Mosler: Between credit conditions, Fed's 0 rate policy and QE. the deficit probably remains too small for anything more than muddling through.

Comment: David Brooks gets his budget arithmetic wrong again.

Mosler: Interest paid is a policy tool, not an imposition.

Mosler: Waiting for the Fed to push back on rates.

Mosler: Housing slowdown causing fed pushback on rates.

Mosler: Fed wants mtg rates down and will 'do what it takes' no matter how inane to lower them.

Mosler: Fed official quickly pushes back-they don't want higher mortgage rates.

Comment: Yellen: Unemployment threshold for rate hike is not a trigger, policy likely to remain highly accommodative long after threshold reached.

Mosler: Pushing back against higher Mtg rates as previously discussed. Expect more of same.

Mosler: Bernanke and Yellen push back on rates.

Mosler: ECB's Draghi doesn't know negative rates function as a tax.

Mosler: Summers doesn't yet know negative rates are a deflationary tax? Seals his legacy....

Mosler: Fed's Bullard coming around on rates causation.

Comment: eh, which title? I'm just a simple physicist trying to understand this money thing. So I read various people's ideas :)

Mosler: Electronic money and neg rates.

Comment: Dear Obama--(1) there are no bond vigilantes, (2) if you #mintthecoin then you don't even sell bonds anyway.

Mosler: Interest on reserves' vigilantes? ;)

Comment: See here on the Fed changing private portfolio preferences through Quantitative Easing.

Mosler: It's about interest rates expressing indifference levels.

Mosler: Govt. 'money finance vs debt finance' is a fixed exchange rate distinction inconsequential to floating exchange rate regimes.

Comment: Understanding the FED Policy on Bank Excess Reserves & Why Banks Find Holding Reserves "Unattractive": @wbmosler

Mosler: The fed's policy rate is about setting the banking system's marginal cost of funds.

Mosler: FYI, same mainstream model that says QE=deflation says 0 rates=deflation ;)

Comment: Hope @MikeBloombergnwill listen to @wbmosler @stephaniekelton @carney explains #MMT very well here ->How High Should Taxes Get on the Wealthy?

Mosler: True! Hence 0 rates, no tsy secs, etc. cutting off said income at source!

Mosler: The Fed can easily set mortgage rates.

Comment: Yes, the personal savings rate is down to 4.2% in the US now but isn’t this what policy makers want? The key is wages.

Mosler: Interesting how savings rates tend to fall with the federal deficit falling ;)

Mosler: ECB acts to remove a bit more interest income from the economy, making euro even 'harder to get'/reducing aggregate demand a bit more, etc

Mosler: Yes, I tried to tell him he was describing a fixed exchange rate condition but he wouldn't 'listen' at the time :(

Comment: Turkish central bank raises overnight borrowing rate to 8% vs previous 3.5%.

Mosler: Backwards, rate hikes like that fundamentally weaken the currency.

Mosler: For Turkey: 0 rate policy, target a JG pool at 3% with fiscal policy, no fx sales, narrow banking, free healthcare, free education, etc.

Mosler: The new US treasury floating rate securities are a Disgrace to the Flag.

Comment: It tells there is a different mandate: markets focus on NFP when it comes to the FED, on inflation in the case of the ECB.

Mosler: And as if interest rates matter the way they think they do!

Comment: Fighting the Last Macro War? (Slightly Wonkish).

Mosler: Just counter productively bogged down in inapplicable fixed exchange rate rhetoric.

Comment: As I was pointing out yesterday, jobless claims data were real time info saying US economy was going into recession in 2008.

Mosler: Even if they knew they just would have cut rates sooner making things worse sooner :(

Mosler: A CB rate hike redefines the (fwd) value of the currency downward = "pure inflation" per se, aka, the monopolist sets the "own rate".

Mosler: Charts showing how much low rates hurting personal interest income.

Mosler: History and theory show wage and output growth increases after rate hikes and end when the federal deficit gets too small

Mosler: If a 0 rate policy and/or QE was at all inflationary we would have seen it in Japan, the US, and the EU long before now.

Comment: The solution? Abolish the Fed and let the market set interest rates &abandon the notion that one metric of inflation has any meaning..

Mosler: Markets set rates with fixed fx policy. With our floating fx policy the govt does.

Comment: Yellen’s inflation dilemma. How far should wages be allowed to run before the Fed hikes rates.

Mosler: Not to mention rate hikes in fact add to aggregate demand via the interest income channels.

Mosler: With a fixed exchange rate policy the nominal interest rate is the 'real rate' (the own rate) for the object of conversion.

Mosler: 0 is the 'natural rate' of interest, inflation, and unemployment. Deviations are necessarily a consequence of government policy.

Mosler: Drop in net interest margins for large banks exacerbated by QE?

Comment: Yellen may be poised to rewrite Fed's rule book on wages, inflation. Wage Rigidity Meter.

Mosler: Seems her heart is in the right place but she still has the rate and qe thing backwards so isn't calling for a fiscal relaxation.

Comment: Thinking about how term of issuance and subsequent passage of time impacts any quantitative monetary analysis.

Mosler: The primary influence would be on the term structure of rates vs current policy, etc.

Comment: Thinking about how term of issuance and subsequent passage of time impacts any quantitative monetary analysis.

Mosler: The primary influence would be on the term structure of rates vs current policy, etc.

Comment: Adjusted monetary base rises over the past two weeks to $4.13 trillion, another record.

Mosler: The falling growth rate (ex QE) is alarming, no?

Comment: Consumer price index rose 0.1 percent in July, the smallest increase since February.

Mosler: And without the massive QE it would have been way minus? Not! QE/0 rates are disinflationary- the economy is a net saver!

Comment: Housing starts rose 15.7 percent in July to an annual rate of 1,093,000, the highest level since November.

Mosler: The year over year permits rate of growth has been steadily falling and is now near 0- not good- starts always follow permits.

Comment: @JAMyerson @wbmosler @ProfSteveKeen has demonstrated private loans tend to drive economy, not interest channel. But i-channel still there.

Mosler: Income, including interest, drives/supports private loans.

Comment: $10 trillion global QE, widespread ZIRP, record govt debt/GDP. Yet inflation is extraordinarily low, showing how chronically weak demand is.

Mosler: And that qe is just a tax removing $100 billion/yr of interest income from the economy.

Mosler: Gov. 0 rate policy euthanizes rentiers AND creates fiscal space for more public spending and/or lower taxes!.

Comment: Deficit monetizing, the last hope. Being sure of consequences maybe worth try/as a last social experiment.

Mosler: Monetizing is applicable to fixed exchange rate regimes, not applicable to today's floating fx regimes.

Comment: What Can Emerging Markets Do to Protect Against Hot Money? Not Much.

Mosler: How about no FX debt, full employment fiscal with a transition job, and a 0 rate and floating FX policy.

Comment: Higher bank margins and lower amount of loans depend on supply, if this is remedied credit will grow. Won't help on demand though.

Mosler: Supply constraints are liquidity & capital. Liquid excess at ECB rate, cap/foreign lenders in excess, points to demand?

Comment: I'd call QE with budget surplus a "tax". Otherwise, there's still net fin asset issuance.

Mosler: QE with today's yield curve cuts interest income to the economy about = to fed profits thereby reducing nfa growth.

Comment: If QE removes income it functions like tax. But should govt pay higher interest to provide more risk-free savings?

Mosler: I prefer a tax cut instead of an interest rate hike.

Comment: Does the ECB play the same role in the EZ re the payment system as the Fed in the US? If so, implications?

Mosler: Yes, currency floats, CB not reserve constrained, CB sets rates.

Comment: The ECB controls monetary policy in the same way that the Fed controls Panama's monetary policy.

Mosler: Agreed, the same way it sets rates/policy for the states and all $ users, ECB for euro users.

Comment: Wrong. The EP represents the EU, not the Eurozone. Non-Euro users are not "foreigners"

Mosler: But the ECB still sets rates for euro users whether represented or not.

Comment: This is my complaint. You cannot separate monetary and fiscal authorities like that. Does not work.

Mosler: The Fed and the ECB both set rates. Congress and the EP have their budgets.

Mosler: Even your real QE functions as a tax removing interest income from the economy.

Comment: Personal consumption expenditures rose 0.2 percent in October after being flat in September.

Mosler: Alarmingly low and what's historically been 'stall speed' and note the low interest income growth component vs prior cycles.

Comment: China's economy shows further weakness.

Mosler: The western educated monetarist kids now in charge think the way to go is a balanced budget and low rates- good luck to them!

Mosler: There is no right time for the Fed to raise rates- just posted.

Comment: But you are right about interest rates. The high interest rates are both futile and damaging.

Mosler: Rate hikes increase gov deficit spending, etc.

Comment: Is It Time for MMT To Become Mainstream to Save Us from the Second Global Financial Crisis of the Millennium?

Mosler: With floating fx, the natural 'risk free' nominal rate is 0.

Comment: I'll venture a guess. FX rate main driver of Brazil inflation with gvt deficits accounting for zig-zags.

Mosler: The unemployment rate tells us it's not aggregate demand!

Mosler: New blog post! a couple of ramifications of the 0 rate policy.

Comment: If money desks understand monetary ops, why don't fin. inst. lobby for more fiscal? Seems banks & biz stand to gain. Any insights?

Mosler: I see 0 as the 'natural rate' and higher rates as a govt. subsidy ;)

Comment: How about student loans as the "missing" credit creator? Or not big enough? Couple hundred billion a year?

Mosler: The growth rate has been falling for several years.

Comment: How long-term interest rates have remained so low so long? This is not the result of QE — a largely irrelevant bogeyman..."

Mosler: Is because high rates cause inflation and vice versa.

Comment: The ECB publishes report, shows holding €19.8 billion of Greek sovereign debt at end 2014.

Mosler: So look at who is paying interest to the ECB to support their operations!.

Comment: Want to see folks' head explode? Just say we could retire the public debt tomorrow with no inflationary impact.

Mosler: Easy to confuse debt and debt burden. Permanent 0 rate policy = 0 debt burden = their 'debt free money'.

Comment: Public debt is the accounting record of non gov net monetary savings. Why would you want to tax away that savings?

Mosler: They confuse debt and debt burden. Permanent 0 rate policy = 0 debt burden = 'debt free money'.

Comment: Monetary Policy for the Next Recession.

Mosler: Monetary policy=Rates and Financial Asset shuffling, Fiscal= taxing/spending, regardless of the agency that does it.

Comment: Dudley on reinvestments today.

Mosler: You'd think, the head of the NY Fed would have a better understanding of monetary operations :(

Comment: @wbmosler, write about it!

Mosler: First, with floating fx, 0% = absence of gov intervention- higher rates require interference via interest on reserves or tsy sec sales.

Mosler: He should also know QE is removing some $100b of interest income from the economy as he is the one who writes the check to tsy.

Comment: Bullard: I think low rates feed bubbles, but I’m listening to reasons why tech is not an exact repeat of the ‘90s.

Mosler: How does he explain the lack of bubbles in Japan over 20 years of 0 rates???

Comment: "By raising rates to dampen upswing in credit cycle CBs may accelerate an output downturn".

Mosler: And I say the higher rates paid by govt. add that much income to the economy and thereby support output ;)

Comment: Those understandably afraid to vote 'no', should understand that a yes vote means you're back in this same spot again within a few years.

Mosler: And they worry that a return to Drachma reopens that shameless corruption channel + inflation, currency depreciation, unemployment, high rates.

Comment: What the hell is going on w/ the IMF lately? They're starting to sound like they're capable of reasonable analysis: The Fed should hold off until mid-2016 before raising rates from zero, the IMF says.

Mosler: And maybe someday, they'll realize that low rates contribute to the weakness via interest income channels ;)

Mosler: EU losing interest in Greece as the euro stabilizes and rates stay low, with discussion turning to humanitarian assistance.

Comment: How did positive money folks stack up to MMT?

Mosler: My original permanent 0% rate policy proposal is functionally pm's proposal.

Comment: The euro, like the gold standard is doomed to fail.

Mosler: Making the deficit limit a policy tool, raising it to 8%, and an ECB debt guarantee ends the economic crisis.

Comment: You don't say it here, but when FOMC raises the target rate, you will need to raise the interest rate on excess reserves. Right?

Mosler: Or sell the portfolio ;), or matched sales. That is, just offer any kind of interest bearing account as support.

Comment: Brazil inflation rate hits 12-year high of almost 10%

Mosler: Maybe their high rates support their high inflation?

Comment: What's amazing is that any business person could give you the following answer. Why do economists get it wrong?

Mosler:

Comment: Yes, but to provide safe assets is not socially very useful for 80% of the people, just monetize it!

Mosler: Govt. debt functions first to support the term structure of risk free rates, not to fund expenditures or provide safe assets.

Comment: That’s to assist the creation of an NIB.

Mosler: With a gov guarantee, a national investment bank can fund itself at BOE policy rates without PQE.

Comment: Is selling U.S.-based property for Yuan "helping" the Chinese?

Mosler: If we weren't over taxed, China's policy would be a benefit ;)

Comment: Central Bankers Rethink Views on Inflation. Need to: is 0% as supply side reforms mean labour takes all risk.

Mosler: They will eventually discover the theory that supports the overwhelming evidence that lowering rates is deflationary ;)

Comment: Fed's Beige Book claims there IS wage pressure (and so perhaps reason to hike)

Mosler: And in any case it's a major stretch to suggest it's a function of today's interest rate policy.

Comment: Quantitative easing has never been repaid. And there’s not a hope it will be.

Mosler: Properly understood, reversing QE would be done to support higher longer term rates. And today's growth is in spite of QE.

Comment: "The Fed has sent roughly $500 billion to the Treasury since 2008."

Mosler: That's interest income that would have been earned by the economy if not for QE. QE has functioned like a tax.

Mosler: The fact that the Fed sets a range for the fed funds rate dispels any suggestion that they understand monetary operations ;)

Mosler: Nothing that a touch of repo can't deal with.

