Why Martin Wolf Is Wrong on Modern Monetary Theory (MMT)

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Yves here. I’m glad Richard Murphy did the heavy lifting on Martin Wolf’s comment today on MMT. A small point: Murphy remarks that he believes that Wolf got something wrong “deliberately”. That might seem like a stretch. But I imagine that Murphy has been reading Wolf regularly longer than I have, and I can point to cases where Wolf took a position that he had to know was dodgy but was politically expedient for him to do so. For instance, he has repeatedly endorsed the discredited “savings glut” theory of the financial crisis. I assume he did so to stay in the good graces of Ben Bernanke.

By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK

Martin Wolf has conceded that MMT is an economic truth in the FT this morning. The headline says:

States create useful money, but abuse it

The sub heading is:

To the extent modern monetary theory is true, it is unoriginal; to the extent it is original, it is false

To summarise, he says MMT is right: states can create money at will; money is given its value by taxation; states with their own central banks that do not borrow in foreign currencies cannot go bust and taxes do not fund government spending, he agrees the whole gamut. I could quibble, and purists will, but in essence he says MMT is correct. And, of course, he agrees it always has been so by saying there is nothing new about any of this.

That’s the good news. Then comes the ‘but’. He says this:

Money is a creature of the state. Modern monetary theory, a controversial account of this truth, is analytically correct, so far as it goes. But where it does not go is crucial: money is a powerful tool, but it can be abused.

That’s partly because Wolf also makes some very basic errors. For example, he says:

[O]nly inflation sets limits on a government’s ability to spend. But, if inflation emerges, the government has to tighten demand, by raising taxes.

This is not what MMT says. MMT does not say inflation imposes a limit on government spending. It says using all available resources – effectively available labour – imposes that limit. Then it says inflation follows if expansion continues. And it only says that is an issue if it is decided that the resulting inflation rate is too high. Inflation, per se, is not a limit. I suspect Wolf chose to get this wrong, deliberately. His narrative does not work if he noted correctly what MMT said.

But his real disagreement is that whilst MMT is correct (subject to his own misconceptions) he thinks the policy implications are wrong. He says:

This analysis is correct, up to a point. It also has implications for policy. A sovereign government can always spend in order to support demand. Again, expansion of the central bank balance sheet does not make high inflation likely, let alone inevitable. Some believers in MMT argue that the power to create money should be used to offer a universal jobs guarantee or finance programmes such as the Green New Deal proposed by Democrats in the US. But such ideas do not follow from their analysis. These are just suggestions for where the state should spend.

Again, this is misunderstanding, whether deliberate or otherwise, by Wolf. These ideas, or at least variants on them, are a necessary part of MMT, but Wolf cannot change his world view to realise that. This is because Wolf is stuck with the dying idea that macroeconomic policy is all about the need for independent central banks to control inflation rates with the objective of delivering a stable value for money to support the property rights of the world’s owners of debt – who are banks and the well off. This assumption drives Wolf’s slightly odd explanation of the role of bonds in MMT, and his objections to it. These are threefold.

The first is that we do not know where full employment is in an economy with certainty. This is true. Wolf thinks this justifies not taking the risk of creating it. Unemployed and under-employed people, and people not fulfilling their potential, is a risk Martin Wolf is clearly willing to take to prevent inflation. Those suggesting MMT think that the wrong priority. This is also why he does not say what the spending MMT permits should be spent upon, having dismissed the choices those who propose MMT make: he, by implication, suggest that the state should not spend. He clearly thinks that it should sit and watch human potential go to waste. I will say no more on that.

Second, he says this:

A still more important economic mistake is to ignore the expectations that drive people’s behaviour. Suppose holders of money fear that the government is prepared to spend on its high priority items, regardless of how overheated the economy might become. Suppose holders of money fear that the central bank has also become entirely subject to the government’s whims (which has happened often enough in the past). They are then likely to dump money in favour of some other asset, causing a collapsing currency, soaring asset prices and booming demand for durables. This may not lead to outright hyperinflation. But it might lead to a burst of high inflation, which becomes entrenched. The focus of MMT’s proponents on balance sheets and indifference to expectations that drive behaviour are huge errors.

This is pure ‘bond fairy’ nonsense. Even Paul Krugman (when not writing about MMT) has debunked this sort of scare-mongering, time and again. But let’s be clear why. First, people can’t dump money. Ultimately, it’s what they have to make exchange. So the idea that they exit money forever is absurd. They will not do that. Instead, they might speculate. And as MMT makes clear, let them try. The government simply has to respond by buying the gilts they want to sell. It can. It is doing so regularly through the QE programme, so the mechanism exists, and as Japan proves, there is no real limit to how much of that debt the government can buy. In that case, a market panic, deliberately generated or otherwise, can always be neutered. No country is beholden to speculators in its bonds or currency, which it creates and the supply of which it controls if the core MMT conditions prevail. The only reason why this might not be true is if there was a central bank not under government control that then permitted runs by not intervening. One presumes Wolf wants such central bank independence to permit this possibility, which suits his theory. And that is precisely why I oppose it.

