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Guest Post: Modern Monetary Theory — A Primer on the Operational Realities of the Monetary System

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By Scott Fullwiler, Associate Professor of Economics at Wartburg College

At its core, there are two parts to Modern Monetary Theory (MMT). The first is a description of how the monetary system actually works, mostly focusing upon interactions between the central bank, the treasury, and the financial system, though this part also requires a very thorough understanding of the Minskyan-related literature of many MMT’ers (I note this because so many critics of MMT ignore or not aware of the vast MMT literature on financial instability and reforming the financial system). The second is a set of policy proposals that arise from this description and is largely outside the scope of this particular post but which can be found in any number of MMT publications and blogposts (and, again, including the sizeable MMT literature on reforming the financial system).

Of critical importance to most of MMT’s description of the monetary system is its elaboration of the system’s operational realities, which for MMT’ers generally means three things:

First is the accounting logic of real-world transactions. Any relevant theory simply must be consistent with real-world accounting as a very basic criteria, and furthermore it is just this sort of base level understanding of accounting that is quite often absent from economic theories and how both the public and policymakers discuss and understand economics. In other words, our focus on accounting is anything but trivial in the current environment—it’s like the adage about being able to crawl before you walk, and as such it’s no wonder that the economics profession as a whole continues to trip over itself when it comes to understanding the monetary system.

Every transaction in a real-world economy affects financial statements of those engaged, and if an economic theory or a posited model is not consistent with how real-world financial statements are affected, then the theory is inapplicable. A typical example used by MMT’ers is a framework used in mainstream economics, the so-called loanable funds market. It posits a demand for loanable funds and a supply of loanable funds available for the macroeconomy, and contains classic supply-demand curve assumptions from goods markets, thaT higher prices (in this case interest rates) will elicit more “supply” (as in investors will divert more funds from other uses, such as risky venture investments, and make them available for lending). This model is simply inapplicable to our current monetary system in which empirical studies have demonstrated that banks create loans “out of thin air” without the requirement of prior reserve balances or deposits to “fund” the loan’s creation. Completely contrary to the loanable funds model, in fact, the vast majority of bank liabilities have been created by banks simply growing their balance sheets through loans and asset purchases. Similarly, there are macroeconomic accounting identities, such as the often-cited sector financial balances equation in which the domestic private sector’s net saving of financial assets is by definition equal to the government sector’s deficit and the current account balance (see here, here, and here for further discussion). MMT’ers understand very well that an accurate understanding of accounting is not in itself a theory.

The second part of operational realities is the tactical logic for operations necessary to achieve particular, fundamental ends given a particular monetary regime. Different monetary regimes have different operational realities—the currency issuer has a different operational reality from currency users; a central bank under a gold standard has different operational realities than a central bank under flexible exchange rates. The tactical logic of operations as employed by MMT’ers is (a) general, in the sense that the purpose is to consider a “pure” fiat system under flexible exchange rates, or a state government that is a currency user, and so forth—in a general sense, not specifically referring to any particular nation or state, and (b) particularly concerned with a hierarchy of authority and thus a hierarchy of “money”.

Regarding (a), for example, it is recognized that under a monetary regime other than gold standards or currency boards, the central bank is able to expand its balance sheet to enable smooth functioning of the retail and wholesale payments systems. Even in this case, though, the operational logic of interbank markets means that for the central bank to achieve its target rate in the absence of interest on reserves at the target rate, it must offset any changes occurring to its own balance sheet (i.e., an increase in currency that by accounting identity drains bank reserve accounts) that are inconsistent with banks’ desired reserve holdings at the central bank’s target rate. As for (b), it is recognized that different monetary regimes leave institutions occupying different spaces within the hierarchy of money—a currency-issuer government under flexible exchange rates sits at the top of the hierarchy, whereas under a gold standard or a currency union its place would be lower in the hierarchy.

The third aspect of operational realities is what is not possible given the accounting and the tactical logic. A good example here is the traditional money multiplier model that assumes central banks target reserve levels or the monetary base in order to target a monetary aggregate via a money multiplier. But the money multiplier gets both the accounting logic and the tactical logic of the monetary system wrong. For the former, as noted above, loans create deposits and the creation of more bank liabilities does not require that banks hold more reserve balances; banks do use reserve balances to settle payments and meet reserve requirements, but the quantity of reserve balances held for these purposes is mostly unrelated to growth in monetary aggregates. For the latter, absent interest on reserves at the target rate, a central bank would not be able to achieve its target rate if it employed the money multiplier model and tried to directly target reserves (and, by extension, the monetary base, as again according to tactical logic of the monetary system the currency component of the monetary base is set by the public’s portfolio preferences). Instead of the money multiplier, a proper understanding of the operational realities of the monetary system demonstrates that central banks—as monopoly suppliers of reserve balances to the banking system—must set an interest rate target (or, in the case of the Fed during 1979-1982, an operating range for the target rate) but can only directly target the quantity of reserves if the target rate is set equal to the central bank’s remuneration rate on reserves.

While there is over 20 years of MMT literature published in books, refereed journals, and in working papers available all over cyberspace (though most can be found at CFEPS, CofFEE, the Levy Institute, and MoslerEconomics) it’s only recently that we began blogging, and it is clear that many commenters on MMT-related posts are largely unaware that this extensive literature exists and serves as the basis for our blogposts that are by necessity less detailed. Indeed, over the past 10-15 years, I have personally waded through all of the publications from various official sources on the (relevant-to-MMT aspects of the) monetary system’s functioning that I could get my hands on and have found nothing that is inconsistent with how MMT describes it. We have had numerous conversations with individuals responsible for Fed operations, Treasury operations, and relevant parts of the financial system, and cannot recall any significant disagreements there, as well. It is interesting to note that an increasing number of neoclassical economists are publishing research describing the monetary system in a manner consistent with MMT (without appropriate attribution, usually), though these descriptions have yet to make their way into neoclassical models of the macroeconomy.

Particularly where the operational realities of the Treasury’s actions are concerned, blogposts by MMT’ers can be met with dissenting comments. A good deal of this is because the MMT understanding of the operational realities of the monetary system is completely counter to that of the neoclassical economics that most learn. But another reason is that a number of people appear to confuse the MMT description of the operational realities of the monetary system with procedures self-imposed by existing laws and/or regulations.

A case in point is a paper by Stephanie Kelton titled “Can Taxes and Bonds Finance Government Spending?” This paper is a classic in the MMT literature first published in 1998. The main points of Kelton’s paper are entirely related to operational realities of the existing monetary system: (1) Given the accounting logic of the Fed’s balance sheet, changes to the Treasury’s account affect the quantity of reserve balances circulating—that is, government spending creates reserve balances, taxes and bond sales destroy them; (2) Given the tactical logic of the Fed’s operations to achieve an interest rate target, flows to/from the Treasury’s account must be offset; (3) Consistent with the tactical logic of the Fed’s operations, calls/adds to/from the Treasury’s tax and loan system are universally understood to be monetary operations to minimize the influence of flows to/from the Treasury’s account on the Fed’s operations—essentially reducing the complexity of the Fed’s daily operations, particularly given the Treasury’s assumed superior ability to forecast its own account balance; (4) Bond sales are much like calls from the tax and loan accounts—monetary operations—since if the Treasury doesn’t sell bonds, the Fed must to be able to hit its fed funds rate target; (5) Given the hierarchy of money, it is not the Treasury that needs the reserve balances to spend—indeed, as Kelton put it, the very act of paying taxes (when the taxpayer’s bank settles with the Treasury) or purchasing a Treasury security is also the “destruction” of reserve balances, while (6) the act of government spending is the creation of reserve balances.

Having said that, MMT’ers are keenly aware that governments can and do write laws that their treasuries’ operations be legally bound in certain ways. For instance, the Fed is constrained by law to only purchase Treasury securities in the “open market,” is thereby forbidden from directly lending or providing overdrafts to the Treasury. In other words, “specific” cases can and do differ from the “general” case MMT’ers describe for a sovereign currency issuer under flexible exchange rates in the sense that self-imposed constraints specify particular operations. But, this does not mean that the operational function of the Treasury’s bond sales to aid the Fed has changed—to the contrary, with or without legal prohibition of overdrafts for the Treasury’s account, either the Fed or Treasury must offset flows to/from the Treasury’s account to achieve the Fed’s target rate (with the caveat that interest on reserve balances can potentially eliminate this necessity).

The overarching point here is to recognize who sits at the top of the hierarchy of money for a given monetary regime. Since under flexible exchange rates it is the currency issuing government, self-imposed constraints are simply that—self-imposed and not operational. For MMT’ers, concerns that a nation cannot “afford” to put idle capacity to use through tax cuts or appropriately targeted spending (i.e., NOT bailouts of the financial system or pet political projects—MMT’ers dislike those as much as anyone) are akin to a person with his/her shoes tied together concerned that he/she can’t run. Indeed, it is the very fact that such self-imposed constraints can be and have been disregarded in the past when it has been deemed desirable (e.g., the law requiring that the Fed only purchase Treasury obligations in the open market has been periodically relaxed) that demonstrates who is in charge—as Marshall Auerback recently put it, particularly where fiscal actions, such as military appropriations in a time of war, are deemed important, “we don’t go to China to give them a line-item veto for what we can and can’t spend. We just spend the money.”

The self-imposed constraint for a sovereign currency issuer is thus clearly quite different from the constraints on, say, households or firms or even state governments, which truly do not operationally or otherwise have the ability to issue a non-convertible currency—these entities can most definitely find themselves in the metaphorical position of having their shoes tied together and no ability to run, or walk for that matter, as the constraints are obviously not merely self imposed. This is not the case for the sovereign-currency issuer—if it pretends that its self-imposed constraints are of the same character as operational constraints on households or state governments, the result can be involuntary unemployment, retirees below the poverty line, military defeat, and so forth. In other words, while the ability to “just spend the money” is recognized in times of war or when a financial bailout is deemed necessary (by politicians, at least), MMT’ers want it to be just as obvious when the issue at hand is involuntary unemployment, crumbling infrastructure, children or retirees living below the poverty line, a major city devastated by natural disaster, and so forth. Please note that this is not to say that such a government should always spend simply because it can operationally—that would be ridiculous—but, rather, that there is no such thing as it not being able to ”afford” to put idle capacity to work; the appropriate constraint to consider is whether there is idle capacity in the first place, while also recognizing the obvious point that not all fiscal actions are equally efficient.

This all leads me to the often noted MMT point that “spending comes before tax revenues are received or bond sales.” If one expands this a bit to include loans from the Fed, then this statement is absolutely correct in terms of the operational realities of the monetary system. That is, according to both the tactical and accounting logics, taxes credited to the Treasury’s account and the settlement of Treasury bond auctions can only occur via bank reserve accounts, while the original source of banks’ balances in their reserve accounts can only be previous government deficits (which are net credits reserve accounts) or loans from the Fed (repos, loans, purchases of private securities, or overdrafts—note that an outright purchase of a Treasury security by the Fed to add reserve balances requires a previous government deficit). Therefore, it very much is the operational reality that for taxes to be paid or bonds to be settled, there has to have been previous government spending or loans from the Fed to the non-government sector, and this is true whether or not the Fed is legally prohibited from providing overdrafts.

However, the statement that “deficits or Fed lending logically precede tax payments and bond sales” should not be interpreted as “MMT’ers think there is no legal obligation that the Treasury have balances in its account before it spends or are otherwise ignoring the existing law prohibiting Fed overdrafts for the Treasury.” As I noted above, it is clear that the Fed cannot legally provide overdrafts to the Treasury, and every MMT’er does in fact understand this—the key is to understand what “deficits or Fed lending logically precede tax payments and bond sales” does and does not mean. That is, when MMT’ers say the latter, they are effectively saying “deficits or Fed loans logically precede taxation and bond sales as an operational reality of the monetary system” (the general case), and this and the statement “the Treasury must have positive balances in its account prior to spending under current law” (the specific case) are in fact not mutually exclusive. Both can be and are true—the government can and does require itself through its own self-imposed constraint to obtain credits to its own account at the Fed that were created via previous deficits or Fed lending before it spends again.

Finally, to fully understand the operational realities associated with the Treasury’s account at the Fed, it must be recognized that the lowest rate the Treasury would reasonably expect to pay on the national debt in the case of overdrafts on its account would be the Fed’s target rate. Operationally, the Fed would have to pay interest on reserve balances at its target rate or otherwise offer its own time deposits at competitive rates in line with the current and anticipated target rates to drain the reserve balances and achieve its target rate (in the case that the remuneration rate on reserve balances is below the target rate or even zero), both of which reduce the Fed’s profits returned to the Treasury and act functionally like debt service for the Treasury. The situation is unchanged even if the Treasury deficit spends via a “helicopter drop” of pure cash or coins, since the private sector will deposit the vast majority in banking accounts, and banks will return excess vault cash to the Fed in exchange for reserve balances.

One can then think of three different degrees or “forms” (to borrow the taxonomy used by financial economists in describing the efficient markets hypothesis) related to deficits and interest on the national debt for a currency issuer under flexible exchange rates. The “strong form” deficits would be where the Treasury has an overdraft or similar at the Fed and interest on the national debt is essentially at the Fed’s target rate or on average a bit higher if the Fed issues time deposits to drain reserve balances. While the “strong form” is operationally “pure,” it is again obviously not current law in the US. The “semi-strong form” deficits would be where the Treasury is not provided with overdrafts and must issue its own securities to have positive balances in its account before spending again while the securities issued—given their zero-default-risk that results from operational realities and the fact that any “constraint” on the Treasury is self-imposed—mostly arbitrage with the Fed’s target (for short-term Treasuries) and the expected target rate (for longer-term Treasuries) aside from some technical effects (like convexity) and some demand/supply issues (like maturity and liquidity at different maturities). Examples of the “semi-strong form” would be here and here. The “weak-form” deficits would consider that bond markets might at some point choose to repudiate even a currency-issuer’s debt with zero default risk (the “semi-strong form” does, too, but presumes the effect is temporary as arbitrage relationships would over-rule at least in the medium-term), but recognizes that the Fed always has the ability to set the market rate on Treasuries as long as it is willing to buy all quantities offered at its bid price (and has no operational or even legal constraint for doing so). Examples would be the Fed’s “Operation Twist” or the Fed prior to the Treasury Accord, or in the non-currency issuer case, consider how the recent EMU crisis quickly faded once the ECB began purchasing the debt of troubled member nations.

All three forms, while different in degree, agree that the interest on the national debt for a sovereign currency issuer under flexible exchange rates is a policy variable—not a market-set rate—or at the very least could be if the government so desires. And note that this is the case whether or not the Treasury receives overdrafts at the Fed. In other words, since the outcome is roughly the same in all three cases, it really doesn’t matter if the Treasury receives overdrafts in its Fed account or not—if it can sell its debt at roughly the Fed’s target, then there is no economically meaningful difference from the Treasury’s perspective between the government enabling itself to obtain an overdraft and the government forbidding itself from doing so. That self-imposed “constraint” is really not a constraint at all even if it is never abandoned.

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220 comments

  1. leroguetradeur

    Thanks for this, enough references and enough content in the post itself, to get one’s teeth into.

    1. Bates

      “enough references and enough content in the post itself, to get one’s teeth into.”

      The same can be said for a baloney sandwich…

      The following is from Mosler’s site…

      “Once we realize that the deficit can present no financial risk, it will be evident that spending programs should be evaluated on their real economic benefits, and weighed against their real economic costs.”

      The problem with this line of reasoning is that ‘weighing real economic costs’ is not done…it is as phony as the bank stress tests…and the results may vary but all variables will include a destroyed US Dollar. ‘Weighing economic costs’ have already been rationalized by the supposed short term ‘real economic benefits’ that will not be real when commodities inflation is factored in.

      This is the old ‘deficits do not matter’ claim made by VP Cheney…but dressed up in a long tirade of gibberish.

      What MMT fails to consider is that the US is not self sufficient in commodities. Printing dollars will in short order drive up the costs of all commodities, regardless of what the reasons for printing the dollars were.

      As we observed at the last G meeting, Europe is not on board with unlimited printing of currency…much to Timmy’s chagrin…so an additional problem is FX stability.

      If the US prints enough dollars to pay off every home owners mortgage what would the price of gas at the pump be when the oil producers realize that their soverign reserve funds are now worth half what they were prior to the printing? Since all the world’s major economies are tied to the price of oil and oil is denominated mostly in dollars, the world would experience inflation in everything connected to oil…that is to say, everything. So what would have been gained by printing? The government would gain because they get first use of newly created currency, the dollar end users, consumers, experience the inflation.

      BTW, I was against TARP, I am against all monetization, and I campaigned vigorously to let the imprudent banks, businesses, and individuals fail. That is the way capitalism is supposed to work. In fact, that is the only way that capitalism can work. Anyone that believes that a debt soaked economy can be fixed by printing more debt is delusional.

      1. DownSouth

        Bates,

        There’s always enough truth in your comments to make them verisimilar. You lay a groundwork with some truth, and then launch off into your fantasy world, which is completely disconnected from any physical reality.

        The EROEI (Energy Return on Energy Invested) of windmills matches that of current oil extraction from less mature provinces (as in the Middle East). It easily exceeds that of oil extraction from more mature provinces (like the US, and including deep-water offshore which has an EROEI which is about half of that of windmills).

