Wednesday, February 3, 2010

Responses to my questions about Chartalism

In the comments, I get responses to my questions about Chartalism from Tom Hickey, Winterspeak and JKH, and I respond to their answers. I am posting them here to provide continuity from my previous post.

Tom Hickey said: Hi Rogue, good questions.
1. A sovereign government that is the monopoly provider of a non-convertible floating fx currency is not financially constrained but there are real constraints on currency issuance or either inflation or deflation will result. As the monopoly provider of the currency of issue, which enters the economy through government disbursements and creates net financial assets, the government has the corresponding responsibility to provide the proper amount of currency to balance nominal aggregate demand with real output capacity at full employment, neither providing too much, which would be inflationary, nor too little, which would be deflationary. Primary signals in judging nominal AD relative to real output capacity are the output gap and the employment rate.

2. Good question. This is why MMT favors fiscal means, since both disbursements and taxation can be tightly targeted to encourage more efficient and effective distribution when inefficiencies and deficiencies arise.

3. Floating fx rates generally handle international currency balance with respect to trade and other such issues. In addition, as the issuer of the world's reserve currency, the US is in a special position and relationship with other nations and their currencies. Therefore, the US must balance national and international needs. Similarly, the developed nations have recognized their responsibility to the global economy by maintaining order and fostering the development of emerging nations. This involves making capital and technology available where it is needed, for example, as well as forging international cooperation, e.g., WTO, G20, IMF, World Bank, SDR's, etc. Of course, there is still a long way to go.

4. The commercial banking system creates bank money or credit money by lending -loans create deposits. Therefore, all credit money in the economy nets to zero. Only the currency issuer can increase net financial assets (by disbursing) and reduce them (by taxing). The central bank affects the commercial banking system chiefly through its control of the overnight rate on reserves, which influence the cost of lending, hence, borrowing.

5. No absolute limit. This is a political choice. The Chinese make different choices in this regard than the US, for example.

6. The US government has a responsibility under the Constitution "to provide for the general welfare" (Preamble). MMT takes this to apply monetarily particularly to employment. MMT scholars have published a great deal on full employment and price stability.

7. MMT scholars have proposed a job guarantee that would set a stable floor price for labor.

There are two excellent intros to MMT principles:
Warren Mosler's 7 Deadly Innocent Frauds
L. Randall Wray, Understanding Modern Money: The Key to Full Employment and Price Stability

winterspeak said...
No disagreement with Tom, but another perspective:

1. Upper constraint to Govt issuing currency is an intolerable amount of inflation.

2. The best way to ensure Govt currency goes to everyone in today's high-tax world is to lower taxes (take less money away from people). Regressive taxes like payroll tax work best here. Or, it can be disbursed on per capita basis.

3. Chartalists like imports. It means an economy can issue tokens for real stuff. Real stuff is worth something, money is just a token, so yes, run higher deficits (lower taxes, higher spending) and fund foreign savings demand.

4. Banks are a public private partnership with the Govt. They cannot create net financial assets. Capital requirements limit how much credit they can extend. The hope is that banks will focus on making good loans (loans that will be paid back) because private capital is in first loss position for when those loans go bad. This is not how it has worked in practise for quite some time due to terrible regulation, and predatory banks are a product of their environment.

5. How much the Govt can or should direct private investigation is an issue outside of chartalism. Chartalism is mostly just accounting, it isn't really a "theory".

6. Generally, the Govt should keep its people employed. So yes, if businesses experience aggregate demand shortfall, and employment falls, the Govt should step in.

