Philip Pilkington: Why MMT is Right and the Dreamers are Wrong – Kaldor Versus the Kaldorians

By Philip Pilkington, a writer and research assistant at Kingston University in London. You can follow him on Twitter @pilkingtonphil

Dreaming, I was only dreaming
I wake and I find you asleep

– Billie Holiday “Gloomy Sunday

The criticisms of Modern Monetary Theory (MMT) on the internet and in academia can be placed into three categories: the cranks; the nit-pickers; and the Kaldorians. The cranks make up by far the largest group. These are the people that simply have not bothered to understand the theory. These, which include some prominent academics, say things like: “The MMTers say that deficits don’t matter; they forgot about hyperinflation!” These people can usually be safely ignored as they are not arguing in good faith.

The nit-pickers are a smaller group, but perhaps more vocal. They do understand the theory to a large extent but they try to pick holes on minor points. “Taxes,” they might say, “aren’t the only thing driving money; money is also ingrained in the legal system because it can be used to settle legal contracts and this gives it value.” In this the nit-pickers don’t appreciate the difference between a general theory and an additional consideration that might be included as an afterthought. Apart from this, the nit-pickers often misrepresent their “opponents” (mentors?) by cribbing throwaway comments from blogs and insisting that MMT explain itself (over and over again) when MMT has proponents have already developed a considerable literature that does just that.

The Kaldorians are an altogether different breed. Where the others simply constitute noise in the blogosphere crowding out debate, the Kaldorians’ argument is rigorous, academic and extremely relevant to the potential success of certain policy approaches advocated not just by MMTers, but also more mainstream New Keynesians like Paul Krugman. This is not just an academic debate. It has very real implications for what policies we might suggest to get us out of the present crisis.

However, there are two serious problems with the Kaldorian approach – both of which are inextricably linked to one another. First of all, the Kaldorians are utopians in their politics and have a fairly airy grasp of what we can and cannot potentially achieve given the international political scene today. Secondly, they seem at odds with their own mentor, the British economist Nicholas Kaldor, on their understanding of current economic problems.

What follows may at times feel a bit “he said, she said” and it’s all a bit long, but I would ask the reader to follow through. The implications of the following argument and the understanding of our current problems they contain are extremely important to where we are today.

Kaldor Versus the Kaldorians

Nicholas Kaldor was one of the most famous economists of the 20th century. He was considered by many to be the direct heir to John Maynard Keynes as he was not only an extremely accomplished theoretical economist but also played a key role in the construction of British economic policy after World War II and was an all-round politically savvy individual – he ended his life, like Keynes, with a Lordship.

We mention this because if you read his writings you note that there were really two Kaldors. One was the Kaldor of the halls of Cambridge University. This was the Kaldor of abstract mathematical models of how capitalist economies function (some of the finest ever produced, mind you). The other Kaldor was the Kaldor that actually analysed economic problems and proposed solutions – while keeping firmly in mind the political situation of whatever time he was giving advice.

The Kaldorians, following the British economist Anthony Thirlwall, have picked up the first Kaldor and left the second to rot on the shelf. They have attempted to turn Kaldor into an economic model that immediately and fully explains the real world economy. The difference here between them and Kaldor is key to understand: Kaldor would have never applied a model directly to understand the world, for him it could only guide you in investigating problems from all angles – economic, social, political and so on. But for the Kaldorians this does not appear to be the case.

Their gripe with MMT is that it ignores that government spending policies will cause trade deficits to widen and this will… well… something bad will happen. In this they reference what they call “Thirlwall’s Law”. The Law itself seems to be set up only with very strict conditions in mind, but some of the Kaldorians apply it to everything they see in every economy at every time. This is the problem with confusing an economic model for a perfect description of the world: in the same manner as a recent religious convert, you start to see the Holy One everywhere you turn.

The annoying thing is that the problems that the Kaldorians raise are actually very important – in specific contexts. As most MMTers acknowledge, for example, it is probably not advisable for developing countries to run high trade deficits for too long as this may result in currency crises and all sorts of other economic nasties. So, the Kaldorian argument, in some ways, has a lot of merit – it led me, for example, to discuss policies that developing countries might use to avoid such crises while maintaining full employment.

However, the problems the Kaldorians raise probably do not apply to many advanced Western countries. Countries like the US have been running trade deficits for literally decades and this has not led to crisis. When the Kaldorians are asked what the crisis they think will happen is they either start muttering rather vaguely or they say that the Chinese and others are going to crash the value of the US dollar. The latter is, of course, the same argument put forward by many Austrian doomsayers who use it to flog gold to punters. It is also extremely unlikely – such a move would be suicidal for the Chinese in just about every way imaginable. The US dollar may gradually depreciate over the coming years – and then again, it may not – but the likelihood of it crashing is extremely miniscule; unless China and the US went to war, but then the exchange rate would be the least of our problems.

The reason for this is that the world today – indeed, the world since World War II – is completely dependent on the dollar to function. The Kaldorians simply do not recognise this political reality. This is because, as we said above, unlike Kaldor, they think purely in terms of models and cannot properly understand politics and aspects of political economy. So, let us turn now to how Kaldor himself thought that the system functioned.

The US Dollar as the Fuel of Worldwide Growth

In the last of a series of phenomenal lectures that Kaldor gave in Italy in 1984 entitled “Causes of Growth and Stagnation in the World Economy,” he posed himself a complicated and crucial question: why, between 1945 and 1973, had the world economy grown at rates never seen before in human history but then after this it had fallen into stagnation? And Kaldor gives an answer that, I think, would resonate with the advocates of MMT today – and, it should be added, grate on the ears of the Kaldorian modelling crowd.

Kaldor gives many reasons why the world economy boomed for thirty years and then went into a slump, but only one was given central importance. This was the inflation of the 1970s. Kaldor notes that the inflation started in the late 1960s when the US ramped up deficit spending to fund Vietnam – an already unpopular war that the government didn’t want to pay for out of taxes. But the inflation really began to have serious effects on growth when OPEC raised its price in 1973 thus setting in motion an enormous inflationary surge which then led to a wage-price spiral.

So far, so familiar – right? Well, Kaldor gave another reason too and while it interests us for the purposes of our argument he thought it minor. This peripheral argument was that in the post-war era the US government had been flooding the world with dollars – mainly through Foreign Direct Investment (which was mostly probably Cold War spending either in the form of aid, development funds or military spending). Since these economies had their currencies pegged to the dollar they were then able to run trade deficits and government deficits with impunity, thus boosting growth. Here’s how Kaldor explains it and who, for the sake of his disciples, we shall quote in full:

I would attribute primary importance to the role of the United States dollar which, after the adoption of the Bretton Woods arrangement concerning currencies, became de facto the international reserve currency, so that America had, in fact, an unlimited borrowing power – she was able to borrow automatically by incurring deficits on “basic transactions” (on current and capital accounts taken together) and thereby provide other countries with additional reserves, thus enabling them to expand their economic activities without running into a balance of payments constraint.

Moreover, the balance of payments of the United States, after the large-scale currency realignments of 1949, turned into a deficit on “basic transactions” (i.e. on current and capital account) , and remained in deficit in almost every single year until 1971. At first this was due to net foreign investment (public and private) exceeding her current account surplus. Later, in the 1960s, it was supplemented by a growing deficit on current account. Deficits of both kinds implied an addition to the demand for goods and services in the world outside. They implied an increase in world investment which had much the same international “multiplier” effects as if the annual production of gold had increased by an equivalent amount. For the rest of the world, it meant increasing reserves (in the form of ever rising dollar balances) earned through rising exports or externally financed domestic investment. (P. 77-78)

According to Kaldor, then, the capitalist world economy was ticking over in the post-war years because the US was flooding the world with dollars. These dollars were then entering countries and circulating within the economy – while also allowing these countries to buy US produced goods and services. The US dollar was literally the lifeblood of the world economy in this era and it was this political dimension that allowed countries, Kaldor writes, “to expand their economic activities without running into a balance of payments constraint”.

So, what happened? Well, certain countries – especially France, who was a rather more assertive power in that era than she is today – got sick of the arrangement and crashed the system by calling in their debts in gold thus forcing the US off the Bretton Woods system. We’ll quote Kaldor again:

At the beginning, the world was hungry for dollars and was delighted to accumulate dollar reserves, which yielded interest, in preference to gold, which did not. But as countries had more and more dollars, and as the U.S. official liabilities began to exceed several times the total value of gold in their possession (at the official price, which until March 1968 corresponded also to the market price), the willingness to accept dollars was progressively impaired – especially when the U.S. deficit assumed larger dimensions during the Vietnam War. France demanded to be paid in gold; Germany revalued her currency repeatedly in a vain attempt to stem the speculative flight from the dollar into the Deutschmark, and in the end the whole Bretton Woods system collapsed in August 1971 with America’s formal abandonment of convertibility coupled with a demand for a large-scale readjustment of currency parities. (P. 78)

Well, this is all sounding a bit MMT isn’t it? The US was running deficits with the rest of the world – just as they are now – and this was supporting world economic growth. Now, the Kaldorian must surely assume that Kaldor himself should turn around and jump us with the consequences of these irresponsible actions. Surely when the Bretton Woods system collapsed there was some direct, dire consequence for the US and everyone else. Well… not really. Instead Kaldor shrugs it off and points to the real culprit for the stagnation: the oil shocks and the resulting inflation. He does mention that exchange-rates fluctuated and this was a problem but he indicates that it was far from fundamental:

Since that time, large-scale and unpredictable variations in exchange rates – between the dollar and the EEC currencies, and for some years also between the dollar and the yen – continued, which must have been one of the factors preventing economic recovery, though it is impossible to assess its precise importance. (P. 78)

What an anti-climax, eh? The good Kaldorian would expect some sort of explosion. But the Bretton Woods system of world growth ended with a whimper, not a bang. Kaldor himself says that the fluctuations in the exchange rate that followed were “impossible to assess” in terms of their importance for the stagnation of the 1970s. And indeed, if you read the rest of the lecture you’ll see clearly that they play a very small part, if any, in his story which is mainly focused on the oil shocks, the inflation and the idiotic monetarist policy response. This is not the Kaldor of the models, to be sure! This is Kaldor the political economist – and what a better analyst he is to the “dollar crash” scaremongers!

