07 Aug 2020

BMS ep. 136: A Framework for Money, Inflation, and Debt

Bob Murphy Show, Debt, Inflation 10 Comments

This is a follow-up to the marathon interview I did with Rohan Grey on MMT. I lay out what is the fairly standard framework economists use for thinking about money, inflation, and debt, and apply it to the discussion Rohan and I had.

10 Responses to “BMS ep. 136: A Framework for Money, Inflation, and Debt”

  1. Charles DuBois says:

    Thanks for this. I think Rohan’s view can be reconciled with Bob’s view. Consider:

    Scenario A: Selling Treasuries to finance deficit.

    1.The government issues, say, $1000 to Treasury securities to private sector agent A. Agent A’s bank deposits are debited for $1000.

    2. The $1000 is given to private agent B, the recipient of the “deficit payment”. Agent B’s bank deposits increase by $1000.

    3. Agent B will typically spend, say, 70% of this payment and save the rest.

    Scenario B: The debt is “monetized” with QE

    Steps 1-3 of Scenario A are the same. Steps 4-5 are added:

    4. The government buys Agent A’s Treasury securities. Agent A’s Treasury securities go down by $1000 and Agent A’s bank deposits increase by $1000.

    5. Since this money was part of Agent A’s savings, Agent A will try to find another home for his $1000 of bank deposits. As Bob explained, this action will tend to help asset markets

    Thus I think the views of Rohan and Bob can be reconciled:

    Spending is the same in either scenario. This supports Rohan’s point that the impact on inflation (CPI inflation) will be the same in either scenario.

    Asset markets do better in Scenario B. This supports Bob’s point that inflation still shows up somewhere – in this case in the asset markets.

    More importantly, this reconciliation is supported by real world events. It explains why Bob’s inflation forecast of years ago was incorrect. It helps also to explain why asset markets have done so well.

    Does this make sense? Thanks.

  2. Bitter Clinger says:

    1. Many years ago Milton Friedman wrote an article in which he argued that Paper Is Better Than Gold. I don’t remember his specific arguments. In general he said that because we are human beings and have free will, and can control our thoughts, actions, and emotions, any system of currency that is developed based upon gold can be duplicated with paper without the mal-investment and cost of producing gold.

    2. I do not discuss Money per se, preferring to think more about the general case which are assets. There are tangible and (contrary to Dr. Murphy’s ignorance of “Intangible Drilling Costs” and why they can be capitalized and depreciated) intangible assets. My promise to pay at some time in the future (a bond) for currency today is an intangible asset, but it is an asset. Currency is a tangible asset (the paper and any number that can be converted to paper) while intellectual property is intangible. Assets can be real or imaginary, the china cabinets I build are real while Bit coins are imaginary.

    3. I visualize the economy as a huge cauldron of all kinds of assets being created and consumed in a boiling, frothing, turmoil seeking comparative value in terms of every other asset based upon human preference and supply and demand. This process is what is known as The Market
    4. In Classic MMT, as I understand it, Ivanka would wander into the Oval office and say, “Dad, I have an invoice for $9 billion for F35 aircraft.” The President would take the invoice, grab the phone and shout, “ Is this the Mint? This is Trump. How many dollars does it take to make $9 billion? That’s Big League. Well put them on pallets and ship them out to Lockheed Martin.” The reason I use $9 billion is that in 2018 the gold industry in the United States produced $9 billion worth of gold. (a real asset just like paper dollars are a real asset) They dumped it into the caldron of assets diluting the value of gold in exactly the same manner Trump’s hypothetical printing of $9 billion diluted the value of currency. In one case society got some F35 aircraft in return (I won’t argue whether that is good or bad), in the other case they got a big hole in the ground, heavy equipment, a toxic refining process, and a huge environmental footprint.

    5. In 1913 and 1914 the two most heinous crimes were committed against the people of the United States. The first was the income tax which was a tax on productivity instead of a tax on wealth, the second was the Federal Reserve. Dr. Murphy is writing a book about the Federal Reserve and from the chapters he has posted on the blog he knows less about how it works than I do and I don’t know anything.

    6. In my Trump example Trump trades dollars for aircraft in the same manner that mining companies trade gold for holes in the ground, equipment, and pollution (also personal profit). But that is not how the Federal Reserve works. The Fed has a government monopoly on the creation of currency by lending out money. It was implement by and for the benefit of the banksters and the detriment to everyone else. You say how is buying the promise to pay (bond), different than buying a tangible asset (aircraft). Aren’t they both assets by my definition? This misunderstanding is the essence of the problem. Trump’s $9 billion like the gold is now part of my cauldron bubbling and frothing. There is no way it can be retrieved. It bought goods and services for the benefit of the United States or in the case of gold, the people who own the mine.

    7. The Fed’s money did not buy goods or services, it is owed back to the Fed plus interest so it is only temporarily in the cauldron. Think of it, EVERY DOLLAR IN EXISTENCE BELONGS (is owed) TO THE FEDERAL RESERVE PLUS COMPOUNDED INTEREST FOR THE LAST 106 YEARS.