7. The system embraces market competition by having private capital in first loss position, and adjusting fiscal demand broadly. Although this is a funny question as in practise, we are in a chartalist world, and what happens in practise is the Govt largess goes to those who are politically connected (GM unions, Goldman Sachs)

JKH said...
Agree with Tom and winterspeak. I’ll add that Chartalism might be viewed as a two stage process of understanding and belief. Understanding is the result of a correct interpretation of the facts of accounting, and how the monetary system actually works. This is a significant hurdle. Not nearly enough economists understand basic monetary operations – for example, why the textbook “multiplier” theory of deposits leads to outer darkness, or what excess reserves actually represent on today’s Federal Reserve balance sheet. Belief is what individual Chartalists do with the result of their understanding, and how they steer it into preferred ideology and policy. Belief is an option. Understanding how the monetary system is a requirement. Most Chartalists will emphasize that understanding allows debate about policy that otherwise can’t take place on a level playing field insofar as facts on the ground are concerned. The problem is that not nearly enough economists are yet able to pass that threshold of understanding because of existing educational indoctrination.

I respond:
Tom, Winterspeak, JKH, thanks for providing answers to my questions.

1. Tom, I see the logic of using the output gap and employment rate as the signals to look for. For as long as fiscal actions are going towards productive activities that create actual employment instead of non-productive speculative activities, then the net benefit should outweigh any incremental inflation.

2. WS, agreed that lowering tax may enable some businesses marginally responsive to hiring when lowered tax rates frees up some cash flow for this purpose, but perhaps at this point in our current economic predicament, more hiring and spending by government will do more of the trick, since what businesses need more than anything is a boost in sales.

3. WS, I guess if it all boils down to nothing more than trade balances (and the deficit nation does not actually incur debts that have interest and maturity obligations as a normal loan would) then you’re right, it shouldn’t matter how much money actually goes towards imports. Come to think of it, surplus countries do not acquire the deficit nation’s bonds when they finance deficits, they acquire foreign reserves. So it’s just cash that they can use to fund future deficits vis-a-vis the former deficit country (US).

4. My actual concern with the banks acting as fiat boosters is that not all bank loans could actually go towards consumption or towards financing productive activities. Sometimes they are used towards financial speculation. This results in an income boost for the recipient, who does not merely deposit it in the bank or use it fund consumption, but uses it to fund even more speculation in the same (or other) assets. In other words, banks can have a closed loop effect on the growth of asset bubbles. I’m sure this is something outside the scope of the original intent of government fiat, but I was wondering if Chartalist framework had any additional ideas on how to contain this loop from happening. Otherwise, yes, WS, banks are the product of their environment, and probably the only way to contain it is with strong regulation.

5. Tom, I thought as much. For as long as it contributes to productive employment and increases national output, then why should government be limited from it (Well, it shouldn’t be immoral or promote public vice, though that hasn’t stopped government from being the monopoly gambling business operator in some countries.) WS, if it’s not a theory, just accounting, that probably explains why I didn’t find it hard to reconcile these ideas with my own conceptions of the economy.

6. Flowing from Tom’s answer in # 1, ok.

7. My concern in question 7 was that having a definite safety net could also have the unintended consequence of having people not try harder to innovate anymore. Who cares if we don’t innovate, when if we lose our jobs as a result, the government is always there to give us our new gig? So perhaps there should be a clear distinction that government will only provide a safety net when there is a general demand decline in the economy, not to any casualty of a previously giant corporation that loses market share.

UPDATE: There are more clarifications about Chartalism from Scott Fullwiler in the comment thread.


Stefan said...

2. The best way to ensure Govt currency goes to everyone in today's high-tax world is to lower taxes (take less money away from people). '

It certainly is not, as many famed economists have pointed out.

Tax cuts are generally spent on the same things by everyone that recieves them, mainly Housing, transport and education. If everybody gets a tax cut, they simply put the relativer prices of these 'must have' items/services.

Tax cuts have no advantage to anyone other than the political party thats gained a few brownie points by instigating them.

Rogue Economist said...

That's right. and taxes can also just be saved and not spent, which was the original intent of government in lowering. So I also think lowering taxes is not really very helpful right now.

vimothy said...

Can you ask them how the price level can be exogenous of the supply of money is endogenous, by any chance?

I'm having trouble getting my head round that one...

