Steven Keen models the MMT economy

The Mathematical Model of Modern Monetary Theory 2: Simulating #MMT by Steve Keen. Support Dr Keen’s work at Patreon.

The previous post finished with the observation that, since the sum of all Equity is zero, and the banking sector must be in positive equity, part of the remainder of the economy—the government, or the non-bank public—must be in negative equity. So which sector is better equipped to handle that: the non-bank public, or the government?

This will raise the age-old question that is perennially thrown at those who advocate government spending: “How are you going to pay for it?”, or “Where’s the money going to come from?”. To answer both these questions, we first need to know how money is created in general.

Since money, exclusively in this model and primarily in the real world, is the sum of the Banking Sector’s Liabilities and Equity, any action which increases Bank Liabilities and Equity creates money. Since every transaction is recorded twice, operations which increase the money supply must therefore occur on both the Assets and the Liabilities/Equity sides of the banking sector’s ledger. Operations which occur exclusively on either the Assets side, or the Liabilities/Equity side, shift money between accounts and do not create money.

So the answer to the “where’s the money going to come from?” question is “from any operation which increases the Assets and Liabilities/Equity of the banking sector”. Equally, any operation that reduces Assets and Liabilities/Equity destroys money.

Only 5 of the 13 flows in this model affect both the Asset and Liabilities/Equity sides of the banking sector’s ledger: Lending (and Repayment); Government spending (and Taxation); and interest payments on Treasury Bonds. These are shown in the top 5 rows of Figure 1. All other operations are either Liability/Equity swaps, or Asset swaps, and they don’t create money.

Figure 1: The Banking Sector’s Ledger

Operations that don’t create money include the usual suspects—payment of interest on loans by firms (which transfers money from the Firm Sector to the Banking Sector), purchases of goods from the Firm Sector by workers, capitalists and bankers. But they also include two operations that figure large in conventional arguments about how to pay for government spending: sales of Treasury Bonds to the finance sector; and purchases of Treasury Bonds from the finance sector by the Central Bank in “Open Market Operations” (which are primarily used to control the rate of interest). Neither of these operations create money.

They are asset swaps: the sale of Treasury Bonds to the finance sector (the “Banking Sector” in this model) reduces Reserves and increases the Banking Sector’s stock of Treasury Bonds. The purchase of Treasury Bonds from the Banking Sector by the Central Bank reduces the Banking Sector’s stock of Treasury Bonds and increases the Banking Sector’s Reserves. Neither operation affects the amount of money in the economy—the sum of the Liabilities plus Equity of the Banking Sector.

Since it’s an asset swap for the Banking sector to buy Treasury Bonds using Reserves, the answer to “where’s the money going to come from?” is “from operations that increase the sum of Reserves and Bonds”. You can work this out by adding up the entries in the Reserves and Bonds columns of Figure 1: the Banking sector assets Reserves plus Bonds will grow if government spending plus interest payments on Treasury Bonds exceed taxation:

The Reserves that are used to buy the Bonds thus come from the deficit itself. The deficit—the extent to which government spending and interest payments exceeds taxation—creates money in private sector bank accounts (the Firm Sector and Bank Equity only in this model). This boosts the Liabilities and Equity of the Banking Sector. The corresponding Asset that is increased by the deficit is the Reserve accounts of the banking sector. If no interest is paid on Reserves—the “usual” situation, and sometimes made worse by charging negative interest on Reserves in the false belief that this will encourage Banks to lend more—then the Banks have a positive incentive to use these reserves to buy Treasury Bonds instead.

So the answer to the “Where’s the money going to come from?” to pay for the deficit question is that it comes from the deficit itself: the deficit creates money that can be spent in the private sector; and it creates Reserves, which are (usually) non-interest earning Assets of the Banking Sector that are liabilities of the Central Bank—see Figure 2.

Figure 2: The Central Bank’s Ledger

Reserves are Assets of the Banking Sector that earn it no income. But if the Treasury issues bonds to cover the deficit—if the total value of Treasury Bonds offered for sale is equal to the deficit itself—then the Banking Sector is offered a deal to swap a non-income-earning asset for an income-earning one.

What do you think the banks would do, when offered that deal? They take it, of course: this is why Treasury Bond Auctions have always been over-subscribed. Selling the bonds themselves is not a problem. It is, as Kelton emphasises in The Deficit Myth, a “no brainer” swap of a zero-income-asset for a positive-income-asset.

The money needed to buy the bonds has already been created, and is sitting in the Reserve account. Banks then transfer their funds from one Asset that earns no income (Reserves) to another Asset that does (Treasury Bonds). This Asset is a liability, not of the Central Bank, but of the Treasury itself—see Figure 3.

Figure 3: The Treasury’s Ledger

This table also shows that the increase in Reserves is caused by the fall in the Government’s equity: Reserves (and hence money) rise if the Government runs a deficit; Reserves and money fall if the Government runs a surplus:

How does the Treasury pay the interest on the bonds? The same way it pays for spending in excess of taxation: it runs up its own negative equity—see the final column in Figure 3.

This can be done in two ways, as indeed can overall deficit-financing itself: by the Treasury having a negative balance in its account at the Central Bank; or if the Treasury borrows from the Central Bank to pay Interest on the Bonds (the second last row of Figure 3). If it does so, the negative equity from paying interest on the bonds remains, but the Treasury Account at the Central Bank can be kept non-negative.