Mosler: So how good can the Fed think the economy is if it thinks near 0% is the appropriate rate setting?

Comment: "As former Fed Chair Ben Bernanke has reminded us...no nation has ever successfully escaped the zero bound in the postwar era"

Mosler: Because in fact 0 rates are a deflationary bias. That is, they have it backwards. Policy is not accommodative they way they believe.

Comment: Fed doesn't have the tools to deal with asset price bubbles, acc to the Fed itself.

Mosler: Worse, employment and price stability aren't a function of interest rates, at least not the way they believe.

Comment: Blog: The paradoxes of central bankers - I wrote yesterday on what I will be calling a safe haven policy for the w...

Mosler: Unemployment is always an unspent income story, only a fiscal adjustment can address. It's not a function of interest rates.

Comment: Bombshell from FRBSF economist Vasco Cúrdia suggests neutral rate is currently -2.1% (i.e. policy way too tight)

Mosler: And, if the Fed lowered the rate to -2.1% the neutral rate would go that much lower as they have the causation backwards :(

Comment: What can negative rates or quantitative easing achieve that forward guidance can't?

Mosler: They can remove interest income much like a tax does ;)

Comment: Warren - that’s an absurd position to take. Does MMT no favours to side with tax abusers.

Mosler: Not! But policy response to said new revenue is to cut other taxes or increase public spending, not deficit reduction!

Comment: China cuts key interest rate to 4.35%

Mosler: So how good can they think their economy is if they are cutting rates, etc? (not that rate cuts actually help)

Comment: Rate cut would not help at all? what is alternative (monetary policy) for China?

Mosler: Permanent 0 rate policy, employed buffer stock policy, and adjust with fiscal as needed

Comment: Profit/wage ratio high as ever. Lets TILT playing field towards companies that pay workers more. Good piece in FT.

Mosler: An universal federally funded transition job for a wage floor and sustained full employment fiscal policy

Comment: U.S. medical care services inflation picking up, according to the BLS.

Mosler: Which has nothing whatsoever to do with interest rate policy ;).

Comment: MUFG's Chris Rupkey is NOT happy with the Fed ignoring regional reserve banks on discount rate.

Mosler: And they voted to raise the rate with no outstanding discount rate loans whatsoever to any of their members!

Comment: Conceptual question: if the natural rate of interest is 0 when the gov runs a deficit, what is it when the gov runs a surplus?

Mosler: That would be the rate the govt. charges for reserves when balances go negative.

Comment: Is there in that case some 'optimal' rate that the govt should charge to maximise output w/o inflation?

Mosler: 0%, as per my writings and proposals.

Comment: ECB could have done more and better. LTRO extension not needed. True open ended QE would have been much more effective.

Mosler: Neither helps with output, sales, employment, pricing, etc. ;) and QE removes interest income from the economy...

Comment: They lower the cost of adjustment, thus buying time. By reducing forced demand declines, they contain decline in potential growth.

Mosler: How are 'forced demand declines' reduced, especially by policy that directly reduces the economy's interest income?

Mosler: The constructive policy response to capex cuts is lower taxes or higher spending.

Mosler: His reason is that rates are low :(

Comment: Also, if open ended and state contingent, the central bank sells an option on the economic outlook, thus boosting asset prices.

Mosler: Only if it does something more than remove interest income ;)

Comment: Agreed on fiscal, but monetary a placebo at best. ;)

Mosler: QE and rates have no discernable channel to desired outcomes apart from psychological 'one time' portfolio shifting.

Mosler: A Fed rate hike is nothing more than the federal government's decision to pay more interest on what's called its public debt.

Comment: Wage pressures for skilled workers evident in most Fed districts

Mosler: And hopefully true, but not a reason to hike rates.

Comment: Warren, would you pls mind laying out ur logic on how higher rates are expansionary, but you think Fed shouldn't have raised them?

Mosler: Rate hikes add interest income but I prefer a tax (like fica) cut or spending increase, and reread what I said about the Fed.

Comment: Article examines whether focus on low real interest rate might be misplaced.

Mosler: Nominal policy rates project that term structure of market prices to the economy.

Mosler: Negative rates are a tax, and only Congress can enact taxes, no?

Comment: Bernie Sanders and the Case for a New Economic Stimulus Package.

Mosler: Good, and then he lists risks as interest rates and trade that cast imaginary doubt on it all. :(

Comment: That low interest rates R deflationary due to Economy being a net receiver of interest income from Govt

Mosler: And the anticipated policy rate is the term structure of risk free rates presented to the economy.

Comment: The anticipated policy rate is the term structure of risk free rates presented to the economy.

Mosler: And thereby further presents the term structure of prices to the economy aka the inflation rate.

Mosler: He's reading my stuff? "Low rates may be causing low inflation, St. Louis Fed President James Bullard theorized in Friday remarks.".

Mosler: Wrote this on rate hikes a while back.

Comment: Required Reserve Ratio, a really irrelevant in most cases. CBs provide on demand at target rate to support pmts system.

Mosler: To support target rate. First instance, reserve requirement is a debit to a reserve acct, created by the loan/dep.

Comment: Helicopter money' is overrated.

Mosler: Exactly! Though Fed rate hikes also hike deficit spending, so a Fed vote to hike rates is a Fed vote to hike Federal spending... ;)

Mosler: Excellent! And also shows how so called 'positive money' = 'normal' federal deficit spending + permanent 0 rate policy.

Comment: "Why Declining Oil Prices Can Be Contractionary".

Mosler: Yes, oil price declines have been a big whopping negative, but it's about the related capex spending collapse, not interest rates.

Comment: I did, not good, but what's the connection?

Mosler: The economy is already decelerating and the real rate cut if anything most likely makes it worse.

Comment: Tesla says it received more than 325k Model 3 reservations. In its first week. Just like that.

Mosler: $1000 refundable deposit is being seen as a free option, so not an indication of actual buying interest ;)

Comment: The question is not why oil prices have fallen, but why they have not fallen further.

Mosler: Negative rates are an incentive to not only pay, but also to prepay taxes.

Comment: Agree with this! My q is why/when we reach this conclusion via income flows, and why/when via balance sheets.

Mosler: I look at both the income flows and balance sheets and rates of change of each as well.

Mosler: Rate hikes per se cause inflation via interest income channels, but I'd prefer tax cuts or spending hikes.

Mosler: Government is a large net payer of interest to the economy, so rate hikes per se have an expansionary fiscal effect.

Comment: "Negative Interest Rates: A Tax in Sheep's Clothing" When @billy_blog & @wbmosler said it no one listened. What now?

Mosler: And once understood negative rates are a tax, how much of a leap is it to see positive rates as a subsidy???

Mosler: Data shows rate cuts and qe work to reduce unemployment by reducing the size of the labor force? ;)

Comment: 10-year real rate is back below zero. In a rational world we'd be building infrastructure.

Mosler: You build infrastructure when that infrastructure serves real public purpose, regardless of interest rates.

Comment: Krugman: "They say 'money talks'; cheap money is speaking v. clearly now & it’s telling us to invest in our future."

Mosler: No, if anything, low rates are the Fed telling us they want more deficit spending, private or public.

Comment: There are many different simple monetary policy rules & no agreement on a single “best” rule.

Mosler: Why not a permanent 0 rate policy?

Comment: 90% of income growth has gone to the top 1%." We see a problem.

Mosler: Replacing treasury securities with interest on reserves is a good start- eliminates all the income generated by bond trading.

Comment: Government gets tough on student loan servicers, but will it be effective?

Mosler: With no prepayment penalties, why would this govt. not refinance all its student loans at Treasury rates plus servicing fees?

Comment: Yes. I (normally) think of currency as a (de facto/de jure) government monopoly.

Mosler: And monops 'set' 2 prices: Own rate (interest rate for currency) and terms exchange for other goods + services.

Comment: "A nominal fed funds rate of around 3 percent is probably the best estimate of a normal interest rate"—John Williams.

Mosler: Maybe 3% for a fixed exchange rate regime. With floating exchange rate policy, the 'natural' policy rate' is always exactly 0%.

Mosler: As we discussed 7 years ago? Rate and qe policy doesn't increase demand. The EU needs to relax the deficit limit to 8% asap.

Mosler: CBs wrongly assume forward prices, a function of policy rates, are expected prices. Instead, they are current prices for future delivery.

Mosler: That is, the current term structure of prices presented to the economy, including the rate of change, is a function of CB policy rates.

Mosler: The rate of change of the term structure of prices in the economy, a function of CB rate policy, is the textbook definition of inflation.

Mosler: That is, the rate of inflation (as defined) presented to the economy at any given point in time is a direct function of CB policy rates.

Mosler: Moot with a permanent 0 rate policy and no transactions taxes. And cuts size of gov. ;).

Mosler: Or: Tsy sales function to support the term rate structure, and CB purchases function to remove that support.

Mosler: A positive Fed policy rate is a basic income policy for those who already have money ;)

Comment: Profiting from covered interest parity deviations ("cannot prevail in the marketplace for long"): 1977 textbook example.

Mosler: That's what the 'term structure of prices' is about. It's a function of the Fed's policy rate and it's also the rate of inflation.

Comment: Profiting from covered interest parity deviations ("cannot prevail in the marketplace for long"): 1977 textbook example.

Mosler: That's what the 'term structure of prices' is about. It's a function of the Fed's policy rate and it's also the rate of inflation.

Comment: So-called Fraud #5 "trade deficit is an unsustainable imbalance" Very US-centric.

Mosler: Exchange Rate Policy and Full Employment.

Comment: Profiting from covered interest parity deviations ("cannot prevail in the marketplace for long"): 1977 textbook example.

Mosler: Resolve this: Fed says we're at full employment so hike rates, Trump says cut taxes and build infrastructure to put millions back to work.

Mosler: Cross currency basis is just the difference between actual market interest rates and libor settings.

Comment: There are many different simple monetary policy rules and no agreement on a single “best” rule.

Mosler: How about setting the policy rate at 0% permanently and using other macro tools, such as fiscal adjustments... ;)

Comment: There are many different simple monetary policy rules and no agreement on a single “best” rule.

Mosler: How about setting the policy rate at 0% permanently and using other macro tools, such as fiscal adjustments... ;)

Mosler: I proposed fixed rate funding at tsy rates with tsy eating the convexity best serves public purpose of promoting ownership.

Comment: Total consumer credit outstanding rose in October to $3.73 trillion.

Mosler: It was accelerating, but now decelerating for 2 years. Credit deceleration is a reason to hike rates? ;)

Comment: The Trump Administration will issue 50-year bonds, maybe even 100 year bonds.

Mosler: Better to issue no bonds, sustain a permanent 0 rate policy, and use fiscal adjustments for the economy as needed.

Comment: See the Bank for International Settlements’ latest data on credit to the nonfinancial sector in 40 economies.

Mosler: Notice how the slowing growth rate coincides with a recession... :(

Comment: The latest St. Louis Fed research explains how several factors have combined to keep interest rates low.

Mosler: There is just one factor- the rate the FOMC votes for.

Comment: Commercial and industrial loans at all banks drop by $18.7 billion in a week to $2.077 trillion.

Mosler: So why vote to hike rates if credit is already decelerating and at an increasing rate year over year?

Comment: But, as I see it, our National Debt works as a non-labored source of income that should be reduced or taxed at a more appropriate level.

Mosler: A permanent 0% policy rate policy eliminates govt payment of interest on $ spent but not yet taxed.

Comment: Well a little bit long sorry. Thank you Fadhel.

Mosler: The currency is just a tax credit. And I've been proposing a permanent 0 rate policy for a very long time.

Comment: Why Abba Lerner believed that raising rates could help combat deflationary pressures.

Mosler: HT Stuart Medina MMT Spain. Supports my position: the term structure of prices is a function of the policy rate= academic def of inflation.

Comment: Do these new Economists accept a need forUKSavers legal Min. interest rate = 5/4 x (RPI +1) ?All other rates founded on this ?

Mosler: I support a permanent 0 rate policy.

Comment: Interest rate policy can be debated, but I don't think any particular rate policy is fundamental to MMT.

Mosler: For me a permanent 0 rate policy furthers a progressive agenda.

Comment: Once @federalreserve buys the bonds, it's as if @USTreasury never issued them in the first place.

Mosler: I said same to Bernanke years ago who responded 'No, when the Fed buys bonds it adds reserves.' I just let it go- it was too hard for him.

Mosler: He also said that when investment picked up and used up the available funds, it would drive up rates. :(

Comment: I saw VID. Some questions. Biggest: Why do Currency (undefined) Issuers go to the trouble and expense of paying interest to bondholders?

Mosler: I've been proposing a permanent 0 rate policy for a very long time.

Comment: Thoughts?: Biggest risk to the economy: 'Fed raising rates too quickly,' according to this analyst.

Mosler: Not! If anything rate hikes help some via interest income channels.

Comment: I saw VID. Some questions. Biggest: Why do Currency (undefined) Issuers go to the trouble and expense of paying interest to bondholders?

Mosler: I've been proposing a permanent 0 rate policy for a very long time.

Comment: How are private Fed member banks "agents of Congress"?

Mosler: Fully regulated, supervised, chartered, disciplined, with regard to assets, liabilities, management, capital, liquidity, interest rate risk.

Mosler: The natural rate of unemployment (as defined) is 0%. It is after creating unemployment, that govt. acts to undo the problem it created.

Comment: I mean seriously. Ditching this assumption is a no-brainer.

Mosler: Not to mention the paper you did about how rate hikes promote inflation. ;)

Mosler: The Trump tax plan cuts state/local tax deductions which then cuts spending/corp revenue/profits, to reduce the corp income tax rate???

Comment: Political move. Blue states have > state/local taxes, GOP figures if somebody's taxes must go up, should be people who don't vote for them.

Mosler: Just saying what corporation would opt for lower sales/income/profits to 'pay for' a lower income tax rate? Makes no sense?

Comment: Wld be nice if left-sovereignist MMTers clarified if they plan to convert deposits or not; how prevent bank runs while keeping New Lira stable.