And then there is Wolf’s third objection. He says:

These mistakes are economic ones, but there is a related and far worse political error, as Sebastian Edwards of University of California, Los Angeles, has argued. If politicians think they do not need to worry about the possibility of default, only about inflation, their tendency may be to assume output can be driven far higher, and unemployment far lower, than is possible without triggering an upsurge in inflation. That happened to many western countries in the 1970s. It has happened more often to developing countries, especially in Latin America. But the economic and social consequences of big spikes in inflation can be very damaging.

Now we come to the core of Wolf’s objection. It is, as he admits, political. And it is that politicians might use their judgements. Heaven forbid! Wolf is very clearly of the school that created economics to impose constraint on that judgement so that full employment, rising real wages and a redistribution from capital to labour may not happen. And now he is petrified that the so-called economics that underpinned that heinous political system is shown to be wrong the constraints must still be imposed because politicians – and so, of course, those who elected them – cannot be trusted with the economy. Only bankers can have such faith placed in them, according to Wolf.

But he is wrong, of course. The 1970s are not now. And the economics of that era, including the belief that money was still a scarce resource, are even longer gone. Instead we live in an era of perpetual underuse of labour, and of politics that, if given the choice to do something would rather not do it. We have stagnation, inequality and real poverty precisely because of the maintenance of the economics that Wolf now wants to perpetuate by fear alone.

And tacitly even he admits that. He has to acknowledge the power of the state to intervene. In his conclusion he says:

The solution, nearly all of the time, is to delegate the needed discretion to independent central banks and financial regulators. Yet proponents of MMT are right that during a period of structurally feeble private demand (as in Japan since 1990) or a deep slump, a sovereign government must and can act, on its own or in co-operation with the central bank, to offset private weakness. There is then no reason to fear the constraints. It should just go for it.

We are back to basic errors here. We have endured structurally feeble private demand for a decade now. And we need a Green New Deal. We could deliver that GND without problem precisely because there is structurally feeble private demand without there being a shortage of resources or inflation. But when a central bank is told it may not deliver such a programme it is an impediment to progress. The result is we need to sweep away the central bank and the independence it has that is this impediment to progress. Or we, at the very least, need to change its mandate. Wolf’s perception of what is normal is seriously awry and his ability to adjust his economics to suit that false perception is as adrift.

Wolf has conceded MMT is right. Now he needs to accept the consequences. Including that democracy by and for the people should prevail.

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81 comments

  1. vlade

    Hmm. I had thought that I had MMT described to me as descriptive, not prescriptive. That said, googling a bit around, it sees that “JG is part and parcel of MMT” is going back quite some time (I’ve easily got something from 2012, which was talking about earlier debates, so must have been even before then), so I remembered it wrong (doh).

    That said, it does seem a bit stretched argument for me. One of the posts I found was saying something along the lines “physics is descriptive, but that doesn’t mean mechanic can’t tell you how better run your car”. Sure. But it’s not the law of physics that makes the choice. It’s the mechanic telling you so. It pressuposes values, because “better” makes sense only in a context.

    The “proper science” (physics, chemistry, maths) have theories that are entirely descriptive. They say “if you do X, Y happens” (sort of). They don’t say “if you want a better engine, do X” – because they have no clue what “better” means (fuel economy? Generated horsepower? Weight/power ratio?).

    And, setting up values is a political, not economical issue, TBH. So unless MMT accepts that it embeds political values (which is fine, but then it’d be told clearly, calling something “theory” suggests, at least to me, it’s value-neutral), it’d not say what is “better” or worse.

    Reply
    1. PlutoniumKun

      I was sceptical too about the linkages between MMT and the JG, but having read a bit into it I understand the fundamental importance now. A JG is vital to ensure that MMT doesn’t accidentally overcook the economy (or regional parts of a larger economy).

      I think really there should be a distinction between ‘MMT’, as in the purely mechanical description of money that is at the heart of MMT and the broader set of recommendations around MMT which are both inherent to how it will work in practice, and represent the values of the proponents. While the proponents work hard to present it as a ‘package’, in reality its always open to a government to pick and choose. For example, Keynes theory was ‘progressive’ in that he clearly envisaged his ideas as a means of preventing mass unemployment and preventing crashes, but (at least in the US), we ended up with Military Keynesianism in the late 50’s and 1960’s.

      Reply
      1. JohnnyGL

        Yes, fair point about the descriptive aspects of state created money and the prescriptive appropriate policy tools to manage that money (JG) that advocates would like to create and use.

        I think most of the major MMT practitioners would say, “we recognize that unemployment causes real, lasting damage and too many economists blow it off as not very problematic” (Wolf would seem to put himself in this bucket).

        Then, they say, “How can we put a floor under society which allows us to manage demand via raising and lowering wages, instead of throwing people out of work completely?”

