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MMT and funding

Cullen, great piece today on the concept of funding. Why do you think so many academics struggle with this point? As a financial analyst it seems to intuitive and obvious. Also, do you find it shocking that Warren Mosler misunderstands this?  Being a finance guy I am surprised he doesn't seem to get it.

I think there's a simple reason why endogenous money is attractive to so many people in finance - we know how funding actually works because we see it all the time. We see firms and households expand their balance sheets all the time. It's just so obviously true. So the concept of endogenous money in banking is easy to understand.

Honestly, I am surprised Mosler misunderstands it. He's a very smart guy. Then again, I see LOTS of very smart people misunderstanding this concept so I guess I shouldn't be surprised.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Yes, the idea of endogenous asset creation never really confused me. This more nuanced view of funding is a little more confusing. I don't think the idea that printed cash has to be "funded" is easy for people to understand. Or the idea that a net profit is a funding source for banks. I think it's easier to understand by stating that all financial transactions require a buyer and a seller. When you print cash someone still has to buy that cash. When you issue loans someone still has to buy that loan. When you fund loan creation you had to sell a deposit. This makes it clear that all financial transactions require a supply provider AND a demand provider.

Well, if the govt prints cash then the recipient doesn't really "buy" it in any meaningful sense. But there does have to be demand for that money. There's low demand for Argentinean dollars so the govt has trouble funding their spending. And strangely, printing more money could actually reduce the demand for money. So to me it's more about counterparty supply and demand rather than thinking of it as buyers and sellers.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Obviously when you "print cash" there doesn't have to be a buyer.  That's the whole point the hyperinflationists use, that you can "print cash" with no buyer, thus making cash less valuable.   Correctly the hyperinflationists use this potential imbalance as their prime argument, but then applied it incorrectly to QE.   QE provided, at the margin, a question of liquidity preference.  If you viewed cash deposits as having a liquidity preference over US TSY instruments then altering the balance sheets of the private sector vs. the FED should increase the price of US TSY instruments.  It is probably true that an individual of modest means does clearly see a difference between holding cash and holding US TSY because the US TSY is not as liquid as cash for an individual.  But to wealthy people or institutions there is almost no difference between holding cash and US TSY, except that the latter generally pays more interest.


Cullen: Pls take this as conversation seeking understanding not argument. I dislike the term endogenous money - perhaps because I can't visualize what exogenous money would be. (Can you give me an example?) The general usage of "endogenous" is "internal". That makes sense in a field like medical because if a problem shows no external cause it's endogenous - else exogenous. In math, "endogenous" refers to a dependent variable (& "exogenous" to an independent variable).  When we're talking about money as a measurement in accounting terms, the math definition seems more descriptive as all the forms money can take (revenue, expense, asset, or liability) are all dependent variables (each dependent on one or more of the others). Am I missing something here?

My understanding of banking is that all a loan officer needs to consider is the quality of the borrower & that the loan is priced at a rate sufficiently higher than what they can borrow at (from the central or other bank in their system), ie, they're not at all constrained by their deposits. True? All a bank is really constrained by is its Equity? (which is what you mean by its "capital position"?).

Re government money, let me go back to a short description you approved of earlier: "GDP is the measure of our *productive* economy. GDP is the sum of household, business and government spending (and likewise their income equals that spending, because all spending is someone else's income). Our economy depends on household spending (2/3 of GDP). That spending is limited by household income (which comes only from those three sectors). Business provides that income to the extent demand (business opportunity) exists, and government provides the rest (by way of bookkeeping entries in household bank accounts). All that's important to the economy is maintaining this flow, and with a fiat currency (whose value, by definition, depends only on currency-users perception), there are no limits other than that perception."

I see that household spending as the "demand". It's always there - people need to eat, house, drive, etc. If anything becomes limited, it will be the amount & distribution of available currency, not the demand (for goods/services). If business increases the amount of available currency (eg, via wages), one would expect the demand would increase - & one wouldn't worry about inflation until that increasing demand started impacting available supply (of those goods/services). Now, replace "business" with "government" in the previous sentence, & why isn't the effect the same? Does the household even know or care who put that added currency in their account? And (apart from existing law), what difference does it make whether that government currency came from taxes or borrowing or was created via bookkeeping. All this is an endogenous flow of revenue & expense. Assets & liabilities aren't even part of this (what we call the *productive* economy, as measured by GDP). What am I not seeing here?