Mosler: No deposit conversion, unlimited CB liquidity, no interbank mkt, 0 rate policy, regulators tell banks what's legal/not what's illegal.

Comment: "There are, therefore, theoretically just as many rates of interest expressed in terms of goods as there are kinds of goods diverging from one another in value" (Fisher, 1930)Can a unique "real" rate of interest then be defined?

Mosler: How about the 'own rate' of the actual or implied buffer stock? ;)

Mosler: 0% is the natural rate of unemployment for any society. Only after taxation is introduced is there any of what we define as unemployment.

Comment: I'm a big fan, thank you for your work. Is the natural rate of interest in the US still zero with the Fed paying IOER? Would be grateful for your view.

Mosler: The natural rate, as defined is 0. With IOR, the fed is supporting a rate higher than that natural rate.

Comment: But if the central bank just sets rates in the model, isn't that the definition of public monopoly? I will admit, this is a type III error on the part of academic economists. Right but for the wrong reason.

Mosler: And yes, mainstream recognizes the CB as monopoly supplier of reserves and therefore price setter of the interest rate.

Mosler: Monopolists set 2 rates, the own rate and the exchange rate with other goods and services.

Mosler: For a currency, the 'own rate' is called the interest rate. All in my (very short) book thanks!

Mosler: But reserves are also required to pay taxes, making the price level necessarily a function of prices paid by the state when it spends.

Comment: Notice he says more than three with the market priced for 2 1/2: Fed’s Rosengren: More than three rate increases likely necessary this year.

Mosler: Unfortunately they don't understand how rate hikes do the reverse of what they expect, through the interest income channels.

Comment: The Federal Reserve's interest rate is literally nothing but an arbitrary tax on borrowers (risk takers), funneled as a free money subsidy to the savings accounts of money hoarders (risk avoiders).

Mosler: Rate hikes shift income from borrowers to savers, and also increase gov payments of interest to the economy.

Comment: Is an entirely different question and not for our concern here. Nor does it affect the underlying thought experiment. Your argument is that the real world doesn't work this way. I agree! That's why I posed a hypothetical!

Mosler: With a permanent 0 rate policy. It makes no sense for Tsy to sell anything longer than, say, 3 month bills, so where long end might trade is moot.

Comment: Obviously, there some tightening in the labour market. It’s more the “record low” part. Don’t remember details of his argument.

Mosler: Participation rates and wage growth still historically very low, as is labor share of GDP.

Comment: So what would you call what economists call tax financed spending, bond financed spending and money financed spending?

Mosler: I call it spending which creates reserves followed by selling Treasury securities that function as interest rate support and not funding.

Comment: *Politically* it hurts the government. Voters/people with mortgages loathe it. (Keeping rates low is a major consideration for the government here in Australia.)

Mosler: In any case why not permanently set the policy rate at 0?

Comment: The cuts could have come at a point when their impact on overall output would have been offset by monetary policy. That is the key point that you have not grasped.

Mosler: The mainstream tends to have monetary policy "backwards" due to interest income channels.

Mosler: Trump et al. have the trade thing backwards and the Fed et al. have the rate thing backwards. History will not be kind to them. ;)

Comment: Key chart from FOMC minutes: ZERO Fed officials now see risks to their inflation forecasts as tilted to the downside (for the first time since they started publishing data in 2011), while three now see risks as tilted to the upside.

Mosler: Interesting how that always happens some time after they raise rates...

Mosler: No discussion about how negative rates and QE from the ECB have slowed things down via the interest income channels (fiscal tightening)? ;)

Comment: The BoE sets the s-t interest rate and the money supply is endogenous. Central banks have leant and relearned that attempts to control the money suppy are futile. Exogenous money exists in text books only!

Mosler: Exogenous money' exists in theory in fixed exchange rate regimes only... ;)

Mosler: But what about those countries who have or who might have 6% or 10% trade deficit? Will 5% be suffice for them? Also they need to have a CB under control of Treasury and its own currency.

Mosler: 5% will go a long way, and under current ECB 'do what it takes to prevent default' member nation interest rate costs are reasonably anchored to the ECB policy rate.

Comment: That BI (for people with $) is getting much bigger - thanks, I guess, to all the Fed Rate hikes? U would think Fed remittance to Trsy would be going up, in tandem with rate hikes, no?

Mosler: No, the fed has to pay more interest on reserve account balances.

Comment: “Slow the economy” = impoverish more citizens by increasing unemployment. This practice should be abolished. There IS an alternative. Dudley Foresees Need for Fed Rate Hikes to Slow the U.S. Economy.

Mosler: Except he has the rate thing backwards. ;)

Mosler: Employment growth rate vs the same date 10 years prior. We've decelerated more and recovered far less in this latest cycle, as aggregate demand remains depressed by the damage done by the surplus years of the late 1990's.

Comment: Yet you agree that Treasury could mint a high value platinum coin, thus avoiding “borrowing” from the CB. And what did Eccles say about how the CB actually funds Treasury?: "If Congress appropriates more money than Congress levies taxes to pay, then, there is naturally a deficit, and the Treasury is obligated to borrow. The fact that they cannot go directly to the Federal Reserve bank to borrow does not mean that they cannot go indirectly to the Federal Reserve bank, for the very reason that there is no limit to the amount that the Federal Reserve System can buy in the market. That is the way, the war was financed... the Reserve System creates the condition in the money market to enable the borrowing to be done, so that, in effect, the Reserve System indirectly finances the Treasury through the money market...So it is an illusion to think that to eliminate or to restrict the direct borrowing privilege reduces the amount of deficit financing. Or that the market controls the interest rate. Neither is true."Marriner Eccles, Chair of the Federal Reserve, 1947.

Mosler: Yes, the tsy could mint the coin and sell it to the Fed. But either the Fed or Tsy has to pay interest on net spending, if it wants a policy rate higher than 0%, so for all practical purposes nothing has changed?

Comment: Ignoring the billions of interest expense paid ANNUALLY to the wealthiest families and most powerful corporations (the groups that own much of the US debt) seems disingenuous and untruthful. There is another way: Tax wealthy people AND THEN spend the money on needed Gov services.

Mosler: With my permanent 0% policy rate proposal, risk adjusted returns on new investments go to 0.

Comment: What is the point of doing this??: When the govt “borrows,” it turns green paper ($ in fed accounts it already spent) into yellow paper ($ in different fed accounts aka ‘treasury bonds’). At maturity, the yellow paper is transformed back into green paper by shifting those $ back to the fed accounts they came from.

Mosler: It was applicable to our prior gold standard fixed exchange rate policy, but not to our current floating exchange rate policy.

Comment: How is it not a logical fallacy to think the Fed needs to keep a positive slope in the yield curve to avoid a recession when that would basically imply they will always be raising interest rates?

Mosler: Higher rates support demand and inflation through interest income channels and forward pricing channels. That is, a positive policy rate provides basic income for those with money.

Comment: Government bonds are where the problem lies as this is where the interest rate is suppressed.

Mosler: Gov bonds work to support rates. Have you read my book?

Mosler: Proving yet again and beyond a shadow of a doubt that QE and low rates don't "stimulate" and are not inflationary... ;)

Comment: At the end, given govt expenditure, it is not up to the govt determining the level of its deficit, but up to the private sector and the rest of the World (ROW). If they want more T-Bills & Bonds the deficit will increase due to lower real investment & net exports: (G-T)=(S-I)-(X-M).

Mosler: Your narrative is applicable to fixed exchange rate policy.

Comment: To stabilise the economy.

Mosler: When economies are large enough net savers seems the first order effect of changes in income from Gov interest payments dwarf differences in propensities to consume from interest income?

Comment: Will orthodox economists now admit they spoke too soon of Eurozone recovery? The mystery of Eurozone slowdown.

Mosler: No discussion about how negative rates and QE from the ECB have slowed things down via the interest income channels (fiscal tightening)? ;)

Comment: 12-Month Ahead Inflation Expectation is 13%, 24-Month Ahead Inflation Expectation is 10.7% in July 2018.

Mosler: Higher policy rates support inflation through two channels- interest income and forward pricing.

Comment: "I don't think anyone has a good model of inflation that shows how policy levers link to a price index." Exactly! You will hear me say this in my @planetmoney interview going up (probably) tonight.

Mosler: The 'policy rate' *is* the rate of inflation as academically defined. ;)

Comment: “We’ve not had any inflation” as a result of Quantitative Easing? Maybe not in products, services or wages, but QE has fuelled massive asset inflation (because that’s where nearly all of the new money was channeled - not very Keynesian).

Mosler: Asset prices adjust to the policy rate as a matter of indifference levels. It’s not about changes in “new money”.

Comment: We have a system which does not have enough money to repay credit issued with interest. The system can only operate with defaults and asset transfers. Is this the best we can do?

Mosler: If all income (including interest income) is spent there is no problem. Unemployment is an unspent income story.

Mosler: Except they got the interest rate thing backwards

Mosler: Professor Stephanie Kelton found a mainstream ivy league author that agrees with my take on policy rates: ABSTRACT: Hyperinflation is usually interpreted as a result of the monetary financing of serious fiscal imbalances. Here, a fiscalist alternative is explored, in which inflation explodes because of the fiscal effects of monetary policy. Higher interest rates cause the outside financial wealth of private agents to grow faster in nominal terms, which in fiscalist models calls for higher inflation. If the monetary authority responds to higher inflation with sufficiently higher nominal interest rates, a vicious circle is formed. The model is particularly advantageous for hyperinflations in which most of the fiscal action concentrates in the interest bill on public debt and debt rollover, rather than seigniorage or primary budget deficits. Brazil in the late 1970s and early 1980s serves as a motivating case. (JEL E31, E5)

Mosler: Rate reductions can be contractionary. Depends on inst. structure, debt to gdp, issuance policy, propensities, etc. 0 has always been my preferred policy rate.

Mosler: That is, I favor a tax cut or expanded public services over a rate hike. ;)

Comment: Do you have a take through this lens that explains US disinflation after Volcker raised rates?

Mosler: Those rates supported and prolonged the inflation.

Comment: Italy was paying 10% of GDP in interest on public debt, with real interest rates of 4% (nominal rates of 9-10%) and was having inflation above 5%.

Mosler: Yes, I met with CB officials back then suggesting that as rates came down, the annual deficit would fall, inflation would come down, the currency stabilize, the economy decelerate and unemployment go up and they would converge with the rest of the EU.

Comment: Correct. And AFAIK, he never claimed raising rates *is* expansionary. Only that there’s an income-effect (and perhaps other effects) that tends to get overlooked, making it possible that hiking is pro-cyclical.

Mosler: Link to your paper on how debt to gdp ratios line up with policy rate effects?

Mosler: You can sustain full employment and output, and a permanent 0 rate policy, but real terms of (external) trade can be problematic in any case.

Mosler: I'm thinking of Greece going to Drachma, sustaining domestic full employment output levels, and then facing currency depreciation. GDP would be maybe 25% higher and growing. Or Italy, for another example.

Comment: You don't think Greece and Italy are more constrained than Turkey?

Mosler: Depends on how you define constrained but I do agree Turkey's fx debt reduces their real terms of trade potential vs. that of the UK. But both can quickly get to full employment and a 0 rate policy.

Mosler: Are they using fiscal to sustain domestic output at full employment levels? Their high policy rate is basic income for those who already have "money" so created distributional issues. Are govt payments indexed to "inflation"? How's banking regulation and supervision?

Mosler: I've shown how their high policy rate is supporting their inflation rate and depreciating the currency continuously over time. They need to drop it to 0 imho.

Mosler: None of that is coming from high demand.

Mosler: Which comes largely from bank lending? Especially as loans accrue interest at some 30% compounded, as per the policy rate.

Mosler: I do look at it unfavorably. Just saying it's no worse if you have your own currency. And with Turkey it doesn't read like the problem is the state increasing demand.

Mosler: Looks more like the high policy rate is causing lenders to sell their interest payments for fx and drive down the lira. The inflation looks at lot more like cost push than demand pull?

Mosler: And high policy rates means equally high forward prices for nonperishable goods that continually increase with forward delivery dates.

Comment: But what did they actually do that resulted in that measure of lira expanding?

Mosler: Debt to GDP is only 28% so it's not about excess fiscal expansion?

Mosler: And over time the rate of currency depreciation isn't that much different from the policy rate of interest, so it doesn't look 'out of control' to me?

Mosler: The reported GDP growth rate is adjusted for inflation.

Mosler: So in sum Turkey's fx depreciation is not coming from attempts to sustain full employment but from issues in the banking system combined with the 25% state policy rate.

Mosler: And Scotland's 90% sterling debt under current institutional arrangements is a drag on its economy and will continue to be a drag with it's own currency, though it would both be a lesser drag and diminish over time.

Mosler: And Scotland would be able to keep the population fully employed and sustain a 0 policy rate all of which would promote low inflation, a stable currency, and real gdp growth that would cause the fx debt to gdp to diminish over time all with a higher standard of living.

Mosler: The state sets the policy rate at 0 and offers a state funded transition job to all takers to both facilitate the transition from unemployment to private sector employment and enhance price stability, and adjusts fiscal balance to minimize the # of transition workers.

Comment: If reserves made a difference to future loans perhaps but the empirical evidence shows fractional reserve banking is a myth. It’s an accounting irregularity nothing more.

Mosler: It's applicable with fixed exchange rate regimes.

Comment: I think it's a VERY muddled point about the long-run near zero interest rate environment and the demand-side slack of the 8 years of the Great Recession recovery.

Mosler: It's about the rate hikes and unwinding of QE. Neither points have any validity. Rate hikes and Fed portfolio reductions actually support growth as gov interest payments to the economy increase.

Comment: Wouldnt it risk seeing capital flight as investors prefer to invest in other countries with a higher interest rate?

Mosler: Higher rates of employment and consumer demand tend to attract investment. And 'capital flight' as defined is only applicable to fixed exchange rate regimes.

Comment: This the part I don’t get. Isn’t there an argument that the cash rate should be set at zero?