        I think it’s true that the job market is already managed by the central bank, albeit indirectly and imperfectly. But it’s also explicitly done. You can see it in the central bank minutes that get released. A JG just makes the government management of unemployment more direct and explicit.

        If Wolf doesn’t like a JG as a policy tool, he should argue so explicitly and lay off the fairy-tale monsters.

        Reply
        1. Summer

          “I think most of the major MMT practitioners would say, “we recognize that unemployment causes real, lasting damage and too many economists blow it off as not very problematic” (Wolf would seem to put himself in this bucket).”

          The economists that blow off unemployment never say anything about stigmatizing the unemployed.
          But they can’t really say, “We should be thankful for the unemployed, they keep money in my master’s pocket.”

          Reply
          1. Mel

            Other economists have their theory of unemployment. Thus we get NAIRU, the Philips Curve, etc. MMT has the Job Guarantee instead. And as Murphy says, the NAIRU/Philips Curve theory is appallingly inhumane.

            Reply
    2. skippy

      MMT with NAIRU / Philips curve = neo classical – neo Keynesian administration E.g. neoliberal progression from monetarist to quasi monetarist views which favor aggregate capital and its unencumbered flows.

      MMT with JG = Post Keynesian administration E.g. more targeted government spending on social uplift where the market can not or is not interested in investing, looting is always permissible, and more importantly spending where the market does not provide the primary function of a service or good.

      Reply
      1. GramSci

        Am I wrong? The MIC *is* the “neoliberal MMT Jobs Guarantee”. A job is guaranteed to anybody who is willing to kill a stranger on orders. If you have a college degree, you don’t even have to get your hands bloody. Just push a button or a piece of paper.

        Reply
        1. skippy

          I would say that and a blow off value for HS level lower socioeconomic sorts looking to up grade skills and education, side of middle class adventurers.

          Reply
        2. Pespi

          No. It might be like a neoliberal job corps, a temporary program. You can’t just enlist and stay for 20 years anymore. They’re cutting down every branch because they want to get rid of pension and healthcare costs.

          Reply
          1. skippy

            No different to the corporate sector looking to off load legacy people post productive years and legacy costs kick in …

            Reply
  2. S Weil

    Wolf’s point that the GND does not follow from MMT is correct; the GND is simply one option for deploying resources given the private demand is insufficient. That the GND should be pursued vs other wants is a more basic political question.

    Reply
  3. Steven B Kurtz

    Note that fiat money, tokens, credits…have no intrinsic value. They are simply power tools in acquiring goods and services that are provided by physical reality. As The Footprint Network calculates that human economies are utilizing more energy/material now than can be continually regenerated on the planet, throughput growth is borrowing from the future. Weak links like potable water, peak oil, peak soil, peak biodiversity…could short circuit a brittle, overly complex system. So, MMT or other print our way to prosperity is a fool’s game. There is no caloric nor nutritional value in money, no shelter, no energy…

    Reply
    1. Jon S

      Money does have an intrinsic value: it represents human labor. If I offer it in exchange for say creating a solar panel, the money transforms into labor and then into a solar panel. However, without the money, there is no solar panel. Therefore, the creation and judiciuos use of money is a wealth creation machine.

      Reply
    2. Grant

      Private capital does not invest in things that bring positive non-market benefits nearly enough, it invests too much in things that result in negative non-market impacts. The state clearly has a role in investing in things that private capital will not, and we cannot realistically price all of those things too. The state could invest in things that are even unprofitable if the non-market benefits or forgone negative non-market impacts are large enough. Again, private capital cannot act that way. It can do so more than it does now by the state forcing it to, or by creating markets in things like carbon sequestration or carbon emissions, but those things are problematic for many different reasons and we need far more than that. So, what is your solution, if not by the state investing in environmental programs that private capital will not? Yeah, we need the human economy to shrink relative to the ecosystem that we draw resources from and use as a sink for wastes. So, how does that happen without society breaking down (doubly given how inequitable we are to begin with) without some form of comprehensive (and democratic hopefully) economic planning?

      Reply
  4. Ignacio

    It would be interesting to ask Wolf if military spending follows MMT or if it is constrained by inflation.

    Reply
  5. JohnnyGL

    So Wolf doesn’t want to openly admit his contempt for democratic control? He’d rather recycle zero-hedge-style fairy-tale villains about bond vigilantes coming to hurt us.

    If bond-vigilantes were actually a thing, rather than an excuse, then they would have stopped actual major spending projects throughout history like ANY of the major wars that have occurred.

    Bond vigilantes were nowhere to be found in the 1960s and 1970s and bondholders took negative real returns for many years until Paul Volcker helped create the fairytale that they existed and should be feared. Again, it was air-cover for what was a policy decision by the state. It was a policy that created winners (bankers and lenders and bondholders) and losers (developing countries, capital intensive manufacturing and labor unions).

