Warren Mosler’s contributions to the MMT Round Table in Sofia required a translator for the Bulgarian audience. As an alternative to watching the videos (which can be viewed in video 1 and video 2), some might find it convenient to read transcripts of his talk and Q&A session. Repetitions of phrases due to the translation process have been edited out, and a word or two not deciphered, but apart from that the transcripts are as spoken. In the talk, Warren briefly discusses Professor Hanke’s view of the currency board before explaining: (i) the basics of establishing a sovereign currency; (ii) determinants of the value of the currency; and (iii) the dynamics of the currency board. In the Q&A session, he discusses what would be involved in getting off the currency board and reviving the economy, making comparisons with Argentina’s experience under similar circumstances. As always, Warren speaks with great clarity. Unfortunately I am unable to transcribe the talks by Pavlina Tcherneva and Ryan Markov due to the language barrier.



Transcript of Warren Mosler’s presentation

[Runs in video 1 from 0:00:00 to 0:53:17.]

One of my partners in my financial firm was one of his [Professor Hanke’s] students. So I had some dialogue with Professor Hanke. He agreed that the currency board was an instrument of colonial exploitation. He agreed that the currency board took probably at least 5 percent of GDP away from the domestic economy to fund the financial assets and that, additionally, more often than not, it resulted in very high levels of unemployment. He agreed to this, but he said he thought it was worth it because there would be more currency stability than there had been before the currency board. He doesn’t compare it to alternative monetary operations. He compares it to the chaos before the currency board.

Additionally, going back to some of the comments, (and by the way Air France still has my clothes somewhere), foreign direct investment is a function of employment. The countries with the highest levels of domestic employment get the highest levels of foreign investment. In 1999 in the US, when unemployment was 4 percent or less, the US had the highest foreign investment in the world and we certainly did not have the lowest wages. In fact they were very high.

Now, when it comes to neoliberalism, I understand their models, I work with central bankers. The models are not wrong, but they’re incomplete. They use what are called relative value models. There is no money in the model. It’s introduced later as a numéraire to denominate relative value transactions.

What MMT does is recognize that the currency is a public monopoly and this comes at the point of taxation. So when you introduce taxation into an economy, when you introduce taxation into a neoliberal model, if they would do that, and they don’t do that, it is coercive, it’s not a voluntary market transaction. Taxation introduces what’s called imperfect competition. It’s monopoly. And as every neoliberal knows, monopoly interferes with market clearing. And that’s why they are for free everything. That’s the word “free”, “liberal”, same word. They will tell you that monopoly, imperfect competition, causes unemployment. So they must deregulate everything, they must privatize everything. There can be no labor unions. Everything must be free market. What they missed is there’s one more monopoly. The currency itself is a monopoly. And just like the neoliberals teach, when a monopolist restricts supply you get unemployment. They use the word[s] “excess capacity” – unemployment, people out of work.

Now, I’m going to go through the model in a way that brings it right home. And it’s going to demonstrate these principles. (Points to PowerPoint slide listing principles.) So don’t read them yet. I want you to wait. Look over here. (Motions to self. ) Don’t look, don’t look.

Now, I’m going to give you the three minute version of this. This is all about unemployment. If unemployment was 3%, we wouldn’t be here. There would be nobody in this room. So unemployment is people looking for paid work. It’s not about people wanting to volunteer for work who can’t find it. It’s paid work.

(Holds up business card.)

This is my business card. I’ve got lots of jobs for people who want to work. Anybody wants a job, I’ve got jobs but I will pay you with my business cards.

I hope you have enough sense not to take these jobs, because it’s worth nothing until one thing happens.

Now, I’m going to make you all unemployed. I’m going to make you all desperately looking for paid work for my business cards.

(Points to Ryan Markov, seated behind him.)

Ryan here has arranged that there’s only one door out of this room. And Ryan has arranged for an armed guard outside that door with a gun. None of you can get out of here without one of these cards.

You are now all unemployed. Can you feel the pressure? You need one of these. That man is the tax man. I will now offer you all jobs to stay late and help clean up the room. I’ll pay one card for every hour you stay to clean up the room.

Okay, you will all stay and clean up the room if you want to get out. Okay.

Taxation has turned this piece of litter into money. (Shows back of card.) Here’s the back of the card. There’s no gold behind this card. There’s no currency board with foreign exchange reserves. But you’ll still work for this card. It has value.

So, taxes function to create unemployment.

Why did I do this? Because I wanted this room cleaned. I’m the government and I need soldiers, I need police, I need teachers, I need legal system. So I tax you in something you don’t have and then I give you a way to earn the money to pay the tax.