        The fixation on oil is driven not by physics and not by economics, as you would have us believe, but by other considerations, such as politics.

        1. Bates

          Here is how the physics has worked out in Germany over the last 12 years…1007 thru 2009.

          ‘In 2009, the percentable of renewable sources in Germany’s total energy consumption was 10.1% (+8.6% compared to 2008). Biomass contributed 7.0% of the total energy consumption, wind power 1.6%, hydro power 0.8% and other renewables 0.7%.’

          …and, Germany has made a serious commitment to renewables since 1997. Wind power 1.6%? I say it’s you that are living in fantasyland. Do you own a windmill factory or are you connected to green energy in any professional capacity?

          No way is the US going to replace ~ 12 million bbls per day of imported oil with any of the above substitutes…notice that at 7%, biomass is by far the largest replacement for oil/gas in Germany…not windmills.

          As an anecdotal aside…when I lived in a northern clime I reduced my fuel oil usage from ~ 650 gal per year to about ~ 20 gal per year by installation of a wood furnace. On weekends I cut and split my own oak from my own property and from other downed hardwood trees of others. This is a fine solution for some people but a bit much for most Americans I see today. One must be in good physical condition and it’s a bit much for those in the later stages of their lives.

          Renewable energy is like fusion…always just twenty years away. If someone invents a CHEAP battery with a life span of 20 years instead of 5 I will say that we are getting closer.

          I have also taken a close look at the large windmills being constructed now. As a pilot I can tell you the design is very poor…they do not have self feathering props…how stupid is that? If winds increase in velocity the windmill props should begin to feather or ‘flatten their facial exposure’. They don’t and consequently they rotate at increasingly higher speeds until they self destruct from angular momentum/centrifical force. If you are in the windmill biz you need to get to work on that one asap. It is not rocket science.

      2. SteveW

        “The problem with this line of reasoning is that ‘weighing real economic costs’ is not done…”
        Some governments do better than the others. Agree that there is a real problem of the government having the capacities and skills to do proper fiscal stimulus, thereby misallocating activities and resources.
        “and the results may vary but all variables will include a destroyed US Dollar…”
        The destruction of currency value is not evident so far. When the aggregate demand starts to increases and leverages on the excessive reserves start to develop, there will likely be problem down the road (one cannot see how the government can easily drain the excessive reserves. Tax cut perhaps?)
        “If the US prints enough dollars to pay off every home owners mortgage what would the price of gas at the pump be..”
        That is exactly what MMT is NOT about. It advocates fiscal spending for productive goods and services, NOT subsidy to pay off debts which would cause aggregate demand to drop. The key to MMT is to maintain the productive capacities and activities.

        1. dave

          You just said that MMT is about accounting realities, not policy proposals. The accounting realities are obvious. What is not obvious is the policy recommendations that flow from it.

          It is one thing to say you only support “wise” fiscal spending to bring down an output gap. It is entirely another to have a government capable of doing that. If your government is not capable, which I believe is the case here in the US, then most spending will be a negative for society.

          So the “revelation” that someone can improve society by spending its resources well is pretty worthless for us today.

          1. Other Dave

            Dave, MMT isn’t about recommending policy. However, if we do think about policy options, we should understand the reality of potential consequences, and this is where MMT can provide illumination. It’s certainly reasonable to believe that the policy makers are and will remain unenlightened.

      3. Gary Anderson

        If every mortgage had been bailed out and the TBTF banks would have been allowed to fail, then we could have afforded it. Too late now. And BTW, the TBTF banks had and have the protection of the private central banks.

        If the Fed only cared about monetary policy, why did they allow ponzi housing banking and fail to regulate a known bubble. Or did people forget that Greenspan told everyone to take out an adjustable in February of 2004. The housing bubble was a scam, set up by the central banks.

        Europe is not much different from the US. They already spend alot so they don’t have extra for stimulus. They hate inflation, which the US does not, but other than that, taxpayers bailed out the TBTF banks, in the name of a Greek bailout, in Europe just like it happened here.

      4. Jim Haygood

        Bates brings up a serious defect with MMT — that it seems to assume a closed economy.

        In a world with open capital flows, a goofball MMT finance minister who blithely announces that ‘deficits can pose no financial risk’ will find her currency trashed.

        Oil becomes unaffordable and the lights go out. MMTers end up dangling on lampposts, as pitchfork-waving mobs scream ’30 hours work for 40 hours pay.’

        But hey, whatever floats your boat …

        1. Rodger Malcolm Mitchell

          Federal debt poses no current financial risk, simply because financial risk involves but two factors:
          1. Ability and desire to repay
          2. Inflation

          The federal government owes money it has the unlimited ability to create. No federal check or T-security ever has bounced. So, #1 is not a realistic factor

          Since 1971, the federal debt has increased 1600% without inflation beyond what the government has targeted. During that time, there has been no relationship between federal debts and inflation. There has, however, been a close correlation between oil prices and inflation. See: INFLATION.

          Today, with the largest deficits in modern history, we are far more concerned about deflation than inflation. And with good reason. Deflation is a far more serious problem.

          Rodger Malcolm Mitchell

          1. Bates

            “The federal government owes money it has the unlimited ability to create. No federal check or T-security ever has bounced. So, #1 is not a realistic factor”

            More baloney! The Fed Gov will have one failed treasury auction and it’s game, set, match. When the interest on US Debt becomes so large that the entire US GDP is required to pay them do you think that this house of cards will continue? You are truly delusional.

          2. stf

            Sorry, Bates, but the US has already had failed auctions in the past, and looks like we’re all still here. See Garbade’s research publications on the history of Treasuries at the NYFed.

  2. attempter

    This model is simply inapplicable to our current monetary system in which empirical studies have demonstrated that banks create loans “out of thin air” without the requirement of prior reserve balances or deposits to “fund” the loan’s creation. Completely contrary to the loanable funds model, in fact, the vast majority of bank liabilities have been created by banks simply growing their balance sheets through loans and asset purchases.

    This is the same as the way bankster apologists have no problem with the most profligate spending out of thin air on the Bailout, war, Pentagon budgets, Big Ag subsidies, and all other corporate welfare, yet throw a fiscal-conservative fit over any spending which might benefit the people. So here the fact that private banks “create” money out of thin air is a dirty little secret everyone agrees to keep quiet, and no one sees as dangerous. But it’s a scandal if someone suggests the government sovereign in its own currency can do the same thing.

    It’s similar to how “Keynes” has become a bad word (generally thrown around promisicuously by many who seem to have only the foggiest grasp of what it means) while bastard Keynes is considered the best policy imaginable. (As has been said before, military stimulus is the only stimulus braodly acceptable to the elites.)

    As we see here:

    In other words, while the ability to “just spend the money” is recognized in times of war or when a financial bailout is deemed necessary (by politicians, at least), MMT’ers want it to be just as obvious when the issue at hand is involuntary unemployment, crumbling infrastructure, children or retirees living below the poverty line, a major city devastated by natural disaster, and so forth.

    MMTers just want to do as Alinsky said, “make them live up to their own rules”. The difference being that actual stimulus could possibly help reform and restore the productive economy, while bailouts, war, the Pentagon, and all other forms of corporate welfare are purely destructive spending, just cannibalizing what’s left of the principal. Pure robbery.

    I like the heirarchy of authority heuristic. The restraints on effective fiscal action are purely artificial, trumped up by the elites and for the elites, at the expense of the people. It’s funny how those who normally pose as anti-statists suddenly become champions of state constraint here (we just explored that paradox in the “libertarian” thread as well), where a more free regime could be beneficial to the people and detrimental to the finance rackets.

    The restraints on operational actions are purely artificial, purely political. The Status Quo Lie, challenged by MMT as explored in this post, falsely claims otherwise. But in truth we can just as easily make radically different political choices. It’s always a political choice.

    1. Bates

      Baloney.

      MMT is for delusional people that believe that deficits do not matter.

      MMT is for delusional people that believe that the dollar cannot be destroyed because it is currently ‘the world reserve currency’.

      Ask Argentinians how MMT worked out there…or in hundreds of other instances.

      If MMT is so great why does it describe it in terms that a layman can understand? MMT always comes wrapped in bull shit verbiage.

      BTW, no one has addressed my comment about what will happen to commodity imports when the Fed/treasury go on another printing binge…assuming they have stopped…which I seriously doubt. MMT assumes that we live in a closed loop…but that is the sort of thinking that I expect from those that are Americacentric. Get your heads out of the box and think about imports necessary to run the US economy and how these will be paid for in devalued dollars and how the inflation will effect everything and everyone in America.

      1. stf

        That’s all been addressed many, many times, by many people, and there’s really no point in repeating over and over again for those who don’t want to actually discuss but instead want to choose not to listen while they just hurl insults.

      2. EmilianoZ

        Bates: “If MMT is so great why does it describe it in terms that a layman can understand? MMT always comes wrapped in bull shit verbiage.”

        One cannot explain the Theory of General Relativity to a layman, but you wouldn’t trash Einstein, would you? Come on, give MMT a chance. Trust the experts.

      3. attempter

        If MMT is so great why does it describe it in terms that a layman can understand? MMT always comes wrapped in bull shit verbiage.

        I’m a layman, I suppose, with regard to this stuff. I have no problem understanding it.

        Nor does the bullshit verbiage quotient seem bad relative to most economic “theories” (i.e. bullshit neoliberal ideology).

        BTW, no one has addressed my comment about what will happen to commodity imports when the Fed/treasury go on another printing binge

        Why didn’t anything untoward happen with all the other printing binges? They’ve been on pretty much a non-stop printing binge for ten years now. Oil went up, but not because of that. And clearly even with the lunacy of QE (lunacy not because it’s deficit spending per se but because it’s socially and economically destructive spending like if they were paying Blackwater to destroy domestic cities), no one including OPEC seems alarmed.

        The fact is you “austerity”-mongers keep being proven wrong about all the allegedly dire consequences once Mom finds out, er, the invisible bond vigilantes, or in this case the oil sellers, find out about all this profligacy.

        Yet Spain’s bonds are still doing better than those of the self-immolating Irish. Sorry, I think I’ll keep telling people that Ireland has showed us exactly what NOT to do, and has proven the deficit terrorist propaganda attack to be a Big Lie.

      4. Marshall Auerback

        Bates,

        If you actually looked at the facts, rather than indulging in tired cliches, you’d see that in fact MMT type policies worked very well in Argentina. Many of us have consistently highlighted the distinction between the issuer of a currency and the user of a currency. Argentina was not “sovereign” in the sense that MMT describes it, during the period of its currency peg which in effect operated like a gold standard constraint. When the peg was dropped, the country grew very rapidly during the post 2001 Duhalde Presidency. Before that, Argentina had been the poster child for the Washington Consensus, adopting a currency board, opening markets, downsizing government, and freeing capital. After its economy collapsed and unemployment and poverty skyrocketed, it implemented a limited employer of last resort program called Plan Jefes de Hogar, to provide jobs to poor heads of households. The program provided jobs to 2 million workers or about 5% of the population, and about 13% of the labor force.
        Government’s total spending on Jefes and PEL was currently equal to about 1% of GDP, with nearly 2 million participants (about 1.6 million in Jefes and 300,000 in PEL). This is out of a population of only 37 million, or more than 5% of the population.
        According to the World Bank’s reviews (see for example World Bank Report No: 23710-AR), the program was successful in achieving a number of goals. First, program spending was well targeted to the intended population—poor households with children. Second, the program provided needed services and small infrastructure projects in poor communities, with most projects successfully completed and operating. Third, the program increased income of poor households, although it did not pulled them above the poverty line (this is not surprising, because of the low monthly income provided through the program). Hence, the poverty rate in Argentina continued to rise during the first months after the implementation of Jefes. While beneficiaries report satisfaction with the program, there were some problems. The program probably could have been improved by relaxing rules so that more than one family member could participate in the program. More generally, if the program had moved beyond the head of household and dropped means testing, it could have provided jobs to all willing to work at the base wage.
        But for the most part, the program was successful in promoting employment and reducing extreme poverty. I’m sorry the facts don’t comport with your comfortable ideological, but as the late Senator Moynihan said, “We all have the right to different opinions; we don’t have the right to different facts.”

        1. Doug Terpstra

          Marshall, even such modest domestic investment is surely a quantum leap above the maintenance of a garrison-state empire with unending, multi-front wars. The choices are so stark and self-evident, but the entrenched merchants of death are tenacious dissemblers.

    2. Rodger Malcolm Mitchellr

      Despite all the convoluted theorizing and semanticizing, the fact is, the federal government creates money by crediting the bank accounts of its creditors. The federal government neither needs nor has “cash in the bank.” It creates cash, ad hoc, when it spends by crediting bank accounts.

      For that reason, the government neither needs taxes nor borrowing. These are not theory, but absolute fact. All this is as factual, yet contrary to intuition, as a spherical earth is to people who wonder why we don’t fall off.

      Rodger Malcolm Mitchell

        1. molecule

          Can you then explain why Norway can’t just spend their sovereign money(the Norwegian krone) and build/buy military bases around the world?
          Why can’t they use their sovereign privilege, buy from the Chinese, give them krone and get stuff. Just have the government spend the money, buy stuff and give it to the Norwegians. Who needs to work?

          -paraphrase–
          Despite all the convoluted theorizing and semanticizing, the fact is, the Norwegian government creates money by crediting the bank accounts of its creditors. The Norwegian government neither needs nor has “cash in the bank.” It creates cash, ad hoc, when it spends by crediting bank accounts.

          For that reason, the Norwegian government neither needs taxes nor borrowing. These are not theory, but absolute fact. All this is as factual, yet contrary to intuition, as a spherical earth is to people who wonder why we don’t fall off.
          - end paraphrase–

          1. stf

            Here’a a paraphrase for you—you really have no clue what the actual paradigm is you are critiquing.

            There are very clear reasons within the MMT paradigm for why Norway shouldn’t do that. Can you find them? I doubt you’ll even look–just continue throwing off-base insults as if that somehow is supposed to makes us feel like you’ve one-upped us.

  3. Bruce

    The “operational reality” is that if there were no taxes and no bonds and no “independent”central bank, no one would trust US currency. Each fresh new currency “emission” would be a signal to raise prices.

    Seriously, can anyone imagine 9x the amount of currency in circulation? 9 trillion or so?

      1. Bruce

        I said “with no taxes”, since MMTers think taxes are primarily a reserve draining mechanism.

        What I am asking is if, “tomorrow”, the government says we are redeeming all bonds for FRNs (and won’t sell any more), there will be zero taxes on anything (at the federal level), and that yes, we epect to continue to spend/print/create fresh reserves of $4 trillion per year, wht would happen to the value of the FRN?

        I don’t disagree with MMT per se, I think if you collapse the system down into “what is happening”‘, then yes, it’s basically right. But so what? There are still limits on currency creation no matter how it’s operatively created.

        And more fundamentally, the actual operative mechanics of the US currency creation is quite necessary in order to maintain the optics that FRNs have value. One might even say that the purpose of the creation of the income tax was only to insure that people would attach some value to the currency.

        1. stf

          With no taxes or ability to enforce taxes, you have no ability to issue currency, so the “no taxes” point you are making is a non-starter for MMT’ers.

        2. FlimFlamMan

          What would things be like with no taxes? Bad. Nobody is proposing to scrap taxes though, so lets move on.

          “But so what? There are still limits on currency creation no matter how it’s operatively created.”

          Yes, there are limits, as MMT proponents always make clear. The ‘so what?’ comes from the fact that the real limits are different to – and more restrictive than – the artificial limits we have imposed on ourselves, and that those artificial limits are seriously and unnecessarily damaging to to society; to real people.

          Eddie

        3. Tom Hickey

          Bruce said. “with no taxes, since MMTers think taxes are primarily a reserve draining mechanism.”

          MMT’ers hold that Tsy issuance is a monetary operation to drain excess reserves so the Fed can hit its target rate without paying interest on the excess reserves.

          MMT is often called Neo-Chartalism because it holds that the value of state money comes from the ability to tax. Taxes create the necessity to obtain state money in order to satisfy the tax obligation to the state. Functionally, taxes withdraw nongovernment net financial assets from the economy and their operational use is chiefly to dampen inflationary pressure as effective demand approaches the capacity of the economy to add production.

          See Abba Lerner’s principles of functional finance.

          1. Rodger Malcolm Mitchell

            Actually, Federal taxes are unnecessary. I’ve discussed this with Warren Mosler and Randy Wray, who agree with me that state and local taxes are sufficient to create demand for money.

            Rodger Malcolm Mitchell

  4. fresno dan

    “Fed admits: Money is a spreadsheet Lambert Strether”

    Its funny (sad) when you look at the chart of where the MMT money created by the ???FED, Treasury, Banks???? goes, I never get any of it.

    “…. whether there is idle capacity in the first place, while also recognizing the obvious point that not all fiscal actions are equally efficient.”
    Let us say I accept this theory. So why exactly is it that both under Bush and Obama, if money creation is so easy and painless, the money always goes to the banks?
    And one other little point – why should a bank get money for free, and make interest greater than a t-bill? I would find it hard to accept the arguement that they are “efficient” allocators of capital, when reality suggests that they are the most inefficient (or idiotic) allocators of capital.