What Happened Next?

As we have said, Kaldor’s lecture was given in 1984. He died two years later. So, what happened next? Well, basically when the inflation stabilised and the oil prices came down the US started pumping more dollars into the world economy – the whole system reset. Growth resumed for a long time as the US ran persistent trade deficits with the rest of the world. The growth was never quite the same as it was in the post-war era – mainly because idiots were managing the world economy – but growth did resume; and it resumed precisely because the flow of dollars began once more.

Financial inflows into Wall Street propped the dollar up where trade surpluses combined with gold backing did in the post-war era. As Yanis Varoufakis and Michael Hudson have pointed out numerous times before: during and after the Reagan era, dollars flowed into the world economy, buttressing economic growth, while foreign money circulated back to Wall Street to buy up financial assets. This is how the system maintained a fairly steady rate of growth through dollar issuance. But when the 2008 crisis hit, the US economy slowed and fewer dollars flowed into the world – this was mainly because US consumers were broke and couldn’t buy foreign goods. The unfortunate fact of the matter is that many of these dollars, especially during the Clinton budget surplus years, were being issued by private banks and this turned into a giant Ponzi mess that was sure to topple when a strong wind hit.

So, this is where we stand today. The world economy is grinding along slower than it should be for want of dollars. Related to this the US consumer is spending less than he wants to also for want of dollars. And smart economists have their eyes peeled for signs that another debt bubble might begin to inflate thus risking another financial crisis because, you guessed it, US consumers want those damn dollars. What an absolutely ridiculous situation! The US government issues dollars – and everyone and their mother wants dollars. The US government can thus start issuing dollars to people who want employment and higher consumption in return for labour. Since the US government has no default risk there is no problem. The real risk comes when the private sector starts borrowing these dollars, not when the government issues them to hire people and bring down the unemployment rate.

“But, but, but,” says the dollar crash fantasist, “What if the world spits these dollars back at us and the currency collapse?” Well, I’ve got news for you: the world isn’t going to suddenly reject these dollars. The world craves these dollars. They have been the lifeblood of the world economy since the end of World War II and now that they have dried up the world economy looks pale and anaemic. But this need not be the case if the US government got its act together and started enacting some good macroeconomic policy.

Is This Wrong?

One question here, however, is whether this is a good state of affairs or not. Should the US government have this level of control over the world economy? Do US consumers have the right to consume more than they produce? After all, the Bretton Woods system was imposed by force. After World War II Keynes and the British wanted to put an international currency, the bancor, in place to ensure that trade imbalances were rebalanced through reinvestment in the poorer countries but the Americans decided that they wanted control over the whole system. Isn’t this a tad unfair?

Yes, it most certainly is. This world of ours would have a lot fewer problems today had Keynes’ bancor plan gone through and replaced the dollar standard we now basically live with. And it is this bancor plan that the modern day Kaldorians push for today. But again we must play Kaldor against the Kaldorians. Did Kaldor constantly harp on about the bancor in his writings? No, of course not. Why? Because he knew it wasn’t on the table when he was working and writing. It was on the table at Bretton Woods in 1945, but the Americans won and Keynes lost. Kaldor knew that there was no point in crying over spilt milk. He knew that we just had to get on with it and work with what we had.

Well, the Kaldorians would do well to learn this lesson today. Look, if the bancor plan is ever truly put on the table again I’ll be the first to support it. But it is such a distant possibility that it seems absurdly unrealistic to champion today. Every day we watch the Eurozone falling further into chaos due to national squabbles and mismanagement and then we’re to assume that all world leaders are tomorrow going to come together, hold hands and put the bancor plan in place? Yeah right. Indeed this appears more so a fantasy to hide from the terrible economic problems we face today than anything else. Faced with the very real problems of today it must be nice to have The One True Model that explains all – but in reality it’s just a fantasy and it’s not coming true any time soon.

This is not to say that getting the US government to start pumping dollars back into their own economy – and thus the world economy – in order to promote recovery is going to be an easy task. But at least we can see to whom or what we have to appeal: that is, to the US government. With the bancor plan we don’t even have an institution to appeal to – the appeals process then becomes like something out of a Kafka novel. At least with the MMT proposals we have somewhere to aim. It’s not perfect, no. But then, if we lived in a perfect world you wouldn’t be reading this article, would you?

Gloomy Sunday, a lyric from which we opened this piece, is a pretty bleak song. But that’s not why I opened with it. It’s the lyrical mixing of the themes of sleep and death and suicide that is relevant to this dilemma. Because the Kaldorians – in a spirit totally alien to Kaldor himself – want to put themselves to sleep with their Model of Perfection and Balance so that they can hold the grim political and economic realities of today’s world at bay. But to do this – to insist on a proposal like the bancor that is not even remotely realistic – is to suicide yourself. In putting yourself to sleep, to dream sweet dreams, you simply die to the real world. What good is that going to do for anyone?

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  1. sillyaccountant

    Yves, how about a bookstore on your website with material re MMT and economics? If you’re short of time, money, and knowledge…it can be difficult. Could raise money for your excellent blog and help the dim-witted among us out.

  2. Hugh

    We live under a kleptocracy. Everyone does. How can such topics be discussed and this ignored? For the dollar to be a world reserve currency, the US has to run trade deficits thereby putting large numbers of dollars out in the world economy for use. But not all trade deficits are equal. Kleptocrats in the US stripped US companies, fired US workers, and offshored their jobs to China, all to maximize their extractions. They control the US government and they are inalterably opposed to the US government creating money for any purpose other than theirs. So the US creating money to hire workers and stimulate the international economy? Forget about it. Money that goes to workers is money not going to the kleptocrats.

    As for the bancor, it ultimately is based on a barter system and would require a highly coordinated world economic plan that our fractured, nation-state political order is not remotely close to.

    And finally, why the dollar? If Europe wanted to pull itself out of its crises, it could do so by creating more euros to spend. Or it could do so by taxing the hell out of the rich, or both. But Europe won’t for the same reason that the US won’t. Both are kleptocracies, root and branch.

    1. Bill Smith

      The real problem is that money is not sentient. We need to work on cotton-tree DNA and develop intelligent, egalitarian money that figures out how to run the world on its own, without human intervention.

      Problem solved.

    2. Bunky

      Do the rich (kleptocrats) keep their money in mattresses?
      If so how does that behavior tend to make the rich richer?

    3. rob

      I agree,
      If we keep our thinking limited to “what the current regimes will allow”; than nothing but what we are doing is the answer..Their system is working wonderfully.
      Now, is where the top 400 people in this country have more wealth than the bottom 160 million people.Every political aspiration is bought and paid for.And the bums in office these days couldn’t be trusted to do anything right.They are worse than worthless.They are a liability.They would as soon sell everyone out as they would take another breath.The first and every chance they get.That is what they do for a living.and the rest of the world is no better,and some are worse…now isn’t the time to expect much.

  3. Ramanan


    You write as if a high school boy is writing about black holes and the universe after having read Stephen Hawking’s Brief History of Time.

    According to Kaldor himself exports are the most important thing and the “balance of payments constraint” idea came from him.

    Kaldor rejected the Bancor based on the Chartalist argument and sovereignty (see his 1971 Times article – also reprinted in his Collected Essays).

    As for Kaldorians such as the late Wynne Godley – did he ever propose a bancor? No. His arguments were to bring in plans to balance trade generally without affecting world demand. Not Bancor.

    You fail to understand Thirlwall’s Law saying it holds in special cases! The adjustment because of balance of payments problems first comes via adjustments in *income*.

    Kaldor’s 1986 Causes of Growth and Stagnation book itself takes the balance of payments constraint into account and proposes a fiscal expansion:

    “The first is coordinated fiscal action including a set of consistent balance of payments targets and “full employment” budgets” (page 86).

    Like what Joan Robinson termed Bastard Keynesianism, don’t start a tradition of Bastard Kaldorianism!

    1. Philip Pilkington


      I’m not hugely interested in “he said, she said” here. Just on who is right on substance. Kaldor’s argument says that US deficits fueled world growth in the post-war era AND he does not seem to imply that this fell apart for any fundamental reason.

      The critics have said multiple times that US trade deficits were unsustainable and that this is why MMT is wrong. Sorry, not supported by Kaldor’s argument.

      1. Ramanan

        “I’m not hugely interested in “he said, she said” here. Just on who is right on substance.”

        Right but don’t fantasize and misrepresent someone’s views.

        A nation can run current account deficits for long. Your argument is as un-nuanced as a beginner. For example, a nation can manage to run CADs such that its net indebtedness is below 40%. It is still constrained by the fact that debts shouldn’t blow up.

        The United States was once the world’s biggest creditor and slowly its position changed to being the world’s biggest debtor and this took time.

        I can be rich and have net claims on the rest of the world of $100mn at the age of 18 and can run huge deficits for a long time. Doesn’t mean I can run deficits of any size and that I or anybody can run deficits or deficits are not problematic.

        Sorry this post is just chit-chat.

        1. Philip Pilkington


          The more you talk about this the less it looks like you have a concrete argument.

          What is wrong with MMT policies?

          Why is the US CAD unsustainable?

          What will happen if fiscal expansion in the US opens up higher CADs? Will this boost world growth? If so, why should they not do this? Why should they be concerned with their CA?

          I think we’re all waiting for you to make some concrete statements here. Then we can discern whether (a) my article is “chit-chat” and (b) whether you have any actual real-world criticisms of MMT policies.

          1. diptherio

            I think there is an argument to be made that the US CAD is unsustainable environmentally, since the financial outflows (which are sustainable) are matched by material inflows of goods which must be transported to our shores, which process involves the burning of much petrol and the release of much carbon into the atmosphere, which is what is actually unsustainable about this situation.

            My hope lies in 3-D printing technology which will allow Americans to make their beloved plastic junk right at home, without needing to ship it half-way ’round the world before their kid breaks it. Overproduction and transit problems solved at the same time!

          2. Ramanan

            Look Phil,

            To get you into technical details will involve too much of my effort.

            First this post is a joke. It’s like saying Kaldor held one view and his followers fantasized what he thought. Whether Kaldor is right or wrong is another question but he did believe that exports are the most important thing for a nation’s success in a world of free trade and hence one needs a system of regulated trade. He for example was behind the proposal to put import controls in Britain in the late 70s.