Let’s say there are 50 people in this room, but I decide I’m only going to spend 40 cards, because I went to the University of Chicago and I know I should run a surplus. So I’m going to spend 40 and collect 50 and then I will have a surplus.

What’s going to happen?

Ten people will not be able to find a job. Okay. Ten of you will be unemployed. No matter what. I don’t care if every one of you has an advanced degree in floor cleaning. I don’t care how many structural reforms you make. If the tax is 50 and I only spend 40, there’s going to be unemployment. This is a monopoly. Okay.

Now, there’s one more thing [that] happens. (Points to PowerPoint slide.) And let’s look at number three here. I can’t collect the tax until after I spend the money. I don’t collect the tax first and then spend it. I spend first and then collect it. Is that hard to understand? They come from me. I’m the issuer. Okay.

So let me move on. Some of you might want to earn more than one card. You might want to save one, have one in your pocket. In the real economy, people save. You might want to take one home to your husband or wife to prove that you really were at an economics lecture all day. I mean, who would ever believe that story, right?

So, let’s say you all have to bring one card home. Now I can spend. When I offer jobs, I will spend 100 cards. You’ll each want to earn a card to pay the tax and one to save to bring home. If I tax 50 and I only spend 80 … (Okay, this is a math problem now …) Tax 50, I spend 80, but you want 100. How many people are still unemployed? 20. How many people got 20? Everybody? Okay, we got one right.

Okay, so, and here’s the final answer: If I don’t spend enough to cover the tax bill and the desire to save, the evidence is unemployment. People looking for paid work who cannot find it. Saying it the other way round, unemployment is always and only the evidence that the government has not spent enough to cover the tax bill and the desire to save. As a point of logic there is no other possibility.

Okay, now, if I spend 100 and you pay 50 with the tax, and you have another 50 that you save, if I was a real government, I would then borrow those 50 back and pay interest on it.

What sense does that make?

Well, whatever sense it makes, that’s what governments do. And I can get highly technical into interest rate theory but I won’t do that now. But a government like the United States, Canada, Japan, England, they spend first and then they borrow their own money back. They don’t borrow in order to spend. They borrow after they spend. Just like I did. And close examination of the central banks shows exactly that. They have a fancy way to say it. They say you can’t do a reserve drain until after you do a reserve add. It’s another way to say we spend first and then we borrow. And all that borrowing does is give the money that’s already saved a place to earn interest.

A quick review. Unemployment is the monopolist restricting supply. All the cards come from me if they’re not counterfeit. All the dollars come from the US government if they’re not counterfeit, the ones that can be used to pay taxes. And euros that can be used to pay taxes come from the European Central Bank. Unemployment is about paid work. And the last two we reviewed. Unemployment is necessarily and always the evidence that government spending was not enough for tax payment and saving desires.

Now, if I tax 50 and you want to save 50 but I only spend 80 and there are 20 people unemployed, how do I eliminate the unemployment?

I have two choices. I can lower the tax or increase the spending. If there’s another choice please let me know.

I suppose I could outlaw saving but what sense does that make? Let’s take a vote. Would you rather I lower your tax or not let you save? I vote for the lower tax, but that’s just me. Other people at the highest levels have proposed ways to stop people from saving.

Now notice I had a deficit. What does that mean? I spent 100 and I only collected 50. Is that some kind of problem? No. Okay. I’m not going to run out of these [cards].

And what about inflation? (Is that right? Okay … I’ve skipped ahead, but we’ll get there.)

What is the value of this card? It’s what I tell you you have to do to get it. If I tell you you have to work one hour for this card …

Which is what the University of Missouri told their students. They have to work one hour to get one of these cards. Because they did exactly this for their students. They said to the students we want community service, we want you to serve the community. So we have a student tax. You have to pay 20 of these every semester or you don’t get your grades. And you can earn these by doing one hour of community service at the authorized places in the community where you can do community service.

And at the end of the semester the students learn national income accounting from this model. The total tax might be 2000 buckaroos, but I’m going to make the mathematics easier here. The total tax might be 100 buckaroos. But the university might spend 110 buckaroos. Why? Because some students wanted to save these for the next semester. So they spent 110 but they only collected 100. The deficit was 10. The students’ savings was 10. National income accounts tell you that the government deficit equals the savings in the economy. To the last penny.

Now, back to inflation.