  5. jake chase

    Strip away all the verbosity from MMT and what do you get? That we have licensed a handful of banks to decide who lives, who dies, who succeeds, who fails. Meanwhile, a non elected autocrat fuels looting and speculation for the benefit of a tiny elite with unlimited access to a counterfeiting operation, and this somehow adds up to democracy because every two or four years we get to choose from a chinese menu of charlatans and blowhards whose only visible ambition is to become super rich. Okay, in 1913 (income tax) and 1914 (Fed) they blew it. I get it that MMT provides some juicy academic sinecures and a head spinning literature. Please tell us, professor, what the rest of us are supposed to do.

    1. lambert strether

      I like “juicy academic sinecures”…. That MMT theorists dominate the economics departments at Princeton, Yale, Harvard, and the University of Chicago is a well known, er, operational reality. Not.

      I mean, jeebus, jake. If you can’t even get a personal attack on the motives of the poster right, can we expect you to get anything right? I’m guessing no. I’ve got no issue with populist outrage at all, but let’s try to stay reality-based, mkay?

      1. jake chase

        I leave the outrage to Russ. What you are objecting to is mild irony. Do you really think that explaining counterfeiting ought to be a career path?

  6. anon

    Small quibble:

    - With a zero reserve requirement system, a government determined to run a balanced budget could circumvent the requirement for prior deficits by immediately transferring temporary tax surpluses to a deposit account with a commercial bank, until they are spent; that has no net effect on reserves, and no prior deficit/lending is required to facilitate reserve adjustment

    - An intra-day overdraft facility is required as part of the payments system, which is pretty standard

    - Temporary injection or withdrawal of excess reserves could be achieved by transactions in private sector assets, which does not affect the government’s budget balance position

    1. Ramanan

      Not sure what you are saying here Anon.

      If the Treasury and/or the central bank moves the funds from the central bank account to a bank account, the government’s deficit/surplus position (in the accounting period) is still the same.

      If the central bank purchases government securities, the government’s budget balance is still the same. If it purchases some other asset, it doesn’t change the budget position compared to the case where the central bank purchases government bonds.

  7. lambert strether

    It’s odd, or not, that most of the MMT “critiques” on this thread react with fear and loathing to policy outcomes imputed to MMT advocates, and not to the operational realities described by the post itself.

    Wouldn’t it make sense — at least for a reality-based community — to accept (or deny) the operational realities first, and then move on to discussing the spectrum of policy outcomes?

  8. Dan Duncan

    The Hitchhiker’s Guide to Modern Monetary Theory aka SEP Field Economics.

    Douglas Adams has his character Ford Prefect describe “Somebody Else’s Problem” (SEP) in Life, the Universe and Everything, the third book in the The Hitchhiker’s Guide to
    the Galaxy series. It is perfect for MMT:

    “An SEP is something we can’t see, or don’t see, or our brain doesn’t let us see, because we think that it’s somebody else’s problem…. The brain just edits it out, it’s like a blind spot. If you look at it directly you won’t see it unless you know precisely what it is. Your only hope is to catch it by surprise out of the corner of your eye.

    “The technology involved in making something properly invisible is so mind-bogglingly complex that 999,999,999 times out of a billion it’s simpler just to take the thing away and hide it……. The “Somebody Else’s Problem field” is much simpler, more effective, and “can be run for over a hundred years on a 9Volt battery.”

    This is because it relies on people’s natural predisposition not to see anything they don’t want to, weren’t expecting, or can’t explain.

    “The disposal of litter (or governmental debt)–however spread–seems to be particularly sensitive to the effects of the SEP Field; once the used up cigarette carton or treasury note is discarded they are immediately enveloped in the field and vaporized! The pop bottle or T-Bill, also having served their purpose, immediately disappear from our sight; sweet wrappers, fast food containers and the Full Faith and Credit of the United States of America … all these things, and many more besides, all of them disappear once they have been discarded by their original owners: all of this waste material becomes the pervue of “someone else” and is therefore invisible.”

    And there you have it: The Hitchhikers Guide to MMT—The REAL primer on the operational realities of The Modern Monetary Theory.

  9. flow5

    The liquidity preference curve is a false doctrine. The Fed Funds “bracket racket” has been the problem ever since 1965. MMT’s accounting equalities don’t actually balance. The leakages are currently significant, but will become exaggerated under MMT. The Treasury’s operational “overdraft privilege transforms our “managed” currency into a “fiat” currency. MMT is tripe.

    1. DownSouth

      Again, does anybody have the foggiest notion as to what flow5 is talking about?

      I think these guys have had such an extraordinary religous experience that they have begun talking in tongues.

      1. Bates

        “Again, does anybody have the foggiest notion as to what flow5 is talking about?”

        “Does anybody have a clue as to what Dan is talking about?”

        You seem to lose your ability to comprehend as soon as someone disagrees with you. lol

  10. flow5

    MMTer’s assume that the current administration knows what it is talking about. It is easy to poke holes in their unique communist manifesto, because it is so easy to poke holes in the FED’s current operational policies.

    If MMTer’s really understood economics, they would be talking about the economy.

    Reality (banks pay for what they already own), is much too complicated for their simplistic agenda.

    1. stf

      “MMTer’s assume that the current administration knows what it is talking about”

      You are so completely clueless as to what MMT is really about that it’s not even worth discussing anything with you.

      1. marcf fleury

        Oh come on, now, no need to get so pissy with the tea-partiers amongst us :)

        You should simply point out that there is no “agenda” in describing how the modern monetary system works. That is factual and useful for practioners (money multiplier model is bunk for example).

        Also the application of MMT with fiat money operating model has been equal across party lines. Repugs emit money to finance wars abroad dems emit money to finance healthcare at home (in broad strokes).

        But the criticism should not be dismissed, MMT should strive to LOSE THE AGENDA policy part of its presentation. I subscribe to the factual presentation of modern banking, not to the policy prescriptions of the levy institute.

        1. stf

          Well said. From experience, though, that sort of approach, or any other, never works on this particular individual.

    2. lambert strether

      Flow writes:

      [1] MMTer’s assume that the current administration knows what it is talking about. It is easy to poke holes in [2] their unique communist manifesto, [3] because it is so easy to poke holes in the FED’s current operational policies.

      [1] Huh? The MMT folks are completely at odds with administration policy. Many of the recommend a Jobs Guarantee to use all our economy’s capacity (and reduce the suffering from disemployment). Evidence, please, so I know you will have none.

      [2] Trivially, if the Communists have a manifesto, and the MMTers have a manifesto, then it’s not unique, eh? But again, evidence, please. I’d like a quote that shows an MMTer advocating the collective ownership of the means of production.

      [3] What a weird argument. Because an analytical tool is easy to apply, that makes it useless?

  11. Tao Jonesing

    Thanks to Prof. Fullwiler for the meaty post. I will pore over it later today.

    Equal thanks to attempter for his comment, above, which finally makes clear to me that MMT is not your Uncle Milty’s monetarism, and he did this by focusing on a couple sentences deep in the post.

  12. Jim

    Scott, Do you agree with JKH(from an Intefluidity post) when he says “The MMT absorption of monetary policy by fiscal policy extends the idea of open market operations from conventional asset-liability monetary operations to expenditure/tax fiscal operations. Taxation is viewed as a direct drain on aggregate demand, somewhat analogous to to the conventional view of CB bond sales as a drain of system liquidity. The desired MMT fusion of monetary and fiscal policy could be implemented operationally with the actual fusion of of Government and Central Bank balance sheets and operations as is the case in the “no bonds” option. What is not said is that this endows the resulting entity of government with a fundamentally bank like characteristic.
    It is a mismatched bank, with negative equity, but it is a bank that both spends and lends money into existence and drains it when desired with a variety of “tightening” options, including taxes. The MMT “job guarantee” further extends the open market operation mechanism into the employment realm with “job guarantee” employees being injected into the private sectore during busts and withdrawn during booms…its all looking like a continuum to me now.”

    1. marcf fleury

      That the government controls a bunch of the money supply is clearly taken is the base money. However the real money is developed on top of it. The liabilities do not solely exist on bank balance sheets but are distributed through the CDO mechanism into the shadow financial system. Balance sheet ccounting based regulation fails to accounts for these derivatives, by their very definition. In retrospect it is the impact of the monetary aggregates on the minsky cycle that should give us an idea of appropriate monetary levels. In 1930′s this was deemed to be 12 liabilities/assets at the bank level. It should probably be around 30 counting liabilities and assets in the shadow system and not just banks (thanks to CDO).

      But the full employment stuff is a policy prescription. The fact that you like it or not is not relevant to the factual part of MMT. Forget the policy prescriptions.

      The fact is that most MMT litt is very “leftish” because the marxist are the only ones to study the banking system with a critical eye, I guess?

    2. Tom Hickey

      Jim, JKH is very knowledgeable on banking and finance and would take what he says as being correct, although this is beyond my job description to evaluate. What I take away from this is his analogy of government as a bank. This is significant in light of the common analogy of government as being like a household or a firm, which is not true of a monetarily sovereign government, as Scott establishes.

      Banks create money by lending, that is, expanding their balance sheets by taking on loan obligations as assets (“accounts receivable”). Governments also create money by spending and lending in a very similar fashion when considered from an accounting perspective. What I think that both Scott and JKH are saying is that one has to understand the accounting to understand what is happening operationally.

      The fiction is that the central bank and Treasury are separate entities but operationally they act as a consolidated entity — “the government.” Jointly, they carry out monetary/fiscal policy as set by Congress and the administration under the constitution and laws.

      In fact, the central bank, treasury, and commercial banks all contribute to providing the economy with “money” and ideally providing the correct amount of “money” as a medium of exchange to balance supply and demand so that the economy can grow, production and employment can remains stable at full capacity, and price stability can be maintained.

      As Scott pointed out there is a hierarchy of money with government sitting at the top in a fiat system. JKH’s model recognizes this operationally and structurally. That’s what I get from it anyway.

      1. JKH

        Thanks, Tom.

        Jim’s transcription of the quote inadvertently reversed the JG flow orientation I referred to. The original said:

        “The MMT “job guarantee” further extends the OMO mechanism into the employment realm, with JG employees being injected into the private sector during booms and withdrawn during busts.”

        Apologies to Scott and other MMT’ers for the crudeness of the OMO “injection” phraseology for labor, but there is a more humanized level at which the analogy does hold, I think.

        The original quote is comment # 23 here:

        http://www.interfluidity.com/v2/918.html

  13. AndyC

    MMT = Academic Economic Mumbo Jumbo…
    So why is the acronym MMT instead of AEMJ?………….I don’t know you will have to ask your professor.

    :)

  14. marcf fleury

    Thanks for the primer… I did struggle through Randall Wray’s book and do find the expose needlesly complicated in general, though it focuses, for the most part on the inner-workings of modern money creation. I will be coming back to this article. Please keep it coming :) And thanks Yves for this quality programming.

    I like the distinction between
    a/ MMT as a description of how the money system works
    b/ MMT as a set of policy prescriptions given a/

    a is mostly FACTUAL. It is not a matter of taste how modern money actually works. Most people are taught to parrot the money multiplier but it is far from reality. It shouldn’t really be called a “theory” as most people who are not academic understand “a conjecture” and not “fact”. MMT in the a/ part just describes how the system of money creation actually works. I think MMT would do well if it focused on dismissing the money multiplier for example as opposed to indulging in b/. You can’t discuss A, you will will turn blue discussing B.

    In my opinion every president since Reagan has been a practitioner of MMT, namely indulged in keynesian/MMT monetary driven stimulus to boos the economy. Reagan era did defense, Clinton did economy/internet, Bush did war, Obama did healthcare. But they are all applications of MMT that transcend politics, A transcends politics and politicians. Hence the “deficits be damned”. All of it contribute to the minsky debt cycle.

    B/ However is matter of taste and draws on political convictions. I, for example, do not think “full employment” ala Ray is a priority, but to each its political priorities. However attaching the name MMT to B is likely to get it rejected out right.

    Don’t throw the baby with the bath water.

    1. Tom Hickey

      Art Laffer fully understands MMT, although he doesn’t let on in his public persona.

      Various MMT’ers, especially Bill Mitchell have exposed the money multiplier as an ex post facto accounting relationship that the mainstream mistakes for an ex ante cause. The mainstream never adapted their understanding to Nixon’s shutting the gold window on August 15, 1971. That is a long time ago.

      Money multiplier and other myths

      Money multiplier – missing feared dead

  15. Jim Haygood

    ‘The “weak-form” deficits would consider that bond markets might at some point choose to repudiate even a currency-issuer’s debt with zero default risk, but recognizes that the Fed always has the ability to set the market rate on Treasuries as long as it is willing to buy all quantities offered at its bid price. Examples would be the Fed’s “Operation Twist” or the Fed prior to the Treasury Accord, or in the non-currency issuer case, consider how the recent EMU crisis quickly faded once the ECB began purchasing the debt of troubled member nations.’

    There are limits to this process. If the Fed decided to peg long Treasuries at 2.5% (as it did during 1942-1951) while structural deficits continued, interest rate pressure would rise as the debt/GDP ratio worsened and rating cuts ensued. Interest as a percentage of gov’t spending would escalate exponentially, until the market refused to fund new debt sales. Then the Fed would be buying all of the Treasury’s issuance, Hyperinflation would erupt, as real rates plunged to double-digit negative values. As I say, there are real-word debt LIMITS which MMTers seem not to recognize.

    The ECB bailout which Fullwiler lauds will sound the death knell for MMT, when Greece defaults anyway. The irresistable force of utopian theory collides with the immovable wall of reality — and REALITY WINS.

    By the way, Fullwiler’s a perfessor at ‘Wartburg College’ — are you kiddin’ me? I’ve got a doctorate in motorcycle mechanics from Hogwart U. — and I say he’s out to lunch! Vroom, vroom!

    1. stf

      Also, how does “interest rate pressure” rise as long as the Fed is pegging the interest rate by buying any securities offered at that rate? Once/if it stops, sure, but not until then–which is when Greece, et al., start to have problems (or before if ECB threatens to stop buying).

      1. Jim Haygood

        Same way it’s rising now at the short end. In pre-Fed crises (e.g. the Panic of 1907), rates on overnight call money soared.

        Our abnormal, unnatural zero Fed funds rates are an artifact of central bank intervention. The ‘pressure’ in an unmanipulated market would be for these rates to rise, to reflect credit risk. To counter the pressure, the manipulator is obliged to buy ever larger quantities of securities (as the Fed has done).

        Now this baleful process is spreading to the long end of the curve. The pressure can only be contained for so long, as the ending of the Treasury-Fed accord in 1951 demonstrated. Otherwise, why wouldn’t the Treasury have continued availing itself of the privilege of borrowing at 2.5%?

        1. stf

          Wrong. Fed, as monopoly supplier of reserve balances, can set bid/ask in any maturity of the risk-free market, again, as long as it’s willing to end up holding the resulting inventory. All kinds of empirical research has shown that the short-end arbitrages to the Fed’s target rate, not vice versa.

  16. Ramanan

    From the JEI version of the paper “Can Taxes …”

    “Early debates [Modigliani 1961: Blinder and Solow 1973, 1976; Barro 1974; Buiter 1977; Lerner 1973; Tobin 1961] over the optimal method by which to finance deficit spending remain a controversial topic today [Trostel 1993; Ludvigson 1996: Smith and Villamil 1998]. Despite differing beliefs about the macroeconomic consequences[italic] of, say, borrowing vs. “printing money,” economists on both sides of these debates clearly accept that the purpose of collecting taxes and selling bonds is to secure funds that are then respent[italic] by the government. In other words, it is generally agreed that the role of taxation and bond sales is to transfer financial resources from households and businesses (as if transferring actual dollar bills or coins) to the government, where they are respent[italic] (i.e., in some real sense “used” to finance govennment spending). This erroneous view follows from an implicit treatment of money in its physical form and can be avoided by considering the balance sheet and reserve effects of taxation and bond sales. This, in short, is the purpose of this paper. ”

    This is a bizarre claim.

  17. Siggy

    MMT, well its a theory, one I have a very hard time in apprehending. How do you, ad hoc, increase the supply of money without affecting the level of prices, or the purchasing power of the currency, that which exists and that which is newely issued?

    I’m still slogging thru the explanation above and I’m puzzled. Does MMT theory explain what has transpired over the past 70 odd years; or, is it a road map out of this morass of excess credit that we find ourselves in?

    In a great many ways I find MMT explanatory of a very great deal of what has gone wrong. I don’t see in it any resolve of the current problem wherein we need to be extinguishing debt that cannot be serviced. When we do that there will be a general economic reduction in activity as we go about the business of rebalancing the allocation of resources.

    As to Wartburg – Hogwart, ad hominum does add to the discussion.

    1. FlimFlamMan

      “How do you, ad hoc, increase the supply of money without affecting the level of prices, or the purchasing power of the currency, that which exists and that which is newely issued?”

      MV = PQ, where M is money supply, V is velocity of money, P is price level and Q is output.

      Mainstream economists assume that both V and Q are fixed or slow to respond – even though a simple look at actual economies will show that they are not – and that an increase in M will result in an increase in P. In a situation, as now, where output (Q) is significantly below capacity economies respond to demand boosts from government deficit spending – increases in M – with increases in Q, not P. This isn’t theory or modelling; it’s what you find when you look at real economies. Try the same thing when Q is at capacity though and you get an increase in P: inflation.