Mosler: Yes, and then make fiscal adjustments as needed. I am against using rate hikes for growth.

Mosler: For example, to get the 15m employees for the GreenNewDeal: Medicare4all sheds maybe 5 million workers; a 0 rate policy, narrow banking, and keeping insured pension funds out of stocks millions more; and maybe 5 million can come from people currently unemployed.

Comment: In a decade, when interest is 5 trillion, gov will pay it by crediting bank accounts, creating money from thin air, just like it has for generations. Will there be an inflation problem? Depends on the economy. Mobilize your campus to stop believing the US gov can run out of US$.

Mosler: And in any case they are obviously not assuming a permanent 0 rate policy as I've proposed... ;)

Comment: Economists are using two flawed theories—Quantity Theory of Money and the Loanable Funds Theory of the Interest Rate—to argue that we can’t solve the climate crisis.

Mosler: Yes, they don't apply to floating exchange rate regimes.

Comment: Huh! This 2013 MMT/Austrian School debate of macroeconomics between @wbmosler (MMT) and @BobMurphyEcon (AS) is moderated by @BreitbartNews’ John @carney! (He was with CNBC back then.) This is my listening material for today’s long drive...

Mosler: The Austrian school was shown to be applicable to fixed exchange rate regimes and not to floating exchange rate regimes.

Comment: I’m confused. Erdogan certainly sounded like an MMTer for a while, until the currency collapsed.

Mosler: He was right on the interest rate thing.

Comment: Your periodic reminder that macroeconomic policymakers will do all they can to make sure that millions of people who want work won't find it: In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate from 2-1/4 to 2-1/2 percent.

Mosler: Fortunately, unfortunately, they have the rate thing backwards....

Mosler: Responses to 'how are you going to pay for it?': 1. The Tsy instructs the Fed to credit the appropriate account. 2. The $ to buy bonds or pay taxes comes only from the gov and its agents, so gov spends first, and then taxes are paid or bonds paid for.

Mosler: So gov borrowing supports rates, it doesn't fund expenditures. 4. Likewise interest is paid by instructing the Fed to credit the appropriate accounts, and likewise those $ are paid first, and then taxes are paid or bonds are paid for.

Comment: Rolling over the debt+interest forever may or may not be sustainable. That's where the rg condition kicks in.

Mosler: Interest is paid via the Fed crediting an account on its own books.

Comment: The role of public debt is to promote interest-rate stability and to provide enough of a safe interest earning asset to the non-gov sector to promote financial stability. If at least one of the goals is not achieved then public debt is too low.

Mosler: Both of those goals are fostered by a permanent 0 rate policy. ;)

Mosler: Any positive policy interest rate is basic income for those with money and thereby constitutes regressive public policy.

Comment: Given that the sole purpose of banks is to make profit for themselves and that service to its users is barely secondary and almost provided with contempt. I would say greedy and selfish was a more accurate description.

Mosler: I call it shameless self interest, so it’s about regulation and supervision serving public purpose by specifying what's permissible.

Comment: Personally, biggest ones for me would be the idea that fully abolishing CB independence won't have seriously negative effects (when we have great reasons to worry about that), or that perma ZIRP won't have negative effects.

Mosler: Understood. First, I argue that the base case for a floating fx currency is ZIRP, and operationally it takes continuous state intervention to support rates at higher levels- treasury securities, interest on reserves, etc.

Comment: I'm assuming no constraints on monetary creation, except constraints self-imposed by the central bank in order to hit its target (and those constraints are both upside and downside, and are tightly binding, because it won't hit its target unless it creates exactly right amount).

Mosler: Yes, demand driven with floating fx, so doesn't drive interest rates. Renders ISLM analysis inapplicable.

Comment: Temp check - who wants #M4A & the #GND even if we fail to force billionaires & their armies of attorneys to surrender more $ to the federal government? I want to do both things badly, but I'm down to start building a new world with or without the "contributions" of the wealthy.

Mosler: And see my proposals to eliminate said incomes at source: 0 rate policy, insured pensions can't buy equity, narrow banking, attach public purpose strings to limited liability status, etc.

Comment: My latest piece is up.

Mosler: With floating exchange rate policy, interest rates can be set anywhere the state wants.

Comment: So, the question we need to ask is whether stabilisation through IR policy would have been so effective had regulation been robust enough to prevent over-leveraging. Perhaps the over-leveraging was intrinsic to the apparent success of IR policy.

Mosler: Yes, thought accelerating leverage trends to follow rate hikes, to my point on the interest income channels.

Comment: For JR, the inverse relationship between I and r isn’t in Keynes. Is Warren navigating these waters too? I guess JR’s argument is that in Keynes, r is determined by the ‘monetary system’/liquidity preference. It is about how people hold their hold their financial assets.....

Mosler: No, I'm starting with the interest income channels. And the higher the debt/gdp, the more the income from state interest payments overwhelms differing private propensities to spend interest income.

Comment: Okay, why?

Mosler: You have to be reserve constrained for interest rates to be a function of those variables.

Comment: Not catching the connxn bt MMT + M4A. My understanding of M4A is that the point is to reduce health care costs by reducing overhead. Thus, the policy is not related to MMT in a meaningful way.

Mosler: MMT recognizes that M4A is not a risk to US solvency, doesn't financially burden our children, etc. and per se doesn't drive up interest rates etc.

Comment: Having a hard time understanding MMT interest rate predictions. MMT claims high rates make inflation worse. High rates attract $. But if banks can’t lend bc no one can afford the interest, credit/money shrinks, which reduces inflation.

Mosler: The gov is a very large net payer of interest on what's called the public debt, and so rate hikes increase the economy's income by that much to support spending and support the ability of the private sector to borrow.

Mosler: CB's believe rate hikes fight inflation, but, say, with high public debt, rate hikes= higher interest pymts= inflation, so using fiscal to fund a JG=no option to hike rates to fight inflation. I say THEREFORE they have it backwards and lowering rates fights inflation=no problem with JG.

Comment: To clarify, you’re saying “using their logic, the reverse of the equation would have to be true,” yes?

Mosler: Using their logic about rates and deficits, they are wrong/backwards about rate hikes fighting inflation.

Comment: The impact of a JG in increasing efficiency/productivity and therefore push down interest rates?

Mosler: Just means funding a JG doesn't take away the ability to fight inflation with higher rates as critics fear, because in any case higher rates cause inflation, rather than fight it.

Mosler: First explain why this hasn't happen in Japan after decades of 0 rates? The euro zone with negative rates? The US when we had 0 and now very low rates? We had more housing starts when rates were 15% than today and a lot more people today. Other factors count a lot more seems?

Comment: These guys really believe that the Fed raising interest rates definitely slows economic activity and vice versa. They have not a doubt. I don't know whether they have read the MMT stuff to the contrary or not, probably not. But this is their sincere, unquestioned view.

Mosler: Yet they say-and make my point- that with high public debt, rate hikes are inflationary via interest payments. See the contradiction?

Comment: Well then. MMT thinks interest rate hikes might be expansionary during a boom.

Mosler: And Professor Krugman agrees when he (contradicting himself) uses the same argument to explain why high deficits and debt remove the option to use monetary policy (rate hikes) to fight inflation with his 'interest rate higher than growth rate= unsustainability' story.

Mosler: The increase in interest income paid by gov to the economy is factual and not in dispute.

Comment: I would prefer to say the effects of an interest rate change are many and contradictory. The interest paid by gov pushes on the gas, the rate charged borrowers pushes on the brake. The increased cost of production can push up prices, while change in demand could affect bargaining.

Mosler: Gov is a net payer of interest to the economy. The rest is borrowers and savers that net to 0.

Mosler: More functionally called 'lenders' here rather than 'savers'.

Mosler: For every (non gov) borrower paying interest there is a lender receiving interest and it all nets to 0. That leaves govt as a net payer of interest to the economy. What's left to analyze are the differing propensities to spend regarding interest income and interest expense.

Comment: TBH I struggle with this point. I understand the maths, but an increase in interest rates should depress the enthusiasm of the doers in the economy and reward the savers, who are the least likely to go out and invest in a start up. Can you expand on that please?

Mosler: Those agents called savers that earn interest income directly and indirectly, with some living off of it, in fact spend quite a lot of that income.

Comment: This is playing with words. Interest payments are profits not income. The vast majority are saved not spent. Ever hear of an institution, run out and spend, "interst income"? How about higher service costs to service debt by the 99%? Not a drain in consumption? Its backwards.

Mosler: Fed staffers tell me propensities to spend between borrowers and lenders from interest is about the same. And any difference would have to be extreme to not be dwarfed by gov interest payments on $22+ trillion. (And Krugman says same when arguing against deficits).

Comment: I don’t agree with permanent ZIRP. MMTers believe this bc they contend that treasury rates are net neutral and don’t influence demand. I haven’t seen evidence of this either academically or in the real world. Maybe I haven’t looked hard enough.

Mosler: No, private sector credit is nominally "net neutral" regarding non-gov interest paid and earned. But the treasury and fed - the Gov sector- are net payers of interest to the economy. And higher rates = higher interest payments to the economy.

Comment: So what are Central banks doing playing with short term rates and why does hiking rates correlate so strongly with lower demand and recession?

Mosler: Central banks have it backwards, and other things correlate a lot better than rates which can be working pro cyclically. Read the CB literature on how little evidence there is of causation running from higher rates to higher output, employment, and inflation.

Comment: An interesting reply from a central bank that surely ought to understand monetary operations well enough to avoid this kind of embarrassing commentary.

Mosler: I haven't noticed negative rates and massive ECB buying of member nation debt being inflationary? ;)

Comment: There are 18 countries with negative bond yields ... in the 10th year of a global economic expansion.

Mosler: As previously discussed, with gov a net payer of interest to the economy, negative rates function as a tax, removing those funds from the economy, positive rates do the reverse. CB's all confuse the brake pedal and the accelerator pedal.

Comment: "Chairman Jerome Powell is moving the central bank away from models that have failed it and led to December’s policy error.”

Mosler: They still have the interest rate thing backwards... ;)

Comment: Negative bond yields >10trn. Q: Is global growth that gloomy? Will it get worse? Wut if it isn't? (The Fed turned ZIRP into PIRP - look at US yields - all above zero but that caused some violence in risk assets). What will the NIRP into PIRP exit look like?

Mosler: Add previously discussed, negative rates are an asset tax...

Mosler: So look who's got the interest rate thing right: Erdogan Revives Unorthodox Theory on Interest Rates, Prices.

Comment: John C. Williams, President of NY @federalreserve speaking of #MMT in #PuertoRico Any thoughts?

Mosler: Wrong answer from a Fed President. Would have said MMT correctly identifies the selling of securities by Treasury as a reserve drain that functions to support rates rather than a funding operation, if he understood monetary operations.

Comment: This brings further trouble to the idea of the natural rate of interest, as the direction that interest rates work in depends on very specific conditions.

Mosler: With gov a very large net payer of interest, neg rates function as a wealth tax....

Comment: Random white person to me a sociologist of race: If racism didn't exist, you wouldn't have job. Me: Naw, if racism didn't exist, ya'll mediocre white people wouldn't have a job.

Mosler: The natural rate of unemployment is 0. It's created by proactive gov policy and can immediately be eliminated by same.

Mosler: Add oil prices to the chart. A drop that large would have brought inflation down a lot more if it wasn't for lingering high rates/govt. interest payments (basic income for people with money) supporting spot and forward prices.

Comment: Would it be fair to say money is not a store of value but a store of productive capacity? Money traditionally described as unit of account, means of payment & store of value.

Mosler: It's a tax credit... ;)

Comment: I'm going to take that as a yes considering what you do to obtain the tax credit is done at the margins and how far you go to obtain it contributes to productivity. Please correct me if I have erred in my logic (or use of phrase 'at the margins')

Mosler: Exchange rates and value isn't specified or implied.

Comment: I’m trying to write up a short primer on the Austrian Business Cycle Theory and recessions. I find myself writing “This is nonsense! Where are the formal models?” I’m so embarrassed....

Mosler: It's applicable to fixed exchange rates.

Comment: "Kalecki’s Marxian analysis survives in Modern Monetary Theory, a once-fringe flavor of economics for which liberal Democratic politicians such as Senator Bernie Sanders of Vermont and Representative @AOC of New York have developed a taste".

Mosler: It's that the Fed has the interest rate thing backwards, and as rates go lower a larger fiscal deficit is needed to sustain demand. Fortunately lower taxes or more public services are 'good things.' Unfortunately Congress doesn't get it... ;)

Comment: Negative interest rates -- a Kaleckian perspective.

Mosler: It's that the Fed has the interest rate thing backwards, and as rates go lower a larger fiscal deficit is needed to sustain demand. Fortunately lower taxes or more public services are 'good things.' Unfortunately Congress doesn't get it... ;)

Comment: If you were trying to create a way to foment social unrest, amplify populism on the far right and left, you'd be hard pressed to beat this. Good work. Have any of these people ever had a job outside govt/academia? Any friends outside these echo chambers?

Mosler: Negative rates at the macro level are just a tax on the economy.

Comment: => I'd be very curious to hear whether the framework of this ``mainstream'' paper is consistent with what leading MMT advocates consider their theory to be based on & imply.

Mosler: QE is only a placebo, nor do/can rates function as presumed.

Comment: Which part of the model equations is flawed in your view?

Mosler: The assumption that inflation and aggregate demand are functions of rates, or are a function of securities sales to the non govt sector.

Comment: Absolutely. Cross posted: BoE's attempts to deny QE's negative implications for inequality is despicable IMO. Charlie Bean was open about the intended transmission mechanism. Carney appears to have consistently tried to deny it. It was *always* about making the rich richer & hoping for a trickle-down.

Mosler: The consequent term structure of rates may have had some effect, but not QE per se. Not that they knew that, of course...

Comment: How do we characterise the sum that remains owing on the loan, the loan remaining necessarily unserviceable because real contractions in the economy mean that there exists no longer the wealth to service the principle nor interest.