    The least we can ask of the media pundits is for honesty. MMT gives us honesty when it tells us this was a policy choice by the state which preferred the trade offs that came with higher interest rates.

    I still have a lot of respect for Wolf, he’s a very sharp writer/commentator. He called Obama’s failure in Feb 2009 and he was dead on. Plus, he went against his buddy Larry Summers in doing so. But, yes, like Krugman, he’s not above debasing himself for political expediency.

    Reply
  6. Watt4Bob

    Suppose holders of money fear that the central bank has also become entirely subject to the government’s whims (which has happened often enough in the past). They are then likely to dump money in favour of some other asset, causing a collapsing currency, soaring asset prices and booming demand for durables.

    Or, suppose those who have no money, fear that those with all the money have purchased their government’s attention, to follow their whims exclusively to the detriment of every one else. (which is exactly what has happened over the last few decades)

    Wouldn’t be plausible that being in posession of all the money, and control of government, those with all the money might decide to limit government spending to nothing, except those things that make themselves richer regardless of the immense needs faced by the by the folks with no money?

    Reply
  7. Sound of the Suburbs

    The idea of full employment was mainstream after WW2 and Western policymakers all implemented this policy successfully for a couple of decades before it went wrong in the 1970s.

    They had seen the problems caused by economic hardship and unemployment in the 1930s.

    WW2 had shown Government debt and deficits weren’t a problem, and full employment could be achieved.

    They knew full employment was a realistic and achievable goal.

    This paper from 1943 covers the thinking of the time.
    http://delong.typepad.com/kalecki43.pdf

    He even saw in the 1940s how full employment would lead to problems of its own, which came to pass in the 1970s.

    Kalecki gives an insight into how the US can always find money for the military and new wars, but not for entitlements.

    “The dislike of government spending, whether on public investment or consumption, is overcome by concentrating government expenditure on armaments”

    This would have been well understood at that time, it was the route by which capitalism had degenerated into fascism.

    Reply
  8. Sound of the Suburbs

    You have to look at debt as a whole as this is our money supply.

    Money and debt.
    If there is no debt, there is no money.

    The money supply ≈ public debt + private debt

    Money comes out of nothing and is just numbers typed in at a keyboard.

    https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf

    Bank loans create money and bank repayments destroy money and this is where 97% of the money supply comes from.

    You have to look at debt as a whole as this is our money supply.

    The IMF predicted Greek GDP would have recovered by 2015 with austerity.
    By 2015 Greek GDP was down 27% and still falling.

    The money supply ≈ public debt + private debt

    The “private debt” component was going down with deleveraging from a debt fuelled boom. The Troika then wrecked the Greek economy by cutting the “public debt” component and pushed the economy into debt deflation.

    They didn’t look at the whole, like the UK Government after 2008. Austerity is a very bad idea when the “private debt” component of the money supply is shrinking as it has been since 2008 in the UK.

    Management of the whole just requires an understanding of the monetary system

    The “public debt” component is much more flexible than the “private debt” component.

    Government spending injects money into the economy.
    Government taxes remove money from the economy.

    Bank loans create money, which is injected into the economy.
    Bank loan repayments destroy money, which is removed from the economy.

    The nature of the “private debt” component means the economy has to grow with the debt, so the debt can be repaid to the banks without dragging the economy down.

    You always need more money created than destroyed, the extra money covering the new good and services in the economy achieved by growth. The economy has to grow to withstand the ever increasing debt repayments.

    The money supply, private debt and GDP need to follow each other.

    How can banks grow GDP with bank credit?

    The UK:

    https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.53.09.png

    Before 1980 – banks lending into the right places that result in GDP growth (business and industry, creating new products and services in the economy)

    After 1980 – banks lending into the wrong places that don’t result in GDP growth (real estate and financial speculation)

    Reply
    1. Sound of the Suburbs

      The best example of debt deflation was the Great Depression.

      Looking at the whole of the Great Depression.

      Richard Koo’s video shows the “New Deal” also worked by increasing the money supply, which had been shrinking in the debt deflation of the Great Depression

      https://www.youtube.com/watch?v=8YTyJzmiHGk

      The money supply ≈ public debt + private debt

      The “private debt” component was going down with banks going bust and deleveraging from a debt fuelled boom causing debt deflation (a shrinking money supply).

      Richard Koo shows the US money supply and bank balance sheets (8.30 – 13 mins):

      1) 1929 before the crash – June 1929
      2) The Great depression before the New Deal – June 1933
      3) During the New Deal – June 1936

      Once it was working, they reduced Government borrowing and plunged the nation back into recession again. The enormous public spending and borrowing of WW2, eventually sorted things out.

      Another example of debt deflation is Greece (as above), it is really bad and should be avoided.

      Reply
  9. Summer

    And this from Wolf:
    “Suppose holders of money fear that the government is prepared to spend on its high priority items, regardless of how overheated the economy might become. Suppose holders of money fear that the central bank has also become entirely subject to the government’s whims (which has happened often enough in the past).”