      “Does MMT theory explain what has transpired over the past 70 odd years; or, is it a road map out of this morass of excess credit that we find ourselves in?”

      It explains some of what has happened but not all, but then it doesn’t attempt to explain all. MMT is not by itself a roadmap, but it does make it easier to develop a roadmap that will work.

      “I don’t see in it any resolve of the current problem wherein we need to be extinguishing debt that cannot be serviced. When we do that there will be a general economic reduction in activity as we go about the business of rebalancing the allocation of resources.”

      Assuming you mean non-government debt, which is a problem, then MMT does in fact have much to say. It makes clear that the actions taken by governments to support particular financial institutions were unnecessary and flawed; that governments had the capacity to support the activities of the real economy while failed financial institutions were wound up. Governments had that capacity, and they still have it. At some point the bad decisions of the last couple of years will come back with another major crisis, and when that happens we’re more likely to get good decisions from government if enough people understand how economies actually work and understand what the real capabilities and limits are.

      Of course, this is all from a complete amateur, so you should just keep reading Scott, Randall, Marshall et al.

      Eddie

      1. leroguetradeur

        FlimFlamMan says: “In a situation, as now, where output (Q) is significantly below capacity economies respond to demand boosts from government deficit spending – increases in M – with increases in Q, not P. This isn’t theory or modelling; it’s what you find when you look at real economies.”

        Is this always true, according to the theory? Does it happen regardless of debt ratios, and regardless of what the government spending is on?

        1. FlimFlamMan

          It’s not according to theory, it’s according to observation. There are theories about why it happens, and better yet observations of the mechanics of why it happens. Not least is the fact that in a time of excess capacity a business which raises its prices in response to increased demand will likely lose market share to its competitors, since those competitors can maintain lower prices and instead increase output. The businesses in a given market could of course collude to increase prices across the board, but that’s true at any time and at any level of government spending, and it’s why most countries have laws controlling cartels and abuse of monopoly.

          Debt ratios matter if we’re talking about private debt, since private entities don’t get to create their own currency. Households and businesses – and US states, British County Councils and any other entity without its own currency – have both real and financial limits to spending, and the financial limits are usually reached first. Sovereign governments – governments which issue their own currency, issue debt in that currency and allow the currency to float – have only real limits, so debt ratios for nations running modern monetary systems only tell us what happened in the past; they tell us nothing about what can be done now or in the future because they are not a real limit.

          If a government chose to target all its spending on purchasing one particular product, and if the level of spending were sufficiently high, then – even with excess capacity in general – that demand could exceed the productive capacity for that product, and in exceeding that real limit the spending would result in increased prices for that product, and perhaps components of that product. One could also imagine a scenario where government spending was increased so massively that demand immediately exceeded the total excess capacity within the economy. These would be bizarre things to do though, and nobody is proposing either.

          Eddie

  18. Jim Haygood

    ‘consider how the recent EMU crisis quickly faded once the ECB began purchasing the debt of troubled member nations.’

    With southern Europe’s spreads and default swap premiums remaining high, I wouldn’t necessarily agree that the EMU crisis has faded.

    But if one accepts the claim, the statement seems to laud the ECB’s debt purchases as effective. If Greece proceeds to default, then the ECB’s debt purchases merely served to postpone default while the amount grew larger.

    If this is a vindication for MMT, then what would ever disprove it?

    1. stf

      “If Greece proceeds to default, then the ECB’s debt purchases merely served to postpone default while the amount grew larger.”

      Completely agree, believe it or not. Did you not read my response above? I explained as much there.

      1. Jim Haygood

        You asserted that the EMU crisis ‘quickly faded,’ implying semantically that it’s gone away, fixed, dealt with.

        But if Greece defaults, then the fading was a fake-out, a false dawn attributable to an unsustainable policy.

        And although Greece is not a currency issuer, the ECB’s actions have a lot in common with the MMT prescription for the authorities to peg interest rates by purchasing sovereign debt without theoretical limit.

        I’ve asserted that there are practical limits, both for Greece and for the ECB, which would take a nasty balance sheet hit if Greek debt is restructured. This would hardly seem to be a vindication of MMT.

        1. stf

          That crisis faded, but another could certainly happen given that Greece is not the currency issuer. This has been repeated many times by MMT’ers. Sorry if you misunderstood.

  19. scharfy

    The problem I have with MMT is that it would seem to obfuscate or minimize the real economic costs of Government. Under the current paradigm, “spending and deficits” as a percentage of GDP – we get a nominal “cost’ of our government. Maybe a bunk proxy for costs, but a proxy nonetheless.

    Should fiscal operations be swallowed by monetary operations (as has already happened to a large extent) we could see very insignificant near term costs, and unknown and potentially enormous long term costs. Playing with fire, I would say.

    On a one year time frame, MMT tends to bedazzle the mind, however it would seem quite a flimsy foundation on which build an economy for the long haul.

    Finally, MMT “presupposes” an open, transparent, and productive economy with a currency that will be accepted and trusted. Flexible bookkeeping requires this. The US, Japan, Germany, and China maybe all can issue their own currency with no reduction in efficacy. The rest of the world would be excluded from this style of policy, as implementing it would lead to immediate rebuking of the currency, no?

    So MMT seems (to me) a foothold for productive economies to expand the Governments role.

    1. Other Dave

      Not a bad point. But let’s remember, MMT isn’t about the wisdom of any particular government spending spree, just on the effect that it may have on private spending/saving or trade surplus. Or, if we can guess correctly as to the level of slack capacity, the effect on inflation.

      1. stf

        Well, they’ve dollarized, so most definitely this post wouldn’t apply to them. But “not an option,” if that means they couldn’t “undollarize” and follow MMT policy suggestions, I would disagree–Argentina did just that for a handful of years in the 2000s with quite good results, and a key employment program there was spearheaded by an individual in govt who got his inspiration from reading earlier MMT literature.

  20. JKH

    Whatever ideological problems one may have with government spending or government deficits, it shouldn’t be because the government has to issue bonds in order to maintain its financial position in some sense.

    It should be viewed by all as curious that when the government (together with the central bank) is the monopoly provider of its own class of liabilities that it actually chooses to replace the most elementary form of its own monopoly liability (bank reserves) with a term form (government bonds). The government isn’t competing with anybody for the issuance of bank reserves. Why issue bonds?

    The question is – why is it doing this when it doesn’t need to for operational purposes?

    Why is it issuing bonds to redeem the money for which it is the monopoly supplier?

    You can’t assume that the answer to the question is that government “needs the money”. It doesn’t. It already “has the money” in the sense that it’s already issued the money as its own liability. And that liability is accepted by those who receive it as an asset in a government expenditure transaction.

    And you can’t assume that the answer to the question is that the government requires liability term extension to avoid liquidity risk. It doesn’t. Because the government is the monopoly supplier of its own form of liability, there is no place for that liability to go otherwise. There is no liquidity risk.

    So whatever the answer is, it is an interesting one. Maybe the answer involves a robust debate about the implications for inflation, for example. But one of the benefits of the MMT discussion more generally is to get the prerequisite understanding of monetary operations right before even considering what the right answer is to this kind of question. Only then can there be fruitful debate about the real economic implications of how the government makes its choice.

    1. scharfy

      Why is it issuing bonds?

      Why is it issuing bonds?

      Why is it issuing bonds?

      That is a great question that cuts to the heart of the matter..

      Seems like a residual behavior from an era when these constraints were very real. If you didn’t have the gold, the Gov had to borrow the dollar$ back to spend them. We then meandered off of the Gold Standard but kept the self-imposed restraint.

      This self-imposition may no be a bad thing…

      Why is it issuing bonds?

      gotta ruminate on that one…

      1. Tom Hickey

        Right. It is a hangover from the gold standard that is no longer needed. Now interest on tsy issuance constitutes a subsidy to bondholders for a risk-free parking place. Petty good deal if you can get it, and once you have it, you will fight to keep it.

        BTW, interest on the “national debt” (actually nongovernment net financial savings) goes on the deficit tab. Are you listening deficit hawks? Here’s a great opportunity to cut the deficit, since bonds are not required operationally.

      2. Rodger Malcolm Mitchellr

        In answer to the question, “Why is it still issuing bonds?” For the same reason it still is taxing. Both operations are relics of the gold standard days (R.I.P 1971), and no longer are needed. The mainstream economists still live pre-1971, and control economic thought.

        Rodger Malcolm Mitchell

        1. molecule

          What about Japan?
          They seem to be desperate to issue bonds. The government is advertising in taxicabs, using celebrities to sell them.

        2. molecule

          Perhaps they keep issuing bonds to benefit the primary dealers that create “value”(for themselves) by trading them. Cantor Fitzgerald and the rest. Cui bono?

      3. lambert strether

        We are issuing bonds so that the banksters can take a cut for lending me back money that is already mine. That’s nice work, if you can get it. In an economy run by rentiers, as ours is, it’s all about the rents.

    2. stf

      Excellent, JKH.

      Interesting role reversal–me writing extra-long post and you with a much shorter comment.

      1. JKH

        :)

        … and congratulations on deploying the “ontology of strength” for more useful purposes – away from the EMH dark side.

        Seriously, it’s an inspired transposition. The EMH classification is about the strength of information signals, and your application of it is about the degree of structural purity in fiat systems, I think.

  21. John Merryman

    Earth to the economists: Rearranging the deck chairs won’t keep the Titanic from sinking. Yes, the government can keep borrowing money until hell freezes over, but eventually hell does freeze over.

    Money, however it’s put into circulation, whether by governments issuing it directly, or banks loaning it into existence, is a drawing right to community productivity and if you keep issuing more than the community produces, eventually the community will reject it.

    Debt based currency was a good idea when there was insufficient information to determine how much money was necessary to maintain a stable money supply, but production has to grow to pay off the debt and debt has to grow to finance the production, which creates a feedback loop with no natural brakes beyond government intervention and regulation. So when we eliminate regulation in the name of free markets, they quickly expand beyond sustainable boundaries.

    We need a system which rewards sustainable production and recycles excess production, either of capital or other assets, into economic sustainability. The earth is not flat and it does not go on forever. What goes round, comes round.

    Money serves as a store of value and a medium of exchange. As a store of value, it is private property, but as a medium of exchange, it is a public utility, without which markets cannot exist. As property, there is the desire to accumulate as much as possible, but as a medium of exchange, more money than productivity degrades the value of the money. Money should only be treated as a public utility. In that way, it would be similar to a road system. You own your car, house, business, etc. but not the roads connecting them and no one seriously cries socialism over that. Treating money as form of public commons would make people very careful what value they would take from social relations and environmental resources to convert into currency in the first place. This would be healthy for society, the environment and the monetary system. Of course, it would create a slower, but more sustainable economy. We all like having roads, but there is little inclination to pave more than we need. If we applied the same principle to money, life would be in better shape. Instead of valuing ourselves by how big our bank accounts are, our sense of worth would be on how strong our community is and how healthy our environment is. A smaller money supply would go a long way to limiting the size of the government and the banking system.

    We understand various civil institutions, such as the military, police and the courts, cannot be run as private, for profit enterprises. Eventually we will realize banking also falls in this category. Close to a hundred years ago, the private banking system managed to make the stability of the currency a public responsibility, while retaining the profits of managing it. Either we go back to making the banks responsible for the stability of the currency, or we make banking a public function. If we were to do the later, it would have to be bottom up. Local credit unions would use local deposits to loan to local enterprises and use the profits to fund local needs. They would then form regional banks for broader investments and managing the currency. This local governance would limit the amount of regulation that would otherwise be required of a top down, national banking structure. As with any structure, the strength must be in the foundation, not the impressiveness of the proportions.

    The Federal spending process is designed to overspend by buying votes with lots of local handouts, in order to pass enormous bills that can only be vetoed in whole by the president. This serves to create debt in order to store capital, as government debt is the primary investment vehicle. So the reason our government seems to increase in size so dramatically even under Republicans, who preach financial conservatism, is not so hard to understand, when you consider the extent to which this increased debt is bought by political benefactors. Should the government ever declare bankruptcy, it’s safe to say they would then feel legally empowered to asset strip public properties. It’s the old bankster ploy of extending credit, withholding it and then using the money they control to buy up assets at distressed prices.

    In the spirit of actual budgeting, a possible solution would be to break the spending bills down to their constituent items and have every legislator assign a percentage value to each item and then re-assemble the bills in order of preference. The president would draw the line at what would be funded. This would divide responsibility, allowing the legislature to prioritize, while giving the president final authority over total spending. Since making the cut would be graded on a curve, there would be much less incentive to trade favors and the percentage system would allow legislators to fine tune their granting of favors to other legislators and lobbyists. As the particular items at the cutoff line would have a far smaller constituency than those being asked to fund them, there would be limited political motivation to overspend. A local public banking system would cover much of the lost federal funding of local projects.

      1. John Merryman

        Tom,

        Anarchy is Somalia. Total control is North Korea. We want to be somewhere in the middle and that doesn’t mean being robbed blind by those in control of the cash register.

        1. Tom Hickey

          OK, I was being flip. I apologize, but I couldn’t resist. This wasn’t aimed so much at you but at the minds that sees government as the problem. I don’t deny that government is a potential problem, but the solution is not necessarily less government or more government, but better government. That requires reality-based policy.

          MMT is about harnessing the power of money creation, which in a fiat system rests with the monetary authority, the government. The idea that this is going to change anytime soon is just wishful thinking. The real question is who is going to control that power, the people or vested interests, and whether that power is going to be used intelligently in accordance with operational reality, or for privilege, based on the perpetuation of self-serving myths that create fear and confusion.

          MMT argues that there is a way that leads to global utopia, that is, use of the world resources in a sustainable way with distributional justice without creating imbalance that cannot be corrected with policy adjustments using the principles of functional finance. One may dispute that claim, of course, but one has to show where and how MMT is mistaken. Conversely, what most people do is throw up another paradigm instead of responding directly to MMT.

          Scott put out a summary of basic MMT ideas. The proper response in such a context is to address what he says specifically. A knee-jerk reaction of “rearranging the deck chairs on the Titanic is dismissive” rather than constructively critical. If you think you see a hole in MMT, please state it explicitly.

          I happen to agree with a lot of what you are saying. I am for decentralization, for example, and the principle of subsidiarity (decision-making as close to the level affected as practicable). But in a complex economy situated at the apex of a global economy, there is not a lot of space to do this, especially with respect to the hierarchy of money with government at the top.

          You are correct in saying that economics is about real resources. MMT agrees with this. The monetary system and market pricing in a capitalistic system determine distribution of those resources. Money underlies pricing, of course.

          Government sits at the controls of the monetary system in a fiat system. The policies governments choose have an effect on the real domestic economy and the real global economy. This is what MMT is about. MMT provides understanding of operational reality at the macro level, on one hand, and shows the consequences of policy options as a guide to policy-making, on the other. As far as I can see, it is pretty tightly knit in terms of national accounting and stock-flow consistent macro models. MMT’ers are open to debate, but one had better understand the accounting.

          1. John Merryman

            Tom,

            You are correct that there is a certain apocalyptic bent to my thesis, in that I’m providing some very simplistic concepts in a very complex situation, but from my perspective, we are headed for a crash of fundamentally monumental proportions for the very reason that as long as any possible avenue exists to forestall it, it will be taken and the result is the crash will only be that much larger and there will be proportionally less structural resources to fix it. I think that in a somewhat macabre sense, we will have a clean theoretical slate to start over with. I think that the Federal government and Federal Reserve will have exhausted any reservoirs of trust and respect and it will be left up to the states to fill the void. The result will be that we will go back and try various forms of historical monetary systems, as well as new ideas that might occur. The enormous financial structure that is New York and Washington oriented is going to collapse. This might seem to be a rather presumptuous statement, but I’m not looking at it from an emotional or political perspective, but simply a matter of physics. It’s an enormous edifice, but in this case, that’s a weakness, not a strength. It does not have the economic foundation to support it. This country has farmed out too much of its production and has mortgaged too many of the remaining assets.
            So, from what I see of Modern Monetary Theory, it seems to be a dense academic argument as to how to keep the current situation going and I think reality is going to intervene in a very forceful fashion.

    1. Rodger Malcolm Mitchellr

      John, you said, “. . . production has to grow to pay off the debt . . .” Let me explain why that statement is incorrect.

      Lending to the U.S. involves buying Treasury securities. Say you want to buy a T-bill. First, you must put dollars into your checking account. Then your bank debits your checking account, and the Fed bank credits your T-bill account for the same amount. The money has moved from your checking account to your T-bill account. That’s it.

      Later, when the T-bill matures, the Fed debits your T-bill account and credits your checking account. Nothing physical happens. It’s all just electronic debits and credits — which the government can do endlessly.

      The federal government could pay off the entire $13 trillion (?) debt tomorrow, merely by crediting the checking accounts of all T-security holders, and debiting their T-security accounts. All this is done without the government having any money in the bank, and has no relationship whatsoever to national production, GDP or any other economic measure.

      This all has been possible since 1971, the end of the gold standard, and is the fundamental reason we went off the gold standard.