            A balance of payments constraint view doesn’t require a balanced trade in the long run. A nation can have 2% CAD and yet manage to grow. However if it wishes to achieve a higher growth rate, the trade imbalance will deteriorate unless it does something to improve its exports. This is because a faster growth will deteriorate the balance of payments.

            Just take another example. The Australian non-financial corporate sector is a net debtor and has deficits for long. It however, is not insolvent because it has fixed assets. However, it doesn’t mean it can run any deficit it wishes.

            The US current account deficit drains demand at a massive scale and this is one of the reasons for it high unemployment. If the US government uses fiscal policy to stimulate demand it will lead to a further deterioration of the current account and its net indebtedness will keep rising relative to GDP. It is foolish to think of running a nation this way. The United States however has a lot of power because its currency is acceptable but by no means this is permanent.

            As for other nations, you get your causalities like Mr Milton Friedman. Poor nations are poor because free trade has been imposed on them and are unable to grow because growth also brings in a deterioration of trade.

            In fact as Kaldor observes because of free trade, success breeds more success and failure begets more failure. Also, they are unable to grow fast also implies productivity growth is slower.

            The examples you have in mind is a typical case of survivorship bias. Canada for example is able to float its currency because its balance of payments is relatively better – in the sense that it is more competitive than poor nations. Poorer nations cannot even float freely and need regular intervention by the central bank in the fx markets. So your conditions are even’t valid to begin with there.

            You can keep saying US runs a high CAD and it hence it isn’t a problem but unfortunately, it is and it is more problematic for most nations facing this issue. No the United States is not going to put up fiscal policy to reach full employment. Fiscal policy helps to reduce unemployment but cannot do the full trick. Meanwhile Obama is promoting exports and it helps the US. Incidentally the US also happens to be a very big exporter. It is not India which has an order of magnitude less of exports and less highly less successful than the US.

            Keep dancing to the fact that the US has high CAD. It however has high unemployment too. This dance (balance of payments is benign) is neither useful to the US nor for other nations.

          3. Philip Pilkington

            (1) Actually what I’m saying is that Kaldor, like Keynes, was a nuanced economist who didn’t mistake his models for the real world. But his followers are different and lack nuance. I think that was clearly stated.

            (2) No one denies that the US CAD drains demand. That’s already known by looking at the GDP identity. If that is all that the BoP guys say then they’re saying nothing that isn’t in the GDP identity. But they are saying more than that as the quote from Setterfield shows below.

            (3) “It is foolish to think of running a nation this way.” — Well, that’s just a value judgment. It seems to me that this is the only way to run policy right now. But you obviously have more, erm, utopian proposals which is exactly what I said in the piece.

            (4) “The United States however has a lot of power because its currency is acceptable but by no means this is permanent.” — Nothing is PERMANENT, Ramanan. Nothing. Not even capitalism itself. The question is: if the world is currently the way it is should we promote US CADs. I think that the obvious answer is “yes” because there is no realistic alternative.

            (5) I do not promote free trade in other countries.

            (6) This is beginning to look more and more like a political atgument against MMT. I’ve long suspected that this was always the case. There’s no problem with that. We can have that debate. It’s very relevant. But let’s call it what it is: its a political argument.

          4. Ramanan

            “Actually what I’m saying is that Kaldor, like Keynes, was a nuanced economist who didn’t mistake his models for the real world. But his followers are different and lack nuance. I think that was clearly stated.”

            This post is a proof of how less researched you are. This is the reason I am driving the point about misrepresenting Kaldor’s views.

            It is crystal clear from Kaldor’s work that the external sector and free trade imposes big constraints on a nation’s growth. And his followers rightly point this out. In fact he has many papers quoting Thirlwall. See especially his CW-vol-9.

            Stop spreading this misinformation on the internet.

            He may be right or wrong. But different point.

            The fact that the US current account deficit is beneficial to the rest of the world doesn’t mean that such a strategy is pursued by the world forever. The formation of the Euro also brought in tremendous benefits to many Euro Area nations but look at what it has done. Private sector deficits in the US was also beneficial to itself for many years as it was the engine of growth.

            I am not going to switch between the above point and the technicalities around the balance of payments constraint because I really came here to emphasize the former. The debates on technicalities can go forever.

            Except one thing about the foolish point. If the United States puts up fiscal policy, it will keep increasing foreigners claims on the US – especially the government. The public debt/gdp will rise forever and the negative of NIIP/GDP will rise forever without bounds. If this strategy is to be pursued everyone has to be convinced that this can be run without any issues. Magic Money Theory!

            The US strategy has been to increase its exports and it can of course put up fiscal policy to reduce unemployment. So fiscal austerity is not needed. But fiscal policy solving all problems is a fantasy.

            Take the example of Australia. It has huge current account deficits and its banking system is in a vulnerable position because of liabilities to foreigners in both domestic and foreign currency. Again it would be foolish to propose an MMTish fiscal expansion because that will raise the vulnerability of the banks. The US financial system can also find itself in such a situation.

            More importantly it seems to be a nice strategy by you MMTers to take a relatively strong nation to push your agenda. Other nations cannot even think of aggressively pursuing fiscal policy.

          5. Philip Pilkington

            (1) Again, I’ll repeat: Kaldor said one thing in his models and then said seomthing else when he looked at the course of economic history after the war. You can call it “misinformation” all you want (as if you hold the keys to Kaldor’s mind) — but you cannot explain away the quotes above. Sorry.

            (2) “The fact that the US current account deficit is beneficial to the rest of the world doesn’t mean that such a strategy is pursued by the world forever.” — Once again we have this “forever” clause. It’s such a tired argument. NOTHING lasts forever, Ramanan. Nothing is permanent. To think you can set up an infallible system that lasts “forever” is a fantasy. What a good policy analyst does — what Kaldor did (no matter how much you want to deny it) — is to look at what CAN be done NOW to keep the system relatively stable. Good policy analysts are not interested in “forever” — that’s the terrain of what I referred to as the “Kaldorians” and its why they’ll never have any influence over policy. They aren’t in touch with political realities. End of story.

            (3) “If the United States puts up fiscal policy, it will keep increasing foreigners claims on the US – especially the government.” — Yes. And this was what happened after WWII. It, according to Kaldor, accounts for world growth in that era!

            (4) “The public debt/gdp will rise forever and the negative of NIIP/GDP will rise forever without bounds.” — That depends on the GDP growth. Foreigners claims on the US have been accumulating since WWII without major problems because US GDP growth kept pace. It all depends on how fast the GDP grows.

            (5) But even if the claims did rise forever, we’re back to the question that you either never answer or shroud in mystery: WHAT WILL HAPPEN? I demand you answer this question clearly if you want to be taken seriously. WHAT WILL HAPPEN? Will China et al dump the dollar? Is this what you’re saying? Because if it is then you have no idea how the world economy works. If this is NOT what you’re saying you have to put forward your argument — because you NEVER do. You NEVER make a solid case about what the “bad thing” is that happens if the debt/GDP starts rising.

          6. Ramanan

            ““The public debt/gdp will rise forever and the negative of NIIP/GDP will rise forever without bounds.” — That depends on the GDP growth. Foreigners claims on the US have been accumulating since WWII without major problems because US GDP growth kept pace. It all depends on how fast the GDP grows.”

            Simple here dude. Helps to get your maths right.

            The faster the rise in GDP, the faster the debt/gdp grows (if exports do not grow fast enough). While the denominator grows to bring down the ratio, the numerator blows because

            change in debt = deficit

            and faster growth assuming exports growth are not fast enough, deficits keep rising. The fiscal deficit is related to the current account deficit through the SB identity and hence both indebtedness to foreigners and public debt rises relative to GDP.

            The thing that stabilizes the ratio is adjustment in income.

            The United States was once a big creditor.

            If you have $10mn at the age of 18, you and your future generation can run deficits for a long long long time of $100,000. Your assets can also make capital gains helping you and your kids run deficits for even long.

            Your deficits are beneficial to the rest of the world and to you (because you get to consume more for example). But doesn’t mean that deficits are good.

            It is you who are being un-nuanced.

            What will happen – no the thing won’t even start. This is because nations end up with balance of payments crises where they need the IMF’s help. So didn’t Britain ask for the IMF’s help in the 70s even when floating?

            It is more difficult to imagine this for the US but it can easily be imagined for other nations. Your theological monetary theory supposes that nations can truly float their currencies without the central bank intervening and that there is always a price.

            Again look how you change the topic from the main point of the post about Kaldorians.

            I am less interested in this for now and am not going to debate but you want to change the topic and create a Bastardised version of Kaldorianism.


            Didn’t Wray write a paper in 2006 about Mexico whose currency plummetted in 2008 – requiring IMF help?

            The fear of heading to a balance of payments crisis is sufficient reason for a government to retrench. They overdo this of course and that is bad but by no means does magic money theory policy work.

          7. Philip Pilkington

            Let’s say that your argument is sound. (It makes assumptions about import elasticities that may or may not hold).

            “What will happen – no the thing won’t even start. This is because nations end up with balance of payments crises where they need the IMF’s help. So didn’t Britain ask for the IMF’s help in the 70s even when floating?”

            Yes, to prop up the pound during the inflation.


            “Balogh said the continuing the present balance of payments deficit could provoke a “violent withdrawal” of short-term money if people took fright.”

            They were scared of a currency crisis. As was Kaldor if you read his stuff at the time. They were scared that the markets would flee from the pound and this would exacerbate the inflation and cause a massive mess.

            The UK is no longer in this position because of the growth of inflows into the City of London. So, this is no longer a big deal for them.

            “It is more difficult to imagine this for the US but it can easily be imagined for other nations.”

            There it is. You can’t imagine it for the US. Oh well, the argument is over. End of story. I can’t believe its taken me two years to get you to say that…

            Nothing to see here, folks.

          8. Philip Pilkington


            It’s very difficult to take a person seriously if they just start making baseless claims that everyone can see are wrong.

            Here’s a quote from the piece — I don’t care if you read it or not, but just so that others don’t buy the rhetoric:

            “The annoying thing is that the problems that the Kaldorians raise are actually very important – in specific contexts. As most MMTers acknowledge, for example, it is probably not advisable for developing countries to run high trade deficits for too long as this may result in currency crises and all sorts of other economic nasties.”