What is the value of one of these buckaroos? Well, we know what it was because they did research. They know what the value was. This program was started fifteen years ago. Fifteen years ago the students would exchange these with each other at 5 dollars each. Some rich student who came to school in a big limousine, he didn’t want to do community service so he would offer to buy them from some poor student [in rags] who had to, … who needed some extra money. Capitalism at its best. And they traded for 5 dollars each. That was the fair market value, and a lesson to students about how things work.

Today, this year, after the crash, the student who was in a limousine is on a bicycle now, but everybody’s even worse off. Today they exchange for 15 dollars each. What happened? The buckaroo beat the stock market. This silly currency with no gold behind it and no currency board behind it, no euro back there, it appreciated from 5 dollars to 15 dollars. Inflation in the dollar.

This currency is internally stable. It represents 1 hour of student labor. That’s the anchor. The currency’s value is always what the issuer demands in exchange.

If you look at what the US government demands – you know, what it pays for its dollars, what it demands in exchange – it goes up and up and up. The government pays more and more for the same thing every year. Now it’s not wrong to do that, but it explains why the value goes down.

If I pay you one card an hour, this might be worth 10 euro to someone who doesn’t want to do the work. This room looks a little more affluent. Maybe it’s 20 euro an hour in this room. But if I decide to pay 10 cards an hour, to pay more, then the value might only be 1 or 2 euros. If I tell you I’ll pay you one card for a week’s work, it might be worth 500 or 1000 euros. That’s exactly what they teach in neoliberal college and in neoliberal prep school for the little children. The monopolist sets price, not the market.

[With t]he buckaroo, the purpose was to provision a community. (Reads summary off PowerPoint slide.) Spend first, then collect the tax. It always spent more than it taxed. Savings equals the deficit. The value [equals one hour of labor].

The university does not borrow these back from the students. That’s called a zero interest rate policy, just like Japan has had for 20 years or more and the United States for 5 years.

Okay, zero interest rates, right? And the strongest currency in the world. No inflation. It’s not supposed to work that way. But it worked that way in Japan for 20 years. Now, what do the neoliberals say about Japan? It’s an exception. And what do they say about the United States for the last 5 years? It’s an exception. Another exception. They’re all exceptions.

The theory applies to fixed exchange rates and currency boards, not to this, not to floating exchange rate policy, because they do not recognize that their model is incomplete. It does not recognize the currency is a monopoly and we set price. When I explain this to senior staff members at central banks, they understand it immediately. But they don’t say anything …

There is never any unemployment. No student is ever looking for a job to earn buckaroos who can’t find it. There are unlimited jobs paying buckaroos. There’s absolutely free, open trade. It’s the smallest, “openest” economy possible. They have students from all over the world. Every currency is floating around. All kinds of things floating around. No unemployment. None of them can possibly cause unemployment. Zero rate policy, no inflation, strong currency.

Okay. Now we’ll talk about inflation for a minute.

Monopolists are price setters. We discussed that. The way I say it is the price level is a function of the spending of the government whether it knows it or not. All the major inflations in Latin American have been directly traced to indexation. Indexation is the government paying more for the same thing every year. I’m not saying it’s wrong or you should not do it. They’re might be a lot of good reasons to do it. But it does show up as what we call inflation.

And the policies they use to fight this inflation, high interest rates and unemployment policy, entirely miss the point and often end in disaster for exactly that reason. All the hyperinflations are generally ([and] indexation and the other problems) cessation of taxation. When taxation stops, currency’s over. (Points to door.) When you find out there is nobody out that door, [holds up card) you’re not going to stay around and work for this card. I hope.

And the other problem, major cause of inflation are things like war reparations, where Germany was forced to spend 50 percent of GDP every year on gold and foreign exchange to make war reparations after WWI. Of course that causes the currency to go down, and to have inflation, and then indexation, and the day that policy stopped, it all stopped.

(Do I have time to talk about currency board? Good.)

Currency board dynamics is originally a tool of colonial exploitation. There’s a very old and very absolute principle in economics, and that is economics is the opposite of religion. In economics it’s better to receive than to give.

Okay, your real wealth is your pile of stuff. Your pile of stuff is everything you can produce domestically when everybody’s working, preferably, so you want as much of that as possible, you want everyone working and pitching in to your real output, goods and services, (my arm’s getting tired waiting for the interpretation) plus whatever the rest of the world will send you minus what you have to send them. Okay, everybody got that? Everything you produce, everything the world sends you, minus what you send them. That’s all called real terms of trade.