    Oh, governments have “whims,” a Central Bank and other “holders of money” would never have a “whim.” Not the people who react to every rumor about their market like a bunch of junior high schoolers.

    Reply
    1. ChrisAtRU

      #Natch

      The “burden of proof” with regard to “sound intentions” always resides with the state, and never with our “captains of industry”.

      Good call out.

      Reply
  10. MisterMr

    “For instance, he has repeatedly endorsed the discredited “savings glut” theory of the financial crisis”

    Since I believe in the savings glut theory of the crisis, that I believe is the same thing of underconsumption seen from the other side, I’ll give my objections to the MMT (different fro those of Martin Wolf).

    1) There is a difference between circulating money and asset money, otherwhise nominal GDP would be directly proportional do government debt + banknotes issued + private debt.
    This is because banknotes + private debt + public debt is the total quantity of money, and if changes in circulating money (that is another name for nominal GDP) depended directly on changes in the quantity of money, there would be no deflation during economic crises, when the quantity of asset money doesn’t fall (bankruptcies reduce the quantity of private asset money, but bankruptcies happen when nominal GDP is contracting and therefore debt can’t be serviced, so the causation is the reverse).

    Basically circulating money corresponds to nominal income while asset money is a part of nominal wealth.

    If we use a (wrong) quantity theory of money, the price level is equal to:

    (quantity of (asset) money) * (velocity of money) / (quantity of stuff produced)

    Inflation evidently depends on a change in the velocity of money, not in a change in quantity, since during recessions what falls is the velocity of money and not the quantity of the same.

    If we DON’T use the quantity of money theory, we see that the quantity of asset money is unrelated to nominal GDP, but since a lot of people tend to think in terms of quantity of money, they divide two unrelated measures (quantity of money assets and nominal GDP) and get the spurious measure of the velocity of money, and naturally it appears that everything happens there.

    2) When the government issues or revokes money through taxes it issues asset money, not circulating money.
    The issuing of currency has no direct effect on inflation.
    What causes inflation is this: when the government deficit spends, it boosts sales for capitalists, who therefore can accumulate savings (the asset money created by the government) and are happy, and therefore go on investing and employing people.
    As employment increases, nominal wages grow, but capitalists are able to increase prices and offset partially wage growth, thus creating a wage prace spiral. This wage price spiral is what causes inflation, and not the issuing of excess money (that anyway ends up as someone’s savings).

    3) it follows that keynesian policies recycle capitalists’s savings into demand, by creating money assets. So in this sense underconsumption is just another name for “capitalists want to accumulate a lot of money”, aka a saving glut.

    4) so in the end the government issuing currency is not different from the government issuing debt at very very low interest rates, and doesn’t necessariously result in high inflation but rather in asset bubbles (as holding money assets is compared to holding other capital goods, the price of said capital goods will rise if the return on money assets is low).

    5) from another completely different point of view, the concept of “full employment” is based on marshallian economics and on the idea that there is a falling productivity of labor, and therefore a natural level of wages. This theory is very dubious and in my opinion, most likely wrong.
    So there is the question, what is the definition of “full employment” that the MMTers are using? because they say that they are etherodox economist and at least one that I follow is more or less a neoricardian, but the concept of full employment doesn’t make sense in a neoricardian framework.
    If they just use the term full employment to mean “when inflation increases above X”, which is the implicit operative definition generally used, then yes, it’s a tautology to say that stimulus will not cause inflation to rise until it causes inflation to rise, but we have no way to know wether the point when inflation rises is acceptable or still has an excessively high level of unemployment.

    _____________ Conclusion ______________
    Changing the angle from MMT theory to MMT policy, the problem is that underconsumption, that is the same of savings glut, is mostly caused by income inequality, so an increase in income inequality will necessitate more and more stimulus of one sort or another to keep the economy floating, and will also cause the value of assets to increase relative to nominal GDP, thus incresing the likelyhood of financial collapses.
    Thus some policies that reduce income inequality, like high marginal tax rates, are very important. However the MMT thinking, that doesn’t distinguish between asset stock and income flow, makes it difficult to see the problem, so that Trump’s tax cuts, for example, look like a good idea and are undistinguishable from government spending on social programs.
    This is a very big problem, IMHO.

    Reply
    1. Kilgore Trout

      The Trump tax cuts are “indistinguishable from government spending on social programs”? To the contrary, the Trump cuts promoted a new round of stock buybacks, rather than real investment–contrary to what the public was told when the Trump tax cuts were being sold as investment capital. And certainly contrary to any intent spending on GND projects has.

      Reply
    2. Yves Smith Post author

      *Sigh*

      First, as we discussed in ECONNED, global savings were as high a % of global GDP in the early 1990s, yet the world did not fall a cliff.