            I’m clearly talking about a balance of payments crisis. So, don’t try to misrepresent me. It’s just weird. It’s not helpful. And its needlessly devisive.


            Here’s the real “breaking news”:

            (1) The MMTers and Ramanan both agree that most countries can have balance of payments crises which manifest themselves primarily as currency crises — like Britain in 1975.

            (2) The MMTers and Ramanan both agree that, under current structural conditions, the US will not experience this because they have a highly sought after currency.

            (3) What the future holds is anyone’s guess, but this is how the world is now.

            So, what is the debate here? There is no debate. It’s all just fireworks.

          9. Ramanan

            Look Phil you clearly are presenting an oversimplified analysis.

            When presented an evidence, you refuse to accept it. You are simply enslaved by the just deficit spend mentality. Supposedly Britain just borrowed from the IMF to prop its currency and wasn’t worried about a fall. Just like everyone, a nation also needs a lender of the last resort and just like everyone’s debt sustainablity, a nation also has its debt sustainability and is closely related to its current account.

            The fact that Britain attracts money from abroad is good for Britain. But by no means it means that it can run current account deficits of any size. And the current account math is much more constraining than one would suppose.

            Because if Britain has much higher deficits it is at the mercy of foreign flows.

            Guess what JP Morgan also attracts deposits – does that make JP Morgan non-vulnerable.

            At a more deeper level finance ministers and central bankers are worried about how the deficits are financed. So typically FDI is considered good and short term money bad. And some success depends on how this is financed – it gives some room to improve the external situation.

            The math around this is not really easy intuition. You have to take a paper and pencil to analyse how debts and deficits change. I suspect you have not done so.

            Some countries attract financial flows and are hence less vulnerable than other countries who do not manage to attract flows. It is the reason nations manage to not freely float in spite of the Washington Consensus that nations should float without intervention. It doesn’t mean fixed exchange rates are bad but the debate fixed v float is a hollow debate.

            Again talking of the US – look how conveniently you manipulate the debate to be perfectly honest. You keep dancing about the US and then present as if it is a role model which others can follow.

            “The MMTers and Ramanan both agree that, under current structural conditions, the US will not experience this because they have a highly sought after currency.”

            Right because the US intentionally keeps domestic demand low to keep its debts sustainable.

            “The MMTers and Ramanan both agree that most countries can have balance of payments crises which manifest themselves primarily as currency crises — like Britain in 1975.”

            Really? Ha ha ha! What is this – some Bastardised version of MMT?

          10. Ramanan

            “It doesn’t mean fixed exchange rates are bad …”

            Sorry typo. should be:

            “It doesn’t mean fixed exchange rates are good …”

          11. Philip Pilkington

            The argument is over. Now you’re just making assertions about where MMT stands. Your opinion on this is irrelevant to everyone but you. Everyone is now aware of your criticisms and they can weigh up whether they are or are not in keeping with what they think MMT says.

            That was the purpose of the argument — not to convince you that your concerns are taken into account by MMT economists; you can never be convinced on principle (why? I don’t know and I don’t care). So, that’s it. Everyone can now make up their own mind.

          12. Ramanan

            As I said before my commenting here isn’t primarily aimed at implications of external trade and the relation of fiscal policy to this.

            My aim was to set some facts about Kaldor and his followers.

            The reason to bring some of the arguments – technical – was to show that it is not against his overall philosophy of the supreme importance of the external sector.

            But can’t get you to debate on that, so won’t try more.

            But about assertions, please do not create a new version of MMT. According to all MMTers, the external sector constraint is exotic to say the least and these were the precise words of Bill Mitchell.

            But I don’t care really – except when someone gets swayed by the sexiness of the theology. But again this wasn’t the point of my debating here really.

            Anyway, keep chasing mirages!

          13. Philip Pilkington

            The only mirages here are two faint ghosts that seem to be fighting it out in your mind: one that looks like Kaldor and that looks like MMT. But neither of them ever existed as you imagine them. They’re your own constructions — projections into the past and into the present.

      2. Moneta

        You are assuming that the US is at the head of the food chain and will remain there.

        Empires rise and fall and it is normal for people to question whether or not the US gets knocked down.

      3. Moneta

        The US can practice its current “MMT” because it benefits from the reserve currency.

        If it loses this status, we’ll see how long it can survive as a net importer.

        1. diptherio

          Hopefully not long. I don’t think Mother Earth can take much more of this ship-every-damn-thing-around-the-world-three-times-before-it-gets-consumed approach to commodities distribution for much longer.

          We all need to learn to live within our means, which means living largely within our own borders: not for economic reasons, but for environmental ones.

        2. Ben Johannson

          Not sure what your point is. Everything you wrote here was covered in the post. Saying “we’ll see if the U.S. can still be a net importer when no one wants its currency” is the same as arguing “we’ll see if the U.S. can still be a net importer if no one wants to sell it things.”

          Well, yeah, but let’s see if an asbestos cat can chase a paper dog through hell. Or lets see if Treasury yields spike if the Fed doesn’t facilitate their sale. On their own these are meaningless statements, because these aren’t going to come to pass any time soon.

          There is no other country willing and able to run large trade deficits. No trade deficits, no international reserve currency.

          1. MyLessThanPrimeBeef

            Why is no country willing and able to do that?

            Are there some countries willing and not able to – who are they?

            Are there some some countries not willing but able to – who are they?

            Why are some countries not able to? What disqualifies them – lack of imperial legions?

          2. MyLessThanPrimeBeef

            How large is sufficient?

            Japan has been large enough in the 80s, 90s up to now.

            How does global trades settled in Yuan continue to rise with China running large global trade surpluses?

            Can we settle all our global trades in Dollar while running large global trade surpluses?

          3. Yves Smith Post author


            Did you miss the “willing” part? Both China and Japan (unlike the US) see keeping employment high as critical to social stability. Entrepreneurs in Japan are celebrated because first, they create jobs, and second, because they create good products. The fact that they get rich isn’t considered good.

            Running trade deficits means exporting demand, hence, jobs. So Japan is not willing to have the yen be the reserve currency.

    2. Philip Pilkington

      And yes, Ramanan, Thirlwall’s Law is a special case. It assumes — as I stated clearly in the piece — that the current account must balance in the long-run. Here’s Mark Setterfield on this:


      “Indeed, a fundamental premise of BPCG theory in its original form is that we must observe trade balance, either: a) because countries are unable to run chronic trade deficits (they cannot attract permanent net inflows of financial capital from abroad); or b) because countries are unwilling to run chronic trade deficits (they do not wish to attract permanent net inflows of financial capital from abroad, because of the resulting accumulation of foreign indebtedness and consequent debt servicing commitments).” (Setterfield, M. Pp397)


      As we can clearly see, Thirwall’s Law does NOT apply if a country DOES run persistant deficits. And, as I showed, Kaldor himself argued that the US ran persistant deficits in the post-war years and this was what drove world growth. He also does not indicate ANY reason why this might not be sustainable.

  4. Up the Ante

    ” .. idiot song of [British] birds fills the air .. ” Clive Barker

    “Their gripe with MMT is that it ignores that government spending policies will cause trade deficits to widen and this will… well… something bad will happen. In this they reference what they call “Thirlwall’s Law”. The Law itself seems to be set up only with very strict conditions in mind, but some of the Kaldorians apply it to everything they see in every economy at every time. This is the problem with confusing an economic model for a perfect description of the world: in the same manner as a recent religious convert, you start to see the Holy One everywhere you turn. ” More British gunboat diplomacy, is it ?

    “These people can usually be safely ignored as they are not arguing in good faith [but rather from poverty of spirit]. ” [insert self-referential title]

    fixed it for ‘ya

  5. Chris Engel

    The rise of the Remnimbi is a credible threat to dollar hegemony that will put the trade deficit doves/owls’ argument in peril.

    When the smart money gets tired of the overvalued dollar with lackluster growth in dollar-cash-flow assets they won’t hesitate to jump into the Currency of the East and there will be a significant adjustment.

    Those trade deficits will be a lot harder to maintain when there’s more stable alternatives in Latin America and Asia.

    And who knows? Maybe Europe and Russia will get their acts together one day and provide even more alternatives to dollar-assets. The point is that there’s significant demand for a competitor to challenge America’s monopoly on the international financial system, and the dollar is heavily overvalued and that is something that WILL correct.

    Not suggesting this is an imminent occurrence, but it seems extremely naïve to be promoting endless deep trade deficits just because there’s strong demand worldwide for it currently. The intl financial system is apt to change and there’s a number of ways it could go down.

    1. jake chase

      I think you misunderstand why the world wants dollars. It is not primarily for trade but for capital flight. The US is viewed as safe for international capital. That is why real estate skyrockets in selected locations. That is why stocks keep going up.

      Do you really think capital will change course and flee to Communist China? I know rich people are not necessarily smart, but …

      Secondly, there isn’t any shortage of dollars. They are just being pumped into the wrong pockets. This posts acts like the Gomint is shrinking the economy when in reality it is fueling speculation through the Fed. Asset speculation is a big part of economic activity. Sometimes it is the most important part. Of course, it does nothing for most people, and hurts those who cannot afford houses, but that is a separate issue.

      Third, MMT isn’t ‘wrong’. It’s proponents are naive about what a government unconstrained by borrowing would do with its enlarged power to spend. Think we have crony capitalism now? Just wait.

      1. MyLessThanPrimeBeef

        …no shortage of dollars…pumped into the wrong pockets…

        That’s why some people are paid to scream for more dollar pumping – it will go where it has always gone: the wrong pockets.

      2. Calgacus

        Third, MMT isn’t ‘wrong’. It’s proponents are naive about what a government unconstrained by borrowing would do with its enlarged power to spend. Think we have crony capitalism now? Just wait.

        This misunderstands MMT, in an unfortunately common way.

        MMT sez: We have an MMT system, RIGHT NOW. The government is NOT constrained by borrowing, RIGHT NOW. Printing money, printing bonds – BIG DEAL. What is the difference? Show me the difference! There is no difference!