A third option is that the Central Bank buys the bonds off the Banking Sector in Open Market Operations (or QE). If it does so, the amount of interest the Treasury needs to pay falls. Also, since the Treasury is the effective owner of the Central Bank, it doesn’t need to pay interest to the Central Bank on its holdings of Treasury Bonds—or if it does, the interest payments come back to the Treasury in Central Bank profits.

So the Government can run a deficit, and pay interest on the Treasury Bonds issued to cover it (not finance it: the deficit is self-financing in that it creates money), so long as it is willing to countenance being in negative equity. As noted in the previous post, because Banks must be in positive equity, the non-Banking sectors (and that includes the Government) must be in negative equity. For the Government to achieve positive equity therefore—which seems desirable, if you take the partial view of the economy epitomised by Representative Hern’s motion that “deficits are unsustainable, irresponsible, and dangerous”—the non-Bank private sector must be pushed into even greater negative equity.

Does that sound like a good idea?

To show the consequences for the economy of the government running a deficit or a surplus, it’s necessary to go beyond the purely structural equations used so far, and enable simulations. In what follows, I’ve built an extremely simple model of monetary dynamics in which all expenditures depend on the amounts of money in relevant bank accounts. There are many other ways these expenditures could be modelled, but this way ensures fairly easily that crazy outcomes—like workers have negative bank balances, but still spending their wages—don’t happen in this very simple model.

For example, I relate consumption by workers to the level of workers deposit accounts at the private banks, using the engineering concept of a “time constant”. This is a number that tells you how long an action would take to run an account down to zero, if it’s removing money from the account, or to double it, if it’s adding money to an account. A time constant of 0.02 for workers consumption says that if workers consumed at a constant rate of there were no other inflows or outflows in their accounts, then they would run their accounts down to zero in 1/50th of a year—roughly a week. Higher values for capitalists and bankers—say 2 for capitalists and 5 for bankers—assert that it would take 2 years and 5 years respectively for them to run their accounts down to zero through consumption alone.

You divide the relevant stock (the level of bank accounts, in the case of consumption) by the time constant to get the annual flow—see Figure 4.

Figure 4: Equations for consumption

Similarly, a time constant of 9 for bank lending says that if this was the only inflow affecting the level of debt, and it went on at a constant rate, debt would double in 9 years. Repayment with the same time constant means that the level of (private) debt remains constant.

Figure 5: Modelling interest payments, lending and repayment

GDP is treated as the turnover of money in the firm sector (it can also be treated as the sums of consumption and investment—which investment is entirely debt-financed in this model—and net government spending, but that makes it possible to end up with negative sums in deposit accounts, unless a much more complicated model is constructed).

Figure 6: Modelling GDP and income distribution

Government spending and taxation are treated as simple percentages of GDP. For the moment, I have not considered how they are financed, so the flows BondsB, BondsCB and InterestBonds are not wired up. The equations that define the system’s flows at this point are shown in Figure 7. At this stage, sales of Treasury Bonds to the Banking Sector, Central Bank purchases of Bonds from the Banks, and Treasury borrowing from the Central Bank, are not defined.

Figure 7: All the flow equations in the model (without bond sales or interest on bonds)

With no explicit financing of a government deficit, the negative equity that this causes for the government turns up as a negative balance in the Treasury’s account at the Central Bank—see Figure 8, which shows the impact of a 2% of GDP deficit for 60 years on the Treasury. It runs accumulates negative equity of $160, and that is entirely due to its account at the Central Bank being negative to the tune of $160.

Figure 8: The Treasury’s Ledger with no bond sales: negative Treasury Account and Treasury Equity

Figure 9 shows the impact of a 2% of GDP deficit for 60 years from the Central Bank’s perspective, and the key point is that the negative equity of the Treasury is the same magnitude as the positive Reserves of the Banking Sector: the accumulated deficits of the Government are precisely equal to the accumulated Reserves of the Banking Sector.

Figure 9: The Central Bank’s Ledger with no Bond sales: negative Treasury precisely equals positive Reserves

How does the picture change if we require that the Treasury’s account at the Central Bank can’t go into overdraft? Then the Treasury has to sell Bonds equal to its Deficit, and borrow from the Central Bank to pay interest on those bonds.

Figure 10: Bond sales are equal to the deficit, no Central Bank purchases of Bonds from the Banking Sector

Running this model to the same point as the previous one, where the Treasury Equity reaches minus $160, this negative equity consists of $115 in Bonds and $45.2 in Loans from the Central Bank (see Figure 11; the Treasury account at the Central Bank remains at zero). The Bond sales represent the accumulated government deficit over time, while the Loans from the Central Bank represent the accumulated interest on those bonds.

Figure 11: Treasury books with Bond sales covering the deficit

Can the Central Bank afford to lend the money to pay the interest on Treasury Bonds to the Treasury? Yes: as Figure 12 shows, the loans to the Treasury are an Asset of the Central Bank. It has the capacity to expand its balance sheet indefinitely, and none of the operations shown in this model affect its equity at all.

