Why does the government almost always spend in excess of taxes --i.e. run a budget deficit ? A 🧵
1/ The short answer is that the rest of us, on average, typically want to accumulate more US$ than what is required to pay taxes. That is, we want to net save US$. 2/

"Each time the Federal Reserve acts as a lender of last resort, it prevents some financial institution or some financial market from collapsing. 1/ When it does this, it introduces additional Federal Reserve liabilities into the economy and extends a Federal Reserve guarantee over some set of financial practices. 2/

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20 yrs ago, Scott Fullwiler wrote this paper, comparing the (then extant) practice of hitting interest rate targets via day-to-day open-market operations and managing TT&L accounts with the yet-to-be-adopted practice of paying interest on reserves. 1/ papers.ssrn.com/sol3/papers.cf… Scott concluded that instead of replacing non-interest bearing reserves with interest-bearing Treasuries, it would be far "more direct and more efficient" to turn the non-interest bearing reserves into interest-bearing reserve balances (IBRBs). Treasury could then stop issuing securities altogether. 2/

"If we could wave a magic wand and wipe out Treasury interest payments, we would have a lot of desperate people who had lost the income from savings bonds, Treasury bills, notes, and bonds and the pension funds that were holding them... 1/2 This in turn would mean less spending on goods and services, less production, and less employment for a lot of other people." 2/2
~Robert Eisner (1994)

If you see the MMT documentary, Finding the Money, you’ll hear about my struggle to make sense of @wbmosler’s ideas, including his argument that the three-sources view of public spending was wrong. 1/ Like any Econ student, I had been taught that government must choose how to pay its bills: Tax, borrow, or print.

@wbmosler argued that there was only one option. 2/

Sorting through materials for my next book and stumbled on this piece outlining the influence of MMT in Chinese policymaking circles. 1/ bloomberg.com/news/articles/… "Modern Monetary Theory can inspire China to make sure central bank easing supports government spending, several prominent economists said, as Beijing turns to fiscal policy to boost economic growth." 2/

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Gov spends $100 (G)
Non-gov sector now has $100
Gov taxes $90 (T)
(G-T) = gov deficit = $10
Deficit has added $10 to non-gov
Treasury sells $10 gov bonds
Non-gov swaps $10 for $10 bonds
NET RESULT: $10 increase in net financial assets to the non-gov sector (w/ or w/o bonds) 1/ Without the bond sale, the $10 would stay in bank reserve accounts at the Fed, where it would earn whatever the Fed chooses to pay on overnight reserve balances (IOR). 2/

$34 trillion!!! 😱 Run for the caves!

People have been writing versions of this article for the last 75+ years. It’s actually rather embarrassing.
1/nytimes.com/2024/01/02/bri… Here’s a political cartoon from 1937, when the (so-called) national debt reached $36B. 2/

🧵 5 Myths that Deserve Straightening Out

via Paul Sheard, former vice chairman of S&P Global. 1/10 bloomberg.com/news/articles/… "The first is that the government has to borrow in order to spend and run deficits. It’s the other way around...'raising revenue' is just a cover story." 2/10

Just saw this announcement from the Clinton Global Initiative, touting a competition to raise "awareness about creating a sustainable fiscal future." It is worth remembering ..... 1/ That Bill Clinton was the last POTUS to preside over a fiscal surplus. It is also worth remembering why those surpluses weren't sustainable. Pay close attention to the dates as you look at each slide. The fiscal surplus appears in 1998. 2/

Interest Rates and Fiscal Sustainability
"The orthodox conception of fiscal sustainability demonstrates a fundamentally flawed understanding of the interactions of the Fed, the Treasury, and private financial institutions within the U. S. financial system" papers.ssrn.com/sol3/papers.cf… The paper is full of insights (and policy implications) that are worth your time if you want to understand key differences between MMT and mainstream macro.

via James Galbraith (Aug 9, 2023)
"Back in 2021 and early 2022, a posse of prominent economists...all of Harvard...[argued] that inflation, fueled by federal spending, would prove “persistent"... 1/ But...inflation peaked on its own in mid-2022 (owing partly to sales from the US Strategic Petroleum Reserve). There was no persistence, no surge from the 2021 fiscal stimulus, and no wage-driven inflation from low unemployment... 2/

With notable exceptions, coverage of the debt ceiling debacle has been incomplete (at best) and dishonest (at worst). 1/ Let's start with the basics. The executive branch is bound--under the Constitution--to spend when Congress says spend. The law requires the president/Treasury to honor its spending obligations. The president and Treasury Secretary have taken an oath to uphold the Constitution. 2/

I call it covert monetary financing:
"the federal [government] can essentially finance ANY amount of DEFICIT that they want merely BY PRINTING BONDS and making sure they sell in the market ... and WE ARE INVOLVED IN THAT FINANCING OF THE FEDERAL BUDGET." ~Alan Greenspan

https://twitter.com/talmonsmith/status/1661419574116466688

LINK

This resonated with a lot of people. 1M views in less than 24 hours. Some (a minority) of you said it was just Trump talking "crazy." But this is really very basic stuff. Let's see who else agrees... 1/

https://twitter.com/StephanieKelton/status/1658865924664082434

"We will pay our debts in the end. It's not like if we don't pay we can't pay. We've got the right to print our own money. That's the key." ~Warren Buffet
2/
youtube.com/clip/UgkxMFXsW…

The "debt" limit was never intended to serve as a brake on spending. As @rohangrey explains in this law journal article, the original purpose was to make it easier for the executive branch to carry out the payments that had been authorized by Congress. 1/ rohangrey.net/files/coinage.… Think of the "debt" ceiling as a cap on the number of certain kinds of instruments (those subject to the limit) that Congress wants the US Treasury to use to facilitate the spending that Congress has authorized. 2/

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As the debate over Social Security and Medicare heats up, there's a name you need to know.

Robert Eisner Who was he?

Robert Solow, a Nobel laureate in economics at the Massachusetts Institute of Technology, said: ''Mr. Eisner was fearless. He never softened his language to ingratiate. Yet no serious person in the profession ever dismissed his views.'' nytimes.com/1998/11/28/bus…

Earlier today, a prominent economist was asked, “what keeps the 🇺🇸 from ending up like 🇬🇷?” For whatever reason, his answer skirted around the fact that Greece borrows in what is effectively a foreign currency. A rather important part of the story re: credit risk & interest rates Perhaps it’s in the book.

I shared some thoughts on the UK debacle. Some excerpts follow. 🧵
marketwatch.com/story/have-the… On the market reaction

🧵 Weaponize the debt ceiling in order to CUT Social Security and Medicare? Yes, that's their plan. banks.house.gov/uploadedfiles/… It was easy to see this moment coming, which is why I wrote this four-part series over the summer. I was hoping it might help to reset the debate before it's too late. Please consider sharing. stephaniekelton.substack.com/p/what-fdr-and…

A dissenting view. Some slides from the talk I gave @LevyEcon over the weekend. 1/4 2/4