Rogue Economist said...

vimothy, where was this said? we can ask the question and get an answer that properly addresses your question, if we know in what context this was stated.

vimothy said...

For instance, here:

And see critique here (p.7):

Rogue Economist said...

vimothy, were you asking how price level an be exogenous IF the supply of money is endogenous? I scanned the links you sent, and I can't find the reference. which page did you see it?

Anyway, from what I understand of the concept so far, they say price and money supply is exogenous because the government determines them via spending. But money can be endogenous because it can also be created by bank lending. Is this what you were asking?

vimothy said...

Hmmm, having trouble finding it in Wray, so maybe its just a misunderstanding, but here's Febrero:

"Neo-Chartalists argue that the state has the ability to provide state-money with a certain amount
of value (Wray, 2003, p. 104). Here, the term value stands for purchasing power. The argument
can be described as follows. Imagine that one person works 10 hours a day and produces 100
units of commodity A. The state wishes to purchase 20 units of A paying 20 monetary units
(say, 20 dollars). In theory, this means that the price of one unit of commodity A equals one
monetary unit or, alternatively, that the normal price of one unit of labour amounts to one
hundred monetary units."

Money supply endogeneity means the money supply is not set. If long run potential output is fixed (vertical supply curve) price level will fluctuate according to fluctuations in the money supply. I.e. price level cannot be set if money supply is endogenous.


But perhaps Febrero is wrong in his claims about this being a Chartalist position...?

Rogue Economist said...

vimothy, the state can control prices via increasing money supply, I think we both already know how that works.

But my observation is that the government cannot set the price level for a specific good, particularly if there is a sizable demand coming from the private sector. Did Febrero mean that the state can (and want) to influence the price of grain, for instance, by buying it at $1 per unit? What if the private sector was willing to pay $1.50? I don't think state price-setting would work in this case.

But if the private sector was only willing to pay 50 cents, perhaps the state can influence prices, but more likely the only result would be that more firms will want to be the designated supplier of the state. This sounds like corruption. Is this what Febrero was implying, that the state can encourage corruption?

He could also be talking about how governments in Europe influence prices by paying farmers not to plant? These are acts already being committed by governments who probably have never heard of Chartalism, so I'm not sure this is a question for Chartalists.

I didn't really understand Febrero in that passage either, but if anybody else has insight on this, pls chime in.

vimothy said...

The state only controls a base rate, not the money supply, If the state does not control the money supply, how does it control the price level?

Tax policy?

Rogue Economist said...

The state can control the money supply, by quantitative easing (of the central bank), and this can change general price level. I'm not sure quantitative easing was ever referred to by either of the articles you linked to, but the state does have monetary policy actions that can change prices.

Scott Fullwiler said...

Hi vimothy

The Febrero paper is a complete misrepresentation of Charatalism. No Chartalist takes that paper seriously. All three of the points the paper purports to make as a critique of Chartalism are complete caricatures of Chartalism. Best to ignore the paper (unfortunately, it was published in a top heterodox journal, so it gets trotted out every time someone's looking for some way to critique us--not that this is what you were doing). I did provide a quick critique of the paper on Steve Keen's blog back in September or October, if you care to try and find it (I was posting as "stf" there).

This is not to say that a good critique of the Chartalist approach could not be done, but simply that this particular paper is not that. Not even close.

Scott Fullwiler said...

vimothy . . . found it:

Here's what I wrote in comment 381 at

Eladio’s paper is a complete misinterpretation of chartalism. Anybody using that paper to discredit chartalism doesn’t understand chartalism. At least none of the “card carrying members” will pay any attention to any critique founded on that paper or others like it. I don’t want to use too much space or precious time discussing that paper, but let’s just consider quickly the three points of criticism made in that paper:

1. He uses the EMU as a counter to the chartalist argument that money has value b/c it is used to settle taxes. Apparently he hasn’t read much of anything Randy has written, b/c Randy’s noted numerous times that EMU is NOT an example of a sovereign currency-issuer for precisely the reasons Eladio mentions. If he’d read the chartalism literature instead of the literature critquing chartalism, he might have noticed that.