Figure 12: Central Bank books with Bond sales and interest payments on Bonds

I have to note that this was a surprise to me: I had guessed that the government’s negative equity would be carried by the Central Bank, and the fact that a Central Bank—unlike a private one—can operate with negative equity {Bholat, 2016 #6037} would be what enabled the government as a whole to sustain negative equity. But it turned out that my guess was wrong: the Central Bank simply acts as an enabler of and conduit for the Treasury’s negative equity.

Does the fact that the Treasury is borrowing from the Central Bank (in this model) cause any difficulty? No, because while private individuals can’t pay interest on loans by borrowing from banks—without that interest ballooning with further interest and driving us bankrupt—the Treasury can pay interest on Bonds to the Banking Sector by borrowing from the Central Bank because, technically and legally, the Treasury owns the Central Bank. It therefore doesn’t have to pay interest on any loans from the Central Bank If it did, it would get that money back in dividend payments from the Central Bank anyway.

What happens if the Central Bank buys all the Bonds from the Banks? Then the negative equity of the Treasury consists entirely of its debt to the Central Bank (see Figure 13).

Figure 13: Treasury’s books with Central Bank Open Market Operations purchasing all Treasury Bonds

Since those Bonds have been purchased off the Banking Sector, the Banking Sector has Reserves of 160 (see Figure 14). This is not as desirable a situation for the Banks as when they own the bonds, because with no Treasury Bonds they receive no interest payments from the Government. Far from the finance sector in general having “Bond Vigilantes” ready to deny the government bond sales if they’re worried about the state of government finances, the “Bond Vigilantes” are vigilantly on the lookout for sales of Treasury Bonds so that they can swap out of a non-income-earning asset and into an income-earning one.

Figure 14: Banking Sector’s books with OMOs buying 100% of Bonds

In the next post, I’ll consider what the impact is of different fiscal regimes: the government running a deficit (as the USA has for most of the last 120 years—roughly of 2.5% of GDP); the government running a surplus; the government running a surplus and the private sector borrowing from the Banking Sector; the government running a surplus and the private sector reducing its debt to the Banking Sector; and the government running a deficit while the private sector reduces its debt to the Banking Sector.

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Houses and Holes
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  1. adelaide_economistMEMBER

    He’s going to have to dumb this down significantly if he wants to get traction beyond a few shut-ins. Academics of the modern era need to understand who their real audience is and it isn’t other academics.

    • He shouldn’t bother — he has no clue. As usual with SK, he kind of partly gets it, and then makes the rest up.

      Just after the GFC I had a lengthy email exchange with him and that confirmed the awful truth. Then after the exchange, he sent me a link to his blog and asked me to subscribe if I wanted anymore of his valuable insights.

      Needless to say, I declined.

        • I worked in sales and trading in investment banking as a Debt specialist (interest rates and credit).

        • Well, when you put it like that …

          I think SK had an epiphany at some point when he discovered how money came into being and he realised that his contemporaries in the field of Economics didn’t quite understand money at all. At that moment he thought it was his opportunity to steal a march and make a name for himself. Sadly, it appears he didn’t quite complete the jigsaw correctly — went down a Keynesian dead-end, I suspect.

    • This little Swampy is not stupid, but this is beyond his poor brain.

      Swampy would like to understand, but alas alack.

  2. The Australian government creates bonds (from nothing) and sells them to the market, sucking cash from the economy, to fund its spending.

    The RBA creates cash (from nothing) and buys the bonds from the market to inject cash back into the economy.

    Basically, in effect, the RBA has created cash and it went to the government.

    You could cut out all the government / RBA bureaucracy and red tape and the financial market circus and just have the government create the cash itself to fund its activities. It’s exactly the same outcome, it’s exactly the same thing. The only difference being that the financial (parasite) industry doesn’t take a cut through commissions, fees, spreads, etc.

      • pfh007.comMEMBER


        The difficulty with MMT is that it claims to be nothing more than an operational description of how the monetary system works. That would be fine ( but it is debatable) but they also claim it can be made to work more in the public interest. In other words we just need to use the current model a better way.

        However, the problematic results of the current system are baked in and are no accident.

        Where MMT ties itself in knots is trying to explain how it can fix problems that are there by design.

        One example:

        Treasury sells bonds to finance deficits because it converts what would otherwise be a larger central bank balance sheet into wealth assets for the private sector (aka rich people) and it is also critical to supporting the current role of private banks as the creator of a large chunk of the broad money supply.

        If MMT don’t want to reform this it is a problem as there is no public interest in creating debts out of thin air that attract interest payments instead of a larger central bank balance sheet that attracts no interest payments.

        If MMT does want to reform this then it can’t claim to be a method of better making use of the current system as it is talking about radical reform (see MyRBA).

        The consequence is that MMT sounds like it is simply prescribing lots of interest bearing public debt spent by the government for make work schemes.

        Which is why the defenders of the status quo have little difficulty making fun of it.

        MMT needs to make the jump and call for democracy for Central Bank balance sheets.

        • True, except when coupled with YCC.

          Once yields are held below inflation, the rich getting richer phenomenon breaks down. Debt monetization, by definition, erodes the worth of debt assets, or any unproductive asset for that matter.

          • You presume wealthy people have their money in cash so it is ok to erode those savings. The reality is most wealthy people have their money in assets, and it is the people who are savings for a house and retirement that will see their savings eroded.

          • Freddy, I wrote all of 3 words in that post and you still missed it:

            …erodes the worth of debt assets, or any unproductive asset for that matter.