      Second, one of many pieces that debunk the savings glut theory, and very decisively, is this paper by the BIS, Global imbalances and the financial crisis: Link or no link? What Bernanke and his followers have argued, by contrast are handwaves. The paper is a bit geeky, so we translated it out of econospeak here: https://www.nakedcapitalism.com/2011/09/the-very-important-and-of-course-blacklisted-bis-paper-about-the-crisis.html Borio himself commended our Andrew Dittmer on his recap when we ran into Borio at a conference.

      Reply
      1. MisterMr

        Thanks for the answer, but just skimming the paper I see that I disagree with many of Borio’s assumptions, so I don’t think this paper rteally anwers my criticism.

        We have this pearl (page 2):
        “By contrast, the natural interest rate is an unobservable variable commonly assumed to reflect only real factors, including the balance between ex ante saving and ex ante investment, and to deliver equilibrium in the goods market.”

        So according to Borio there is a natural rate, that automatically makes economic crises impossible. This is just BS, Borio is just assuming that there is something like a natural rate that doesn’t cause crises and mistakes his own assumptions for reality.

        Then Borio assumes that the saving glut only happens in the east, but in reality the “saving glut” is caused by high economic inequality (since people with high income save more than proportionally to their income).

        This forces the USA government to keep deficits up and interest rates down, which causes both net imports and bubbles.
        This is what Borio calls “excess elasticity”.

        But the problem is that “excess elasticity” is forced upon the USA government because otherwise a crisis of underconsumption would develop.

        Incidentially, I’m not an economist, but this is my understanding of the crisis of 2008 based on Steve Keen theories. As Keen was frequently featured on this blog (this is how I encountered keen’s theories) I’m a bit surprised that you see this argument about a build-up of excess leverage as weird.

        Reply
    3. animalogic

      “the problem is that underconsumption, that is the same of savings glut, is mostly caused by income inequality, so an increase in income inequality will necessitate more and more stimulus of one sort or another to keep the economy floating, and will also cause the value of assets to increase relative to nominal GDP….”
      You may be correct IF we accept your underlying assumption — that government spending will cause further income inequality. That could be the case IF the stimulus passes through the private sector. However, in my opinion at least, the public sector is ultimately cheaper & equally efficient at spending government funds. It also means that workers can receive middle class wages & benefits, while limiting the ability of the private sector exploiting the “public purse”.
      Naturally, this implies honest, efficient government. Perhaps we could hope a government willing to commit to MMT inspired policies would also commit to the public welfare….

      Reply
  11. Susan the other`

    Central Bank independence here in the US is murky. Congress has full control over how the Fed spends money. It can give the Fed any mandate it wants. Our dear Congress has stood firmly by the dual mandate of stable prices and full employment. This is justified because, like Martin Wolf, Congress is most interested in supporting and maintaining private enterprise by stabilizing demand, etc. It is an ongoing negotiation – a never ending debate. There still remain enough corrupt pols in control of “fiscal decisions” to prevent direct spending into the economy. So what they are doing is actively delegating fiscal decisions to the private economy – the Market. Which, as we all know, isn’t working anymore. Or any less. It is a new era. Wolf is just another pol. He’s trying to leave the door ajar for any possible opportunism; some future profiteering. One of the old tried-and-true debate tactics is to obfuscate the meaning of inflation. Oh god, we must maintain the value of the dollar or else we will be foreclosed on by bond vigilantes. So the dollar remains overvalued and austerity and manufactured scarcity is the backstop to prevent proper fiscal governance. Just to maintain the opportunity to exploit low hanging fruit. This mindset in a time of environmental crisis is unconscionable. Even Larry Kudlow has backed off of this nonsense. Mr. “King Dollar” himself. But face-saving is now the name of the game. They will start to make the necessary good fiscal decisions but they won’t admit to their former misconceptions. Too embarrassing.

    Reply
    1. templar555510

      How right you are. Wolf is as sharp as a blunt tack. He has a comfortable perch at the FT and he’s not going to put that at risk for any theory, modern or otherwise, about money , or anything else describable as ‘ economic’ . But ( of course ) by tipping his hat in the direction of MMT he assures himself , hopefully, of not appearing irrelevant when the realities of money creation, out of thin air by both the government and the banks, is old hat and the threat of a wheelbarrow full of worthless banknotes being pushed along Wall Street, or Threadneedle Street to the consternation of all and sundry has passed into folklore.

      Reply
    2. K Lee

      “No one in the professional world wants to be exposed as a charlatan. So the resistance to MMT understandings also reflects the fact that there are a lot of careers at stake here in fact. That reality, alone, will generate massive opposition using any tactics that are available.

      There is nothing intellectual in this debate now.

      MMT has finally been perceived as a threat to the cosy and fake macroeconomics that the mainstream of my profession has been hiding behind and profiting from – materially and by repute – for years.