2. His critique of the chartalist point that the state controls the value of money misinterprets the chartalist argument. There’s a lot here I could say, but I’ll just make one point (it’s not a complete refutation, granted): Mosler’s 1998 JPKE paper explained rather clearly that the position was that government deficits RELATIVE to private sector desires to spend is what sets aggregate demand. Thus (a) it’s too simplistic to state the point as Eladio does, (b) the chartalist view here is a theory of aggregate demand, and should not be considered inconsistent with approaches such as the PK wage-conflict view.

3. Eladio misinterprets chartalist use of the term “leverage” and their suggestion that “state money precedes private money” to mean something like the money multiplier. It’s beyond me how anyone could ever read Wray, Mosler, myself, etc., and come to this conclusion, but several have. In short, it’s simply wrong . . . we are in complete agreement with the endogenous money view of banking and there’s nothing inconsistent with it and chartalism. See Wray’s edited volume “credit and state theories of money,” Mosler’s paper “soft currency economics,” or Mosler/Forstater’s paper on a “general framework for the analysis of money and other commodities” or something like that (both on Mosler’s site). Here again, Eladio relies on critics of chartalism that had also misinterpreted the chartalist view.

vimothy said...

Rogue Economist,

The state does not control the money supply. CB targets a base rate. The financial system determines the differential, and the supply curve of money is then horizontal (i.e. infinitely elastic) at any given interest rate (given regulatory and collateral requiremenmts). The money supply is endogenous.

QE just changes the yield curve on treasury debt, transfering income from savers to borrowers.

The theory that the CB controls the money supply = monetarism / quantity theory.


Thanks, lemme try to integrate this into what I know and ask a question...

Rogue Economist said...

vimothy, ok, here's what I meant. Quantitative easing can increase the supply of money in circulation, or at the very least, the amounts banks could be willing to lend.

This is the only way to reverse the trend of transferring income from savers to borrowers.

I think I see that winterspeak has the same position as you, though, and I’m still trying to get around to that position myself. What am I missing here?

Scott Fullwiler said...

Hi Rogue,

Banks don't lend reserves. They create a loan, which simultaneously creates a deposit. Quantitative easing does absolutely nothing for banks' operational abilities to create loans. Banks are capital constrained, not reserve or deposit constrained. This may be of interest:


vimothy said...


Maybe the easiest way to think about it is this: the CB controls a base rate. QE can help them to target different (long term, public or private) rates. But the aggregate supply is infinite (horizontal curve) at that level. Aggregate demand therefore determines the supply of money, regardless of where QE takes the targeted rate.

I've no idea if this is winterspeak's potition. In my head this is a generic neo-Wicksellian horizontalist claim that in fact best represents the monetary system as is (i.e. it's not really theoretical).

vimothy said...


Are you saying that AD for the economy as a whole determines the price level, and the state can influence that through deficit spending?

vimothy said...

Also: Is that a distinctly Chartalist position, or just generic Keynesianism / PKE?


Rogue Economist said...

Vimothy, that sounds about right. Scott, thanks for the link to your post. Adding reserves does not lead to more lending. No additional lending is encouraged if no profitable accounts can be found.

May I also add that neither can banks use excess reserves to speculate directly, as the regulatory capital cost of using them is more expensive than the reserve itself. There must then be some other source of funds for the speculators who are, as Roubini terms it, doing the mother of all carry trades.

David Angelo said...

I dont understand why you think a foreign country can't do anything with fiat currency other than by more sovereign debt.

They can buy the country! Buy businesses, buy stocks, buy commodities and jack the price in USD up. They can sell t-bonds and crash the value of them. That assumption that "oh, who cares if we have a trade deficit...all they can do is buy more of our debt" is totally wrong.