            Savers are screwed now anyway. We’re at the end of the longterm debt cycle, there’s only 2 ways out, mass defaults (in Australia it’d be everyone losing their house) or debt monetization (being able to pay down debts at the expense of eroding purchasing power).

            Look to the last time this happened; YCC throughout WW2 with huge fiscal deficits, moving into post war decades where inflation persistently ran ahead of rising rates/yields. Ultimately, asset values fall (house prices), wages rise and debts fall. Sucks to be younger. Baby boomers were always the true silver spoon generation.

          • How about putting some safety mechanisms in place to protect non-wealthy savers? Let’s say print a bit more money or tax deductions to compensate negative real rates for savers that have total assets worth less than median value of a home?

            Of course that would never fly because the real motivation is to maintain the status quo of lower and upper classes squeezing middle class workers.

    • Of course the Govt creates bonds from nothing — a bit like writing a letter to your girlfriend is creating something from nothing. A bond is a simple IOU, nothing more. The money printing bit by the RBA is what matters here.

      And you’re right, the Govt can fund all its spending with printed money — personally I can’t wait as there’ll be no need for me to pay income tax anymore – how good is that? Even better, we have some recent examples of Govts who have printed money to fund their spending — Venezuela! Oh wait …

      • Although I appreciate Dominic made up his mind on MMT long before he actually understood it, I respond more for the interest of others. As recognised by MMT, Taxes are a necessary and key foundation upon which the monetary system is built, so that throw-away line is just plain rubbish and should be ignored.

        As for the simplistic throw-away line on Venezuela, there are many great resources for the actual reasons behind Venezuela’s economic disintegration and this is not one of them…and for the record money printing had little to do with it. Same is true for the other so-called examples such as Weimar Germany or Zimbabwe. Any genuine attempt to research and understand events and context around these countries would reveal that. Just more rubbish to be ignored.

        MMT accurately describes how the monetary system works and great work by Steve Keen to model it.

        • Marcus, economics is actually quite simple and most theories can be subjected to a ‘common sense test’, for the sake of veracity. Let’s take a look shall we?
          – If the Govt can print all the money it needs to spend, why do we pay income taxes?
          – If the Govt can print money without any cost to its value why do we even have to work? They could just send us a cheque every month (notwithstanding the fact that no goods would be produced).
          – Printing money out of thin air and exchanging it for real goods is the equivalent of getting something for nothing – is that really even feasible (or indeed sustainable) in the real world?
          – Does money even have real value if you can print it out of thin air at zero cost?
          – I could list another twenty legitimate questions …

          MMT has been tried numerous times in numerous jurisdictions throughout history and the result has always been the same. It has merely been re-badged (as MMT) and re-heated to sell to gullible people. “This time it will work – I promise!”

          The idea that the tax system can be used to control inflation is so absurd it causes me chest pains just thinking about it. Never mind, chief, who am I to prevent the believers from having their bit of fun. I personally won’t be hurt by the consequences of such a policy so what do I care.

    • All the current approaches are akin to “Let’s make the baby fat by feeding the tapeworm within it”

      And then they wonder why the baby is skinny with a pot belly.

    • Jumping jack flash

      “You could cut out all the government / RBA bureaucracy and red tape and the financial market circus and just have the government create the cash itself to fund its activities”

      No, I’m pretty sure they need to do this so it hides the inflation it would otherwise cause if they simply printed and spent.
      Its all accounting, but we don’t want to be Zimbabwe.

  3. Much of the complexity comes from the unwillingness to consider the much simpler alternative of allowing the general public and non-banks to operate zero interest deposit accounts at the Central Bank.

    Doing so solves most of the current problems which are all manifestations of the absurdity of giving one industry the privilege of a monopoly on a critical public asset …the central bank balance sheet. No longer is it an either / or of big government v big banks when it comes to money. Everyone has a direct interest in the central bank balance sheet and it’s integrity.

    It’s time to democratise the RBA balance sheet.

    The MyRBA Quick Guide – 10 Key Points

    1. It is our RBA

    The Reserve Bank of Australia (RBA) is a publicly owned institution and its balance sheet is the foundation of the Australian monetary system. Every Australian has an interest in that balance sheet.

    2. RBA Deposit accounts

    The critical reform of the MyRBA proposal is that every Australian will be allowed to operate a deposit account at the Reserve Bank of Australia (RBA).

    3. Convenient

    A MyRBA deposit account at the RBA will be like using notes and coins issued by the RBA only a lot more convenient.

    4. 100% safe

    A deposit account at the MyRBA is 100% safe and risk free because as the foundation of our monetary system the balance sheet of the Reserve Bank of Australia cannot fail. There are no technical or practical reasons for denying all Australians the right to open and operate a deposit account at the RBA, the safest bank in Australia.

    5. End the bank monopoly of RBA deposit accounts

    Currently only banks are permitted to operate deposit accounts at the RBA and this means that anyone who wants to operate a bank account is FORCED to enter into a business relationship with a private bank.

    6. End bankers power to create public money

    The key reason that the Australian public continue to be denied access to RBA deposit accounts is because that protects the private banks’ license to create public money out of thin air. Give Australians the right to open and operate MyRBA deposit accounts at the RBA and the private banks must lose their power to create public money. This does not require nationalising the banks or stopping them from lending money (just like non-banks have been lending money for years) . Banks will still have a role just a different role.