Mosler: You are alluding to what's called an 'unspent income' problem, which includes unspent interest income. It can only be resolved by some agent spending more than his income, called deficit spending, which can be public or private.

Comment: Stanford conference on Friday featuring almost half of the FOMC was basically a dress rehearsal for the upcoming conference in June at the center of Fed's year-long inflation strategy rethink. @RichMiller28 was there and it's not getting good early reviews.

Mosler: They need to know two things- 1. they got the interest rate thing backwards, and 2. the price level is necessarily a function of prices paid by gov (and not inflation expectations).

Comment: Let's try this: Borrower borrows 200k @ 6%, in a 30 year amortized loan. The bank lends $200k & expects $431,700 in return over 30 years. Where does the additional 231k come from, Professor Mosler?

Mosler: Simplel!! Whatever agents that earn the interest spends it. It's always assumed as a base case that all income is spent. That's why unemployment and recession are always unspent income stories. Can't believe you didn't know that???

Comment: First: Mosler’s proposition Second: Coppolla’s counter-argument Third: Mosler’s reply would have been a standard to follow.

Mosler: The understanding that interest rate policy doesn't work as advertised obviates the independent Central Bank discussions.

Comment: Usury is much more often any interest. It's a Christian invention that there is a "just interest rate" that is in contrast to "exploitative" charging of interest. This distinction was also built atop the racialization of Jews as we were defined as the usurer. It’s anti-Semitic.

Mosler: And I proposed my permanent 0 rate policy long before I knew this... ;)

Mosler: I propose both, which for the US can most readily be done, functionally, with a permanent 0% policy rate (no interest on reserves) and tsy sales of only 3 month t bills to all be in compliance with current law.

Comment: "It dawned on me that the government doesn't need to borrow money to be able to spend" @wbmosler recounts his eureka moment on Modern Monetary Theory in Italy in the 1990s.

Mosler: For me, it was about any fed or tsy sales of tsy secs functioning to support rates, and not to fund expenditures, etc.

Comment: That's how I felt 7-8 years ago, when the US was firing teachers and tightening its belt. @Nouriel and @wbmosler even co-wrote a piece calling for a $1 trillion infrastructure program (way before @AOC and @StephanieKelton made MMT trendy)

Mosler: Yes, and it can be done regardless of rates, which are not an obstacle, and I've also proposed the policy rate be set at 0% permanently.

Comment: I watched it again, it is around 2:30. Any clarification @wbmosler? A thought there were a few excellent points. Specifically the part about CBO analyzing inflation risk v cost. Also, the part about us asking traders to charge us more.

Mosler: MMT is descriptive and from there I derive a "base case for analysis" that includes a 0% policy rate and a JG.

Comment: The world’s central bankers have a confession to make: They’re not sure whether the tools they’ve been using for decades work anymore.

Mosler: Yes, if anything, monetary policy tools work in the reverse direction when the state is a large net payer of interest. Not to mention the forward pricing channel... ;)

Comment: UBS: The Fed will cut rates if a recession looms. Meeting that standard in the near term is implausible. Further out a cut depends on the outcome of the trade wars.

Mosler: Rates have been negative in the Euro area and Japan for a long time, without the intended effects... ;)

Comment: Or, you KNOW that interest rate on national debt is a policy variable for a monetary sovereign."There is no free pass for federal debt .... [Otherwise you're] ... betting the ranch on either very low interest rates or very high growth rates, or both.": Is Federal Debt a Problem?

Mosler: More to the point, rate hikes are expansionary and inflationary, and rate cuts are contractionary and deflationary. That alone obviates their entire argument regarding interest payments.

Mosler: The state is a (large) net payer of interest to the economy where, otherwise, interest is only shifted between borrowers and lenders/savers. 2. Forward pricing is a function of rates.

Comment: Bring out the bazooka? Eurozone 5-year, 5-year #inflation expectations have dropped below 1.20%, the lowest on record.

Mosler: Monetary policy- neg rates, we, (is it QE?) etc.- just needs a little more time... ;)

Comment: Mario Draghi’s policy bazooka may be his most precious legacy: The special lending programme has flown under the radar but could be a game-changer.

Mosler: Unlimited bank liquidity is the base case for analysis with floating exchange rates.

Comment: Re-watching: MMT vs. Austrian School Debate with @wbmosler and @BobMurphyEcon.

Mosler: Yes, Austrian analysis is applicable to fixed exchange rate regimes like HK and Bulgaria, etc.

Comment: The first candidate to recognize Medicare for All is a deflationary event that not only doesn't beg a tax increase, but, to the contrary, is what 'pays for' the rest of the progressive laundry list, leapfrogs to the head of the class.

Mosler: Likewise for the first candidate to recognize that the Job Guarantee in the first instance provides for superior price stability vs unemployment, thereby adding to fiscal space crucial to 'paying for' the GND, free higher education, etc. etc.

Mosler: Likewise, to the first candidate to recognize that a permanent 0 rate policy eliminates gov interest payments, downsizes the financial sector, and is a deflationary bias, all of which 'replaces' the need for tax hikes as it all 'makes room' for the progressive agenda.

Mosler: I support free higher education and student debt relief. But making the ultimately false analogy of 'trillions for bank bailouts' undermines implementation, just like (inapplicable) proposed tax hikes for Medicare for All have kept it from being implemented.

Mosler: Students have too often been grossly overcharged. Immediate refinancing at Treasury rates and extending maturities can dramatically reduce inflation adjusted debt burdens and eliminate any moral hazard concerns.

Comment: I could not agree more: As Draghi finally tells EU leaders, just a reminder of why a much more active fiscal policy is badly needed.

Mosler: Yes, as I discussed with Angel well over a decade ago. Monetary policy doesn't work, due to interest income channels and forward pricing channels. It's always been about fiscal policy, directly or indirectly, public or private.

Comment: USA Treasury doesn’t need to sell bonds.

Mosler: The insight that got me into this in 1992- Treasury securities function to support rates, not to fund expenditures.

Mosler: Next time you see ECB Chair Lagarde, let her know that with floating exchange rates, currencies aren't operationally liquidity constrained, and therefore, by design, permanently in a 'liquidity trap': Lagarde Says MMT Is No ‘Panacea’ But May Help Fight Deflation.

Mosler: Worse, they think rate cuts help the economy... :(

Comment: A few thoughts on mini-bots, trying to avoid duplicating stuff elsewhere ( see some nice threads by @FabioGhironi & @SMerler and by @Bruegel_org ).A very important use would be in a debt crunch where sharply rising government interest costs threaten fiscal sustainability.

Mosler: No different than "normal" deficit spending, with implied interest at the policy rate + any risk adjustment?

Comment: The Turkish lira is 2.1 percent weaker against the dollar after President Tayyip Erdogan dismissed the central bank governor, laying bare differences between them over the timing of interest rate cuts to revive the recession-hit economy.

Mosler: I agree that rate cuts will lower inflation, but they will not help the economy unless state spending on interest is "replaced" with other fiscal expansion.

Comment: “Ocasio-Cortez’s implication is that, by raising interest rates out of a fear of illusory inflation, the Fed may have needlessly hurt American workers. Powell’s concession on that point is significant.”

Mosler: Except they have the interest rate thing backwards. Higher rates (regressively) support the economy via interest income channels. I call it basic income for people who already have money... :(

Comment: I’m on board with his overall program, I just object to channeling the subsidy through the banks. It’s not necessary, and is itself a kind of rentier system: Anyone with a banking license gets access to free money forever.

Mosler: Lower rates don't 'subsidize' banks' net interest margins- the spread between cost of funds and rates charged to borrowers, which tends to go down as rates go down.

Mosler: I've proposed a permanent 0% policy rate (via a net long reserve position and no interest paid on reserves) and the Tsy limited to 3 month bills, as this requires no change of institutional structure and can immediately 'get the job done'.

Comment: Please come to America negative interest rates!!! I want to be paid lots of money every month by the bank when I mortgage an expensive house!!

Mosler: Proponents of financial wealth taxes should support negative rate policies, which functionally do much the same thing, but are widely perceived as pro growth... ;)

Comment: Imagine the level of privilege that is thinking you're entitled to a positive real rate of return without taking any risk.

Mosler: Yes, a positive policy rate is "basic income" for those who already have money... ;)

Comment: Mechanically looking at what GLI or NGDP has done over the past 2-4 quarters and setting policy will lead to erratic policymaking. Monetary policy has to be appropriately forward-looking, regardless of the anchor variable.

Mosler: And they all have the interest rate thing backwards...

Comment: Turkish lira returns to relatively unchanged for the session in the wake of central bank's largest ever rate cut of 425 basis points.

Mosler: Let me suggest the currency will continue to strengthen and inflation will fall as they continue to lower rates.

Comment: “Hatzius: We see 2% [growth]. Roughly. Which is still a touch above our estimate of potential. So it should still be consistent with labor-market improvement. We have the unemployment rate edging down slightly. “

Mosler: So he'd support a rate cut if he recognized that would be deflationary... ;)

Comment: Every single one of these Fed chairs endorsed and perpetuated the NAIRU framework which has resulted in systematic undershooting of full employment, at real cost to millions of people. But sure, tell me more about the risks of an independent Fed.

Mosler: However, since they've had the interest rate thing backwards, so the higher than otherwise rates in fact helped support employment... ;)

Comment: Do you think the Volcker shock supported employment?

Mosler: Yes, and supported the inflation as well, which continued long after oil prices collapsed due to the higher rates. It was fiscal tightening (public debt shrunk in real terms) that caused the initial recession.

Comment: Yesterday, I noted the tally was around $14.5 trillion. Now, we've topped $15 TLN. If anyone besides @TheStalwart thinks this is normal, good for them. Actual facts/data show we've never seen anything like this interest rate environment in 5,000 years of recorded history.

Mosler: Negative rates are, functionally, just a tax on those deposits....

Comment: How would a permanent zero rate make the job easier -for those who have the power to set a permanent zero rate?

Mosler: Don't pay interest on reserves and don't sell tsy secs so the system stays net long reserves.

Comment: Yes I agree. Looser fiscal policy also useful.

Mosler: Exporters are Marx's capitalist. They have no interest in the well being of the domestic economy. They just want cheap labor and other inputs to profit from foreign sales. When exporters are in control, the domestic macro economy pays the price.

Comment: Why is interest income so important? Isn't income from fiscal better than income from interest? Why should savers be "paid" "not to spend"? Zirp encourages savers to become investors, yes? That would increase velocity, no?

Mosler: I put the burden of proof on anyone proposing anything but a permanent 0% policy rate... ;)

Comment: Yes, we're in agreement! Not to be all #notallratereductions about it, but it often feels like in making that (very valid) criticism of conventional low rate advocacy, skeptics end up throwing the (valid and arguably good) PZIRP baby out with bathwater.

Mosler: ***A 0 rate policy carries an implied level of 'risk adjusted' asset prices, as observed in Japan for decades now, that doesn't 'inflate' continuously. And from that perspective, 'distortions' in asset prices are induced by non 0 rate policy.

Comment: Why not just say the government should deficit spend? Or do you have something else in mind? Be clear. Are you saying we should attract private sector funds for infrastructure? Or deficit spend, creating money, income, savings, bonds, and infrastructure? Inquiring minds ....

Mosler: With fixed exchange rates, one could say that interest rates are sending such a signal. With floating exchange rates, that notion is inapplicable.

Comment: Here’s what’s not a myth, through this magic policy Kim just described, central banks have manipulated the cost of capital to 0%. When that happens globally, central banks create chaos - especially when alternate forms of digital currency exist with fixed monetary baselines.

Mosler: Cost of capital (equity) isn't 0% but probably double digit for most banks. The gov policy rate, which is approx the marginal cost of funds for the banks, is probably close to 0%, and there's no evidence I've seen that it's created 'chaos' or that digital currency matters?

Comment: These are just Mkt Monetarist talking points. You need a mechanism--how do OMOs enable spending in the real world beyond the 'confidence fairy'?

Mosler: To Scott's point, for any given policy rate, how exactly is QE, OMO, or the like anything more than a placebo?

Comment: “The ECB has learned not one lesson of decades of BOJ easing, no bond can be negative enough and bank profitability can’t suffer enough. Scary s**t.”

Mosler: Negative rates= a tax on those deposits.

Comment: Robert Rubin started financing the national debt with shorter maturity treasuries. Even though the yield differences were small, the amount of debt to finance is huge. Even 0.5% of 22-trillion is $100-billion. Of course it encourages profligacy and exposes us to rate risk.

Mosler: We set or own rates....

Comment: U.S. Weighs Selling 50- and 100-Year Bonds After Yields Plummet I get that we’d get lowest borrowing costs in history of country. But this is seriously something our feckless politicians should have been doing throughout the entire post crisis cycle.

Mosler: I propose a permanent 0 rate policy and nothing longer than 3 mo bills, thereby ending tsy bond trading related incomes at source.

Comment: First of all, why is Greece the second country after the United States spending so much money on its military? Could it be that the EU forced them to buy 15% of Germany's total arms exports & 10% of France's total exports (in 2012) while forcing them to cut everything else?

Mosler: Not to mention the contribution to the debt and ultra low refinance rates....

Comment: Scott Freeman on monetary surprises and nominal government debt.

Mosler: The currency is a public monopoly. With floating exchange rate policy, the Fed is 'price setter' for interest rates, not 'price taker.' Inflation expectations per se don't alter interest rates. Only with fixed exchange rate policy, interest rates are 'market determined.'

Comment: Payments to bondholders is deflationary or contraction, whichever? I'm sure you're right but I don't know how it works. Would you explain that?

Mosler: Those gov. interest payments are inflationary/expansionary to some degree. I call it 'basic income for people who already have money...' ;)

Comment: Note the role inserting the word "somehow" in front of every claim about what MMT thinks plays in making MMT sound absurd, without any actual argument. Yeah, Permanent Zero Interest Rate Policy makes sense.What of it?So is fiscal policy in the lead, with stronger Auto stabilizers.