    8. A while ago Dr. Murphy wrote a post saying how the debt can be paid off. I laughed. Not only is there not enough currency in circulation to pay off the debt to the Federal Reserve, they are owed 55% of all the assets in the United States. As I have pointed out at least five times in the past: “The financial position of the United States includes assets of at least $269.6 trillion (1576% of GDP) and debts of $145.8 trillion (852% of GDP) to produce a net worth of at least $123.8 trillion (723% of GDP)[a] as of Q1 2014.” See: https://en.wikipedia.org/wiki/Financial_position_of_the_United_States#Foreign_debt.2C_assets.2C_and_liabilities

    • Bob Murphy says:

      Bitter Clinger wrote: “There are tangible and (contrary to Dr. Murphy’s ignorance of “Intangible Drilling Costs” and why they can be capitalized and depreciated) intangible assets.”

      Are you referring to some old article I wrote on tax treatment of oil companies, or is this an example you’re using for the current discussion?

      • Bitter Clinger says:

        Years ago you testified at a government hearing. This was during a time where the Frackers were being smeared because they were allegedly cheating by depreciating Intangible Drilling Expenses At the end of the hearing you were asked about them. I thought that while depreciation is a made up concept it still has meaning and purpose. That you would explain how and why it was appropriate to capitalize and deprecate these costs. You mumbled incoherently. I was disappointed, I probably shouldn’t have been.

    • Bob Murphy says:

      BC wrote “Not only is there not enough currency in circulation to pay off the debt to the Federal Reserve, they are owed 55% of all the assets in the United States.” What in the world are you talking about? What are you taking as the assets of the Federal Reserve?

      • Bitter Clinger says:

        In the WIKI Article, the fact that the Federal Reserve cannot hold assets except on its balance sheet is why the debts cannot be booked as an asset. See my next comment.

    • guest says:


      First of all, the Federal Reserve is unconstitutional, and the government owes *us* for siphoning off private sector wealth through the Cantillon Effects of inflation.

      Second, this article might help:

      Why the Greenbackers Are Wrong (AERC 2013)

      “Suppose I, a banker, lend you ten ounces of gold, at ten percent interest. Next year you will owe me 11 ounces: ten ounces for the principal, and one ounce for the interest. Where do you earn the money to pay me the interest? Either by abstaining from consumption to that extent and saving up the money, or by earning it through providing goods or services to others. In other words, you earn the money to pay the interest the same way you earn the money to pay for anything else. …”

      “… Although the “there isn’t enough money to pay the interest” argument fails, I want to take up a related warning about sound money – a warning I noted at the beginning of this essay – that I read in the comments section of my blog: moneylending at interest by the banks will yield a long-run outcome in which the bankers have all the money.

      “The argument runs like this: if banks can lend 1000 ounces of gold today and earn 100 ounces in interest (assuming a 10 percent rate of interest) at the end of the loan period, then in the next period they’ll have a new total of 1100 ounces to lend out, and in turn they can earn 110 in interest on that. Then they’ll have a total of 1210 ounces, and when they lend that out they’ll earn 121 ounces in interest. In the next period they’ll have 1331 (which is 1210 plus the 121 they earned in interest in the previous period) ounces, etc. Eventually, they’ll have everything.

      “This is completely wrong, although even if it were right, presumably even bankers need to buy things at one point or another, so the money would be recirculated into the economy in any case. The money commodity itself rarely yields people so much utility that they will hold it at the expense of food, water, clothing, shelter, entertainment, etc. And when it is recirculated, the same money can be used to make interest payments on multiple loans.

      And third, Bov Murphy understands better than most how the Federal Reserve works. Check out this article:

      The Fed as Giant Counterfeiter

      Finally, here are resource pages about sound money and also one about the Euro (the accompanying video is really helpful):

      An Introduction to Sound Money

      The Tragedy of the Euro

    • Tel says:

      Seems to me that if the software industry can regard the wages of programmers, and the electricity to run their server farms as a expenses for tax purposes … then the oil industry should be able to handle the wages of bulldozer drivers and surveyors and the diesel that goes into their machines in much the same way.

      I get it, that the mining industry has struggled to maintain good public relations, while the software industry has (strangely) been able to make themselves into “the good guys”, but tax accounting has never been the right job for overly emotional people … consistency is the only thing that matters.

      What happens in the software industry is that a startup company ALWAYS makes losses for the first few years and survives by investor generosity … in the hope of making a profit down the track. If it does become profitable those earlier losses get brought forwards to offset the profit. Amazon has been doing this, and yeah … now I mention it … lots of people do grumble about Amazon. Perhaps the real difficulty here is that quite a lot of people have no idea how accounting works and don’t understand the difference between profit and revenue? Would that be a fair statement?!?

      In the oil industry, typically one company will have multiple operations running in parallel with some of them at various phases in the life-cycle so some well are losing money while other wells are making money. You could in theory split off each one as a separate Pty Ltd company and run every one as a project with it’s own cost center … then it would look like the software industry. That said, in the software industry you also have big gaming companies that make profits on a successful title and plow those forward into wages to build their next game which they account for as expenses. You don’t find all that many activists shaking their fists at Electronic Arts or Nintendo even though they have a very similar tax profile to the mining industry … from an accounting perspective.