    7. End bankers abuse of the power to create money

    Removing the power of private banks to create public money is essential because repeated Royal Commissions and many decades of evidence demonstrate that the banks will always use their power to create public money to put their profits and executive bonuses before the interests of the Australian public.

    8. Bank Police – The current system costs the public billions

    Protecting the power of private banks to create money, and trying to stop the banks from failing or going bust, is very expensive. It requires a mountain of regulations, constant inquiries and investigations and an army of regulators (i.e. Bank Police) and results in other bad government policies and economic distortions that cost the general public many billions of dollars EVERY year. The public simply cannot afford to continue to underwrite the private bank business model.

    9. MyRBA will help build a better and fairer Australia

    Giving Australians the right to operate MyRBA accounts is not difficult and will start the process of building a more productive Australian economy that rewards hard work and innovation over speculation, leverage (massive debts) and all the perks and lurks that currently dominant the Australian economy.

    10. It is time to fix this problem

    The current monetary model where Australians are denied access to deposit accounts at the RBA and the private banks have a license to create public money out of thin air is out of date (it dates from the horse and buggy era), is hopelessly broken, impossible to regulate effectively and it is time to fix the problem.

    • Jumping jack flash

      Debt isn’t bad.
      What has happened is due to a lack of productive pursuits caused by globalism, banks had a problem where they had no reason to create debt, and they risked becoming irrelevant.

      Debt should ONLY be used to expand productive capacity which increases profit/revenue greater than the amount of interest repayable on the amount of debt that was needed to expand it.

      Banks knew this, that’s why debt used to be so hard to get. Nobody could get debt, you had to have a mighty good reason complete with pictures with arrows and charts and all manner of things, and the pleading and the begging and the crying to the bank manager, and then you only got half or a third of what you asked for.

      So banks simply redefined and created a new system to create infinite debt for no good reason except consumption. They removed and ignored all the old measures of risk and decided that inflation aka capital gain (ultimately caused by the debt) was the same as increasing productivity. The effect was similar but very, very different.

      The result was that banks could continue to create and issue their debt and get rich, while the economy went on with Globalism and Neo Liberalism.

      The rest is history.

      • pfh007.comMEMBER

        “Debt isn’t bad.”

        Perhaps, but interest bearing debt to create public money which can otherwise be created at zero cost on the balance sheet of the central bank is worse than bad.

        It is outrageous, especially one considers that those who receive this bank created money are chosen by the bank and usually for no better reason than they already own assets.

        Banks have no need to lend for productive purposes to be profitable.

        Why make bank credit creation the centre of the public monetary system when there is absolutely no need to do so?

        A democratic central bank balance sheet with everyone able to operate deposit accounts will do the job WITHOUT interest bearing debt.

        Any introducing this reform requires only a few accounting entries.

        • Jumping jack flash

          “Banks have no need to lend for productive purposes to be profitable.”

          No, but I assume they were properly regulated or had a duty of care back in the olden times.
          And it was in their best interest to be prudent. The parasite often dies if the host does.

          “Why make bank credit creation the centre of the public monetary system when there is absolutely no need to do so?”

          Very, very good question. My opinion is globalism and neoliberalism forced it that way. If there is no production, how do banks solely lend for the purposes of expanding production?

          But also perhaps at key turning points in history the banks were little more than conmen, shysters and grifters and talked to the right people at the right time and/or had photos of powerful people in compromising positions… who knows? I’m sure there’s a lot of hidden agendas and stuff happening that nobody knows about.

          • pfh007.comMEMBER

            ‘..But also perhaps at key turning points in history the banks were little more than conmen, shysters and grifters…”

            Nailed it !

            Banking is nothing more than a con.

            The entire idea of “maturity transformation” is a load of BS.

            How can you accept a “deposit” and promise that it will be returnable at call AND you will pay the depositor interest. The only way interest is payable is if the bank proceeds to use your deposit in a way that makes returnable at call impossible.

            The reason there were ‘runs on banks’ is very simple – the punters understood that banking was a con and getting your deposit back before the bank collapsed in a cloud of its own fraud was essential.

            If a bank makes loans on terms that are inconsistent with the terms on which an unsecured investment (aka deposit) was accepted it is engaging in fraud that will be revealed the moment more than a fraction of its unsecured investors request the return of their investment. Patching this sorry mess up with a central bank (i.e. the public) ready to provide a shonky bank with credit is just asking for the trouble we are now surrounded by.

            There is no reasons to permit this scam when a bank is perfectly capable of issuing bonds to raise the money required by its loans. The holders of the loans can sell the bonds if they wish to liquidate their position but they have no claim on the bank beyond payment of interest on the bonds and ultimately repayment of the principle.

      • Debt isn’t bad, when it is treated honestly – that is to say it is only extended in regards to a specific time frame or productive endevour, upon which it has a reasonable basis of being repaid. The problem, one that has been recognised since time immortal back to the Babylonian empire, is that when used improperly or with little regard, it can also easily be used as a means of capturing a portion of societies productive economic endevours.

        Steve Keen did a nice job of explaining it by addressing the question “where’s the money going to come from?” although I agree that Kelton made it more digestible in terms of explaining it.

        But what neither of them do is to ask the question “where’s the money going to GO to?”