      Rodger Malcolm Mitchell
      http://www.nofica.com

      1. John Merryman

        Roger,

        It’s possible, but the reason private banking works is because politicians, kings, etc. have historically been poor stewards of the money supply, because they are quite willing to do exactly as you propose. It’s like the old joke; I’m not broke, I’ve still got some checks.
        So what happens after the government credits every ones accounts? The amount of value in the economy doesn’t increase, but the amount of currency in circulation does, so, law of supply and demand being what it is, the value of the money goes down. Since there is nothing to stop the government from doing it again next week, the value of the money vanishes. Especially the electronic variety. Since there is actually very little printed money, relative to electronic money, it will likely hold its value for a bit longer. Though that will be remedied as well. I think the thousand dollar bill should have Reagan’s picture on it, the ten thousand should have Bush Sr. on it, the hundred thousand, Clinton’s picture on it, the million dollar bill should have Bush Jr’s on it and the ten million should have Obama’s picture on it.

    2. TDK

      Well, I can agree with some of this but in saying that money “is a drawing right to community productivity and if you keep issuing more than the community produces, eventually the community will reject it” I think you draw too broad a brush wrt “community”.

      Restricting the discussion to the expansion of the gov’t balance sheet since 2008 (since the massive increase in deficit spending in the previous 7 years did not seem to cause nearly as much concern) it is a small fraction of that community that produced too much of its product (namely debt), got itself and everyone else into a world of hurt, and offloaded as much as it could of that debt on the gov’t, threatening ruin to the rest of the community if they were not allowed to. Understandably the rest of the community is upset, but both the timing and the target of their anger is bizarre. NOW they’re worried about deficit spending? And why do the people who got us into this mess — the Schwartzmans, the Dimons — and their enablers — the Boehners, the Pauls — get such a hearing? And why do the Fulds and Gramms and Cassanos get a free pass? That is, what a significant fraction of this community is rejecting is an honest examination of how we got into this, how we might get out, and how we’re going to avoid it next time.

      1. John Merryman

        TDK,

        The banking system managed to get every possible regulation removed that prevented it from asset stripping anyone possible and those year were the freefall before we hit the sidewalk. That two trillion dollars they used to buy the bad debt off the banks was highway robbery, pure and simple.

        This goes back much further, though. I first started questioning economics by trying to figure out how Paul Volcker cured inflation by raising interest rates. Inflation is caused by loose money policies, but higher rates and a tighter money supply benefits those with money to lend, while hurting those wishing to borrow it. So how did he cure an oversupply by harming demand? The first time he eased off, in ’80, inflation came back, but in ’82, it was cured. It just so happened that by 1982, Reagan’s voodoo economics had pushed the deficit up to 200 billion and that was real money in those days. So what is the difference between the Fed selling debt it is holding and the Treasury issuing fresh debt? The Fed simply retires the money it collects, while the Treasury spends its money back into the economy in ways that usually support further private sector investment, so the demand effect is multiplied.

        Now the story we were fed at the time was that inflation was caused by workers and manufacturers constantly wanting more money, but by the Fed’s own logic, it would seem a surplus of money in the economy is in the hands of those with a surplus of wealth. Not a point which got much attention.

        The problem is that it is demand, how much capital the economy can productively absorb, which supports supply of capital, but those with the supply tend to have more political influence than those with the ability to put this capital to work. So it is those with the capital that write the rules and when they destroy that foundation of demand, such as by exporting work to low wage countries in order to keep most of the profits and then lend it to the consumers who buy the products, eventually the system collapses.

  22. Macheath

    Let’s face it, economics is not about “realities”, but about models, and when people confuse models for reality the result is stupidity. MMT departs from reality in many ways. For example: 1) we do NOT have a fiat money system; we have a credit money system with a fiat money system attached; 2) treasuries do not create fiat money; central banks do; and as a matter of accounting reality, treasury needs cash in the bank to spend it; 3) central banks rarely buy treasury bonds on the primary market, so even if you think the distinction between treasuries and central banks is artificial, governments still rarely creates money.

    1. Macheath

      Well… in relation 3) above, I should say rarely create fiat money beyond what meets the private demand for currency notes for cash transactions. And the reason is very simple. It is because they would be a laughing stock. They would be a laughing stock because people know that fiat money creation is addictive; one day you will print to much and your heart will stop.

      1. charley

        The sovereign can create currency, but is this money? Better yet, is this capital? What is MMT if it is not the idea that fiat currency is money?

        1. spectator

          Good catch. Fiat currency is money until everyone says it is. This does not last unfortunately, and often ends rather suddenly.

  23. Hugh

    A primer is supposed to be a clear, basic exposition of a subject. I have to admit that if I didn’t already know most of what the author was trying to say I would find it completely impenetrable. In this regard, MMT remains its own worst enemy. It simply fails to engage and explain in those areas where people have the most questions and doubts, i.e. its limitations, where it can be applied, to what extent it can be, when do resource constraints have an effect, do they, the relationship or lack thereof between monetary theory and fiscal policy, etc. I often say that there are aspects of MMT that I like but I also find it cultish. You are either a believer or an outsider. Well, by nature and experience, I am an outsider.

    1. stf

      “A primer is supposed to be a clear, basic exposition of a subject. I have to admit that if I didn’t already know most of what the author was trying to say I would find it completely impenetrable.”

      It was intended as a more academic piece from the beginning in response to particular questions asked regarding the nature of “operational” in MMT.

      “In this regard, MMT remains its own worst enemy. It simply fails to engage and explain in those areas where people have the most questions and doubts, i.e. its limitations, where it can be applied, to what extent it can be, when do resource constraints have an effect, do they, the relationship or lack thereof between monetary theory and fiscal policy, etc.”

      Again, it was on the nature of “operational,” as the title clearly suggests. And fiscal/monetary policy relations, as they relate to “operational,” were covered in substantial detail.

      “I often say that there are aspects of MMT that I like but I also find it cultish. You are either a believer or an outsider. Well, by nature and experience, I am an outsider.”

      Any disagreement with the description of the operational realities of the monetary system? That’s actually what the post was about, after all. Go ahead and call names if you like, but that just shows you don’t want to discuss whether the operational details are in fact true.

      1. Hugh

        Thank you for illustrating my point. MMT has some good ideas but it is and deserves to be marginalized until its practitioners start taking seriously the concerns people have about it and until they are more open and honest about its limitations. I am interested in real solutions to real problems. Doctrinaire MMTers are as irrelevant to my needs as neoclassical and Austrian school partisans.

        1. stf

          Well, to solve real problems related to the macro/financial system, it would be good to know how the monetary system actually works. So, again, any particular disagreement with how it’s been described here or in any other MMT? I’ve never seen you offer anything specific, just the usual blather that suggests you just want to insult rather than discuss.

          1. Hugh

            I have pointed out to you before that MMT is not going to gain very many adherents if it continues to go postal on everyone who doesn’t absolutely agree with it and you. Your idea of discussion is that you say something and then we agree with you. I have also pointed out that people have real concerns about the scope and limitations of MMT. Your response is to blow them off. You show yourself at every turn to be as rigidly ideological as your neoclassical and Austrian brethren. So yes, for those of us who are concerned about real world problems your theoretical infighting and point scoring against other schools would be comical if it were not so massively irrelevant.

          2. stf

            I asked you a very simple question. Let’s try again.

            You said that you are “interested in real solutions to real problems.” Would you agree that the ability to solve at least some of our “real” problems–particularly those related to the macroeconomy and the financial system–requires an understanding how the monetary system actually works in order to be effective?

            If so, then do you have a disagreement with anything in the post with regard to how that works?

            If not, why not?

  24. Jim Haygood

    Here’s an example (from a Bloomberg article) of MMT logic
    run amok:

    ————

    Aug. 30 (Bloomberg) — The bond market is giving President Barack Obama the green light to spend more money to boost the faltering economy.

    While the government has increased the amount of marketable Treasuries by 70 percent to $8.18 trillion the past two years, rising demand has driven yields so low that interest to service the debt has fallen 17 percent so far in fiscal 2010 ending Sept. 30 from all of 2008.

    http://noir.bloomberg.com/apps/news?pid=20601109&sid=aBxZKK4lGuuo&pos=11

    Here, let me climb into my trusty time machine and rewrite the article:

    (Mar. 10, 2000) — The Nasdaq stock market, which exceeded 5,000 today, is giving tech and telecom companies the green light to raise more money to boost capital investment in everything from fiber optic cable to B-to-B internet businesses.

    While IPOs and price gains have drastically increased the market capitalization in the past two years, rising demand has driven dividend yields so low that the cost of equity capital has fallen 17 percent so far this year.

    ————

    See how Bubble logic — in particular, the utopian notion of ‘no revenue constraints’ — can lead to irrationally exuberant extrapolation?

    Bond Bubblers of the World exhort — ‘Zero percent across the yield curve! Infinite prices for all!’

    And as my broker says, ‘Boy, are those puppies ever marginable!’ ;-)

    Look out below-w-w-w-w …

      1. stf

        Agree, Tom. Haygood is a waste of time. He wants to critique something he doesn’t feel the need to understand in the first place.

    1. Jim Haygood

      I refer you to the eminent economist Roger Malcolm Mitchell above: ‘The federal government could pay off the entire $13 trillion (?) debt tomorrow, merely by crediting the checking accounts of all T-security holders, and debiting their T-security accounts.’

      True, tomorrow the Federal Reserve could buy up the entire outstanding stock of Treasury debt held by the public. Of course, the dollar would promptly collapse, as inflation roared and soared.

      But never mind about such mundane practical complications. MMT [Mississippi Monetary Trauma, derived from John Law's 1718 experiment in 'non revenue constrained' government finance] — says there’s no problem. No, not the slightest! Ford’s in his flivver, and all’s well with the world.

      So why, exactly, does the skinflint Bernanke not relieve the groaning taxpayers of their interest burdens? I guess he’s just not with the Magical Monetary Thinking program. Shame!

      1. Tom Hickey

        “MMT [Mississippi Monetary Trauma, derived from John Law's 1718 experiment in 'non revenue constrained' government finance] — says there’s no problem. No, not the slightest!”

        Not.

        You clearly don’t understand MMT. MMT holds that the constraint is real resources. If effective demand exceeds the capacity of supply, then inflation results. MMT is very well aware of this.

        1. stf

          Yeah, I was even very careful to say just that in the post. Guess I shouldn’t expect Jim to actually have read it, though.

    1. joebhed

      You mention monetary sovereignty as if a foundation issue, not only for MMT but for economic democracy, per se.
      So, why doesn’t MMT embrace monetary sovereignty.

      Perhaps if we use the American version thereof as an example, we can discuss this matter.

      ONLY the Congress shall have the power to create the money, And regulate the value thereof.
      And of foreign monies..
      THAT is what gives us monetary sovereignty.
      Yet, all MMT proponents I have read favor the continuation of the private creation of the nation’s circulating medium.
      In addition, the entire government-debt posture of MMT is to quasi-regulate the private capitalists that by their very nature are destroying our monetary sovereignty.
      So, to me, that’s for no good reason.
      Thanks.

  25. St.John

    If you have ever read Carl Menger, Friedrich von Weiser and Eugen von Bohm-Bawerk you will understand where Haygood is coming from.

    Basically the “Jewish” answer to the other “Jewish” economist by the name of Karl Marx.

    1. stf

      Sure, but if I were going to critique those guys, I’d try to understand what I was critiquing first–ask questions, or something, before assuming I understood the paradigm, particularly if you’re told repeatedly that you’re not interpreting the paradigm correctly.

  26. St.John

    From a “Left-Right” paradym view, the basic premise is this:

    Right:
    1.Financial services is good thing: This is what bothers me by “internet coverage” of the “tea party” and other Menger cultists. They have and will always love financial speculation of the wealthy. If people can’t understand that, they need seriously a new hobby. Their only issue is not letting the current “model” of financial services die the death it deserves…….so the new one can be born. It is reall that simple. Now compare that to the Left….
    Left: Fianancial Services is a bad thing:
    1.This means limitating through government, the ability of the wealthy to speculate is a bain to these people and the destroyer of labor and creativity toward new business. Instead, they prefer a more strict control of capital while government provides a larget share of investment. I would argue this was the system of the post-war era. Likewise, the media mis-shows the current “centrist” model of upholding the current system to much with the left. Not only is the current system not what the left wants, it is the abomination that the wealthy created to pillage from the poor and middle class.

    When in construct of MMT, we must understand somebody is always pulling the chains of the monetary world. The Right wants deflation so they can profit from the boom and reorganize a new financial services paradym while the Left wants inflation through massive public investments while basically shrinking the financial sector down……….while labor’s share of income rises in real terms.

    The fact is, the financial sector under the right will rebuild, and start the same stuff and do the same leaching it just completed. You can destroy all the banks, but the same people will come back and start doing it again. The financial services creature does not change. They are greedy, leaches that destroy countries. It is a fundamental point the left never makes and should. Telling a story is the key in politics and leftist need to retell the days of robber barons and how “financial service” innovation rose/fell, rose/fell and it always ended up badly no matter how many times the liquidation to “purify” happened. MMT needs to be constructed toward the public side and not the private side. Service to a country is the number 1 goal of individuals and only when that is completed does the self-interest really take come to light.

    I wish people who believed in the Austrian school of economics had “real” patriotism but they don’t. Most hate countries and want a culturally and ethnically devoid world with the merchant as king. I frankly don’t see the difference from Marxism. Just a different side of the coin.

    1. Tom Hickey

      It is a fundamental point the left never makes and should.

      Well, Marx and the Marxians made it. Veblen made it. Noam Chomsky made it. Michael Hudson made it. To name a few. :)

  27. Dumb and Dumber

    This discussion is incredibly timely given I only recently become aware of MMT and, as a result, I have been struggling to understand what it is all about. That’s the good news. The bad news is that after reading Prof. Fullwiler’s post and after looking at several of the articles cited and after going through every comment, I am still mightily confused. No doubt most of this is me so my first response is simple: Thanks Yves and please don’t stop here. Keep this conversation (which on the whole is very respectful and civilized) going since I am quite sure that getting an understanding of these issues is really important.

    That said, I do have one observation which may or may not be constructive. The more I attempt to understand alternative economic theories (MMT being only one such example), the more it seems to me that each alternative theory assumes a set of specific set of arbitrary and unstated moral and ethical values (for example, attitudes about the concentration and redistribution of wealth, the proper relation between labor and capital, the proper role of taxation, the role of government regulation and government spending, opinions about what caused the financial crisis including who should be held accountable, etc., etc.). If I am right in this observation, it seems to me that it would be very helpful when presenting an explanation of the sort that Professor Fullwiler offers if the speaker *started* by laying out his political and moral biases up front rather than pretending that the theory he is expounding is in some magical way objectively detached from any ethical or moral starting point.

    1. Tom Hickey

      As Scott pointed out at the outset, there are two aspects of MMT. The first is operational description of the monetary system in accounting terms. This is neither theoretical nor moral. It is just the way the system works. Secondary to that general description of a modern monetary system in which a sovereign government that is the sole provider of a nonconvertible floating rate (fiat) currency is how different rules are imposed on the system in different countries. This is a matter of record.

      The second aspect of MMT is the various policy options that are available under the monetary system and what their anticipated consequences may be under different factual scenarios. This gets into macro theory, and MMT has a macro theory based on national accounting, sectoral balances and stock-flow consistent macro models. Many professional publications are available on this, and some blogs attempt to boil it down to something accessible to non-economists.

      MMT can be used by both people on the right and one the left. Art Laffer, one of the architects of supply-side Reaganomics, is fully conversant with the principles of MMT (although he does not present it publicly as such). Conversely, Bill Mitchell is way over on the left, chiefly interested in full employment along with price stability. There are a number of other possibilities across the political spectrum. For example, tax cuts and spending increases, and tax increases and spending cuts, accomplish the same thing. Some might prefer to emphasize tax cuts to stimulate effective demand when it is lagging, and others might prefer spending increases. Obviously, there are many ways that tax policy and government expenditure can be mixed to achieve a similar budgetary outcome. So there is room for policy debate within MMT.

      1. stf

        Looks like we were posting at the same time. Completely agree. It’s amazing how hard it is to get people to discuss how the system works with us instead of trying to pin us down on our politics. As I tell my students, “don’t try and figure out my politics, since the truth of the matter is I dislike both parties almost equally.”

    2. stf

      The point is to explain the system as it works. There is no policy bias there. There is a methodogical bias, though, which I was very clear about–the 3 points related to the MMT’ers definition of “operational reality.” If you change the definition of “operational reality,” you get a different description, for sure.

      MMT’ers certainly have policy preferences, but despite what many think, they are actually all over the board, even if some of the more vocal bloggers are a bit more leftward leaning. And, particularly at Mosler’s site, there are many, many sympathizers from libertarian and traditional republican backgrounds (see Winterspeak’s blog, for instance)–again, namely because one doesn’t have to be liberal/conservative/whatever to agree on the operational realities once we agree on what that means.

      Hope that helps.

    3. Yves Smith Post author

      To be honest, even though in many respects, MMT is tidy and elegant, it actually IS hard to grasp because many key observations (like loans are created out of thin air; gov’t bond issuance is not necessary for a gov’t to fund deficits, they serve as a way to drain reserves and provide a credit-risk-free investment) are so contrary to what anyone who knows a smidge of economics has been taught is that it winds up being hard to get your mind around it (or at least I found that to be the case). I actually don’t think it would be hard to learn afresh, the rub is the way it conflicts with existing mental models.