        In one case, the government effectively pays people with the sort of money called “bonds”. In the other, it pays people with the sort of bond called “currency”. But they are “one and the same thing” (FDR), fundamentally.

        There is NO enlarged power to spend if we stopped “borrowing” = issuing bonds. (A government trading the bonds it issues for the currency it issues is. not. borrowing, the way the word “borrowing” is used in any other context. Government spending is much more like, much more properly called “borrowing” than government bond auctions.)
        Conceivably, government “borrowing”, could be disinflationary, could give a wee bit more room to spend non-inflationarily, so MMT money-printing would lessen the non-inflationary spending room. Just as conceivably, “borrowing” could be more inflationary, and so MMT money-printing would give more non-inflationary spending room. Who knows?

        The only constraint on government spending is that it can buy anything offered for sale in its money/currency/bonds. If people think your currency is worthless (hyperinflation), they’ll think the same thing about your bonds, and vice versa.

          1. zolicles

            That is where taxation comes in, not to reduce deficits but to keep money in circulation. Income inequality is detrimental in that it keeps money out of circulation, i.e. hoarding by the wealthy. Taxations purpose is to limit hoarding and should be switched from income tax to a property tax as per Adam Smith.

    2. Ben Johannson

      This misses the point. The way other countries get dollars is by selling us stuff, meaning to own the reserve currency we have to run trade deficits. China and Russia and clearly the Eurozone have no intention of running trade deficits in the forseeable future, and they are unwilling to export their currencies to the rest of the world at the quantities necessary.

  6. dearieme

    Was it really the case that the whole problem started with LBJ’s hugely expanded version of JFK’s Vietnam War? Did the costs of LBJ’s welfare state not also play a role?

    1. Yves Smith Post author

      He was not willing to raise taxes to pay for the war. And the economy was already at full employment, so the deficit was really stimulative.

      By contrast, there was a lot of public support for the war on poverty. Tax increases for that (had they been needed, not sure if they required large tax increases in isolation) would have been acceptable. Despite what the US financial media would have you believe, polls consistently show, even now, that the public prefers increasing taxes to pay for social programs rather than cutting them. I was a kid in the 1960s, and the amount of poverty in inner cities and rural areas was seen as a national disgrace.

      And everyone seems to forget the space race, which was also very costly and basically a military program. Even though the public liked it, I am pretty confident the full costs were not properly disclosed.

      1. John F. Opie

        Yves –

        Space was, in comparison, cheap. I get around $224bn constant 2007 dollars from 1958-1969, which of course isn’t the whole period of the space race, but does cover the costs through the moon landing.

        Now, NASA and most involved would take serious umbrage with the idea that their work was for the military. As a matter of fact, rockets that the military wanted (and want) aren’t usually the kind that civilians are interested in: there is no civilian need, for instance, to put rockets into boats and put them underwater; nor is there one to bury them in concrete silos and be prepared to fire them on a few minutes’ notice, both of which require extremely stable solid propellents and a higher degree of performance than manned missions did. As far as I know, neither the US Army and, later, the US Airforce has ever tasked NASA with developing military hardware, with perhaps one exception: the bay size of the shuttle was based on a military requirement to match orbits with and recover military satellites. But the Shuttle wasn’t designed for or built for the military: it did have dual uses, and there were a few military-only flights, but that was largely because the military was also paying for NASA to do so (and this was not always a popular thing with the folks at NASA).

        While technology know no master and there is “leakage” between civilian and military programs, this is inherent to any engineering and scientific undertaking. One of NASA’s major tasks has been to conduct airfoil design and analysis and make it available to pretty much anyone who asks and pays the usual fees, with the goal of improving air flight safety, reducing costs and taking on the otherwise onerous task of paying for engineers to tinker with wing design: this is, if anything, been the single greatest contribution of NASA to the science of aviation.

        Disclaimer: nothing to do with NASA, just your standard ’50s space geek kid who watched the moon landing from Eureka, CA.

        Oh, and the poverty of Appalachia remained after the government threw massive amounts of money at it. It got better, but it didn’t go away. Remains indeed a national shame, but then again, so does the poverty of Washington, DC, outside of NW and SW.

        1. Carla

          “Oh, and the poverty of Appalachia remained after the government threw massive amounts of money at it. It got better, but it didn’t go away. Remains indeed a national shame, but then again, so does the poverty of Washington, DC, outside of NW and SW.”

          Okay, look. We’ve got commonly quoted numbers that the wealth of the richest 400 Americans now equals that of the bottom 160 MILLION. You want to talk about a national shame? THAT’s a national shame.

          We got poverty in Detroit, Buffalo, Cleveland, Chicago, St. Louis, the entire state of Mississippi, all over the southeast and points west. For god’s sake, we got poverty from Maine to California. There’s poverty in Hawaii–I’ve seen it. I don’t know if there’s poverty in Alaska, but every resident of that state gets a regular check from oil revenues, at least for now.

          It is REALLY ANNOYING when people say things like “We have poverty in Appalachia and in Washington DC and that’s a national shame.”

          Well over half the country is struggling and THAT’S A NATIONAL SHAME. And completely unnecessary. People are not poor because government throws massive amounts of money at them. People are poor because RICH PEOPLE STEAL THEIR LABOR and EXTRACT NATURAL RESOURCES right from under their feet.

          1. zolicles

            That in essense is the problem, today’s leadership knows no shame. To their way of thinking poverty and deprivation is part of the natural order of things and highlights the cleverness and breeding of the wealthy and well connected. If you are not on the take, i.e. a kleptocrat, you are a loser. To paraphrase Nietche, Morality is dead.

      2. Nathanael

        “And the economy was already at full employment, so the deficit was really stimulative.”

        The economy was also, roughly speaking, at full oil usage. And extremely dependent on oil. Especially the military!

        So when OPEC restricted the oil supply, rather than just “switching to something else”, like you might do if the milk supply was restricted, everyone kept buying the oil — at whatever price it was offered at. But there just wasn’t enough. Sudden massive inflation.

        It’s also worth noting that right at the beginning of the inflationary period, before the OPEC oil shocks, there was a drought & crop failure. Staple foods are another case where if the supply is restricted, people will just start bidding the price up, will not substitute something else, and inflation will start going.

        1. Yves Smith Post author

          There was inflation before the oil shock. Nixon imposed wage and price controls in 1971. And pretty much everyone agreed the initial inflation was demand driven (a result of the gov’t deficits) rather than commodities driven (demand pull rather than cost push).

    2. John F. Opie

      Bingo. I was perusing the comments to see if anyone would notice.

      LBJ’s deficits, the start of our current problems, was the commitment to permanent deficits in the name of both guns and bullets. To put things in perspective: the cost of the Vietnam conflict is, in constant 2011 dollars, around $738bn and represented, at the peak of spending, 2.3% of GDP and 9.5% of the total defense budget ( I’ve looked and haven’t found a convenient source for the spending by Johnson between 1964 and 1973, when Nixon made the first meaningful changes: the best guesstimate I’ve seen is around $900bn in constant 2011 dollars, which is based on the sum of spending and tax breaks during the period 1964 to 1973 rebased in constant 2011 dollars: to be honest, neither sum is to really be trusted, as the inflation of the 1970s blew those numbers up massively and the deflators used in both cases are not identical (the one is a hedonic military spending deflator, the other is CPI).

      Overall, the total costs to US taxpayers of the war of poverty is well in excess of $7tr in 2011 dollars. That’s more, of course, than the sum of all wars the US has fought.

      The problem is entitlement spending, not military spending. Both are the proverbial third rail of party politics (one democratic, the other republican, no points for guessing which is which).

      1. from Mexico

        If we look at the 1960s and 70s, welfare spending as a percentage of GDP increased from around 2% to 4%, where it has remained steady ever since.

        Pensions increased from from around 4% to 9%.

        What the right-wing ideologues never mention, however, is how these increased pensions are paid for. They are for the most part paid for by increased payroll taxes paid by employees, which rose from 3% of GDP to 7% of GDP:

        Corporate taxes, on the contrary, have fallen from around 4% of GDP to only 2%.

        Individual income taxes have remained constant at about 8% of GDP. However, income taxes on the top 1% have experienced large fluctuations. The average tax rate on the top 1% in 1979 was 35%. By 1986 that had fallen to 25%. By 1995 it had once again risen to 35%, but since has fallen back to about 30%.

  7. JGordon

    “…indeed, the world since World War II – is completely dependent on the dollar to function.”

    Your premise is that MMT is a viable model for America because the world is too dependent on the US dollar to do anything different. That is very interesting.

    I just finished reading Jim Rickards’ “Currency Wars”. In it, Rickards goes through a litany of moves that the Chinese and Russians have been engaging in since 2009 to minimize the dollar as the reserve currency. Some examples: the stock-piling of gold instead of foreign currency reserves by Russian and Chinese central banks–a growing list of bilateral trade agreements that don’t use the USD as an intermediary. BRIC political blocks that are agreeing to operate without the USD and US political interference, and In the case of Iranians, the direct use of gold as an actual currency.

    Although the most important point to take away from Rickard’s book is that currencies are a potent political, not to mention military, weapon and that they will be used as such by the respective world powers when the time is appropriate. I wonder if MMTers or economists in general ever consider that.

    In other words, a lot of people around the world have a keen interest in dumping the dollar as the reserve currency, and the motivations for that have more to do with political/military dominance than economic efficiency. Given that, isn’t the idea that the USD reserve currency is unassailable and that therefore “deficits don’t matter” (they’re too timid or settled to use anything else, so we can print without limit–and they will just have to grin and bear it) is a premise that’s on pretty shaky ground? I mean, you are asserting that premise as if it’s an axiomatic fact, but from my perspective it seems to be anything but.

    Also, again I have to say that Mish Shedlock has been saying that our current monetary/deficit regime will lead to horrendous deflation, not hyper inflation. And from reading your initial statements you would definitely classify him as a crank. Although apparently you would likely classify anyone who has a significant disagreement with your ideological belief system as a crank.

    1. Philip Pilkington

      I disagree with the Kaldorians and I do not classify them as “cranks”. I call people cranks who criticise things without understanding them. If Shedlock falls into that category then by my definition he is a crank. If he does not fall into that category, then he is not a crank. Simple.