Hi @edzimmer.

Endogenous money just refers to the fact that it is created internally. For instance, the best example is public stock. We create public stock from nothing. We just write up a stock certificate and sell it. It doesn't come from somewhere. It isn't a rock or a piece of gold or convertible into a certain amount of gold. It's a contract we write up after having produced something from nothing.

As for banking - I wouldn't say deposits don't constrain a bank from lending. But banks don't take in deposits and lend them out as the textbooks claim. Instead, deposits are best viewed as a cheap form of funding. They allow a bank to pay very little or nothing on their liabilities which optimizes profits and adds to their equity base thereby allowing them to further leverage their balance sheet.

We touched on the concept of "flow" before. Flow is only sustainable when the quality of that flow is high. Think of it like blood flowing through our bodies. You need more than a flow to fuel the system. You need a certain quality in the flow. You need the blood to feed the various systems. So it's about more than flow. It's about the quality of the flow. That's what really makes our economic system viable. Pumping up the flow doesn't necessarily make the economy healthy. That's why endogenous credit based systems (as opposed to government run authoritarian systems) are often so healthy. A credit based system has a natural antibody in the form of competition. This weeds out the weak links and reinforces the stronger entities and higher credit entities to survive.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Hi, Cullen,

New follower here. Thanks for this great website and articles.

When MMTers say "government does not need funding", what I understand is "the government can print money and spend it as long as it doesn't cause inflation".

If the US government today (as of Sep 2019) asks FED to print $100 and buy its bond valued at $100 at 0% interest, and then spends this $100 for fixing a pothole on one of the highways, that would definitely not cause inflation. In this particular scenario, who exactly is funding this $100 spending? Is it funded by the users of USD (which would include foreign entities) or all participants in the American economy, i.e. taxpayers?

But since this spending doesn't cause any inflation (because there is an unemployed person government can find to do this work, i.e filling the pothole), then isn't it funded "out of thin air"? Isn't this same as "no funding required"?

What am I missing here?

Does funding come into picture when government money creation is excessive enough to affect inflation (billions or trillions of dollars) ?

Anybody, please feel free to explain this, cause I am still not exactly clear on what we mean by "funding".




Hi @mercani,

The cost of govt funding is rate of inflation. So, if it costs $100 to fill a pothole in year 2019 and then costs $102 to fill the same pothole in 2020 then the govt incurs a real increase in the cost of their funding. This is obviously affordable in nominal terms, but let's just say it was $200 to emphasize the point. In that scenario the govt would very likely look at the pothole and say "let's not risk exacerbating the inflation by spending more money". So, in essence, your real constraint becomes a nominal constraint. This isn't a problem when inflation is benign or low because some level of inflation is perfectly consistent with a healthy economy, but it becomes a serious nominal problem when inflation is high. The fact that inflation is generally low does not mean the govt doesn't fund its spending. It just means there is high demand for money so they can easily fund their spending without hurting their funding needs.

The key point in all of this is that the govt always has to fund its spending by relying on counterparties to accept their liabilities. Just like a bank funds my new loans by being my counterparty the holders of dollars fund govt spending by agreeing to accept govt liabilities. When inflation is running high this is occurring, in part, because fewer people accept dollars and as the demand for money declines the value of its declines versus everything else. In other words, it then costs the govt more to buy the same quantity of goods and services because the market is re-pricing their assets in such a way that the govts funding costs rise.

Does that make sense?

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Hi, Cullen,

This makes sense when government is creating money on the order of trillions of dollars, but it doesn't still make sense to me when it creates small amount of money.

I am a little confused by your post because in this particular case, printing and spending $100 itself did not cause 2% inflation. Price of filling potholes will be $102 next year whether that $100 were created and spent or not.

So, my precise question is "who is funding the government spending that is done without any new taxation assuming this spending is NOT causing any extra inflation?" OR is this not possible and are you claiming that any spending done without corresponding taxation would sooner or later cause inflation so it is (or will be) funded by USD holders?