      1. stf

        Yes, like parents in living in rural areas of developing nations where it is well documented that a strong percentage of them believe the appropriate treatment for the children’s diarrhea is to stop providing fluids–out of the belief that less going in will mean less going out. The mental model is so strong and seemingly common-sense that it’s very difficult to change even armed with the scientific facts.

      2. Tom Hickey

        Agreed. I was trying to explain that government finance (currency issuer) is not like household or firm finance (currency user) to a friend who has an MBA, and he wasn’t getting it easily. His wife, who knows nothing of economics or finance, had no problem picking up on what I was saying. It’s the mindset.

        Cognitive science accounts for this in terms of neural pathways being open or closed through use, or not yet activated. It requires “reprogramming the biocomputer,” to borrow a phrase from John Lilly. It is easier to program an unused channel than to reprogram a well-worn one. Human hardware is different from electronic hardware due to hysteresis.

      3. Neil Wilson

        It’s blisteringly obvious to anybody who has had accounting training, but not really been brainwashed in classical economics.

        In accounting everything has a counterparty. For currency users to continue with their transaction sequence in aggregate, there has to be a currency issuer doing the opposite in aggregate.

        If it doesn’t then the transaction sequence on one or the other side has to alter to compensate. So you get demand collapse on the currency user side, and increase in automatic stabilisers on the currency issuer side.

        1. Tom Hickey

          This what is truly amazing, Neil. People who understand accounting often can’t get this easily because they apparently have a mental block due to preconceived Ideas.

          I also think that for many people it just doesn’t seem right that the currency issuer “gets something for nothing.” That attitude underlies a lot of the objections to MMT, too.

          One has to come to see that the currency is the “grease” that makes the wheels of the economy turn, and that it is the state, acting for the people, which provides that grease.

          I think that what people don’t like and are afraid of is that the state is not only currency issuer but also currency user, in that the state uses its currency to allocate real resources to (ostensibly) public purpose. But there is really no good way around this in a complex modern society. That’s why we have democratic government that are periodically accountable to the people at the ballot box and also laws against corruption.

  28. RueTheDay

    I’ve posted this here before as well as on Interfluidity, but I never seem to get a serious response from the MMT crowd:

    MMT advocates emphasize the fact that the textbook analysis of the money multiplier is exactly backwards – banks make loans first and then find the the required reserves to support them. This part is correct. They then go on to say that the Fed is thus forced to supply as much in the way of reserves as the banks demand in order to maintain a stable interest rate target. This is strictly true also, at least in the short run, but it hinges on the assumption of the Fed maintaining the interest rate target. In the medium to long run, the Fed Funds target rate is anything but fixed, so no, the Fed is not forced to provide as many reserves as the banks demand over that time horizon.

    This might seem like a minor quibble, but it’s not. It goes to the heart of the proposition that the only constraint on bank money creation is a capital constraint.

    1. marcf fleury

      I seem to remember Fed funds rate is overnight mostly? so medium and long are just reflections of Fed policy.

      To me MMT creates a clear picture where banks created as much debt as it wanted, via derivatives and CDO and thus completely eluded macro regulation which was enacted in terms of balance sheet and accounting entities and aimed at controlling the total level of debt in the system.
      Where minsky focuses on the demand side of the debt problem, the MMT reality makes the supply of debt, as defined by the shadow banking system, much larger. It means the minsky bubble is long and glorious.

      Debts levels cannot be regulated by the invisible hand. End of story.

      1. RueTheDay

        “I seem to remember Fed funds rate is overnight mostly? so medium and long are just reflections of Fed policy.”

        That’s the point. The Fed Funds Rate is not static – the Fed can and does adjust the target depending on economic conditions.

        1. stf

          Whatever the target is on any given day, the Fed has to supply the qty banks are willing to hold. That goes for changes in the target in the short and long runs–though it’s well known that the demand for reserve balances is very interest inelastic, less so over the long run, but still not very much.

          In other words, there’s absolutely no assumption made that the target rate is fixed.

          (Note that throughout here I’m assuming no interest on reserves. In that case, demand for reserves doesn’t really matter as long as the qty supplied is bigger at the target rate.)

          1. RueTheDay

            That was my point. The MMT view of a horizontal supply curve for reserves is only operational in the short term.

          2. stf

            Well, the Fed always accommodates (again, with no interest on reserves or at least set below the target rate), but changes in the target rate can affect the demand curve over longer periods of time as banks find more/less incentive to engage in sweeps (to reduce RR) and more/less incentive to hold required clearing balances at different target rates.

    2. Tom Hickey

      The way it actually works in practice is that the Fed announces its target rate and banks fall in line because they know that the Fed can set the rate through OMO. The point is that the Fed chooses the rate and has the ability to hit it. The Fed changes the FFR as a means of setting monetary policy iaw its version of the Taylor rule. The Fed changes monetary policy using the FFR and discount rate depending on its perception of economic conditions.

  29. Jim

    Dumb and Dumber:

    You have raised a very important issue about the importance of articulating political and moral assumptions upfront.

    The reason no one is anxious to do this is because it tends to evoke a circularity of logic which may be inherent in all of our arguments (i.e. that there tends to be a predominance of the prescriptive over the descriptive in all discourse–that we build our preferred conclusions into
    our assumptions).

    Yet the saving grace for not being able to escape from such circularity is that it creates a powerful philosophic space for the idea of democracy.

    Democracy can be theorized as a political counterpart to the fact that our arguments do not transcend circularity.
    This undercuts the claims of particular individuals or groups to superior knowledge and justifies the inclusion of as many people as possible in public decision-making.

    Since MMT is a new guy on the block they are not anxious to admit any prescriptions in their descriptions. Again JKH about a year ago (On Steve Keen’s Debtwatch) did a wonderful job in laying out some of the fundamental assumptions behind MMT. He stated:

    “Both Chartalists (MMTers) and Circuitists (Keen’s perspective)understand the operation of the fiat system responds to the operation of the endogeous system, in the sense that the fiat money producer satisfies the requirements for reserves attributable to the lending and deposit activity in the endogeneours system. This, of course, is the correct operational casuality as opposed to the erronous text books portrayed of a loan and deposit multiplication based on prior reserve availability.
    Stragegic casuality is another matter. The fiat money producer (the state) is the one that rules the roost an terms of the rule making and of the ultimate architectural integrity of the entire monetary system. It the fiat architecture that allows the operational casuality.
    This design obeys yet a higher authority which is the required overarching logic of consistent double-entry bookkeeping. This means mutually compabible fiat and endogenous components.
    Such a requirement is why it would be somewhat challenging for an independent circuitist endogenous system to effect a revese takeover.”

    Since I tend to be a decentralist from the getgo and see the centralization and alliance of bureaucratic power in both the public and private sectors as our major problem I am partial to strengthening the operational causality at the horizontal level which is certainly a part of the MMT framework, recognizing, as JKH has indicated, that this is an extremely challenging, perhaps impossible, undertaking.

    Keen sometimes also seems to be searching for a solution on the horizontal level (of local banks)as well. Last Apirl in his commentary he argued that “a largely private banking system with financial assets defined in such a way that Ponzi schemes couldn’t develop could well work, becuse despite the best efforts of the cavaliers to peddle debt, generally speaking people would not be willing to take on an inordinate amount of it.

    Many MMTers emphasize the awesome power of fiat money because that power is awsome and because their bias is with a more powerful state to hopefully create a “better government.”

    I consider this hope naive and wonder if MMT is capable of switching their bias from the fiat state to the operational causality at the horizontal level of their own model.

    If so we might have a foundation for constructing a new monetary system (decentralized in nature) but more capable of serving our collective interests.

    1. Dumb and Dumber

      Jim, thanks for giving me some more meat to chew on.

      I should mention that while I come from a finance background, I am new to these discussions of economic theory. I know a lot about how people make real time decisions in the investment banking world but not much about how formal economic theories address the reality that I know. That said I have read and listened to some of Steve Keen’s commentaries and, even though I don’t understand the economics rules that he relies on, I have been consistently impressed with the apparent clarity and coherence of his reasoning. So off to debtdeflation.com I go once again…

    2. stf

      You were doing good, Jim, until you said this:

      “Many MMTers emphasize the awesome power of fiat money because that power is awsome and because their bias is with a more powerful state to hopefully create a “better government.””

      Just flat out wrong. The point is to understand how the system actually works, then have a debate on the size of the state armed with the facts. The descriptive side of MMT has no preference regarding size of govt. See this, for instance: http://neweconomicperspectives.blogspot.com/2010/07/towards-libertarianaustrian-modern.html

      1. spectator

        Perhaps, but just about everything I’ve seen thus far is MMT being used to justify outsize deficits and further growth of government.

        That probably misled me and others about MMT, which at it’s root to me seems very similar to Steve Keen’s thesis. Seems MMT needs to distance itself from the big government advocates, since not many have the patience for another economic theory being used once again to arm our incompetent politicians and bureaucrats.

        1. stf

          I’ve never seen an MMT’er advocate big government, per se, as a core principle of MMT. Quite the opposite, and I know them all and have read virtually everything that’s been published or posted. Many interpret them that way, but it’s simply not correct to do so.

        2. Tom Hickey

          “Big government,” “small government” and “limited government” are essentially meaningless terms. It’s like arguing about a “big military,” or “small military.” You go with the size of the military you need to meet potential threats as they arise.

          The correct approach is to determine what constitutes public purpose in any given time and design a government of the size needed to accomplish this purpose.

          What public purpose is at any given time is a matter of political decision, and we make those decisions at the ballot box.

    3. Tom Hickey

      “I consider this hope naive and wonder if MMT is capable of switching their bias from the fiat state to the operational causality at the horizontal level of their own model.”

      The fact is that MMT simply deals with the system we have in terms of operations. If the system changes, it will describe that operationally. Operations entail possibilities. MMT deals with economic optimization using available operations.

      BTW, MMT has a lot to say about reforming the horizontal (and shadow) banking system based on Minsky’s ideas. Randy Wray, one of the chief proponents of MMT, was a student of Minsky, as I believe Scott mentioned in his post.

      1. stf

        Thanks, Tom. Yes, yet again something I mentioned in the post that detractors conveniently didn’t see. And we’re the ones doing sophistry around here? Give me a break.

  30. Skippy

    MMT removes the curtain off OZ, its present day masters, to their chagrin.

    The new century express is going to leave the station soon.

    All that want to stay on the Eighteen Hundreds platform, be my guest.

  31. kensey

    The only little problem is that government cannot absolutely control the use of currency.

    Currency is both a medium of exchange and a store of value. If the latter purpose is undermined, a use of ‘barter’ currencies for this purpose will increase (e.g. gold hording). People who resort to a non fiat way for store of value will also more likely accept the underlying tokens as a medium of exchange.

    While Government can create demand for its own fiat currency by taxation, ironically, in reality high taxation will have the opposite effect, an increase of barter economy, since it makes it easier to avoid taxation.

  32. Tom Hickey

    “The only little problem is that government cannot absolutely control the use of currency.”

    Government is not much concerned with the use of currency as long as it is used legally. It is certainly not concerned with absolute control of currency use.

    What government is concerned with is its own use of its currency 1) to allocate real resources to public purpose, like the military, the court system, governmental departments, etc., and 2) shaping public policy through disbursements that increase nongovernment net financial assets and taxation that decreases nongovernment net financial assets. The government also uses some tax policy as positive and negative reinforcement, e.g., the mortgage interest deduction to encourage home ownership and the tobacco tax to discourage tobacco use.

    People are hoarding gold at present for a variety of reasons, some antithetical, and shorting tsy’s in expectation of hyperinflation, etc. Other people are buying stocks because they still expect a V shaped recovery. Etc. You place your bets.

    But if anyone thinks that the dollar is going to become worthless anytime soon, they can send them to me for proper disposal. I’ll be the shipping expenses.

    BTW, did you notice that China just surpassed Japan as the #2 economy in terms of GDP. Both China and Japan have a GDP of less than 2T. The US GDP is ~14T.

    Get real. Barter?

    And if you are playing the market with this kind of attitude, you will likely lose your shirt. Lots of people lost their shirts last year looking at base money going exponential and betting on imminent hyperinflation.

  33. John Merryman

    I come from a basic business background, very basic, farming, but it seems reading through this that MMT seems to be a monetary view that is somewhat divorced from economics and that, more than anything, is the source of our current problems. Which is that in the name of providing liquidity, we have a monetary system which is many times the size of the actual economy. Yes, money is borrowed into existence, but if speculation bubbles are allowed to persist over generations, as happened the last thirty years, due to lax regulation and interest rates set lower than assets were appreciating, the result it a very stable and parabolic growth rate, until the bottom drops out completely.

    I’m something of a naturalist and while much of nature is about using and manifesting space, such that much of what exists is forms of bubbles, nature can be extremely brutal in terminating those bubbles which push beyond their viable limits.

    1. Tom Hickey

      John, if that is what you think, it seems to me that you are confused about MMT. What policy prescriptions are you talking about specifically?

      There are MMT’ers that are strong proponents of sustainability, not only financial but also environmental. Moreover, MMT’ers are generally opposed to financialization of the economy, arguing that recent financial innovation does not contribute to economic welfare.

      1. John Merryman

        Tom,

        The problem, as I see it, is they are willing to consider the flexibility of monetary constraints without fully examining what reserves exist within that monetary bubble in the first place. I don’t want to sound like a Marxist, as I have far more bank officers in the family pedigree than union officers(none, actually), but no one seems willing to fully examine the logical fallacies in supply side theory, since those with the biggest supply dominate the conversation. I have no problem with wealth accumulation, but, as I pointed out, the world is round, not flat. Everything exists in relation to everything else and unless there is a fundamental philosophical recognition that enormous concentrations of wealth are not economically healthy, both in the extent to which they distort rewards for mass contributions to the economy, their lack of long term sustainability, but probably most perniciously, the ways they distort broader social incentives and promote economic competition far out of balance with economic cooperation.
        So it’s not so much what MMT addresses, but what they don’t address and thus serve to obscure. As I said, for me, it’s not so much an issue of politics, but physics.

    2. stf

      Right, Tom, and note yet again that I pointed out twice (!!) that MMT’ers have put together a rather sizeable literature promoting financial reform from a Minskyan perspective. Amazing what one finds if one actually reads the post they are supposedly critiquing.

  34. Bates

    Yves, congratulations on yor collection of MMT zealots. How long did it take to aquire them all? I have seen some impressive Cracker Jacks box collections that had fewer nuts!

    Whatever…it’s good for a laugh and thats the best medicine.

    I will leave with a couple of quotes from a guy that witnessed some inflation first hand…

    Ludwig von Mises “But the certain fact about inflation is that, sooner or later, it must come to an end. It is a policy that cannot last.”

    and…

    Ludwig von Mises “Inflation can be pursued only so long as the public still does not believe it will continue. Once the people generally realize that the inflation will be continued on and on and that the value of the monetary unit will decline more and more, then the fate of the money is sealed. Only the belief, that the inflation will come to a stop, maintains the value of the notes.”

    Ignore at your own peril.

    1. zeke cat

      okay, but can I ignore you at least? haven’t seen you say anything factually correct yet. looks like you’ve been shot down every single time above with someone armed with real facts.

      1. zeke cat

        and “zealots” you say? that’s pretty rich coming from someone quoting Austerianism. lol!

        hey pot! you’re black!
        sincerely,
        the kettle

  35. kensey

    “Get real. Barter? And if you are playing the market with this kind of attitude, you will likely lose your shirt. Lots of people lost their shirts last year looking at base money going exponential and betting on imminent hyperinflation.”

    Did I write in any sentence that I assume the current setting to be hyperinflationary?

    My statement related to real life contraints to policy prescriptions that could be derived from MMT, and which have been issued by several of its proponents in the comments section of this blog.

    1. Tom Hickey

      You wrote, “Currency is both a medium of exchange and a store of value. If the latter purpose is undermined…”

      1. kensey

        How does this say anything about the current situation?

        You don’t really think that the current FED/treasury policy is in any way full application of MMT?

        If you apply MMT in a way that some here suggest, you will get hyperinflation and possibly (depending on other policy options to fight it) barter.

  36. spectator

    Have I understood this correctly? The key takeaway from MMT is that government does not need to run fiscal deficits, it can simply print money and fund whatever it wants.

    If that’s what MMT makes clear, it’s critical to avoid letting anyone in government get hold of this theory.

    1. Neil Wilson

      No. That is how people try to damn it.

      What MMT says is that the constraints are real, not financial. If you spend beyond the productive capacity of the economy you will create an inflation. If you put yourself in hock to a foreign nation (gold reparations, dollar imports or join the Euro) and you destroy your productive capacity (the French invade, you destroy the farms, or everybody goes on strike) then you will cause inflation.

      It takes away the ‘We can’t afford it’ excuse from the politicians and requires that they be honest about their motive.

      Politicians cause inflation and/or unemployment by not managing demand properly in an economy. They can no longer slope shoulders and blame ‘the markets’.