    2. Massinissa

      “Currency Wars” is a wonderful book by the way. Read it last year. Wonderful read.

      But you forget that even under the gold standard, currency can still be weaponized. Didnt Currency Wars mention how France and a few other countries all decide to trade their dollars for gold all at the same time?

      And anyway, its not like the gold standard stopped World War One or anything…

      Fiat can of course be used for competition between great powers, but it is little difference than gold or natural resources or intelligence or any other commodity

      Money will always be used as a chess piece in geopolitics, regardless of whether it is denoted in gold or is fiat. Your conclusion on fiat just seems to sort of be beyond the point.

      I dont disagree with your comments, usually, but your stubborn insistence on the gold standard as a conclusion just annoys me, is all. Pardon me if I am sometimes uncivil.

      1. JGordon

        I own more bitcoins that I do gold. My distate is for government fiat, not non-commodity backed currency.

    3. MRW

      MMTers don’t say that “deficits don’t matter.” They make a distinction. They say deficits matter but not the way most people think. And unemployment is an indicator that the deficits are too small.

    4. from Mexico

      @ JGordon

      You express some of the same reservations with MMT that I do.

      The MMT school does a good job of highlighting the relationship between money, industrial production and state violence on the domestic front, which puts them light-years ahead of the classical and neoclassical schools. But when it comes to the international front it drops the ball, and its explanation of the interworkings of money, industrial production and state violence fall short of the mark.

      1. JGordon

        You said something good there; MMT definitely does fall apart on the international front. It looks a lot to me like people trying to force ptolemeic models onto a world where Relativity and quantum mechanics operate. The world is complex beyond our comprehension and we can never know with certainty what the effects of our actions will be on complex systems. Yet economists, and to no small extent MMTers, pretend that they do possess such knowledge with a certainty and arrogance that’s breathtaking to behold.

        But I guess that is the main difference between actual scientists and social scientists after all. In real science stating something as an absolute certain law will get you ridiculed by the rest of the scientific community no matter how “certain” your data is. But I suppose the adherents of ideological belief systems don’t have that luxury; all they can do is believe in their stuff really really strongly, and hope that the strength of their beliefs can manage to influence other people. Coincidentally that’s also how religions work.

        1. from Mexico

          To serve ideals without forgetting the real is an extremely difficult balance to achieve.

          The first is a matter of ethics, the second an object of science.

          As Susan Neiman has noted, those whose only reality is what we experience leave no room for experience to be changed by ideals of justice and progress that challenge the authority of experience itself. Yet those whose lives are guided by ideals without regard to experience are in danger of becoming merely utopian, or even totalitarian. Both in science and in ethics one must stay atune to the risks of tradition-bound empiricism as well as of foolish idealism.

          While mainataining a clear-eyed view of the way the world is, one must never forget the way it should be, and always act according to the latter.

          Do the MMTers have a clear-eyed view of the way the world is? I have my doubts, at least when it comes to some of them. Less confidence and more modesty is needed. It seems to me that nature, both physical and human, puts a huge question mark over their ability to shape the future world.

      2. Chris Engel


        The international / fx critique of MMT is the one that is not addressed.

        As I said in my comment, it’s basically just assumed that since dollar demand is strong now it will go on forever. And since dollar demand has been a driver of world growth in the past, it must continue in the future.

        This rather naïve martingale approach to geopolitical trends is what concerns me regarding their “hey endless large trade deficits are fine.”

        I appreciate very much their contribution on the wisdom of perpetual federal deficits as the better alternative to private deficits. But their assumptions don’t hold or apply to the trade deficit issue.

        The Remnimbi is a credible threat, much more so than Russia’s gold hoarding and other stuff (as has been cited in the very good book Currency Wars), but Latin America and Europe have potential if they get their monetary/fiscal policies in line.

        And while dollars are especially popular in Latin America (a situation that will likely culminate in a unified ‘currency of the Americas’ in the future), the assumption this will just continue endlessly is not a very strong argument at all in light of the potential of so many international players.

        1. Ben Johannson

          Untrue. Wray and Mitchell have stated they do not believe the dollar can be the reserve currency forever.

        2. Ben Johannson

          Also there can be no threat of a foreign currency replacing the dollar as global reserve unless te owner of that currency is both willing and able to run large trade deficits for a very long period of time. Said nation would also have to allow its currency to rise significantly in value relative to other currencies.

          They ain’t no one out there by that description.

    5. diptherio

      “Your premise is that MMT is a viable model for America because the world is too dependent on the US dollar to do anything different.” ~JGordon

      Actually, I didn’t find that premise in the article. But regardless of whether Phil thinks you need to have reserve currency status to make MMT viable, the folks at UMKC do not think this is the case. In their extensive MMT Primer, you will find this entry:

      The JG and Affordability Issues with Special Considerations for Developing Nations. You might want to read it before you assume that MMT is only possible for the US.

    6. zolicles

      MMT does not maintain you can print money without limit, only till there is full employment. Yes printing without limit and allowing the politically well connected to hoard all that currency and use it to speculate and drive up commodity prices to profit without production, as is the case today is destructive. But that has nothing to do with deficit spending, it has to do with corrupt distribution systems, as is the case in the US and Europe today. Again why would a government that can spend money without deficits need taxation? For the very purpose of preventing hoarding and speculation. Taxes to maintain price stability.

  8. craazyman

    Phil to contend with these fellows on their own turf you run the risk of Donald Pleasance’ fate in the 1966 blockbuster FANTASTIC VOYAGE with Raquel Welch.

    Scientists shrunk a spaceship and crew to microscopic size and injected them into a human body where they traveled around the arteries like it was outer space. Donald Pleasance was eaten by a white blood cell. You could see his head dissapear into the enveloping cell like he was rising into a giant maggot. Then he was gone.

    Maybe World War II had something to do with the big boom. You know, rebuilding everything that got destroyed. And what about this Kaldor dude’s models. Do they do anything except math? A Lordship. My that’s impressive. :)

    Look to nature for truth! Not books written by delusional madmen. They’re all delusional, every one of them, although some seem capable of describing reality when it’s obvious enough.

      1. craazyman

        she could have probly gotten a job as an assistant for any one of these guys — Keynes even, maybe especially Keynes. I don’t know what she would have done though, Nudge nudge! Say no more. Say no more.

        The dude’s head going into the white maggot was the talk of the lunch table when we saw the re-run, for the first time. It made you realize what can happen if you confront nature without a good plan, even if your models think it’s an equilibrium.

        1. Bill Smith

          Ya, I read somewhere Keynes just got married for appearances’ sake, and Racheal would certainly have kept up appearances. Silly use of resources, tho, methinks.

          I remember sitting around the kitchen table discussing puss and dad would shake his head and say “unintended consequences”.

  9. joe bongiovanni

    Nit-picking crank here, I believe.
    Partly because by your definition, my problem with MMT is to perhaps nit-pick that it just doesn’t get ‘money’ right.
    And partly because, as an advocate of the Soddy school of money and social science, we have always been relegated to the status of monetary cranks. Please don’t do our lot a disservice by including us with the neo-classicals.

    Trying to place the core of MMT’s so-called internet difficulties as a Kaldorian ‘choice’ is somewhat self-serving and unnecessarily wonkish for this econosphere.

    The Soddy-ists at the American Monetary Institute(AMI), here lay out their evaluation of MMT as a monetary science phenomenon.

    It’s much more about things like what is money, who creates money today, what is the proper role of government in a sovereign fiat monetary economy, etc.

    It is much less about who has the perfect insight into how to integrate sectoral finance with post-Bretton Woods economic exchange.

    On the issue here of who it is that are the dreamers, and who is right about modern money, the real dialogue is just coming to the fore.

    For the Money System Common.

    1. JCC

      Joe, Thanks for the link, well worth the read. I’m curious as to whether MMT is able to justify the present system of fractional reserve lending and the Federal Reserve’s right to issue and control money itself, and if not, what MMT believes is the solution to these very obvious scams.

      1. joe bongiovanni

        The real reply to your question should come from an MMTer.
        MMT gets by being of two minds.
        The first mind embraces the concept of ‘endogenous’ money – the nation’s supply of a certain ‘type’ of money (broad / horizontal) is created from within the workings of banking/finance on the basis of demand for credit.
        This is the money-supply money, M1 and 2 for now.

        The other money of MMT construct is the narrow and vertical money that includes, ironically, cash currency and reserves.
        The private central bank has this ability to issue reserves to its depositories to account-balance all those credit-money loans, which are really debts to the population of borrowers. System Normal.

        My observations are that reserves are not money and that generally speaking, banks can meet their reserve requirements with their cash holdings, but cash is not an issuance of the government. It is an ‘issuance’ of the private Reserve bank system of this country. Cash enters circulation as a collateralized debt of a financial institution. It is not a governent issuance.

        This belief system of MMT means that the there is no scam and thus no need to reform anything. Because there is no problem, no solution is needed. Inaction is justified through the finding of non-necessity.

        The second mind of MMT is that right now the government actually creates and issues money when it spends for public goods and services.
        Would that it were so.

        1. Bev

          Thank you Joe. I learn so much from you.

          You are keeping company with such nit-pickers as Washington, Lincoln, and Kennedy. So brave they risked their lives to take money creation away from bankers to improve the lives of everyone–everyone across the entire political, economic spectrum–for the common good. We must support and protect all brave politicians who do this for us all.

          On, the other hand, MMT’ers, by regarding money as debt loans from bankers, keep company too (non-nit-picking company) with a coalition as per an insider, Kevin Phillips:


          Formerly a Republican Party strategist, Phillips has become disaffected with his former party over the last two decades, and is now one of its most scathing critics.

          American Theocracy (2006)

          Allen Dwight Callahan[1] states the book’s theme is that the Republican Party (GOP), religious fundamentalism, petroleum, and borrowed money are an “Unholy Alliance.”[2] The last chapter, in a nod to his first major work, is titled “The Erring Republican Majority.” American Theocracy “presents a nightmarish vision of ideological extremism, catastrophic fiscal irresponsibility, rampant greed and dangerous shortsightedness.”


      2. Ben Johannson

        You can increase reserve requirements to 100% and have the Department of Health and Human Services issue our currency if you like. It makes no difference. MMT is a description of the existing system, not an argument for how the system ahould be structured.