Mosler: New Keynesians already say that if the public debt gets too high, monetary policy doesn't work because the increased government interest payments become inflationary. I say the public debt is already way more than 'that high' which is why the Fed has the rate effect backwards.

Comment: "So taxes are, first and foremost, about paying for what the government buys (duh). It’s true that they can also affect aggregate demand, and that may be something you want to do. But that really is a secondary issue"- Paul Krugman.

Mosler: True with a fixed exchange rate regime... ;)

Comment: I thought the Fed pays interest on reserves. Are you saying the interest on reserves paid to banks is automatically transferred to people's accounts?

Mosler: No. Reserves are bank assets, 'offset' by bank client deposits which are liabilities. Banks in general compete with each other for deposits, so when interest paid on reserves rises, that competition results in banks paying that much more for deposits.

Comment: Sorry to ask the stupid question (I don't understand convexivity) but yeah maybe could you do a thread?

Mosler: Let's just say on an options adjusted basis a 50 year bond trades at a lot lower interest rate than a 30 year bond.

Comment: Central banks’ negative interest rates were supposed to increase spending, stop deflation and stimulate the economy. They may have done the exact opposite.

Mosler: Right, negative rates are an asset tax.

Mosler: Better to have a permanent 0 rate policy and no bonds... ;)

Comment: Monday's blog entry (02/09) is now posted (13:42 EAT) - An MMT-Green New Deal and the financial markets - Part 1.

Mosler: Yes, the financial sector is a lot more trouble than it's worth... ;) Proposals to reduce it include removing all state sponsored incentives to 'save', a permanent 0 rate policy, banning publicly insured funds from owning stocks, etc. etc

Mosler: Permanent domestic 0 rate policy, plug leaks/corruption in the payment/banking system that's allowing insiders/exporters/etc. and probably state owned enterprises to obtain and sell local currency for fx?

Comment: MMT in a table. Examples of "none": US, Canada, etc. Examples of "financial": Euro Zone countries Examples of "real": WWII US and Europe Examples of "financial/real": ???

Mosler: MS= floating exchange rate policy for purposes of this example.

Mosler: Maybe high rates are contributing to the inflation?

Comment: Yep. NIRP is just another example of policymakers saying "we'll do anything to create jobs and income EXCEPT directly create jobs and income."

Mosler: Negative rates are just another tax... :(

Comment: As a result, for the first time in over a decade, the banking system needs more settlement balances than it has. This means the Fed has to start temporarily buying treasury securities again they're out of practice and not good at it.

Mosler: Or remove the penalty rate for overdrafts...

Comment: More, remove the stigma from the discount window.

Mosler: Overdrafts are booked as discount window loans on settlement day, so yes, removing the penalty rate and the stigma does the trick.

Comment: What happens "in the first instance" is not important for assessing the macroeconomic consequences of (in this case) increasing RR.

Mosler: What's important to know is that it's not about the Fed 'accommodating a shortage,' as the higher reserve requirement *is* functionally a loan from the Fed, and it's the penalty rate and stigma of window borrowing that causes banks to try to replace that Fed loan via bidding up fed funds.

Mosler: Couldn't be easier. Unlimited member bank overdrafts at the policy rate, with no stigma which also eliminates the need for interbank lending.

Comment: Tuesday’s blog (24/09) is now posted (06:27 EAT) - Is the British Labour Party aboard the fiscal dominance train - Part 2?

Mosler: Yes, they've all had the rate thing backwards for a very long time, as suggested here over 20 years ago.

Mosler: On John Kenneth Galbraith's "Economics of Innocent Fraud" (2004): #8- The illusion that the Federal Reserve, by raising or lowering interest rates, has any effect whatsoever on spurring growth or preventing inflation. (Wikipedia)

Comment: Core Inflation: Fed seems correct in describing both 2017 and 2019 slowing as transitory.

Mosler: Supported to a small degree by the rate hikes... ;)

Comment: Question: What do people mean by "capital flight" in this context? They can't mean the departure of paper money (which is replaceable at zero cost). Do they mean the departure of human capital (w/ no scope of importing their brilliant services produced from abroad)?

Mosler: As an aside, a negative policy rate is, functionally a wealth tax... ;)

Comment: This is going to be unpopular, but it's true. Being political independent in a capitalist economy starts with a job guarantee, not entrepreneurship, because being an entrepreneur presupposes that your business can fail, without you losing your social or political independence.

Mosler: In the MMT 'money story' that begins with a state desiring to provision itself, the base case for analysis includes a 0% rate policy and a job guarantee. There is no conflict with entrepreneurship.

Comment: Say what you will about Trump, he has been far more right than the Fed about the US economy & specifically rates, oil, & the USD for the past 2+ years.

Mosler: Except they all have the rate thing backwards. That is, lower rates would have made it all worse.

Mosler: Turkey- Massive interest rate cuts and at least so far lower inflation and a firming currency. Not that this proves anything, of course. Just that the reverse didn't happen. And just in time for Thanksgiving! ;)

Mosler: As if wages are a function of rates.... ;)

Comment: Yep, now that they are stacking term loans through October, it's becoming pseudo-QE4. Balance sheet will keep going up and then at some point they'll call it organic balance sheet expansion or something, and make it permanent.

Mosler: Purely 'technical' to manage the policy rate under current institutional structure- no 'macro economic' consequences.

Comment: And here is a charte that shows Turkish interbank rate and core inflation. Looks like they are strongly correlated.

Mosler: Yes, but not to forget that there are many 'extraneous' factors at work in Turkey... ;)

Comment: BuBa? Can you enlighten some of us on this acronym? PS on the very money system, I do believe Perry Mehrling's discussion of the inherent hierarchy of money, hybridity of private and public money, and the importance of liquidity (not solvency), would add important nuances!.

Mosler: Yes, for fixed exchange rate regimes as we discussed.

Comment: A thread on what #MMT has to say re: small, non-hegemonic or so-called "developing" countries, a vital topic for any truly global & decolonial political economy. @FadhelKaboub has been working on this for decades. But recently many MMTers & fellow-travelers r now taking it on.

Mosler: In 25 years, we've started 3 currencies that have continuously provisioned their universities with student labor- the UMKC Buckaroo, the Denison Dollar and the Franklin Franc with 0 rate policies, 0 inflation, 0 unemployment and in economies that couldn't be smaller or more open.

Comment: Do you agree with this statement, if IOER were 100 basis point below FFR would lead to decrease in reserves? FOMC's target range was not at zero. While spreads between money market rates became large and variable, as can be seen in the graph, reductions in the funds rate were still transmitted one-for-one into other money market rates. For reasons I will come to, a small balance sheet is better than a large balance sheet, and a small balance sheet is only possible under a corridor system, not a floor system. Banks are currently holding over $2.5 trillion in liquid assets to meet the liquidity coverage ratio requirement. If the interest rate the Fed pays on reserves is equal to the fed funds rate and approximately equal to other money market rates, banks will choose to satisfy their liquidity requirement in large part with reserves. The Fed will, of course, then have to meet that demand by holding a large portfolio of securities. +By contrast, under the corridor system, the Fed would end up with a relatively small balance sheet. I spoke with a number of bank treasurers and CFOs about how they would adjust if the interest rate the Fed paid on excess reserves were fifty to one hundred basis points below the fed funds rate. Not surprisingly, they indicated they would find a way to minimize their excess reserves balances. They would reduce their LCR (liquidity coverage ratio) requirements by borrowing beyond thirty days or lending within thirty days. And they would hold Treasury or agency securities instead of reserves. There should be no shortage of securities: if the Fed is providing fewer reserves, it is holding correspondingly fewer government securities. Finally, a smaller portfolio leaves the Fed better prepared if short-term rates again fall to zero. While theoretically it shouldn't matter, realistically, it would be easier for the Fed to conduct an asset purchase program starting with a small balance sheet.

Mosler: Fundamentally, the Fed has 2 choices- 1) Keep the system (functionally) net borrowed and set rates via the resulting reserve add, as was the case before QE or 2) Keep the system (functionally) net long and set rates via paying interest on reserves which it's been doing post QE.

Comment: That assumption is in my models. Not sure what you think falls in place though. It's just standard monetary theory.

Mosler: Monops set 2 prices 1. own rate= policy interest rate set by Fed as single supplier of net reserves 2. terms of exchange for other goods and services= price level is necessarily a function of prices paid by Gov. spends=source of price level.

Mosler: I recall a senior Bank of Mexico officer telling me, they let the market set rates as they set the overnight rate based on their t bill auction rates, which I said was logically dynamically unstable/impossible. The operations people confirmed my suspicions. They set the rate.

Comment: Except that the U.S. govt does not set "the" interest rate. The Fed has an interest rate policy rule that influences how the path of a particular short term money market rate will evolve over time (and in response to a variety of contingencies) for the purpose of achieving D.M.

Mosler: Yes, the Fed, as monopoly supplier of reserves, which also happen to have a 0 marginal cost of production, decides to set rates directly or indirectly. (Textbook monopoly dynamics.)

Comment: What regulation constraints "the loans they're allowed to make"?.

Mosler: FDIC regulations: Capital, Asset Quality, Management, Earnings, Liquidity, Sensitivity to rates. aka CAMELS.

Comment: E.g it now takes more Scotch to buy a Ferrari. Just thinking about countries where they are dependent on mainly one export e.g. oil, as the relative price of oil to other items change, this is reflected in the change in currency value. Idk, just a thought?

Mosler: What you are pointing to is called real terms of trade which is a separate issue from exchange rates.

Comment: The lowering of interest rates only increased the levels of consumer debt giving the illusion of a booming economy all the while jobs were being outsourced. While at the same time destroying the savers by reducing the value of the currency.

Mosler: Households are net savers, so lowering rates reduced household interest income....

Comment: Does liquidity need to be in deficit if repo is the single policy rate. Else, if liquidity is surplus, does reverse repo need to be added to MPC mandate.

Mosler: RBI can't just pay interest on reserves to establish a floor? Political restriction?

Mosler: Not to mention I don't agree that rate hikes fight inflation... ;)

Mosler: Lowry/NYT invited herself to St. Croix to maliciously fabricate false narratives about the USVI, St. Croix, MMT and me personally including that of the Russia fund. I participate in the US Dep of Interior promoted USVI economic development program that offers lower tax rates.

Mosler: As it turned out, the story was front page of the NYT business session and that per se lent credibility to MMT by lifting public awareness and a general interest that greatly furthered the cause.

Comment: I presume that including "$ *spent* by govt" — and excluding lending by the monetary system — is not part of the net money supply because loans are a net subtraction from the money supply due to interest paid, along with the principal (minus defaults). Right? Or Not right?

Mosler: In the non gov sector, for every dollar borrowed there's a dollar saved. Interest paid is interest earned. It all nets to zero. Inside money and all that.

Comment: Until they recognize they have the interest rate thing backwards, they will have what they think is good reason to avoid public debt.

Mosler: Mainstream economists say if gov debt gets too high while sustaining full employment, hiking rates to fight inflation makes it worse due to higher gov interest payments, and I agree, only adding that we are already at that point where rate hikes cause inflation and cuts slow it.

Comment: Nobody seriously questions the validity of modern monetary theory as a description of our monetary system. This is genuinely new, and it has happened since the publication of S. Kelton's "Deficit Myth". That in itself is hugely significant. Next step - abandon the old narrative.

Mosler: And then move on to them getting the interest rate thing right way around, before they start looking to hike due to inflation fears.

Comment: For some reason, I’ve grown up Monetarist, Austrian. I have started reading your work and trying to grasp MMT, and honestly, it makes a lot of sense for today’s day and age. So nice work. P.S your theory pisses a lot of people off, and I love it.

Mosler: Good to hear that, and not to forget that we're all Austrians when in the context of fixed exchange rates... ;)

Comment: But that’s a cop out answer, and the financial system would not have survived for centuries if some totalitarian asshole agency was running around bullying the banks. So what’s the bank’s incentive in the QE exchange?

Mosler: It's entirely voluntary, based on price. The Fed announces it's a buyer, and asks for offers. Securities are bought and sold constantly, generally without the Fed, which is in this case 'just another buyer' as far as the seller is concerned.

Comment: This is genius! If only we could all think as creatively and as outside the box as Hugs... negative 1% rates won’t be enough! Let’s go for -100% overnight deposit rates. Then the banks will be really profitable! “Je ne veux pas travailler!”

Mosler: Negative rates are just a wealth tax.

Comment: The original intent of reserve requirements is to preserve bank solvency. See Sahil’s thread below for an incredibly well-detailed explanation of how reserves function.

Mosler: With fixed exchange rates, reserves of convertible currency protect bank solvency in the case of depositors' withdrawals/demand for convertible currency. This is inapplicable to today's floating exchange rate policies.

Comment: Interesting conclusions. In context of environmental breakdown, I wonder how much these are the right questions. For example, with negative real interest rates - green government infrastructure investment pays for itself even if the multiplier is zero. So why not is the q?

Mosler: More likely lower, as adding to the public debt (net money supply) doesn't involve an indefinite stream of gov. interest payments which are net interest income for the economy that add to aggregate demand.

Comment: Important key victory. Also transitory. The argument that "at *some* point wages will rise and cause inflation" isn't dead. At that point, jobs will again be on the chopping block. We need tools for inflation control other than unemployment & stagnant pay.

Mosler: And they all still think rate hikes fight inflation-it's in fact the presumption behind this latest move- when in fact rate hikes work to support inflation. :(

Mosler: Two of the channels- interest income and forward pricing.

Comment: Do you think this relationship is linear or bell shaped? Makes sense that rising costs (interest) at the low end would translate to higher prices, but at some point the financing costs become prohibitive and cause a decline in loan creation?

Mosler: The economy is a net recipient of gov interest payments.

Comment: It is August 2020, and Financial Times publishes articles on why we need more workers' power.

Mosler: Higher rates provide higher incomes for those who already have money. The gov is a net payer of interest to the economy.

Comment: He’s not “living in a tax haven”, he’s “reducing unemployment”, tsk.

