps as much as a beautiful piece of art? Bitcoin is not a new technology, digital ledgers and cryptography, including blockchain, have been around for a while; nor does it improve the payment system (which does indeed need improving- transactions should be fast and almost free). As founder of FTX Sam Bankman Fried explained, cryptocurrencies are a black box in which you put currency in, in order to get (hopefully) more currency out, admitting it is a semi-legal ponzi scheme at best. The only way to take more currency out of the box is to hope that someone else came later and put more in. The dollars and other currencies that are ‘paid out’ in gains, do have to come from someone else on the big digital ledger where dollars are accounted for at the Fed.

And worst of all, to run this ponzi scheme, the bitcoin network insists on running millions of data processing hard drives solving unnecessary mathematical puzzles in order to ‘mine’ bitcoin, using more energy than the country of Argentina, in the midst of a climate crisis. And still not managing to provide even a percent of total payment transactions occurring in the global economy. Imagine if the whole economy was trying to run on this model.

But in order to understand the popular intuition that Bitcoin could be money, we need to go back to the textbook stories we tell about money: the “myth of barter” and the “gold story”, from which the story of Bitcoin is simply a rational extrapolation. This origin story of money has been called the “foundational myth of economics” by David Graeber and others. According to this story, first there was barter, i.e. a free market. (I’ll give you this if you give me that.) But to solve the problem that exists when I don’t have what you want, exactly when you want it (in econo-speak the “double coincidence of wants”) the free market invents money as a medium of exchange. A commodity is chosen as an intermediary which has value due to its qualities of scarcity, portability, divisibility, durability, etc. In ancient times ‘the market’ supposedly settled upon gold, as an inherently valuable object and the best medium of exchange. (And in modern times that scarce object could just as easily be bitcoin, which of course must also be “mined” and its supply constrained.) The only problem is, there is no historical or anthropological evidence for the existence of a society organized around a barter market system, let alone the evolution from that system, of money and a monetary market.

The gold story of money is important because not only does it feed the current mainstream free-market ideology, but the story also allows for the phenomenon of crypto-currencies, such as bitcoin, to make intuitive sense for the general public. But would it be wise for a nation or a people to adopt bitcoin as its primary currency, foregoing its own national currency? Let’s set aside the fact that bitcoin is starting from a place where a few random people who bought early, hold the majority of the bitcoin in the world (with the likely result being simply higher concentration of that asset into fewer hands as in the game of monopoly); and setting aside the fact that a currency such as this, much like the gold standard, would be most likely deflationary, leading to prolonged depressions where consumers are not able to purchase goods, and businesses are not able to invest to produce goods, in a self-reinforcing downward spiral; setting these aside, consider the hypothetical situation in which a nation finds itself in existential peril.

Let us assume the only source of fresh drinking water for a small nation was contaminated by a mining development, and the only way to restore clean water is to restore the forest and wetland needed to filter the watershed. Let’s say this nation has everything they need to restore these ecosystems- they have thousands of unemployed people looking for work, they have the scientific know-how, and they have the seeds and nurseries ready to propagate— but all of this will take money to pay all the laborers and run the nurseries, and the nation simply does not have enough digital bitcoins to do it, nor do its citizens hold enough bitcoins to raise taxes. Do they go extinct? Should the nation excavate more mines to export metal to nations who have digital bitcoins, in order to pay bitcoin to citizens to restore forests? This is clearly preposterous, but it is exactly what the Global North asks the Global South to do today. Of course developing nations may need to export goods, in order to acquire a foreign currency with which to import goods that the country itself does not produce, such as high tech equipment or medicines. But a sovereign nation can afford to pay its own citizens and mobilize its own domestic resources with its own sovereign currency: credits which are needed by those citizens to in turn pay taxes.

See great articles by Brett Scott I, Token, or Tymoigne on Bitcoin.

15. Does MMT say money has only ever been created by states?

Hyman Minsky had a saying: “Anyone can create money, the problem is getting it accepted”. Anyone can create an IOU, but how many people will accept your IOU, your debt? The state, typically through the imposition of taxes, creates demand for its IOU or debt. A monetary instrument is a financial instrument which has two sides, a liability and an asset, an issuer and a bearer. So “MMT does not state that all monetary instruments are government issued or that every unit of account must have its origin in a government declaration. Monetary instruments can be created by anybody but their capacity to be widely used will vary with the capacity of the issuer to make others (willingly or forcefully) indebted to him.” (Tymoigne).

16. Try not to use the word ‘money’.

The term ‘money’ according to Warren Mosler, should be avoided – it is far too vague and gives the impression of a natural or international phenomenon. If you are always careful to specify which specific currency or financial instrument you are referring to, it is much easier not to get lost, especially with regard to the idea of where does ‘money’ come from? Where does ‘money’ come from, is harder to answer than where does the US dollar come from, or the Euro, or the Yen? That is easily verified. Likewise the question, ‘why does the US federal government ever have to borrow US dollars’ (as the issuer of the dollar) is different from the question, ‘why does the US federal government have to borrow money?’