        This is my core problem with MMT adherents and converts, I’ve previously mockingly likened it to the Underpants Gnomes business plan, they think that:

        Step 1: Money Created
        Step 2: ??
        Step3: Money ends up in people’s pockets.

        It is true, some money will end up in people’s pockets, H&H espouses all the wonderful infrastructure projects that could be delivered to end the backlog we need to catch up on in terms of regaining our lost quality of life, and yes, lots of money will end up in the pockets of various tradesmen.

        It locks in the status quo in more than one way too – it ensures all the beneficiaries of societies current composition remain the primary beneficiaries of the future system, tradesmen, consumer sales, property developers, etc. In a more closed and self contained economy as we’d age, which is partially what this slow down in the economy is about, then the distribution of income within the economy would also change, much more to services and care work – it would do far more to redress inequality in Australia than any other single factor…. maybe the patriarchy really is suppressing the matriarchy economy?

        But the issue with the incomplete Underpants Gnomes plan is that MMT doesn’t stay in the household sector, when the populace is subjected to enslaving debts, and Australia has the highest individual debt burden in the world, it is then nearly instantly transferred to servicing a lifetime mortgage.

        Without debt reform all MMT will serve to function as is in maintaining the status quo, the reality of MMT without debt reform is this:

        Step 1: Money Created
        Step 2: YOU
        Step 3: Banks and Profit

        Great if you own shares in bank and don’t mind servicing lifetime mortgages and seeing the efforts of your past labours salami sliced away through constant monetary debasement.

        MMT could work under Phf’s public banking model, at least for a time until politicians unable to resist the temptation debased it or the banking complex work out how to game it.

        The only true defense against enslaving debts is sound money, calling for MMT without first ensuring enslaving debts repudiated is like a prisoner crying out “Warden! Come mend my chains and fix my walls, because they are both rusting and crumbling away.”

        • I agree with this.

          I think MMT – RBA financed most likely – is now inevitable however the missing piece of the puzzle is our current tax & macro economic policies aren’t very good as a general. So due to this, I agree this would simply exacerbate our existing issues.

          Or, as you say, increasing the input (printing) x the same old business/economic throughputs = more of the same rubbish output in the end

          The whole tax system would need to be redesigned to accommodate a large flow of new money being pumped into it, starting with a reduction in income taxes, and an increase in asset taxes.

    • PFH – could we start a fintech that replicates MyRBA? That is, just has deposits at the RBA and acts as the front end for the public?

      I like the idea but I wonder what the synthetic myRBA would look like – as I don’t see the Govt going for it in a million years – so what does the private sector simulacrum look like?

      • pfh007.comMEMBER


        Do you mean that the FinTech firm would have a deposit account at the RBA and then the public would just transfer their deposits at other banks to FinTech which would result in the Fintech’s deposit account at the RBA rising and those of the banks falling?

        The problem is that in order for this arrangement to work like MyRBA you would need most of the machinery required by MyRBA in place to do it. Otherwise the FinTech is not much more than a bank that promises that its account at the RBA will always match 1 for 1 all the deposits it receives. Hard to see how it would be able to make money with that model. One possible way might be to offer the customer super duper payment system options and charge for those services but I think that might be a tough sell.

        A key point about MyRBA is that it makes clear the distinction between saving and investing.

        If you want to save you deposit money into your MyRBA account and get paid no interest but you have perfect safety.

        If you want a return you are transferring some of your MyRBA deposits into someone else’s MyRBA account who has promised you they will give you a return. It is no longer your money. ALl you have is an unsecured investment. There will always be a risk that you don’t get your money back. Naturally, the amount of return v the amount of risk will vary depending on what you want.

        The banks will be in exactly the same position as every other person seeking to raise capital for investment. They will only lose their “privilege” which as noted above is nothing more than a legalised fraud on the public.

  4. I was going to make a joke about trickle down economics, but 99.9% of you wouldn’t get it.

  5. This is too hard to understand. I get lost from about half way through. Too many variables to keep track of in my head. A video of himself building the model in the software commenting as he does so might make it easier.

  6. The problem here is it describes the effects of models post their influence – see

    => What sets price in a capitalist (NOT ‘market’) economy?

    The models say that supply and demand sets price. More specifically they say that price is set at the margin for the last produced good or service in line with the marginal productivity of labour.

    This is not true. The empirics say it is not true and Steve Keen suggests that it is not even theoretically consistent.

    So, what really sets the price in a capitalist economy? Well, we cannot say. It’s too complex. We cannot build a model and say: “THIS IS HOW PRICE IS SET”. That’s solipsistic and absurd. Instead we take a rule-based approach.

    And so we us the following guiding principles to understand how price is set:

    (1) Price is generally set through mark-up pricing. A firm produces a good or service and then charges a mark-up in order to accumulate profit.

    (2) Mark-up pricing generally follows other prices in a given market. These are usually set by a ‘price leader’ within that market. Firms will then try to either undercut that price leader to gain market share or they will copy the price and try to expand market share through advertising or innovation (usually they will pursue the latter strategy, I should think). Note that undercutting does not usually result in an outright price war (that is: ‘true’ competition). Eventually firms will recognise that it is not in their self-interest to undercut beyond a certain point.