Mosler: It's a US gov sponsored economic development program for a US Territory-a reduced tax rate for qualified business income. I still pay normal rates on all the other taxes. And the program is still open and drawing very little interest, so it can't be all that good of a deal? ;)

Comment: "The idea that inflation is a result of prices moving to align supply with demand, rooted in Economics 101 textbooks, is an unhelpful one. In the real world, corporations set prices on the basis of their expected long-term production costs and don’t suddenly increase them.“

Mosler: And as the term structure of prices currently faced by markets is a direct function of the term structure of rates set by CB policy, in that sense the policy rate is the inflation rate= forward pricing channel. That is, CB's have the rate thing backwards.

Comment: High rates are a disincentive to investment in productive assets.

Mosler: The additional income paid by gov to the economy (from the higher net interest payments to the economy on the public debt that supports those higher rates) adds to aggregate demand which is a positive incentive for investment.

Comment: ICYMI: Some thoughts on yield curve control.

Mosler: It's not going to add to aggregate demand or inflation. Monetary policy works mainly through interest income channels and if anything this is more likely to (modestly) reduce interest paid by gov to the economy.

Comment: There's an asymmetry here, wouldn't you say? Lowering rates here (pushing longer yields down further) not likely to have much an effect. But increasing them from here is likely to be contractionary.

Mosler: Through what channel? Hasn't Fed research already determined that the link between real investments and rates is weak at best? And forward prices are a strong function of term rates.

Comment: Tying policy to labor force participation would give a more accurate assessment of inflation risks and distance to full employment than just focusing on the unemployment rate.

Mosler: Recognizing the currency is a public monopoly and therefore the state is 'price setter' would also be helpful, as would recognizing rate hikes impart an inflationary bias through interest income and forward pricing channels.

Mosler: He still has the interest rate thing backwards: Powell Maintains Dovish Stance after Jobs Report The Federal Reserve Chair Jerome Powell reiterated on Friday its pledge to maintain interest rates lower for years to support recovery from the coronavirus crisis and recession.

Comment: This is simply another way of showing falling labor share. Real Investment per Unit of Available Labor (Labor Force) has been growing just fine. It was the 1970s and 1980s that were aberrant under Volcker.

Mosler: Doesn't look to me like proof that low rates support investment... ;)

Comment: He still has the interest rate thing backwards: Powell Maintains Dovish Stance after Jobs Report. The Federal Reserve Chair Jerome Powell reiterated on Friday its pledge to maintain interest rates lower for years to support recovery from the coronavirus crisis and recession.

Mosler: And while higher rates would be beneficial, it's highly regressive and not on my list of proposals:

1. Immediate $1.000 per capita distribution to state governments and territories to offset lost tax revenues of state and local governments and sustain public services.

2. Nationalize financially failing enterprises deemed strategically important to the promotion of public purpose, including transportation manufacturing businesses, by taking control from shareholders and directors, and assuming all operating expenses and incomes similar to that of bankruptcy. Corporate management and employees can be left in place, should that be deemed to further public purpose. The crisis may not be the fault of the shareholders, but it is a risk they take when investing.

3. Increase the minimum social security payment to $2,000 per month, offsetting the losses from uninsured pensions and supporting our seniors at a level that makes us proud to be Americans.

4. Increase the minimum unemployment compensation to $500 per week and make it available without restriction to all of the unemployed.

5. Fund $15 per hour jobs for qualifying non profit organizations to allow them to employ anyone willing and able to work for that wage.

6. Lower the eligibility age of free Medicare from 65 to 0 and adequately fund it to provide medical care that makes us proud to be Americans.

7. Eliminate the tariffs.

8. Supplement with proposals to eliminate undesired emissions and channel sustainable growth.

Comment: "Others argue that by focusing narrowly on curbing inflation, the MPC lost sight of growth, contributing to India’s economic slowdown."So who is responsible/accountable for the millions of jobs that could have been but not created?

Mosler: Except they have the interest rate thing backwards....

Mosler: Some good points, but he still has the interest rate thing backwards.

Comment: Well, here is why I disagree, but I think at least any economist considering themselves some sort of Keynesian should know the Keynesian part of it anyway ...

Mosler: First, Keynes context was fixed fx/mine is today's floating fx. Second, I point to how the interest income channel alters demand and as debt/gdp increases likely overwhelm differences in propensities to spend between borrowers and savers. Third is forward pricing of goods and services.

Comment: So, have central banks *over*-stimulated?

Mosler: Worse, they have the interest rate thing backwards.

Mosler: Thanks, John, and hoping that they further understand that hiking rates would be inflationary. That is, rate hikes don't fight inflation, they support it and make it worse. From over 20 years ago.

Comment: Creating guaranteed opportunities for meaningful, well-paid work that actually contributes to society would enable people to walk away from extractive industries.

Mosler: Why not do all that through normal public employment? That is, Congress just votes to hire people to do all those things at current rates of pay and gets the job done?

Comment: The Fed is not going to solve wealth and income inequality. They might help on a margin by heating the labor market, but the Fed is not your solution.

Mosler: Fed rate cuts to 0 have dramatically reduced interest payments that I call basic income for those with money and gov securities trading fees/income are down. And deflationary 0 rates allow higher fiscal deficits=more income for lower income earners=(unintentionally) good job Fed!

Comment: In the MMT papers I've read, money finance causes bank reserves to increase. O/N rates go down. So interest rate policy "deactivated". But what if we eventually get inflation? We have to do something other than raise rates, right? So question is whether we should deactivate MP.

Mosler: First, raising rates makes it worse, like throwing gasoline on the fire.

Comment: Why do mainstream economists get MMT so wrong and critique all the wrong things? I think the real debate comes down to one thing - can we deactivate interest-rate policy by using fiscal policy, price controls, credit restrictions etc to deal with a future inflation problem?

Mosler: The problem is they all/you all have the interest rate thing backwards.

Comment: Higher rates make inflation worse?

Mosler: Interest income and forward pricing channels.

Comment: What’s your view on the Volcker shock and inflation thereafter?

Mosler: The high rates supported and prolonged the inflation.

Comment: MMTers say rates go to zero but CB's actively prevent this because they like to use interest rates as a policy tool. So implies we cant use interest rates in this way anymore, no? Which is also what they recommend... "anything but interest rates" seems to be the approach.

Mosler: It's about the consequences of rate hikes being inflationary via increasing deficit spending to pay interest to people who already have money, and at the same time imbedding a continuous increase in the term structure of forward prices, aka, inflation as academically defined.

Comment: MMTs aren’t fans of interest rates as a stabilization tool, but that’s not the reason. We don’t necessarily advocate “money-finance,” and you can still use interest rate policy even if you do “money-finance.”

Mosler: '...use interest rate policy..' for what further purpose?

Comment: Hike'em.

Mosler: :) Extreme trickle down economics- deficit spend to pay interest to people who already have money... President Trump might go for it!

Comment: Rate cuts to make the stock market go up 30% is way more income for people who have money than 5% on the 10 yr.

Mosler: 0 rates, massive QE, yield curve control for going on 30 years hasn't seemed to do all that much for stocks in Japan, so maybe the US stock thing isn't so much about that?

Comment: Interest Rates Limited by Private Sector Fragility: With debt-to-disposable income ratio bouncing around 175%, there is a v. large Canadian household sector sensitivity to interest rates. Bank of Canada is boxed in b/c of household debt.

Mosler: And rate hikes promote inflation. So why do it?

Comment: As speculation builds around another rate cut from the ECB, EUR/$ is rising, an illustration just how ineffective negative rates are in easing financial conditions. Much more effective would be: (i) a strong narrative in press conferences around deflation risk; (ii) bigger QE.

Mosler: Negative rates are an asset tax. QE is being used to keep euro spreads narrow but otherwise is just a placebo for the macro economy/aggregate demand, etc.

Comment: The ECB could guarantee new issues of member nation debt rather than buy it, for example.

Mosler: Not to mention that lower long term rates are further deflationary, which is a good thing- creates fiscal space for larger fiscal deficits/more public services/lower taxes, etc.

Comment: The long maturity average of UK debt means that any interest rate rise would take a long time to affect the country's borrowing costs.

Mosler: Not to forget, the UK can tax interest income at any rate it wants. ;)

Comment: Spot on. Also a perfect illustration of how silly the MMT critique "that the Fed might lose its independence" is. The Fed is begging (rightfully) for more fiscal support, the GOP wants to be "independent" to do nothing and let the economy drown.

Mosler: The Fed's 0 rate policy is helping to keep inflation and aggregate demand down, opening the door to a fiscal adjustment- increased gov spending/lower taxes.

Comment: @wbmosler according to the MMT, how could these inflations levels be explained in countries such as Argentina and Venezuela? n Arg, I think we still have available resources. I see no other explanation than the printing of money. It would be really interesting to read your view!

Mosler: One factor is the high interest rate policy.

Comment: First of all, thank you very much for your reply. Without an increase in the interest rate and with a lot of Argentinian pesos circulating, what measures would you think should be taken to lower inflation?

Mosler: Start by cutting the local currency policy rate to 0. Then examine the source of the price increases, including loans to SOE's and 'insiders' that 'count' as deficit spending and result in the selling of those funds for fx.

Comment: Brazil's recession is less severe than the rest of LatAm (lhs), thanks to the biggest fiscal stimulus in EM (rhs). But all this comes at a cost. Brazil's Real is the weakest currency in LatAm, down 30% vs USD in 2020. That's markets saying Brazil doesn't have this policy space...

Mosler: High nominal policy rates support nominal growth.

Comment: Bonds aren’t that dissimilar to the tax demand in that they’re another way of encouraging those who are good at not paying taxes to still want to get hold of the currency Collect 10 invisible dogs and we’ll give you an eleventh (creature of the state).

Mosler: QE evidences otherwise as it has not increased the rate of inflation.

Comment: What's gotten lost since COVID-19 first hit is how constrained EM fiscal policy space really is. Countries below the diagonal have seen local currency bond yields rise despite the huge gravitational pull down from US yields falling so much. Turkey (TR) & Brazil (BR) stand out....

Mosler: With floating fx, the CB sets the policy rate.

Comment: Eye-balling this Goldman chart, it's hard not to conclude that the root cause of a lot of muddled economics today is that a lot of influential economists went to university in the 1970s and 1980s.

Mosler: And maybe it's because they have the interest rate thing backwards.

Comment: Besides that brazil has huge dollar reserves and minimal external sovereign debt. CB refuses to intervene both, on fx level and long term interest rates. high treason crime?

Mosler: Brazil's interest rate cuts have helped bring inflation down maybe?

Comment: Not as I understand it. The goal is to give decent paying jobs to everybody who wants them. Except they don’t really have to be jobs as everybody understands that word. So why don’t we just give people money. And let them figure out what they want to do. Same thing, right?

Mosler: No, the goal of a JG is to promote the transition from unemployment to private sector employment for those remaining unemployed after the public sector has fully provisioned itself. That is, if gov wants more workers it should hire them at current rates of pub sec pay/benefits.

Comment: Not as I understand it. The goal is to give decent paying jobs to everybody who wants them. Except they don’t really have to be jobs as everybody understands that word. So why don’t we just give people money. And let them figure out what they want to do. Same thing, right?

Mosler: No, the goal of a JG is to promote the transition from unemployment to private sector employment for those remaining unemployed after the public sector has fully provisioned itself. That is, if gov wants more workers it should hire them at current rates of pub sec pay/benefits.

Comment: Oil and gas workers want a Job Guarantee.

Mosler: Would you call that a special interest group? ;)

Comment: Nevertheless, there is reason for concern. The reason isn't that the UK might default, or even that it will have difficulty borrowing in the future. It's that the likelihood of either higher real interest rates or unwanted inflation in the future is increasing.

Mosler: You've got the interest rate thing backwards... :(

Comment: Proving the neo Fisherians wrong once again! (Neo Fisherians believe the way to lower inflation is to lower interest rates. Erdogan is a neo Fisherian.)

Comment: Is the "man" for that! :-)

Mosler: They recently hike rates to support the currency. So far the opposite has happened.

Comment: There is one way in which NF makes sense though. Low interest rate lowers interest expense of debt. And if interest expense is financed via money creation, this can lower rate of inflation. (But this is not standard NF argument.)

Mosler: Gov is a net payer of interest to the economy-interest payments are fiscal transfers. And there also is the forward pricing channel.

Comment: Yet game theory is also in people’s heads & doesn’t exist anywhere in the universe except for where there is consciousness making mistakes about things. So saying what some people think contradicts what others think is surely meaningless? Action makes thought real, even if wrong.

Mosler: In that, regardless of the rate of unemployment, 'the labor market' isn't a 'fair game' as people have to work to eat, so to speak, while employers only hire if they like the return prospects. So without 'external support' real wages gravitate toward subsistence levels, no?

Comment: Can I settle my tax liability to US govt (such as it now is) with Bitcoin?

Mosler: US tax liabilities are denominated in $US and the US government doesn't provide a fixed exchange rate for gold, bitcoin, or any other asset.

Comment: Never a good idea to participate in the watering down, misrepresentation, perversion, co-opting, etc.

Mosler: He said he did it to attract interest... :(

Comment: In Q3, GDP bounced back (+18.2% q-o-q after -13.7% q-o-q) in France. All components of domestic demand rebounded. GDP remained well below its pre-crisis level (-4.1%)

Mosler: And the gap is even larger if you assume it would have continued at it's prior growth rate.

Comment: High inflation combined with low interest will result in more lending and ultimately to hyperinflation. To stop this, we need some combination of:- government surplus- high interest rates- some other regulations to shrink banks' balance sheets.

Mosler: Higher rates make it worse.

Comment: IMF chief economist says fiscal policy must be the main game in town to fight the Corona crisis. Activist fiscal policy is not only necessary to support economic activity and employment; it is also the "fiscally responsible thing to do".

Mosler: With floating fx policy, it's always a 'liquidity trap' as rate cuts are a deflationary bias.