With the currency board, for the government to spend it has to get the local currency, the lev. Well where does that come from? Someone has to go to the central bank with euro, get the lev, pay the tax, so the money can be spent. If you’re walking around with currency in your pocket, where did it come from? Someone had to get the euro, go to the central bank, put it in your pocket, pension funds, corporate reserves.

These are all your net financial assets that get saved. We call these demand leakages. When you get paid, some of the money goes into savings. We all know what saving is, right? You earn some and you save some and you pay the taxes.

Now, just one word. When I say taxes, the income tax works, but it’s complicated. It’s easier to think of it like a property tax or a simple head tax. [I]t does work for an income tax but it’s a little more complicated.

So now all these euro that go into the currency board to supply the net financial assets, where do they come from?

Once things are running properly, they come from net exports. You have to sell things to the rest of the world, to Europe, to get the euro, to go to the central bank, to get the currency to put in your pocket. That money is not available to buy imports.

Now, if you don’t have it and the European Union helps you out, you can borrow it. Then you need that much plus interest the next year and your problem compounds.

So how does the country net export?

You have to get your real wages low enough to compete with other countries trying to do the same thing. You have to figure out how your workers can live on fewer calories per day in food, so you can compete with India and Brazil who have already figured out how to get their people to live on 1200 calories per day.

And why are you doing this?

To get foreign exchange to buy imports for your benefit? No, to get foreign exchange to convert to your own currency to fund your own financial assets.

(Holds up card.) Now when I got the cards, where did the extra cards to save come from? I just gave them to you. Well, you had to earn them. You were paid for paid work.

If I was on a currency board, I couldn’t do that. You’d all have to go out somewhere to earn enough euro to put in my bank to get some of these cards.

With the currency board your real wealth is everything you produce domestically plus everything you import, which becomes very little, minus everything you export, which is a lot. Okay. Your real terms of trade turn bad.

And everything you produce domestically has been cut back because there’s high unemployment because there’s need to compete for foreign exchange. It forces these horrible reforms called “structural reforms”. The entire purpose is to make you export more, import less, in order to get financial assets which have no real value, just like Hong Kong.

Look at Hong Kong, they always net export. Big. They have horrible deflations regularly. Of course they don’t have unemployment because they just send everybody back home to China. And then when it gets low enough, and China’s bad enough, they all come back to work. You look at their property values going up and down, but they have built hundreds of billions of foreign exchange reserves. They net export, lowering their real terms of trade, in exchange for numbers on a US Federal Reserve balance sheet called US dollars, as compelled by their currency board arrangement.

(Okay. Is that it?) Okay. Thank you very much.



Transcript of Warren Mosler’s answers to questions

[Runs in video 2 from 01:52 – 24:55.]

Okay, so we’re going to respond in the same order.

So, the first question is how do you exit the currency board? And it’s quite simple. You simply announce that it’s been suspended. However, that alone is not going to help your economy. The problem with the economy is unemployment running at maybe half your actual capacity as a nation. And it’s because people need to save.

So, number 1, you’re going to need a larger budget deficit, and you’re also going to need an interest rate policy, which is not the case with the currency board. That’s going to mean some combination of spending increases and tax cuts, depending on the politics. You have to make the political decision of what’s the appropriate size of government. You have to adequately provision the legal system, the public health system. These are all political decisions as to appropriate size.

Everyone else will be employed in the private sector. So you can have less public sector, more private sector, or any ratio you wish to determine politically. But the real cost of the public sector is that the people in the private sector have to provision it. The benefits of the public sector are the public services and all the efficiencies gained by having the proper incentives in place.

Once that decision is made, then you provision the public sector. Then you have to help the unemployed get private sector jobs. There’s going to be a massive transition from unemployment to the private sector. That’s because once the deficit’s at the right size, people have money to spend and business starts doing very well. Business is going to want to hire everyone who is unemployed when the deficit’s at the right size. The problem is the business sector finds it very hard to hire people who have been unemployed. They would much rather hire people already working.

That’s why we have the job guarantee.

[Refers to participants in the Jefes jobs program in Argentina.] These were people who were never in the labor force. What they call disadvantaged people. People they never expected to be in the labor force. Indians and people they considered lower class. Many, many women who had already raised their children. Out of 2 million, over 1 million transitioned into private sector jobs within two years. This was unheard of. They had the strongest economy in the world for three or four years till the politics changed. Daniel [Kostzer] left and got a job somewhere else. Somebody took his budget and did something else with it, and the economy started faltering.

So, we have good documented history. And all these people were interviewed. University of Missouri (UMKC) people went down to interview them and they asked these people would you rather work or just stay home and get the money. Every one of them said they would rather work. All these people who were supposedly lazy, never would do anything, were taking advantage of the system, they’d all rather work.

