There are few videos that everyone should watch, starting in high school. Money As Debt is one of them, Chris Martenson’s Crash Course is another.

Warren Mosler is a poor public speaker but he gets his point across. Watch a few times until you ‘get it’

What is explained is the mechanism of government debt creation. This is Econ 101, yet most economic and finance commentators do not grasp it. It’s one thing for school children to be economic illiterates, but people in the ‘money business’ should know better! By ‘money business’ I mean those who obsess about the US government debt. 

The US borrowing is in its own currency, there is no technical limit to how much funding it can create. There is also no difficulty in the servicing of this funds’ creation. The process of creating more funds acts to reduce the discount cost of the funds. 

The way governments create and account debt is an artifact of double entry bookkeeping. Creating debt or raising taxes is a matter of changing custody of an amount of funds between accounts. 

The other persons in the space with Mosler don’t have a clue about what he’s talking about; it’s funny.

Mosler’s idea is that shifting funds into the economy should stimulate demand. The problem with the debt- shifting process is that it only really works when the multipliers suggest that fractional reserve lending is also taking place. Otherwise the cycling of funds is pointless since no new money is lent into existence. This is happening right now outside! John Maynard Keynes would suggest our recession is an example of constrained aggregate demand. 

A bank can lend my business funds, but unless it also lends all my customers funds, I will do no business. My loan will become a bad loan, though no fault of my own, but for a lack of lending overall. However, if the banks lend sufficiently to provide cash flow to my business, the bank will inevitably make an increasing percentage of bad loans. This will also cut cash flow to my business. Eventually, my business will fail due to lack of transfers which will also cause distress to the bank. In the course of ordinary business. the bank will inevitably lend itself into insolvency. The bank needs a constant supply of new money in order to offset losses created along with its increased lending.

This ‘new money’ is represented by the expansion of cumulative balance sheets, the ‘debt overhang’. The history of economics is that of unpayable debts. What Mosler points out is the immediate shortage of funds is what matters rather than the debt overhang which is nothing more than a receipt.

The issue I take with this concept is not its dangers but rather its limitations. While the governments with central banks can create more currency, they cannot ‘print’ jobs … or more importantly, more crude oil. Finance can create more debt but in doing so it multiplies redundant claims against useful work.

HT Mish on the vid …