Comment: Govt needs to stimulate demand to keep the economy growing. If it does with monetary policy, it raises asset prices and makes rich people richer. If with fiscal spending, workers get the money. /6

Mosler: They've got the interest rate thing backwards.

Comment: In fact, 44% of current government debt is 'owed' to the Bank England. The govt pays interest to the BoE which then returns it to the Treasury in a nice little merry-go-round that no-one knows about, including the Chancellor it seems.

Mosler: And the BOE pays the policy rate of interest on the balances it created when it effected the purchases to support its policy rate, no?

Comment: Divided Government May Push the Fed to Go Bigger. Here’s What That Might Look Like. Credit easing is the name of the game.

Mosler: As the carpenter said about his piece of wood, 'No matter how much I cut off, it's still too short.' They still got the interest rate thing backwards.

Comment: Remember negative policy rates? From @ecb consolidated banking data, euro area banks' Net Interest Income fell to a record low in Q2 2020 as a share of total assets. A sign that NIRP side-effects are increasing? Some caveats. (1/n)

Mosler: Yes, central banks have the interest rate thing backwards.

Comment: "This is a gut idea, Michael?" Nah, we're gonna rip your face off on this one. Instead of asking a sclerotic group of political appointees to set a single number, we're going to expect them to accurately guide an aggregate number with nearly infinite inputs. Much better!

Mosler: As if NGDP is a function of rates as presumed... :(

Comment: Here's an original idea, let the mkt set rates and the FED is only the lender of last resort...oh wait, that was the original intention #wealthinequality #zombiecorps #assetmanias.

Mosler: That would be with fixed fx policy. With floating, Fed is necessarily rate setter: http://moslereconomics.com/wp-content/upl

Mosler: Portfolio effect=portfolios shifting to riskier assets due to QE (for the further purpose of subsequent credit expansion/new issuance). I'm saying that while rates can shift, at the macro level the shift to more riskier assets can't happen until after the 'risky' credit growth.

Comment: See, I said Twitter wasn't the place for this discussion! Portfolio effect meant to change corporate incentives, and has done so: higher asset prices incentivized bond issuance, IPOs and buybacks. I doubt that boosts real economy much, but is important - and main Fed case for QE.

Mosler: Yes, to reduce long term rates, which only works if that induces more spending on goods and services (GDP) vs financial assets.

Comment: Keep Tsy rate at 0 but Congress should authorize Fed to adjust the de-facto private sector rate with a loan interest fee that, on the borrower’s side, would amount to a rate hike. The New Zealanders had the right idea. https://rbnz.govt.nz/monetary-policy/about-monetary-policy/mortgage-interest-levy-a-detailed-option.

Mosler: Looks like the (independent?) RBNZ plans on altering rates (taxing/subsidizing) home owners with mortgages? :(

Comment: Interest rates are zero you say? PCE inflation nowhere to be found you say? Then CBs have done their job I say. What else does a fiscal authority want? If fiscal space can be used productively, then use it. Not the CB's job.

Mosler: Rate hikes would flood the fiscal space via interest payments to the non gov sector. ;)

Mosler: It's because he have the interest rate thing backwards.

Comment: Compared to Yellen? I’m getting tremendous pushback for suggesting a conventional banker with real world experience would introduce less harm to the financial system than a liberal labor economist academic who was bored by financial regulation throughout her tenure as Fed chair.

Mosler: As long as they don't have the interest rate thing backwards.

Comment: Issue 2: Interest rates have fallen. As a result, while the debt is rising over the next several years interest payments on the debt are actually falling (in nominal dollars).

Mosler: The Fed has the interest rate thing backwards= their models are broken.

Comment: Amazing, this strong secular decline in interest payments in % of GDP in the €zone. Even in Italy, the numbers were recently smaller than in UK And look at Germany Public-debt-to GDP can be a misleading metric in assessing debt sustainability; it does not account for interest payments!

Mosler: And a reduction of interest payments to the non gov sector is per se a deflationary/contractionary bias. They've got the interest rate thing backwards.

Comment: For the record - Warren and I are on the public record (2001) as saying the continued issuance of public debt is unnecessary and should be discontinued. That certainly would change the CB-Treasury relationship.

Mosler: Yes, and for all practical purposes the US Treasury limiting new securities to 3 month bills does the trick within current institutional structure. Please forward to Janet, thanks, and remind Congress to mandate a permanent 0 rate policy and a JG to enhance price stability.

Comment: Like each citizen can invest in a special-issue bond that pays a favorable interest rate, and is capped so that rich people can’t use it to get cushy non-risk returns.

Mosler: How about leaving the policy rate at 0 and raising the minimum social security payment to maybe 2,500/month.

Comment: It also leaves us with a deeply inequitable society - and a crusted state sector. There is no way LVT could ever equitably deliver the tax revenue required by a state embracing MMT and wanting to control inflation. If you want to say goodbye to the NHS and more, do this.

Mosler: My proposed real estate tax along with proposals to cut off problematic income at source, permanent 0 rate policy, JG, narrow banking, etc. and sufficient aggregate demand via fiscal policy can do the trick. Institutional structure is causing the problems and can be modified. ;)

Comment: A policy variable means the central bank can set it by market-making. Which points to supply/demand factors in setting yields, not expectations. What am I missing?

Mosler: The Fed is the sole supplier of reserves, therefore 'price setter.' It can set the entire term structure of 'risk free' rates but elects to only set overnight rates and let the term structure reflect anticipated future rate settings and 'technicals' of institutional structure.

Comment: Well, if the Fed doesn't actually have a yield curve target, the effect of its bond purchases on the yield curve would be a wash. Are you saying there is no demonstrable effect of Fed bond purchases on the long rate since 2008?

Mosler: So if markets believe Fed bond buying increases demand/lowers unemployment, forwards rates would go up. So, ironically, QE leads to lower long rates only if markets believe QE doesn't work to increase demand/reduce unemployment? ;)

Comment: Best of Mankiw No. 7: "When the government reduces national saving by running a budget deficit, the interest rises and investment falls. Because investment is important for.

Mosler: Can be true for fixed exchange rate regimes.

Comment: Remember this when you hear economists opining about the “sustainability” of public debt. A sovereign, currency-issuing government can always CHOOSE the interest rate on any bonds it CHOOSES to offer. I explain here.

Mosler: The problem is they think rate hikes fight inflation when in fact the opposite is true.

Comment: There's a narrative in the Euro zone that @ECB has done all it can and it's now down to fiscal policy. No! Real 10-year rates in Italy and Spain are -0.4% and -0.9% vs -1.5% in Germany. Monetary conditions in Italy and Spain are tighter than Germany. That's for the ECB to fix...

Mosler: The opposite, in fact. Negative rates are a tax.

Comment: Best of Mankiw No. 8: What is the primary job of banks? A primary job of banks is to take in deposits from people who want to save and use these deposits to make loans to people who want to borrow".

Mosler: True for fixed exchange rates/convertible currency.

Comment: Interesting exchange. Ann making a point MMter’s constantly make. The state sets the interest rate. So “we can borrow now because interest rates are low” still conforms to the household analogy, because it compares the state to a household who has to accept rates from the market.

Mosler: And raising rates contributes to inflation....

Comment: Interesting exchange. Ann making a point MMter’s constantly make. The state sets the interest rate. So “we can borrow now because interest rates are low” still conforms to the household analogy, because it compares the state to a household who has to accept rates from the market.

Mosler: A permanent 0 rate policy is a deflationary bias that promotes low inflation and low demand, thereby requiring larger fiscal deficits to support full employment. And that's just one reason why I propose it.

Comment: Thread. After a decade of maligning MMT, the grand poobahs of neoclassical macro reinvent it and pretend they presided over a new paradigm - without mentioning previous critiques.

Mosler: It still implies the debt to gdp ratio matters. :( And doesn't assert the policy rate should be permanently at 0. :(

Comment: Why do we have zero interest rates? I am not opposed to leaving them close to zero and using financial regulation to limit and influence private credit. But it was not deliberate. It results from decades of inappropriate fiscal policy and inappropriate reliance on private debt.

Mosler: I don't see any reason for the policy rate to ever not be 0%. Am I missing something?

Mosler: More simply when it's realized gov necessarily spends first and only then can taxes be paid or gov bonds purchased, and that rate hikes cause inflation, notions of gov solvency, debt burdens, etc, become entirely inapplicable.

Comment: Do rising interest rates in the future create a problem for the UK government?

Mosler: And once it's understood rate hikes cause inflation, there will be no reason for rates to ever go up.

Comment: "Sunak stated that ‚there are record peacetime highs in borrowing and debt, .. forecasts .. show us on a path where that continues to be at a very elevated level’. The elephant in the room is this: How is a sustainable position in public debt defined?“

Mosler: When they understand rate hikes cause inflation, there is no longer any reason rates would go up.

Comment: But the government can borrow cheaply, so isn't there a good argument for spending now? This is the flashing red light. The Fed has had to purchase US debt so the Treasury can issue it. The Fed now owns the equivalent of: + $33,300 per householdor + 20 percent of GDP.

Mosler: The gov sets the policy rate, and rate hikes cause inflation, so why would a gov 'in the know' ever hike rates?

Comment: Except its not ‘external’ real income. Functionally it gives some people extra fines against other people-so it’s opening an additional ‘channel’ of private trade, but it’s not a net addition of anything (other than it doesn’t take resources away for its ‘addition’ of currency).

Mosler: Fiscal/interest rate channel- gov is a net payer of interest to the economy, so rate hikes increase gov spending on interest earned by non gov sector, etc. Also forward pricing channel: contango changes as a function of rates.

Comment: ECB staff projections for core inflation don't look like the ECB just delivered a bold enough package.

Mosler: They haven't yet figured out they have the interest rate thing backwards....

Comment: Daily, I cannot stop being overwhelmed by evidence that the vast majority of people, including people trained in mainstream economics, firmly believe monetarily sovereign governments, spending in their own fiat, unpegged currencies, NEED TO RAISE TAX-REVENUE to spend.

Mosler: In this case you could just say govs with floating exchange rates... ;)

Comment: Yes, but more like 1) prices paid by govt 2) market power 3) bottlenecks, etc. Also see: An MMT response on what causes inflation.

Mosler: Well stated letter but no mention of the Fed having the interest rate thing backwards.

Comment: My story: "The ‘Savings Glut’ Is Really a Dearth of Investment”.

Mosler: The low rates come from anticipated future Fed rate settings. And with floating fx causation runs from loans to deposits, so the idea of a savings glut is inapplicable.

Comment: Now here is a central bank that gets MMT. What do you think, @wbmosler?

Mosler: Then again they would have a 0 rate policy rather than paying all that interest on the public debt which is nothing more than basic income to people who already have money.

Comment: I'll post this again Monday morning, but WOW! Negative-yielding sovereign debt up $337 billion to a new record high. Also, I had not noticed until now, there are 5 countries with negative-yield 30yr bonds.

Mosler: It's because CB's have the interest rate thing backwards.

Comment: An MMT critique from the man who bailed out the banks. Others have already shares strong words about this. Some comments from me.

Mosler: MMT teaches sequence- tax liabilities, spending, tax payment/bond purchase- thereby eliminating solvency consideration, and the source of the price level is prices paid by gov. And they have the rate thing backwards. No new tools, just a new (for them) understanding of the tools.

Comment: Just to add appropriate qualifiers, does your interest rate - inflation link only apply to "advanced countries"? Higher interest rates definitely appear to be brining inflation down for turkey right now correct? mainly because its stabilized their currency..wanted to clarify!

Mosler: Turkey's (still high) interest rates are lending support to inflation, not fighting it. IMHO Erdogan has been right all along on that score.

Comment: By 'be mindful' I mean, return the favour of not abusing the accumulated reputation for not abusing the privilege of being able to raise money cheaply, and respect therefore the fiscal limits, a long way off and uncertain though they may be.

Mosler: Gov (and its agents), single supplier of that which it demands for tax payment, necessarily spends first, and then taxes are paid and gilts paid for. It also sets the interest rate. (And it currently has the rate thing backwards, unfortunately)

Mosler: Prof Perelman on high rates causing inflation, 1996: Michael Perelman. Here are my notes from one article on the subject showing how HIGH interest rates can add to inflation. Journal of Economics 100: 1 (February): 149-64. Rep. Wright Patman charged that high interest rates cause inflation. // Hotson articles. Traditional view: high interest => declines in inflation and interest rates in long run. Steven Seelig. 1974. "Rising Interest Rates and Cost Push Inflation. J. of Finance, 29, p. 1049-61 found that interest rates would have had to double during 1959-69 in order for interest rates to be an important determinant of prices. Today interest rates have achieved that level.I have fond memories of Wright Patman, who pushed this idea in the 1960s and before. Driskill, Robert A. and Steven M. Sheffrin. 1985. "The "Patman Effect" and Stabilization Policy." Quarterly. They assume that wages and interest are prime determinants of cost and output is demand determined. With a fairly high interest cost share and a relatively interest-inelastic money demand relationship the model becomes unstable, lending some credibility to Patman. Also economies with high interest cost shares in production have worse macroeconomic tradeoffs. Michael Perelman.

Comment: Credit to Jim Bullard for reviving this view under the Neo-Fisherian argument. Also credit to Jim Bullard for failing to advance anything controversial.

Mosler: So, not that it actually matters, a prime mainstream argument about increasing net (deficit) spending to sustain full employment, for example, is 'we're ok as long as the Fed keeps rates low' which becomes moot when it's understood that raising rates in fact promotes inflation.

Comment: Real yields on U.S. 10-year debt turn the most negative since early September, at negative 1.05%, heading back down to the record low.

Mosler: Negative rates=a tax on those deposits= deflationary/contractionary. Positive rates=basic income for people who already have money=inflationary/expansionary but highly regressive so not my first choice for public policy=I like permanent 0 rate policy+full employment fiscal+JG.

Comment: QE is a tax. It stops interest payments on Treasuries using an asset swap.

Mosler: Instead, the Fed pays interest on the reserves spent via QE.