      That threat has become obvious as more and more people seek to understand our work and embrace it as viable knowledge.”

      http://bilbo.economicoutlook.net/blog/?p=42327

      Reply
  12. Steven

    I am going to take issue with what appears to be a couple of basic tenets of MMT:
    1. Money is a creature of the state
    2. money is given its value by taxation

    Money is a creature of privately owned banks and the financial markets that provide liquidity for the debt (that can’t be repaid and won’t be) of Western governments. At best, those banks, financiers and governments are partners in crime.

    So long as the world continues to maintain the pretense of market capitalism, money is given its value by what it can buy in the marketplace – not how much of it governments remove from the pockets of potential consumers.

    All that said I have no trouble with the basic premise of MMT which seems to be something along the lines of: money isn’t wealth. It is nothing more than an obstacle that stands between governments doing what they should to insure the welfare and survival of civil society. If the West’s politicians don’t have the stomach to take away the money they have already created for their monetarily most affluent constituents – people like Trump for whom more money serves no higher purpose than to “keep score” – then by all means ‘print’ more of it.

    Reply
    1. Adam1

      Let me help clarify your issues…

      Government money is created by the government. This does not preclude others, such as banks, from creating money.

      Taxes create demand (value) for government money, so long as the government can enforce its taxes. You must acquire government money in order to pay the government’s taxes as they are only payable in their money.

      Reply
      1. todde

        when banks create money, the loans create demand(value) for ‘bank’ money.

        but it still really isn’t bank money, or at least not anymore.

        What ‘money’ does your bank ‘create’? Is it it’s own money, or ‘state’ money?

        Reply
        1. Mel

          There’s an interesting way to look at this, with a zesty foreign-exchange flavor.
          Credit that a private bank extends is the bank’s own fiat. The legal environment around banking requires that the bank peg it’s fiat, dollar for dollar (I’ll just say dollars for my examples) with the central bank currency. So when you spend your borrowed money outside the lending bank, the bank where your check is deposited will demand that your bank honor the peg, and your bank will do that by paying the other bank with central bank dollars out of its reserve account.
          Part of a normal deal between a bank and a customer involves the bank agreeing to spend its (reserve) dollars on the customer’s behalf.
          The central bank’s sovereignty is evident because it alone can create dollars in other parties reserve accounts.

          Reply
        2. ewmayer

          “What ‘money’ does your bank ‘create’? Is it it’s own money, or ‘state’ money?” — It is privately created credit money in the state-declared unit of account. It spends just like state-created fiat, but rather than being destroyed via taxation, it is destroyed via the debt being repaid. “Ah, but who creates the money attached in the form of interest” is where things get truly interesting and exponentials enter the picture.

          Reply
      2. Steven

        Let me help clarify reality. By “Government money” if you mean ‘legal tender’ I’ll buy your circular definition. But as far as I know banks can not create ‘legal tender’. That does not, however, deter governments from accepting the money banks do create in payment for taxes. (See Mel’s comment below. All the government appears to require is that a bank’s accounts of money created by the PRIVATELY OWNED FED eventually, kinda sorta balance.) It is money’s status as ‘legal tender’, i.e. the coercive power of the state to compel its acceptance for “all debts public and private” that creates the demand for money. If you don’t believe me just ask the citizens of any country that refuses to accept more ‘near money’ of Washington / Western government debt.

        Reply
    2. ChrisAtRU

      “Money is a creature of privately owned banks and the financial markets that provide liquidity for the debt (that can’t be repaid and won’t be) of Western governments. At best, those banks, financiers and governments are partners in crime.”

      … Banks create IOU’s denominated in the unit account of the state. If what you are saying were true, banks would have merely “bailed themselves out” during the GFC.

      See Randy Wray’s Modern Money Primer at NEP – Installments 14 & 15 – with respect to the “pyramid of liabilities”.

      “money is given its value by what it can buy in the marketplace – not how much of it governments remove from the pockets of potential consumers.”

      As always, most people sort the functions of money in near reverse order of importance:
      – Medium-Of-Exchange/Store-of-Value vying for #1 and #2
      – Unit-of-Account at #3 with an undeserved bronze medal
      Unit of Account comes 1st in reality. People accept dollars because the government demands payment in dollars. It’s not about how much tax, it’s about the imposition of an obligation – and a universal one at that. It’s not just individuals, but also businesses. Warren Mosler goes so far as to say that the imposition of a state money causes unemployment. He’s correct.

      Reply
      1. Steven

        “If what you are saying were true, banks would have merely “bailed themselves out” during the GFC.”

        As far as I can see, that’s pretty much what happened. Wasn’t it Pelosi who asked something like “Where did they get the money?” when told about the trillions of dollars created for that purpose?

        “As always, most people sort the functions of money in near reverse order of importance:
        – Medium-Of-Exchange/Store-of-Value vying for #1 and #2
        – Unit-of-Account at #3 with an undeserved bronze medal
        Unit of Account comes 1st in reality.”

        I either don’t get your point or hold it up as an example of making facts(?) fit your theory. You will have to forgive “most people” if they value money more for what it will buy than whether it is a dollar, euro or yen.