Now it was said the currency board by Professor Hanke stopped destructive developments, which is what I said earlier, that he is just comparing it to what was happening before. He didn’t look at Argentina before and after the currency board there. So while he could say the currency board was better than what was there before, what came afterwards was far better (until Daniel left) than anything they ever had in the currency board.

Now, what model do you use?

You have to use the UK model for the European Union. They’re members of the EU but they have their own currency. But you want to have the right size deficit for full employment, not like the UK. If you go to your own currency like the UK and try to balance the budget like the UK, you’ll get high unemployment like the UK.

And by the way, the peso was very strong at the time. It was an appreciated currency. Now, they did have 9 or 10 percent inflation but it did not interfere with their prosperity. They had high prosperity with prices going up 10 percent a year. And a good part of that was because the currency had fallen a lot more than it should have because of the blood in the street problem. That problem had caused the currency to drop a lot more than it should have. So the price increases were more of a one-time adjustment than actual inflation. Inflation is a continuous, by definition, a continuous, self-sustaining thing that you can’t do anything about.

To the next question. The problem with the currency board is that it doesn’t allow the budget deficit to be high enough. The reason is because if you try to increase your deficits you’re subjected to market discipline and higher interest rates. So you can’t run high enough deficits, even if you want to. You’ll immediately turn into Greece. I have a paper on this on my website called ‘Full Employment, Exchange Rate Policy and Price Stability’, which is translated into Bulgarian.

Once you have your own currency, you’re like Japan and the United States in that Japan has the highest deficits in the world and the lowest interest rates, and their deficits aren’t high enough and they’ve been trying to get them up recently with the new [?]. And their ten year bond is at 0.6%, interest rates are zero, because the government has decided to set them there. You can’t earn interest on my cards unless I decide to pay it, unless you want to take a risk and lend them to somebody else. But you know there’s no risk lending them to me. I can always pay them back, right? My cards. So part of the exit strategy is to maintain a low interest rate policy like Japan, like the United States, which has generated zero inflation in Japan for 20 years through every imaginable crisis.

As far as the exchange rate goes, I think if you do this it will be reasonably strong. If you look at wages here compared to wages in the rest of Europe, then it seems to me that if you come in one-to-one with the euro you’ll be dealing with currency appreciation, not depreciation. But if there is an adjustment, it will be a one-time adjustment.

I didn’t know about Romania, but you may wind up with 7-12 percent deficits. It really doesn’t matter. The value will be set at the margin of 400 lev a month that you’re paying for a transition job. That will be the marginal cost of labor in the country. That will give you the same internal stability as the buckaroo did for the University of Missouri.

As for corruption, corruption comes from several sources. One is the financial sector. With a zero rate policy you don’t need government bonds. The deficit spending just sits as cash balances at the central bank that don’t pay interest. Bonds are just alternative balances at the central bank. They would serve no public purpose and so there would be no reason to offer them. It’s all part of the zero interest rate policy, again, like Japan. Eliminating government bonds eliminates the financing of a lot of corruption.

Eliminating unemployment and having jobs for everyone eliminates a lot of corruption. Other channels of corruption include lending — state lending — which is really deficit spending. Now I don’t have any specific knowledge here, but in general state owned enterprises can be a source of corruption. Privatized industry that has strong ties to government can be a source of corruption. Government loans to finance these businesses can find its way into the owners and associates who then sell their lev for foreign exchange and drive the currency down. So you want to be very careful of any state lending. You don’t need to support state enterprises or private enterprises for jobs anymore. You’ve got the already guaranteed jobs. So unemployment is no longer the imperative that it used to be.

And then in the banking sector you want to guarantee all your bank deposits in the local currency, which you cannot do now, it’s not credible. With a currency board, if there is a deposit guarantee by the government it can be found to be worthless under any kind of stress. With lev deposits, with the arrangement we’re talking about, the deposits are absolutely secure.

But bank lending has to be narrow. Very narrow. You have to make sure that lending is only allowed where it suits public purpose. Banks cannot lend against financial assets. That’s just financial leverage. There’s no public purpose behind that. You specifically decide what lending suits public purpose. Maybe car loans, home loans, that type of thing, and that’s all your banks are allowed to do. Otherwise the lending leaks out into the foreign exchange markets and can destroy your currency.

The private sector can lend out to anyone they want. If they lose, they lose their money. But guaranteed bank deposits? No. That’s public money.

Thank you.