      1. Rodger Malcolm Mitchell

        “If you spend beyond the productive capacity of the economy you will create an inflation.”
        .
        Neil, this is the old “Too many dollars chasing too few goods” cause of inflation, which may no longer apply to today’s world-wide economy. With one exception, it is difficult to imagine there being too few goods produced in the world, if money is available to buy them.
        .
        That exception is energy. Since that fateful year 1971 (end of the gold standard), there has been no relationship between federal deficit spending and INFLATION, but there has been a close relationship between energy prices and inflation.
        .
        Rodger Malcolm Mitchell

        1. Tom Hickey

          That’s an important point, Rodger, but I don’t think that Neil or Scott would disagree. The fact is that global capacity has far outstripped global demand, resulting in huge economic imbalances, the worst of which generate unemployment, hunger, starvation, disease, and a host of other problems needlessly when real remedies are available and they are also affordable, given an MMT understanding of the modern monetary system.

          Michael Hudson has shown how this global imbalance of supply and demand is largely a result of parasitic rent-seeking — land rent, monopoly rent, and financial rent. With more equal distribution of wealth and income, global demand could respond to global supply and everyone would be better off, except the very few who are profiting inordinately from rent-seeking. The solution lies in reducing and eliminating these rents and committing investment productively instead.

  37. Septeus7

    I’m afraid I’m not quit clear on so aspects of MMT. MMT seems to be saying that the only source of value for a sovereign currency is the demand created by taxes.

    But if this is true, then is MMT saying the demand fluctuation for a currency that comes from foreign nations buying and selling a sovereign currency doesn’t matter?

    It seems to me that there could only be two main reasons why foreign nations would buy foreign currency is either to buy real goods produced by the issuer nation or to buy enough of the currency to regulate the value of their own currency against foreign currencies.

    However, if this is true then as far I can see one of the claims of MMT that trade deficits don’t matter would be wrong.

    For example, if China buys 2 trillion U.S. Dollars then they could sell as many of those dollars to as many people wanted to buy those dollars. However, let’s say Chinese looking at the U.S. decide that the U.S. can’t produce 2 trillion of goods they would want to buy so they decide to sell of their dollar holding by buying what they can of the limited supply of American products and selling those dollars to whoever wants them.

    Now the market is flooded with dollars because of the large holding position of the Chinese relative to liquid money supply has made effectively the Chinese a dollar issuer that is acting outside of the U.S. government’s immediate power. Based on supply and demand if the supply of Dollars increases based on Chinese actions triggering a panic selling where the demand for dollars falls because the major holder is selling coupled with the limited number of American goods which purchase won’t the increase cause high or hyperinflation if the U.S. doesn’t immediately increase taxes to absorb excess dollars?

    Now if you say that Fed could always buy back the dollars but that can’t happen if the United States can’t sell goods and nobody wants more dollars and a dollar is only good for paying taxes, buying Americans goods, or buying more dollars. If there are no American goods to buy because manufacturing has been outsourced and nobody’ wants any more dollar then Fed can’t buy back dollars because nobody wants to buy dollars regardless of whether or not the Fed raises interests because the inflation is already too high for people to want to buy dollars.

    If the actual productive capacity of a nation falls because the government believes trade deficits don’t matter and then lets domestic production be dismantled thinking we can always buy imports more cheaply because people will always want our dollars when in fact the Fed is simple responding to demand created by a dollar bubble which can’t be deflated by tax increases for political reasons.

    MMT reminds me of the people who said that housing prices always go up and in fact I remember Peter Schiff in 2007 debating one of the MMT guys saying the fundamentals of the housing market were sound.

    MMTers seem to believe that demand to dollars will always go up because the government can always create its own demand which true in theory is wrong in reality because neither tax policy or demand created by artificial interest changes can move fast enough to match real time market fluctuations which is why Von Mises argued against centrally planned monetary policy i.e. fiat currency.

    I am not an Austrian but they seem to understand supply and demand pretty well even if they get the operational mechanics of Banking wrong and MMT get them right.
    I am more than willing pit good old American School economics against MMT because we believe in the same mechanics of sovereign currency but MMT guys simple don’t know what to do in regard to an economy because you don’t understand physical process of wealth creation.

    A nation that is physically dependent on imports cannot be truly sovereign because money is not a source of wealth but a symbol for wealth and the power of symbols are political and politics are determined by physical conditions not monetary conditions. Alexander Hamilton was right and everyone else is wrong.

    1. Neil Wilson

      You’ve got it the wrong way around. The chinese accumulate US dollars because that’s the only way they can sell their goods into the US.

      The chinese *need* to sell those goods, because otherwise they will have a demand collapse in their economy. But the US dollar is only of any use (ultimately) to somebody with a US federal tax bill to settle.

      Thus all these edge case propositions that I read about if this happens and that happens everything goes horribly wrong fail to understand the simple dynamics of a trade relationship. Both sides need each other and that means the tug of war will happen somewhere in the middle of the probability distribution, not at the edges.

      The chinese are attempting to fire up their internal market so that more of their stuff can be sold internally. Then less stuff will be sold to the US, the price will rise and the US will either import from the next developing nation or start to re-develop capacity to make stuff themselves.

      1. Macheath

        “But the US dollar is only of any use (ultimately) to somebody with a US federal tax bill to settle.” Typical MMT obfuscation. Ultimate use? Please… The ultimate use of my car is to keep the scrap yard guys employed. The ultimate use of my shirt is to wax the bonnet in the meantime.

        1. Tom Hickey

          MacHeath, this is about the theory of monetary value. The position being asserted is called Chartalism.

          What this means in ‘econospeak” is that the currency, e.g., a dollar, is an IOU of the government, i.e., a government liability.

          Unlike in a convertible system, where the currency is exchangeable at government offices for the real numeraire, e.g., gold, and the value of the currency is the amount of gold that it is exchangeable for, in a fiat system the IOU (dollar) is non-convertible, that is, you can’t take an IOU note to the Treasury and all you can get for it is another dollar in exchange. What then is the “value” of the currency?

          Because it is a government liability, you can use it to extinguish any liability you might have with the government, e.g., tax, fine, fee, etc. In fact is the only thing that the government accepts at its payment offices. That is the basis of the value of the currency, not anything that the note is convertible into at government offices. The value of the dollar is established by being required to meet one’s liabilities to the government, which just about everyone incurs in some form.

          Why does the government do this? It needs funds to operate. By creating a need for its currency to satisfy liabilities to it, chiefly tax liabilities, it establishes a value for the currency so that people are willing to exchange real goods and services with the government to get the currency to meet liabilities to the government. This establishes the currency as a medium of exchange, and the markets take over from there, using the currency also as unit of account in pricing and as a store of value for future use.

      2. Septeus7

        Quote: “You’ve got it the wrong way around. The Chinese accumulate US dollars because that’s the only way they can sell their goods into the US.”

        So? I already said that under second reason to buy dollars was the regulation of the value of currency of their own markets. You are assuming the Chinese will always want to sell to the United States even if the United States is a net drain economically. You are basically saying that MMT says the Chinese are stupid and will continue to act stupid supporting a dead beat forever.

        Quote: “The chinese *need* to sell those goods, because otherwise they will have a demand collapse in their economy. But the US dollar is only of any use (ultimately) to somebody with a US federal tax bill to settle.”

        OMG! You are saying that 1.3 billion Chinese can never produce the demand created by 300 milliion Americans. Absurd!

        You are completely failing to understand what the Chinese are doing. The Chinese are suppressing internal demanding using a low wage model in order to attract foreign capital investment not dollars. They don’t care about dollars or American demand they care about capital.

        Once the Chinese have enough capital then they can raise internal demand without the need for the United States. You are a fool to think they need us.

        Quote: “The Chinese are attempting to fire up their internal market so that more of their stuff can be sold internally. Then less stuff will be sold to the US, the price will rise and the US will either import from the next developing nation or start to re-develop capacity to make stuff themselves.”

        So prices rise on everything imported from China which just about everything in the stores doesn’t meaning inflation?

        The Chinese dump the American consumers and prices skyrocket yet you claim that only they government not the market determines the value of the currency and even though the stores are empty because the dollar can’t buy cheap crap anymore because it is third currency compared to the yuan.

        As for going to other countries that trying to play them for greater fool won’t because the global for dollars was destroyed by losing the major purchaser. Why would I invest a currency that the Chinese wouldn’t touch?

        As for just re-developing capacity to make it isn’t that easy because by relying on import you lose permanent skilled labor to needed produce because cheap imports displaced goods produce by domestic skilled labor and if you have years lack of investment in the infrastructure needed to support production because you shifted to a consumer economy instead of a productive economy. Also consider that fact that you are operating in inflationary environment for the imported capital including human capital needed to re-develop is permanently out of reach.

        MMT says that exports are net cost to the economy but that is not true because the value of the capital investment needed to support the creation of surplus of consumer goods for export is greater the value of imported consumer goods because consumer goods have diminishing returns and capital goods supporting exports have economies of scale.

        Capitalism based on capital goods accumulation not retail good accumulation. MMT is anti-capitalism and anti-wealth.

        No country in the world ever developed under free trade floating currency model. They all had capital controls and policy of capital accumulation over imported consumer goods.

        MMT is wrong and the Bible is right: “For even when we were with you, this we commanded you, that if any would not work, neither should he eat” 2 Thessalonians 3:10.

    2. stf

      Adding to Neil’s point, taxes create a demand for the currency and also create value in the sense that what you have to do to settle your tax liability sets the relative value of the currency to other goods and services. This isn’t the same thing as inflation, though, as that is set by how easy it is to get the currency for settling the tax liability. And it’s not the same thing as an exchange rate, either, though not unrelated.

    3. Tom Hickey

      “MMT reminds me of the people who said that housing prices always go up and in fact I remember Peter Schiff in 2007 debating one of the MMT guys saying the fundamentals of the housing market were sound.”

      Doesn’t sound like an “MMT guy” to me. The MMT’ers were some of the one that got it right.

      MMT reminds me of the people who said that housing prices always go up and in fact I remember Peter Schiff in 2007 debating one of the MMT guys saying the fundamentals of the housing market were sound.

      MMT reminds me of the people who said that housing prices always go up and in fact I remember Peter Schiff in 2007 debating one of the MMT guys saying the fundamentals of the housing market were sound.
      MMTers seem to believe that demand to dollars will always go up because the government can always create its own demand which true in theory is wrong in reality because neither tax policy or demand created by artificial interest changes can move fast enough to match real time market fluctuations which is why Von Mises argued against centrally planned monetary policy i.e. fiat currency.
      .

      Again, it doesn’t sound like MMT to me. What MMT says is that fiscal policy can always bolster lagging effective demand in order to close an output gap, thereby reducing the cost of unemployment and the foregone opportunity of idle capacity. These are the greatest economic drags on a society by far. It’s an efficiency argument.

      The fact is that the world is now running on a fiat monetary system, the “sound money” folks notwithstanding. Those that don’t like it can lobby against it politically, but until the monetary system changes, MMT will continue to describe it operations and what this makes possible policy-wise.

      MMTers seem to believe that demand to dollars will always go up because the government can always create its own demand which true in theory is wrong in reality because neither tax policy or demand created by artificial interest changes can move fast enough to match real time market fluctuations which is why Von Mises argued against centrally planned monetary policy i.e. fiat currency.

      1. Septeus7

        Quote: “Doesn’t sound like an “MMT guy” to me. The MMT’ers were some of the one that got it right.”

        The MMT guys were Art Laffer and Mike Norman and here’s the video from 2006: http://www.youtube.com/watch?v=IU6PamCQ6zw&p=451C0E4BF1F06C42&playnext=1&index=2.

        Here’s the video for Mike Norman: http://www.youtube.com/watch?v=UkCrvvSH2OI

        Quote:Again, it doesn’t sound like MMT to me. What MMT says is that fiscal policy can always bolster lagging effective demand in order to close an output gap, thereby reducing the cost of unemployment and the foregone opportunity of idle capacity. These are the greatest economic drags on a society by far. It’s an efficiency argument.”

        Well that sounds like typical Keynesian pump priming which fails to understand the physical effects of paying people for productive work versus just increasing the amount of demand for consumer goods which would be great if the money flowed into domestically produced goods thus raising demand for American employers but since we have Free Trade with China that demand goes to support the Chinese economy with only minor benefits for the retail sector of our economy and ultimately destroys the capital stock of the nation.

        Fiscal policy must be targeted to increase the per capita productivity of domestic producers so that they can using high value added products undersell the absolute labor advantage of China.

        I swear you people have never read Hamilton, List, Henry Carey, Bismarck or any of the designers of the Industrial policies that worked. Smith, Mills, and Keynes where British Imperialists and fundamentally anti-American and should be ignored as their policies results only in warfare, famine, an a general increase in misery.

        When real Americans face a depression were don’t play games throwing fast money around hoping do something nor do sit and say that we can’t do everything we should fate take it’s course the fatalist Austrian school.

        The American school says we go to work and fight the depression. We create and innovate our way of the depression with increased production not a consumer lend recovery but a high wage high skill domestic producer lead economy.

        I’m to post 5 point recovery program and I would any of you to tell me what is wrong with the plan under a monetary mechanics of the MMT model. Ignore the source as many folks are prone to name calling.

        30 MILLION PRODUCTIVE JOBS TO REBUILD US INFRASTRUCTURE, INDUSTRY AND AGRICULTURE: THE PROGRAM TO END THE ECONOMIC DEPRESSION
        by Webster G. Tarpley, http://www.tarpley.net
        November 14, 2009
        The US and the world are gripped by a deepening economic depression. There is no recovery and no automatic business cycle which will revive the economy. This bottomless depression will worsen until policies are reformed. The depression results from deregulated and globalized financial speculation, especially the $1.5 quadrillion world derivatives bubble. The US industrial base has been gutted, and the US standard of living has fallen by almost two thirds over the last four decades. We must reverse this trend of speculation, de-industrialization, and immiseration. Current policy bails out bankers, but harms working people, industrial producers, farmers, and small business. We must defend civil society and democratic institutions from the effects of high unemployment and economic breakdown. We therefore demand:
        1. Measures to reduce speculation and minimize the burden of fictitious capital: End all bailouts of banks and financial institutions. Claw back the TARP and other public money given or lent to financiers. Abolish the notion of too big to fail; JP Morgan, Goldman Sachs, Citibank, Wells Fargo and other Wall Street zombie banks are insolvent and must be seized by the FDIC for chapter 7 liquidation, with derivatives eliminated by triage. Re-institute the Glass-Steagall firewall to separate banks, brokerages, and insurance. Ban credit default swaps and adjustable rate mortgages. To generate revenue and discourage speculation, levy a 1% Tobin tax (securities transfer tax or trading tax) on all financial transactions including derivatives (futures, options, indices, and over the counter derivatives), stocks, bonds, foreign exchange, and commodities, especially program trading, high-frequency trading, and flash trading. Set up a 15% reserve requirement for all OTC derivatives. Use Tobin tax revenue and a revived corporate income tax to provide immediate tax relief to individuals, families, the self-employed, and small business by increasing personal exemptions and standard deductions. Stop all foreclosures on primary residences, businesses, and farms for five years or the duration of the depression, whichever lasts longer. Set a 10% maximum rate of interest on credit cards and payday loans. Re-regulate commodities markets with 100% margin requirements, position limits, and anti-speculation protections for hedgers and end users to prevent oil and gasoline price spikes. Enforce labor laws and anti-trust laws against monopolies and cartels. Restore individual chapter 11.
        2. Measures to nationalize the Federal Reserve, cut federal borrowing, and provide 0% federal credit for production: Seize the Federal Reserve and bring it under the US Treasury as the National Bank of the United States, no longer the preserve of unelected and unaccountable cliques of incompetent and predatory bankers. The size of the money supply, interest rates, and approved types of lending must be determined by public laws passed and debated openly, passed by the congress and signed by the president. Stop US government borrowing from zombie banks and foreigners — let the US government function as its own bank. Reverse current policy by instituting 0% federal LENDING with preferential treatment for tangible physical production and manufacturing of goods and commodities, to include industry, agriculture, construction, mining, energy production, transportation, infrastructure building, public works, and scientific research, but not financial services and speculation. Issue successive tranches of $1 trillion as needed to create 30 million union-wage productive jobs and attain full employment for the first time since 1945, reversing the secular decline in the US standard of living. Provide 0% credit to reconvert idle auto and other plants and re-hire unemployed workers to build modern rail, mass transit, farm tractors, and aerospace equipment, including for export. Extend 0% federal credit for production to small businesses like auto and electronics repair shops, dry cleaners, restaurants, tailors, family farms, taxis, and trucking. Maintain commercial credit for retail stores. Create an unlimited rediscount guarantee by the National Bank for public works projects to provide cash to local banks for bills of exchange pertaining to infrastructure and public works. Repatriate the foreign dollar overhang by encouraging China, Japan, and other dollar holders to place orders for US-made capital goods and modern hospitals. Revive the US Export-Import Bank. Set up a 10% tariff to protect domestic re-industrialization. Nationalize and operate GM, Chrysler, CIT, and other needed but insolvent firms as a permanent public sector. Maintain Amtrak and USPS.
        3. Measures to re-industrialize, build infrastructure, develop science drivers, create jobs, and restore a high-wage economy: state and local governments and special government agencies modeled on the Tennessee Valley Authority will be prime contractors for an ambitious program of infrastructure and public works subcontracted to the private sector. To deal with collapsing US infrastructure, modernize the US elgeneration, pebble bed, high temperature reactors of 1,000 to 2,000 megawatts each. Rebuild the rail system with 50,000 miles of ultra-modern maglev Amtrak rail reaching into every state. Rebuild the entire interstate highway system to 21st century standards. Rebuild drinking water and waste water systems nationwide. Promote canal building and irrigation. For health care, build 1,000 500-bed modern hospitals to meet the minimum Hill-Burton standards of 1946. Train 250,000 doctors over the next decade. The Davis-Bacon Act will mandate union pay scales for all projects. For the farm sector, provide a debt freeze for the duration of the crisis, 0% federal credit for working capital and capital improvements, a ban on foreclosures, and federal price supports at 110% of parity across the board, with farm surpluses being used for a new Food for Peace program to stop world famine and genocide. Working with other interested nations, invest $100 billion each in: biomedical research to cure dread diseases; high energy physics (including lasers) to develop fusion power and beyond; and a multi-decade NASA program of moon-Mars manned exploration, permanent colonization, and industrial production. These science drivers will provide the technological spin-offs to modernize the entire US economy in the same way that the NASA moon shot gave us microchips and computers in the 1960s. These steps will expand and upgrade the national stock of capital goods and enhance the real productivity of US labor. Return the federal budget and foreign trade to surplus in 5 years or less.
        4. Measures to defend and expand the social safety net: Restore all cuts; full funding at improved levels for Social Security, Medicare, Medicaid, food stamps, jobless benefits, WIC, Head Start, and related programs. Offer Medicare for All to anyone under 65 who wants it at $100 per person per month, with reduced rates for families, students, and the unemployed. Pay for this with Tobin tax revenues and TARP clawback, and by ending the Iraq and Afghan wars. Seek to raise life expectancy by five years for starters. No rationing or death panels; savings can come only by finding cures. Quickly reach a $15 per hour living wage. Repeal the Taft-Hartley Act and affirm the right to organize. Pass card check to promote collective bargaining.
        5. Measures to re-launch world trade and promote world recovery: Create a new world monetary system including the euro, the yen, the dollar, and the ruble, plus emerging Arab and Latin American regional currencies, with fixed exchange rates and narrow bands of fluctuation enforced by participating governments. Institute clearing and gold settlement among member states. Replace the IMF with a Multilateral Development Bank to finance world trade and infrastructure. The goal of the system must be to re-launch world trade through exports of high-technology capital goods, especially to sub-Saharan Africa, south Asia, and the poorer parts of Latin America. Promote a world Marshall Plan of great projects of world infrastructure, including: a Middle East reconstruction and development program; plans for the Ganges-Bramaputra, Indus, Mekong, Amazon, and Nile-Congo river basins; bridge-tunnel combinations to span the Bering Strait, the Straits of Gibraltar, the Straits of Malacca, the Sicilian narrows, and connect Japan to the Asian mainland; second Panama canal and Kra canals; Eurasian silk road, Cape to Cairo/Dakar to Djibouti, Australian coastal, and Inter-American rail projects, and more. American businesses will receive many of these orders, which means American jobs.
        This program will create 30 million jobs in less than five years. It will end the depression, rebuild the US economy, improve wages and standards of living, re-start productive investment, and attain full employment with increased levels of capital investment per job. Most orders placed under this program will go to US private sector bidders. Because of the vastly increased volume of goods put on the market, inflation will not result.