    (3) Any increases in inputs — including labour inputs — are pushed onto the consumer to maintain profit levels. However, sometimes they are not. This is a CHOICE on the part of the firm and ties into their long-term plans. If profits have been good for a few years and the economy enters recession, they may not push increased prices onto consumers and instead use the period to pursue market share.

    (4) Firms do not simply respond to so-called market pressures. They usually plan their approach (where they will be in two years etc.) and make decisions based on this long or medium-term plan. They are not just passive islands in a giant sea of market forces. Instead they are active participants in strategies that ultimately set prices and which we cannot hope to model with even the most sophisticated mathematical apparatus.

    They’re just some of the rules we could use — and they’re just off the top of my head. In the real world, lots of things happen and we never know what is determining price. But we can say with confidence what almost NEVER sets price: pure supply and demand, and, more specifically, the price of labour inputs at the margin.

    In the book Galbraith assumes that he is describing the technostructure — that is, larger firms and not smaller ‘competitive’ firms. I’m coming increasingly to think that there is no smaller sector at all. Smaller firms probably operate in line with the way Galbraith portrays large firms in many regard. In short: they are part and parcel of the technostructure itself.

    Also look at all the literature on monopoly and oligopoly. I think much of this applies to how prices are set generally in modern capitalist economies…

    Too think [tm] that all this boils down to fighting a ***closed*** model due to the faith of its proponents and the desire to see it out regardless of the costs … because it has to be TRUE … FMD~~~~~

    • Jumping jack flash

      “So, what really sets the price in a capitalist economy? Well, we cannot say. It’s too complex. ”

      Pfft. not complex at all.

      If you’re a business that is part of a monopoly or oligopoly for providing an essential service or resource then you use this method:

      Determine how much debt you need to afford the lifestyle you think you deserve.
      Set your wages to allow that much debt to be obtained and serviced
      Set your prices to support those wages, and the wages of everyone else who works for you.

      If you’re a business that provides a luxury or there is massive competition, like a cafe, restaurant, clothing shop, etc, etc, etc, then you use this method:

      Set your prices at whatever the market will bear.
      Set your wages in line with those prices and the generated revenue/profit/whatever and obtain the essential amount of debt
      Hire as few 3rd world slaves as you possibly can get away with and still service your customers, and pay them $8/hour to work 12 hours a day to provide the items/services/whatever to your customers.
      Increase your wages based on the new amount of profit that is obtained and then obtain more debt that you need to support your desired lifestyle.

  7. “… Does the fact that the Treasury is borrowing from the Central Bank (in this model) cause any difficulty? No, because while private individuals can’t pay interest on loans by borrowing from banks—without that interest ballooning with further interest and driving us bankrupt—the Treasury can pay interest on Bonds to the Banking Sector by borrowing from the Central Bank because, technically and legally, the Treasury owns the Central Bank….”

    How Is it in the public interest to be creating bonds, that incur interest charges, to sell to banks and wealth managers?

    This it is “just an asset swap“ stuff is nonsense. Central bank deposits are very different to interest accruing bonds.

    It is not in the interests of the public to be “swapping” deposits on the RBA balance sheet that pay no interest for bonds that do attract interest payments.

    It is no surprise that bankers don’t like zero interest reserves (central bank deposits) but so what?

    Cry me a river.

    MyRBA solves this problem

  8. I got lost.
    In any case what i wanted to know is how they account for the $$ that just get paid overseas as a lot of stuff is private owned overseas with the continuing bleed coming from deficit to our govt. Makes more sense if it is a closed loop system.

    • I wouldn’t worry yourself — the monetary system is far simpler than he makes out.

      Typical academic — heaps of waffle and too much complexity.

      • His problem is that he doesn’t really wrap up the conclusions easily he breaks things up into separate groups (workers, capitalists, etc) when he doesn’t need to tries to tie it into GDP and other typical economic terms that tbh are a related but another topic.

        MMT and SK theories are pretty much one and the same; at least on the basics. Only difference is that MMT proponents favor the dial is shifted towards government spending (not current state) to achieve max employment; whereas SK states that in the current system private banks are the main creators of money (current state). All that’s different here is the balance of equity between the entities. Ignoring private debt however can’t be done – its the biggest factor in Australia’s economy and you need to have a plan for it.

        In Summary: Treasury negative equity is equal to the whole private sector positive equity (including the foreign sector as AUD never truly leaves the country). That’s it. Balance sheet of central bank nets out to zero so is irrelevant. This agrees with MMT IMO that government spending is important; in fact the central bank really isn’t all that relevant in terns of positive/negative outcomes to you and/or me from a net equity position.

        Or more importantly the only way to get out of the private debt issue we are in without massive deflation is for the government to deficit spend and we shift some equity in the private sector away from foreigners to locals (via exporters, foreign taxes, etc). Pretty simple sentence really.

        • Jumping jack flash

          “Ignoring private debt however can’t be done – its the biggest factor in Australia’s economy and you need to have a plan for it.”


          Also he seems to miss the point entirely when he states that you can’t borrow money to pay the interest on borrowed money when that is precisely how the economy has been functioning for the past 20 years.

          • When I left uni all those years/decades ago I summed it up all as: Interest rates will trend to zero, at that point either the government makes up the payments instead of private debt or deflation ensures and we hit a hard reset. Interest payments of the debt are assumed to go around and around, the problem is that typically accumulate to the “owners” which creates two sub-economies where many debtors on the poor end have a hard time. One default trickles to many unless balance sheets can be repaired so interest rates can again rise. Sad that my paragraph summary is mostly all you need to know about economics.