  10. from Mexico

    Philip Pilkington said:

    So, this is where we stand today. The world economy is grinding along slower than it should be for want of dollars.

    Is the world economy grinding along slower because of want of dollars, or because of want of energy?

    “Growth in World Liquids Lagging Since 2005”

    World oil production grew steadily from 1983 to 2005, almost along an upwardly sloping straight line, but since 2005 has been almost flat.

    Speaking nationally as opposed to globally, a similar phenomenon occurred in the US in the 1970s. The 70s in the US were tumultuous years of great change, and this sea change in the US correlates with US peak oil:

    US Oil Production Rate

    In The Weary Titan: Britain and the Experience of Relative Decline, 1895-10’5, Aaron L. Friedberg breaks Britain’s total power down into three categories:

    1) Financial Power: This includes Pound hegemony and the Pound’s position as the world’s reserve currency, plus Britain’s banking and finance sector

    2) Economic Power: This refers to Britain’s productive capacity, the nation’s production of goods and services less banking and financial services

    3) Military Power: These are Britain’s instruments of foreign violence, its ability to project violence into foreign lands, which Friedberg further breaks down into Land Power and Sea Power.

    Friedberg explains that Britain attempted to compensate for its waning economic power by attempting to increase its financial power and military power. It didn’t work.

    The United States, in response to a similar crisis in economic power (declining oil production), reacted exactly as Britain did a century earlier. It

    1) Financialized its economy, the best evidence of this being this graph:

    “US Private Debt to GDP”

    2) Militarized its energy policy, the best evidence of this being this graph:

    “US Crude Oil Imports”

    “Simply put, the United States would rely on military might to keep order in the Gulf and mainatin the flow of oil,” Andrew Bacevich explained in The Limits of Power. “The unspoken assumption has been that profliagate spending on what politicians euphemistically refer to as ‘defense’ can sustain profligate domestic consumption of energy and imported manufacturers. Unprecedented military might could defer the day of reckoning indefinitely — so at least the hope went.”

    However, the financialization and militarization of all aspects of US life — economic, social, cultural, political, etc. — as Marshall Auerback and Chris P. Dialynas argue in a paper titled “Renegade Economics: The Bretton Woods II Fiction,” comes with great risks. The authors write:

    The U.S. has been perfectly happy to accede to the current state of affairs [chronic and persistent trade deficits] in spite of the immense economic damage it has inflicted on its domestic manufacturing sector (and the concomitant evisceration of its middle class) because it has provided the country with a cheap form of war finance, a particularly important consideration as it has gradually militarized its energy policy…

    …Von Clausewitz once said, “War is diplomacy by other menas.” Under recent U.S. administrations, however, war has become an extensions, not of diplomacy, but of energy policy.

    While the Pentagon readily acknowledges it can do little to promote trade or enhance financial stability, it increasingly asserts that it can play a key role in protecting resource supplies. Resourses are tangible assets that can be exposed to risk by political turmoil and conflict abroad — and so, it is increasingly argued, they require physical protection, which in turn is used to justify the extraordianry sums now lavished on the Pentagon….

    But America is paying little heed as to how it acquires this energy; it too embraces a form of renegade economics and is in part able to do so becuase Bretton Woods II provides nothing in the way of an external constraint of its debt-bingeing financing requirements. Quite the contrry: It subsidizes it.

    Does the “currency” of global military might make the U.S. immune to debt trap dynamics?….

    A successful military option enables the victorious country to reap the spoils of the loser. Military victories allow for the confiscation of foreign assets… The realization of the futiltiy of an internally generated solution leads to hope for and support of an externally war driven solution.
    The war solution, as seductive as it appears, has tremendous costs, which will be borne most fully by future generations, as the current Iraq war demonstrates. Beyond the tremendous human costs, the burden assoicated with a loss in war renders resolution even more problematic and severe.

    For those who see dollar hegemony and finance as an elixir that will cure all ills, I would remind them of what Joseph Chamberlain told a group of bankers in the City of London in 1904:

    Granted that you are the clearing-house of the world, but are you entirely beyond anxiety as to the permanence of your great position?… Banking is not the creator of our prosperity, but is the creation of it. It is not the cause of our wealth, but it is the consequence of our wealth; and if the industrial energy and development which has been going on for so many years in this country were to be hindered or relaxed, then finance, and all that finance means, will follow trade to the countries which are more successful than ourselves.

    1. from Mexico

      Summary in a nutshell:

      Financialization and militarization are inseparable, always marching side by side, and are a response to a nation’s declining economic (productive) power.

    2. Nathanael

      Right now? Lack of dollars.

      Lack of energy supplies creates *inflation*, for what it’s worth. I’ve explained this above.

      1. MyLessThanPrimeBeef

        I see it differently.

        It’s not the lack of money but the unequal distribution of money.

  11. Moneta

    The MMTers keep on repeating that this theory explains how the system currently works.

    Hovewer, our system is not working very well right now because only the 1percenters seem to get the easy funding. So to fix the problem, the MMTers say that we should forget austerity and just keep on printing for everyone.

    My issue is that they never explain how the projects that will get funded get chosen. Do we just fund everything? Who gets to decide what project is good or not? Because I don’t know very many good unbiased forecasters.

    In my mind, for MMT to work long term, money needs to be allocated to sustainalbe projects.

    The huge issue right now is that the US still beneftis from the dollar being the reserve currency. The US can probably generate huge trade deficits for years before getting punished but the reality is that the US gets to live beyond its means while one country after the other gets plundered. In the end, many more countries will get devastated. Of course, that could be good for the US but IMO not really. Why? Because countries that get devastated and are forced into the race to the bottom will often destroy their environment. So in many decades, all I can see, with MMT and deficits as far as the eye can see, is an environmentally destroyed planet.

    Frankly, this MMT solution offers us the same future as all other theories unless we start being more fair and fund bunisesses in a sustainalble fashion. This would mean the US taking a huge hit and stop consuming more resources per capita than the rest of the word’s population.

    1. Lambert Strether

      Actually, I.think Phil missed a category, which is criticizing MMT the theory for not solving problems outside its scope.

      Adding…. as if a restaurant reviewer wrote: “The chef prepared an excellent meal, but failed to call a taxi to take me home, and so this restaurant rates one star.”

      Taken to an extreme, this tactic leads to threadjacking and trolling, as people discuss the out of scope issues.

      1. MRW

        I’m going to steal that. “as if a restaurant reviewer wrote: ‘The chef prepared an excellent meal, but failed to call a taxi to take me home, so this restaurant rates one star.’”

        1. MyLessThanPrimeBeef

          To be successful in the depression we are, one has to offer more than one’s competitors.

          It never hurts to think outside of the scope.

          “What will the internal combustion engine do to the world when produced in billions,” asked an inquiring youngster in the late 1800’s?

          “That’s outside of the scope of I.C.E. 101,” responded the smart professor.

          – from a fiction to be written one of these days

      2. Calgacus

        Give that man a cigar!

        In defense of such behavior, though, there is the fact that money, finance, credit & debt, economic production and purposes are not only an essential part of everyone’s lives, but deeper, they are also an essential part of the human way of looking at the world, the only one we humans know.

      3. Hugh

        MMT is amorphous. When its practitioners want it to be, it is a purely monetary theory, but they have no problems shifting it, again when they want, to fiscal policy, public purpose, or as here, to balance of payments issues. So what really is the scope of MMT? And more to the point, what is its relevance if, in a world ruled by kleptocracy and wealth inequality, it ignores both?

      4. Ben Johannson

        It’s also a manner of criticizing which is a complete waste of time, as a global utopianist state is typically required to address its concerns.

        Never going to happen.

    2. MRW

      The quicky answer: if Congress was doing its domestic job instead of spending all its legislative time passing laws for Israel and against Iran, and fixing the holes in the financial system, demanding more regulators, and ordering the Justice Dept to bring the perps to justice, you might begin to see where the projects should be properly funded. See any large infrastructure projects in the last four years? Has Congress dealt with middle-class homelessness? Why isn’t it helping out the states with large transfer payments for education and the like? Why hasn’t it bailed out Main Street?

      The long answer: read Michael Hudson.

    3. Nathanael

      “In my mind, for MMT to work long term, money needs to be allocated to sustainalbe projects.”

      Well, this is certainly true. This is true of all other economic theories too. MMT has the mild advantage of being an *accurate* economic theory.

      Several of the competing theories claim that we can’t allocate money to sustainable projects because “balanced budget! hyperinflation! yeaaargh!”. This is wrong.

        1. Moneta

          I would specify that we need a system that helps us generate more GDP but consume less material goods per capita.

          1. MyLessThanPrimeBeef

            I am not sure more GDP means greater overall happiness for all.

            I can imagine less GDP with greater overall happiness for all – just compare us own with us a few decades ago with less wealth inequality.

          2. Moneta

            When I wrote more GDP, I was essentially implying more people participating in the economy…

            But I guess those who don’t want to work will be miserable if forced to!

          3. MyLessThanPrimeBeef

            That’s a problem, isn’t it – that some people don’t want to work.

            Mabye there is problem with ‘work.’

  12. JEHR

    Thank you so much for a very interesting article that approaches our economic problems in a slightly different way. It is always satisfying to read about a problem described in creative ways as this one does.

  13. MyLessThanPrimeBeef

    Well, this may be nitpicking, but what is the exact wording on taxes and the value of money?

    I find it hard to believe that a goverment that can make its citizens drive on the right (or the left, heck, even in the center if it wants) side of the road by just writing down a few words on a piece of paper would need taxes to make people use its fiat currency.

    How does a government make its citizens accept its laws? By the threat of fines or imprisonment. You need muscle for that, which the state has plenty.

    You use this as your currency or else you go to jail!

    Why bother with taxes?

    1. Calgacus

      Yeah, Legal Tender Chartalism might work, in a small government, laissez-faire economy. But only if the legal tender laws are enforced as rigorously as tax laws are – becoming taxes in all but name. Actually, more rigorously would be necessary, as every transaction would have to be monitored, not just every firm or household. There aren’t any real world examples of this. People don’t drive on the wrong side of the street, because there is no pecuniary motive in doing so. Rather the reverse. If there were, they would.