        1. Tom Hickey

          Good points. MMT has considered all of them.

          1. Measures to reduce speculation and minimize the burden of fictitious capital: End all bailouts of banks and financial institutions…

          An MMT point as well.

          2. Measures to nationalize the Federal Reserve, cut federal borrowing, and provide 0% federal credit for production: Seize the Federal Reserve and bring it under the US Treasury as the National Bank of the United States, no longer the preserve of unelected and unaccountable cliques of incompetent and predatory bankers

          Advocated by some MMT’ers.

          3. Measures to re-industrialize, build infrastructure, develop science drivers, create jobs, and restore a high-wage economy: state and local governments and special government agencies modeled on the Tennessee Valley Authority will be prime contractors for an ambitious program of infrastructure and public works subcontracted to the private sector.

          Advocated by some MMT’ers.

          4. Measures to defend and expand the social safety net: Restore all cuts; full funding at improved levels for Social Security, Medicare, Medicaid, food stamps, jobless benefits, WIC, Head Start, and related programs.

          Advocated by some MMT’ers.

          5. Measures to re-launch world trade and promote world recovery: Create a new world monetary system including the euro, the yen, the dollar, and the ruble, plus emerging Arab and Latin American regional currencies, with fixed exchange rates and narrow bands of fluctuation enforced by participating governments. Institute clearing and gold settlement among member states…

          MMT’ers in general do not recommend a return to a fixed rate regime because ending monetary sovereignty limits national sovereignty and the ability of a nation to take charge of its destiny. The result would be an unelected and unaccountable world bank without an elected and accountable world government. As long as there are sovereign nations, there are better ways to accomplish what this is intended to do.

          The first is to end the dominance of rent-seeking — land rent, monopoly rent, and financial rent, which are parasitical, and devote those funds to productive investment in sustainable innovation that is income generating.

          The problem is overcapacity of global supply in relation to global demand. Global demand must be increased by increasing incomes in all nations and ending predatory relationships.

          As Scott said in the posts, there is a lot to MMT in the professional literature and blogs that he could not address here. So glad you asked.( He or someone else knowledgeable about MMT can correct me if I have anything wrong or incomplete.)

  38. Rodger Malcolm Mitchell

    Neil, “But the US dollar is only of any use (ultimately) to somebody with a US federal tax bill to settle.”

    I have discussed this with Warren Mosler and Randy Wray, and they both agree with me that state and local taxes provide sufficient motivation. Thus, federal taxes aren’t necessary for that purpose.

    Also, I don’t understand “The Chinese accumulate US dollars because that’s the only way they can sell their goods into the US.” I can understand why buying goods from us requires them to have dollars, but why does selling goods to us also require them to have dollars?

    Rodger Malcolm Mitchell

    1. Tom Hickey

      I can understand why buying goods from us requires them to have dollars, but why does selling goods to us also require them to have dollars?

      Rodger, I think that what is meant is that when a nation incurs a current account deficit then another nation has to be willing to save in that currency to account for the offsetting capital account surplus. China is willing to save in US$ in order to be able to export freely to the US. President Bush bragged about this symbiotic arrangement, for instance. It’s even got a name, “Chimerica.”

      1. Rodger Malcolm Mitchell

        You’re right Tom,
        In essence, China is stuck with dollars, because that’s what we pay. This is the key point the media don’t see. They think we need China to lend to us. We don’t.
        .
        We don’t give a fig whether China uses those dollars to buy T-bills or — figs. They are forced to accept dollars, so they buy T-bills in an effort to support the value of those dollars.
        .
        China’s mainstream economists (Yes, they have them, too) don’t disclose that China could support its economy by purchasing much of its output with yen.
        .
        And our mainstream economists don’t disclose our economy largely could be supported with federal spending. As I’ve said before, mainstream economics does not understand monetary sovereignty. (When someone asks me, “What is MMT,” I say, “It’s something that began in 1971 called ‘Monetary sovereignty.’” It’s a start.)

        Rodger Malcolm Mitchell

        1. Septeus7

          They are only stuck with dollars as long as they want them. They don’t have to buy them or hold. They could buy Euros instead and sell dollars becoming a defacto issuers if the U.S. is not able change policy to absorb the suddenly infusing of liquidity and don’t assume that increased liquidity will go into the hands of people for need cash.

          That’s the problem with floating rate fiat is essentially denies the sovereign ability of nations to the value of the currency by letting hot money rush in an devalue or currency bubble to form.

          Fixed Parity Fiat outlaws such hot money flows allowing long term investment and true sovereignty through treaty agreements rather than bubble driven exchange markets.

          MMT is the way the world works (or doesn’t ) post-Bretton Woods but it’s based on faux Sovereignty. Time to go back to the most stable system of the original intention of Bretton Woods i.e. the Fixed Parity Fiat.

          1. stf

            Septeus . . . I think it’s been quite thoroughly demonstrated above that you really don’t understand MMT. You are clearly intelligent and have some insightful things to say, but for now anyone reading this should completely ignore your interpretations of MMT as they are wildly off base.

          2. Septeus7

            I fail to understand where my understanding of MMT is wrong because it basically seems like simple accounting principles applied to national accounts. I just don’t understand how you guys can say that a floating rate is more sovereign than treaty agreements.

            Brettons Woods was the most stable system the world has even seen and fail to understand the logic behind floating rates. I wish someone would explain it to me because it seems to me that if a process isn’t strictly defined by law then it isn’t sovereign.

  39. TJS

    I don’t know if this has been asked already or not (I don’t feel like wading through what looks like a ton of BS comments, frankly)

    I noticed that Prof. Fullweiler never mentioned inflation as a real (as opposed to artificial) constraint on monetary policy. What exactly does MMT have to say about inflation dynamics?

    Thanks

    1. Tom Hickey

      In brief, when effective demand is in excess of the ability of an economy’s productive capacity to meet with with real resources for sale, then inflation will be the result.

      When effective demand is unable to meet the capacity to produce, then an output gap opens and unemployment rises.

      A monetarily sovereign government always has the ability to increase effective demand to meet available supply through deficit expenditure and tax cuts, and the ability to decrease effective demand when it threatens to exceed available supply through increased taxation and reductions in discretionary expenditure.

      This already happens for the most part automatically through automatic stabilization under ordinary circumstances. Under extraordinary circumstances such as we are experiencing now, government must intervene with additional fiscal policy.

      See Prof. Bill Mitchell, Modern monetary theory and inflation – Part 1

      1. Rodger Malcolm Mitchell

        TJS,
        Now let me give you another take. Most MMT authors suggest using taxes as a stimulus and also as a prevention/cure for inflation. I have told Warren Mosler and Randy Wray that I strongly disagree.
        .
        Assume we worry about inflation. Increased federal taxes and/or reduced federal spending might well prevent the inflation, but historically this has caused recessions. Further, tax and spending policy is too slow, too political and too heavy handed to fine-tune inflation.
        .
        Remember that the Fed feels 3% is about right and 5% is too high — a narrow margin. It functionally and practically is impossible to use elephantine taxation/spending activity to accomplish that narrow goal.
        .
        Because inflation is the loss of money’s comparative value (compared to the perceived value of goods and services), the way to prevent/cure inflation is to increase the value of (i.e. the demand for) money. This is done most expediently by increasing the reward for owning money. The reward is interest, so inflation is prevented/cured by interest rate control, which the Fed can do instantly and incrementally.
        .
        Randy and Warren’s theory is that increasing interest rates increases the cost of doing business, which actually increases inflation, but I have found no data to support that notion, nor have they. For most businesses, interest is a minuscule business cost, especially compared to its effect on money value.
        .
        The highest interest rates in modern history came in early 1980′s, which cured the inflation of 1979-80.

        Rodger Malcolm Mitchell

        1. stf

          There absolutely is published research, even by neoclassicals, on rising interest rates raising business costs and inflation, in fact.

          And, while it may be very difficult at present to actively use fiscal policy to fine tune inflation, that’s not to say that automatic stabilizers don’t already do that to a large degree, and could be further expanded upon to do it even better (i.e., job guarantee, and any other number of “automatic” adjustments that would require no Congressional action in real time).

          Finally, Rodger, I find it rather strange that you advocate using interest rates to fine tune inflation when you also advocate no taxation. So, you’d have a very large deficit/debt, and interest expenditures would move procyclically with interest rate changes, causing perverse effects of interest rate changes on inflation. It just wouldn’t work. (Unless I’ve misinterpreted your proposals–apologies if so.)

          I should note, though, that we do mostly agree on the workings of the monetary system, so any disagreements we have pale in comparison to what we have in common.

          1. Rodger Malcolm Mitchell

            “There absolutely is published research, even by neoclassicals, on rising interest rates raising business costs and inflation, in fact.”
            Please direct me to that research.
            .
            “. . . large deficit/debt, and interest expenditures would move procyclically with interest rate changes, causing perverse effects of interest rate changes on inflation . . .”
            I think you are saying that the absence of taxes + federal interest payments would exacerbate inflation. True? I agree, with these caveats:
            .
            I don’t suggest eliminating taxes all at once, but rather a draw-down over several years. At any point where inflation began to rear its ugly head, I would delay the draw-down (but not reinstate any taxes), and increase interest rates, until inflation were controlled.
            .
            My first suggested step. End FICA.
            .
            As for federal interest adding to inflation, I also oppose federal borrowing as being an unnecessary exercise. The Fed can control interest rates without federal borrowing.
            .
            Rodger Malcolm Mitchell

          2. stf

            Rodger . . .you can have the federal borrowing end, but you are still going to have interest attached to the funds created or the Fed won’t be able to put the interest rate target above zero, which is your preferred method to reducing inflation over the long run.

            In other words, suppose you just have the Tsy create all the funds it wants to via overdraft at the Fed or whatever. This spending creates reserve balances for banks. To achieve a positive interest target, you have to pay interest on these balances at the target, or you have to offer an interest bearing alternative, such as time deposits at the Fed. Either way, you don’t avoid the problem of interest payments rising as you raise the target rate.

            Even if you do “helicopter drops” of currency instead, unless the public wants or can be forced to hold all that currency, it will be deposited in bank accounts and banks will sell their excess vault cash for reserve balances. You end up with the same scenario as the previous paragraph.

    2. stf

      It most definitely was mentioned as a real constraint on macro policy overall (“the appropriate constraint is whether there is idle capacity”), though mostly with respect to fiscal policy, since that’s what the post was primarily focused on.

  40. Rodger Malcolm Mitchell

    TJS,

    I should have mentioned that in today’s world economy, it no longer is possible for “effective demand to be in excess of the ability of an economy’s productive capacity to meet with with real resources for sale.” That is the old “too much money chasing too few goods” idea, an obsolete theory describing an individual nation, with minimal importing capability.
    .
    In short, if the U.S. can’t produce it, 100 other nations will.
    .
    Today, there is only one group of products that can be in such short supply overall world prices are affected: Energy products, and specifically oil. This is discussed at

    Rodger Malcolm Mitchell

    1. Eryk

      Rodger, you say “…and specifically oil. This is discussed at…” Where is this discussed? Hydrocarbons are fundamental to our economy, not just for energy but as petrochemicals and plastics. If we try to increase productivity beyond the output capacity for hydrocarbons, the price will skyrocket and stall the economy. However, I suppose the reply would be that we’re already way over-capacity, and we need to create more demand with stimulus. I would point out, however, that billions of people live today in medieval conditions. What’s your answer to all the poor nations out there? There are insufficient hydrocarbons to go around for all of them to live an energy rich lifestyle. What are we doing to seriously move away from the hydrocarbon economy? There are clean alternatives in solar, geothermal, wind, tidal, etc. I see new ideas coming forward every week, especially in solar light/heat conversion with nano-technological devices. Shouldn’t the power of our economic sovereignty be put to work producing the infrastructure to create a surplus of clean energy and alternatives to petrochemicals? We could become an energy exporter to the developing world (e.g. in liquid hydrogen tankers) in exchange for their goods and services. We could also be investing in recycling technologies to reclaim resources that are currently being piled up in landfills, thus putting our economy on a sustainable footing. Everybody can win.

      1. Rodger Malcolm Mitchell

        Sorry Eryk, I was trying to give you a link, but must have mistyped something. The discussion is at: http://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation/
        .
        You are correct that alternative sources of energy must be developed. The point remains however, that “too many dollars chasing too few goods,” is an obsolete concept in today’s world market, with one exception. Energy.
        .
        So long as energy remains scarce, that will continue to be the case.
        .
        Rodger Malcolm Mitchell

        1. Tom Hickey

          I would question whether “energy is scarce.” The fact is that monopoly rent is being extracted from carbon-based sources through both price-fixing and externalities, and this is enabled politically, essentially through collusion, disinformation, cronyism, and corruption. Alternatives are available. They are effectively being suppressed.

          1. Rodger Malcolm Mitchell

            Tom, energy is “scarce” in the economic sense, meaning it is not freely available in unlimited quantities. The alternatives also will be economically scarce.
            .
            I remember a time when people believed atomic power plants would create such cheap electricity, people would not even have meters in their houses. Even then, electricity would be scarce, because someone would have to build and maintain the plants.
            .
            Fresh water is scarce, though sea water isn’t. Air isn’t, though we may be approaching the time when fresh air is. Obviously, there are degrees of scarcity, and if all the political problems you mentioned ever are resolved, energy may be less scarce, and its pricing may no longer be the prime cause of inflation. I pray you live long enough to see it.
            .
            While waiting for that to happen, be aware that “too much money chasing too few goods” no longer is an inflationary cause. Two events made that concept obsolete. The end of the gold standard and the massive increase in international trade.

            Rodger Malcolm Mitchell

          2. Tom Hickey

            Rodger. if we convert to solar energy, tide energy, wind energy, and geothermal energy and scale up the technology globally, energy will be so inexpensive as to be almost free. That is what the heavily invested energy companies want to avoid as long as they can stretch it out.

            Air and water are no longer free goods owing to “externalties” (pollution). They actually carry rather heavy costs. Sea water is also heavily polluted too. Virtually all sea food is laden with heavy metals now. Man has fouled the nest, and there’s no escaping it anymore.

            Of hand, I cant’ think of a free good other than thinking, and you have to supply yourself with energy (food) for that.

            There are no “free goods.”

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