      If your problem is exactly WHEN those expenses get written off for tax purposes, then in the case of a long running corporation that has multiple projects at various life cycle stages I would argue that when you sit down and do the numbers it comes out almost exactly the same. Since all phases of the project are happening somewhere or other, shifting the time when expenses are written off for tax purposes makes no difference.

      In the case where you are making each project a separate company, that company doesn’t pay ANY tax while it is still unprofitable … thus the expense automatically has to roll forwards and they have tax credits and other such things to handle this. Unless your plan is to disallow tax credits entirely and then you are shifting to a revenue based tax … but in that case go the whole hog over to a transaction tax instead. That would be changing the entire tax system. Heck, if you are going to change the entire tax system, go back to a 10% import tariff and leave it at that.

  3. Bitter Clinger says:

    I believe the only way that the Federal Reserve can create Federal Reserve Notes is to lend them out though the Discount Window. If this is the case lets see what the process looks like. Using Excel we can make a model.

    1 100
    2 104 4.00 4.00 4.16
    3 108.16 4.16 8.16 12.81
    4 112.49 4.33 12.49 26.31

    The first column is the year, the second is the amount of money in circulation, the third is 4% new money being created, the next column is the total created, and the last is the amount owed at 4% interest compounded yearly. If we skip down to the end :

    104 5681 218.50 5581 463,452
    105 5908 227.24 5808 488,031
    106 6145 236.33 6045 513,839

    You can see (or at least check my work) that the debt blows up to 85 times what is created by the 106th year of operation. Since the Fed has created $2 Trillion dollars in Federal Reserve notes (see their website) that would mean that the debt, assuming it was created uniformly at 4% a year at a uniform discount rate of 4% (both just guesses for the purpose of illustration), we would owe $170 TRILLION today instead of the $145 Trillion, I reference in the article.

    To service this debt the member banks mark up the discount rate by a couple of percent and lend out the money for mortgages, student loans, consumer debt etc. By marking it up 2% it makes them $3.5 Trillion dollars a year, talk about money for nothing, Chicks for free. I should have studied finance.

    This discussion started with Gamble asking why we can’t print it all. I had considered myself as a Greenbacker and said while the well of dollars is deep it is not as the MMT’ers claim infinitely deep. It appears I am a MMT’er as according to you they don’t believe it is infinitely deep either. All your complaints about paper money are caused not by the paper but by the Central Bank, the Federal Reserve.

    • guest says:

      “I believe the only way that the Federal Reserve can create Federal Reserve Notes is to lend them out though the Discount Window.”

      The only reason FRNs trade is because people believe them to be worth something. My position is that since they do not have utility enough as paper to be worth anywhere near what people are willing to trade for them (try buying a ream of paper and printing your own 1,000 note IOU-Nothings and see if people will accept them), and that since they are not IOUs for a specific good or commodity, that they are simply a means to steal from you based on your mistaken belief that they are worth something in trade.

      In other words, the FRNs trade value depends on someone else’s expectation that still a third party will accept them in trade. And that’s a Ponzi scheme.

      So, it’s the fact that the paper, itself, has no link to use-value that results in “debt money”, not the central bank’s handling of the paper, as such. Which is why the Austrian School criticizes pre-central bank creations of unbacked IOUs.

      For what it’s worth, I happen to go further than Bob Murphy in my criticism of paper money in that I see the logic behind the criticism also applies to unbacked Bitcoins that were created out of thin air.

      The point of a central bank is to solve the non-problem of supposedly insufficient currency. But to say that there is “insufficient” currency is to say that people really want it and can’t get it – which means that it will have a high trade value.

      That high trade value is what incentivizes an increase in supply, so the supposed supply problem takes care of itself. There’s nothing for a central planner to do.

      And if people can’t get the currency to make transactions in it because it’s in such short supply, that doesn’t mean they will stop trading and choose to starve to death.

      Either they will, 1) barter, or 2) they will look around at what the going wage rates are for those who *can* acquire the currency, and then simply barter with those who have currency based both on what it would cost the employer to go get those barter goods and also on a wage that is in terms of the currency.

      After saving enough in barter goods, you’ll have the resources to sustain you through a period of underconsumption that will allow you to then acquire some currency.

      All the while, your willingness to barter with someone who has currency is causing that person to spend currency on the things you want. You’d be participating in the economy just fine as long as the government isn’t in your way preventing you from trading with people.

      (Aside: Fairly recently I heard Tom Woods say that any supply of money “above a certain threshold” is sufficient – but he didn’t use to make that qualification before. I hold that it literally does not matter what the supply of money is, so long as it’s a commodity money, and that will be sufficient for an economy to run. For the reason mentioned above: if you value it, your efforts to acquire it will incentivize an increase in its supply; And if people don’t value it as much because they have enough, then people will naturally discover some other commodity is worth more in trade, and they’ll switch to that.)

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