      Remember – the real taxation is government spending, when people give up real goods and services for government-issued credit. To make such legal tender ideas seem to work, the government would probably have to be directly involved in running a large part of the economy – as in running vital industries and stores – like the oil industry and gas stations. But again, this is taxation under a different name. When MMT says “taxes drive money”, what is meant is taxes (and any other payment to the government, any other private sector purchase from the government using the King’s coin) drive money. In the last century or so, taxation has been the overwhelmingly important payment-to-the-government; but it has not always been so.

      1. MyLessThanPrimeBeef

        It’s not the hard.

        Besides, it’s not that the 0.01% don’t get around the tax laws.

        This is a dollar.

        This is an inch.

        This ia a pound.

        Drive on the right side.

        Set your clock one hour earlier.

        Just proclaim it.

  14. MyLessThanPrimeBeef

    My other question is on the MMT position with respect to inflation and more taxes.

    If, for example, workers are getting paid more than food and energy are getting cheaper, thus causing the core inflation index to rise, do we tax them more?

    1. Ben Johannson

      Rising real wages do not necessarily mean there will be inflation. If a continual rise in the price of a particular commodity is a problem, you craft policies to discourage use of that commodity or find a way to increase production of it.

      However if food becomes truly scarce my personal opinion is inflation will be the least of our problems.

      1. MyLessThanPrimeBeef

        Those inflation hawks are always watching out for rising wages so they can raise rates…or taxes.

  15. aj

    Sometimes I learn additional information from reading the comments on this site. Sadly, this is not one of those times. Excellent article (as always), PK.

    1. MyLessThanPrimeBeef

      Sometimes, one learns without knowing it or sometimes, one only realizes it after a long time.

      It may be unfamiliar as we are used to instant everything, including results, learning results, in our instant world.

  16. MyLessThanPrimeBeef

    Can you comment on the similarities between

    1) MMT’s the bigger the public sector debt the more the private sector saving, excluding foreingers


    2) in a simpler money system, the more I print, the more money you guys will have?

    Can you also comment on how relevant is the claim about the private sector’s bigger saving?

    Is it more relevant to look at the distribution of that private sector saving, rather than the size of it?

  17. Francis

    Well this statement is wrong:

    “The reason for this is that the world today – indeed, the world since World War II – is completely dependent on the dollar to function”

    the good one is this:

    “The reason for this is that the world today – indeed, the world since World War II – is completely dependent on OIL to function which is payed in dollars”

    a single word changes everything. MMT like all the other more or less mainstream economical theories continue to believe in an unconstrained world, which is on the contrary a termodynamical system which needs energy to work. While we can produce electrical energy in many different ways, we can’t replace oil, which is payed in dollars because we have a huge army where the oil is and we have demonstrated to all that we will use it at any cost.

  18. The Dork of Cork.

    The post war oil crisis began soon after the banks which won that war started to issue credit on a large scale.

    Both Round 1 and round 2 was of course about oil and who would get to use and destroy it.

    The oil crisis did not start at Yom Kippur or Vietnam.

    There was tremendous pressure building since Suez.

    You get a oil crisis when banks issue credit.
    They create a banking asset which destroys oil capital.

    Eventually you get a oil crisis………

    The Egg comes first in this sick joke of a world Phillip , not the chicken.

  19. beowulf

    I would not have thought of writing a long piece about Nicholas Kaldor without first ordering a drone strike on Ramanan (or at the very least, securing his endorsement).
    The guy is a Kaldor superfan.

    In any event, the US economy is sui generis (and it is impressive that an Irishman and an Indian can debate its workings more knowledgely than all but a few Americans).
    I take Ramanan’s side on this simply on the grounds running a current account deficit (CAD) is bad for the US economy.

    Politically speaking, you can’t change people’s minds about budget deficits, you can only change the subject.
    Like Wynne Godley (Ramanan’s other hero-father) once said,
    “The budget balance is equal to the difference between the government’s receipts and outlays, but it is also equal, by definition, to the sum of private net saving (personal and corporate combined) plus the balance of payments deficit.”

    Last year’s budget deficit was $1.1 trillion, last year’s CAD was $500 trillion. balanced trade (by means of, say, Warren Buffett’s import certificate market) would, inexplicably to the politicians, cut budget deficit nearly in half. The Fed could accomodate foreign desire for dollars by currency swaps with other central banks.

    Its crazy that CAD isn’t part of the deficit debate but since the CBO has never caught Godley’s point, they don’t account for trade in their budget estimates. Its actually worse in good times. When budget deficit sinks below CAD, savings net of investment are drained from economy until it implodes(this last happened in 2007, the time before in 2000). Because of this dynamic,its doubtful we can have sustained full employment again without first eliminating the CAD (I’m genuinely curious if the Admin could enact a Buffett IC market without Congress under current WTO authority).

    We could eliminate the rest of the deficit by taking capital spending off-budget($600 billion last year). Alternately, we could just pay gross interest off-budget with our old friend, the Trillion Dollar Coin. But that would be almost too easy. The Admin certainly wouldn’t need to go to Congress first.

  20. Adam1

    In summary…
    US faces a balance of payments risk… Analyst says very very low risk anytime soon. Keynes says… In the long run we are all dead… Policy wonk asks… Why are we worrying about this today???l

  21. Keynesian

    In today’s highly ideologically charged environment Keynesianism has become a rhetorical bin into which anything Conservative economists disagree is discarded. These apologists have created multiple Keynesian strawmen to discredit him, and even Keynesian economists themselves have, without bad intentions, contributed mulitple versions of Keynesianism that naturally arise by historical interpretation. However, many critics fail to distinguish Keynesian economics and the economics of Keynes. Economist Joan Robinson coined the term “bastard Keynesianism” to describe post-war Keynesian orthodoxy which neglected uncertainity, time, and psychological expectation in their mathematical models acting a simulacrum of the economy.

    Joan Robinson said the Keynesian revolution was about time. She made the distinction between history, and equilibrium. Historical time is uncertain and indeterminate involving the creative free will of human beings. Equilibrium is a theoretical construct that is a mathematical point in logical time. Keynes questioned the simulacrum of mathematical economic equilibrium and instead turned to human behavior in real time, in lived historical time, to understand economic activity.

    Here again we see flaws in an economic theory that postulations a mythical economic agent in a pre-Lapsarian market model free of imperfections: a frictionless world of supply and demand, omniscient agents, reasonable consumers, predictable behavior, tamable mathematical risk, free economic actors, and competitive markets of pure equilibrium. Economic mathematical formulas could perfectly predict the future if only humans were mechanical automatons that lived in a static world without time. Heraclitus told us the cosmos is not static, but exists in a dynamic river of time.

  22. Rob Rawlings

    I don’t quite understand why so much emphasis is put on the USD in this post.

    If what is needed is expansionary monetary policy then the eurozone has it within its own powers to make this happen. Individual counties (like the UK) with their own currencies also have the ability to expand their money supply.

    While this would probably cause the exchange rate for the eurozone (or for the GBP) to fall initially – I don’t see why this would cause a balance-of-payments problem.

    I just got the impression that this article was written by someone still living in the 1950’s who hasn’t bothered to keep up to date with how the world has changed.

  23. Schofield

    MMT macro balance sheet accounting tells us that it’s sovereign government creation and injection of net money into the domestic private sector that gets this sector out of its deficit hole and enables an economy to grow. Equally it’s this sovereign government injection of net money that allows some other countries to run a foreign trade surplus.

    What’s wrong with that you might ask. Well just morality is the answer. Morality tells us a country’s economy should be run for the benefit of all its citizens. Currently global trade is continuously manipulated to produce an unlevel playing field with all manner of tricks thought up by different countries to become export champions. This has adverse effects on citizens in countries dominated by a plutocracy that benefits from the unlevel playing field.

    The only rational solution to this is bilateral trade agreements, or multi-lateral agreements where possible, that allow the right to balance trade whilst encouraging advanced expertise from member countries to set up production of goods manufacturing and services in other member countries to optimize sustainability in each country. No barriers to be erected against repatriation of profits because the medium to long term hope is that the expertise transfer will encourage home grown enterprise to set up in competition.

    1. Calgacus

      Schofield:Morality tells us a country’s economy should be run for the benefit of all its citizens. Currently global trade is continuously manipulated to produce an unlevel playing field with all manner of tricks thought up by different countries to become export champions. This has adverse effects on citizens in countries dominated by a plutocracy that benefits from the unlevel playing field.

      The only rational solution to this is bilateral trade agreements …

      NO, NO, NO!

      The only rational solution is – to do NOTHING about foreign trade per se. Ignore the frigging external sector. More precisely, just treat it as a domestic sector. An open economy is a special case of a closed economy. Not just vice versa. If you want to rip foreigners off a bit, set up trade barriers, tarriffs etc to exercise your monopoly or monopsony powers with respect to them.

      Governments are always “intervening” in foreign trade. While they always preach that domestic “intervention” will do harm to the divine capitalist system. This gets things exactly backwards, as usual. Laissez-faire works fine in modern international trade for sane fiat currency issuers. The floating rates are the instantaneous adjustments that theoclassicals imagine to apply domestically. But domestically, because of the paradox of thrift, government “intervention” is always necessary for a sanely, morally run economy. The reason for getting things backwards is the same as usual – governments in both cases do what makes some rich and powerful people relatively richer, at the cost of far greater damage to the absolute wealth of the whole and even the plutocrats.

      Just have a Job Guarantee doing beneficial things at a decent wage – and things will take care of themselves. So other countries, the export champions, are sucking up your currency and creating unemployment? The JG will automatically print more to hire everyone thrown out of a job, and their demand will stabilize the rest of the economy. If the rest of the world wants to save up your currency (why shouldn’t they? you obviously understand what you are doing, because your economy is now growing by leaps and bounds) just raise the JG wage, build a base on the Moon etc, to further counter the deflation their export championship is inflicting on your economy.

      Far from breaking down or not addressing or dropping the ball in the case of foreign trade, MMT is easier to understand because things are simpler then. It is always the “so simple it repels the mind” stuff that people have problems with. To my mind, the best exposition of MMT/FF in open economies is still Lerner’s chapters in The Economics of Employment – which shed great light on the domestic case, the theory as a whole.

      Take care of employment, and everything else takes care of itself.

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