            The rest of the course (Phillips Curve, efficient market hypothesis, etc.) all was simply academic with assumptions that were mostly untrue in the real world or weren’t going to be true forever. Hit me when I was working for trading desks that were consistently making cash; they laughed at a lot of the theories taught at universities. I do agree with one thing – people are trending back to the simple “identity” equations of economics which tbh is all you need to know. Who has the money, who makes the money, and who’s balance sheet is getting fatter. The rest is I suspect propaganda by different schools/businesses for their own agenda – many professional macro economists are just fancy lobbyists these days.

  9. Arthur Schopenhauer

    It’s simple, for a country to be rich and provide the society Australians have enjoyed since 1945, it needs to have productive capacity. Lose that capacity and a country loses its wealth. (See Britain and the US for examples.)

    Economists are useful to create a system to build a country’s productive capacity, and not useful when they become the tools of rapacious, predatory capital.

    Keen is doing his best, but like most economists, he is completely disconnected from what it takes to build an economy that actually makes stuff for itself and others.

    All those Baroque calculations are for economies that have lost their mooring to reality.

    • Jumping jack flash


      They seem to be trying to create something from nothing.
      Maybe it works if you believe it does?

  10. You don’t have to read the whole thing. He starts from a flawed concept of how MMT would work – ie. he assumes the government would finance it’s spending by borrowing from the private sector (via bond sales). As he rightly says, this operation would not create any new money. But this is just conventional fiscal policy – not MMT.

    MMT says that the central bank can explicitly finance government spending by buying bonds directly from the treasury. This operation does create new money and including it in his model would completely upset his entire analysis.

    Keen is good at maths but has a long history of being about 10 years behind the curve on understanding the monetary system. He is also intellectually disingenuous – eg. claims to have discovered the idea that credit creation drives economic outcomes. He has certainly popularised the idea but he got it from others such as Richard Werner

    • pfh007.comMEMBER

      “..MMT says that the central bank can explicitly finance government spending by buying bonds directly from the treasury…”

      Does it?

      A Central Bank cannot buy bonds from the treasury without fundamentally changing the way the monetary system currently works and the roles of the Central Bank and the private banks. If MMT is saying that it is hardly a mere operational description of the system as it is.

      As soon as the government starts spending the deposits at the Central Bank, that are created by the Central Bank when it buys bonds direct from treasury, the balances of the deposit accounts of the banks at the Central Bank start rising.

      That will cause problems for the Central Bank conduct of monetary policy.

      It could just ignore the rising banks deposits impact on the target rate (forcing it down) or do what they do now and pay the banks interest on their central bank deposits at the target rate (which is nuts as why should anyone be paid interest on risk free central bank deposits)

      Or it could try to reduce the bank deposit balances at the Central Bank by selling the banks treasuries that it has bought from the treasury when it created deposits for the government to spend.. What would be the point of that as the end result is the same as if the treasury sold the bonds to the banks in the first place.

      The only way that the RBA can directly finance treasury AND allow the balance sheet of the RBA to expand is to fundamentally reform the role of private banks in the monetary system and MMT is not proposing that or is it?

      If it is proposing fundamental reform of the roles of banks and the central bank and how the monetary systems works well great but that is not what they say when they claim to be just describing how the monetary system currently works.

      • You’re describing the current institutional constraints placed on monetary operations. MMT’s point is that these constraints are voluntary – they are political, not economic, constructs. That is to say MMT does not propose any new plumbing is needed – it just points out that some artificial valves have been installed in the system which can be safely removed.

        This has happened numerous times throughout history and is happening again now. You need to realise that the old rules are being rewritten before our very eyes!

        • pfh007.comMEMBER

          “..You need to realise that the old rules are being rewritten before our very eyes!..”

          No argument about the need for that !

  11. Could someone let Steve know there is a typo in figure 7. It should read:
    T/c K x W / 20
    Surprised no one else picked up on this?

  12. Jumping jack flash

    ” private individuals can’t pay interest on loans by borrowing from banks—without that interest ballooning with further interest and driving us bankrupt”

    Yet this is pretty much what has actually happened. The reason it could was because interest rates were regularly lowered and the debt load was passed around between different people.

  13. Tim FullerMEMBER

    We have Steve on the show next week for Nucleus Investment Insights (MB Fund podcast) – happy to take any questions for SK (reply here if you like) and I will endeavour to ask them next week. Alternatively, head over to at 12:30pm AEST on the 3rd September and ask them live. Looking forward to a big show!

    • Thanks TIm. One of the questions I have (probably more for Nucleus than SK but I guess it all ties in) is the strategy going forward for Government Bonds and how is it exactly do you try to profit from its purchase. Not experienced in trading bonds (etbs) so it would be good to get an overview. Do you keep these till maturity or can you trade them before? Is it even worth trying to trade them? How does the RBA yield curve control affect this strategy? Again these types of products are fuzzy to me.

  14. Ronin8317MEMBER

    The budget deficit of all major economy have reached the point of no return collectively : paying it back is mathematically impossible. That’s why there is this sudden interest in MMT from all around the world. It needs a ‘fancy and very hard to understand model’ to justify making the interest portion of the deficit disappear, if not the deficit itself.