        Reply
        1. Jen

          “As far as I can see, that’s pretty much what happened.”

          No, that’s not what happened. Private banks did not bail themselves out. Bernanke injected the reserves on their Fed account.

          Reply
            1. Jen

              Hahaha, right, the Jekyll Island creature whose charter was engineered by bankers such as JP Morgan but nonetheless needs legitimation through congressional mandate and whose chairman and board of governors are appointed/nominated by the POTUS and needs confirmation by the US Senate.

              What other privately owned corporations have to go through such interference by Federal officials?

              And why does its chair has to report to congress twice a year on its monetary policy objectives?

              Reply
                1. Jen

                  “Doesn’t seem to me all those ‘checks’ on the power of the FED have done us much good.”

                  Well, I for one is in favor of more checks, more oversight, more supervision.

                  Heck, I’d go all the way to favor giving back to congress the keystroke power as exercised by Bernanke.

                  Also, nationalize all private banks. Currently they serve no greater purpose, per Michael Hudson, than being parasites in the economy.

                  Reply
            2. ChrisAtRU

              The FED IS a privately owned bank.

              Oh dear, here we go again … you didn’t read the last set of links I provided, so for the benefit of others in the NC Commentariat:

              Who Owns The Federal Reserve

              Excerpts (added emphasis mine):

              [1] “The Federal Reserve derives its authority from the Congress, which created the System in 1913 with the enactment of the Federal Reserve Act. This central banking “system” has three important features: (1) a central governing board–the Federal Reserve Board of Governors; (2) a decentralized operating structure of 12 Federal Reserve Banks; and (3) a blend of public and private characteristics.”

              [2] “The Board reports to and is directly accountable to the Congress but, unlike many other public agencies, it is not funded by congressional appropriations. In addition, though the Congress sets the goals for monetary policy, decisions of the Board–and the Fed’s monetary policy-setting body, the Federal Open Market Committee–about how to reach those goals do not require approval by the President or anyone else in the executive or legislative branches of government.”

              [3]”Some observers mistakenly consider the Federal Reserve to be a private entity because the Reserve Banks are organized similarly to private corporations.” #Ooopsie

              Reply
        2. ChrisAtRU

          Wasn’t it Pelosi who asked something like “Where did they get the money?” when told about the trillions of dollars created for that purpose?

          Yes, created by whom? And at whose direction, and with whose permission?

          I either don’t get your point or hold it up as an example of making facts(?) fit your theory. You will have to forgive “most people” if they value money more for what it will buy than whether it is a dollar, euro or yen.

          Hypothetical – if the US Govt decided today that it was no longer going to accept USD currency notes, or IOU’s (checks, bank drafts etc) denominated in USD because the govt came to find out that there was a massive counterfeiting scheme that had been going on for decades (RussiaRussiaRussia!); and that further, the govt was going to start a new currency called the “Steven”, I want you to name ONE person or business entity that you think would continue to accept US Dollars … Steven.

          As todde correctly pointed out above, this is why bitCoin and any of the other crypto-currencies will remain on the fringes. No one is obligated to use them, and thus the highest power – that of the state currency monopoly – continues to dominate the three functions.

          Reply
    3. sj

      private banks create money because the state lets them – it doesn’t need them – this is the whole argument. Only the state can demand taxes be paid, not banks.
      What money can buy depends upon the economy and the resources available – this has nothing to do with the value of money.

      Reply
      1. Code Name D

        It helps to understand what the “state” is as well. The “state” is basicly the governing athority and the only insitution which reserves itself the “right” to use force (IE police or military.)

        But that which is the “state” can get fuzzy. As corperations and banks gain more political power, they esentualy become part of the state – by definition.

        Reply
  13. Effem

    You’re counting on the government to pull back once we’ve used all slack in the system?! Good luck on that one.

    Reply
    1. sj

      you’re counting on financial markets creating well paid jobs to ensure that the majority of the population can live well? Good luck on that one.

      Reply
    2. John k

      In the thirty year period from 1945, gov was willing to spend whenever unemployment rose… and unemployment included those that had given up until Clinton. Recessions were shallow and infrequent. Modest asset bubbles.
      The only time inflation became significant was when gov shipped engineers to Vietnam for cannon fodder just as they demanded engineers for the space program. Plus the 70’s oil embargo, which caused a short but sharp shortage of a critical commodity with a resulting 4x price increase.
      So elected politicians did a much better job of maintaining the fed mandate of full employment than the present era, where banks have paid off.. er, convinced, the pols to do nothing.

      Reply
      1. Andy Raushner

        In fairness, by 1967, the US had 20 years of double the population GDP growth and that will create inflation pressure just as predicted. Since then, the GDP pressure to potential(which I say is 1.7% right now in the good ole 2019) begin to drop in the 70’s as population trend GDP grew and growth slowed.

        Massive growth like that was there in the post-war era was really the consumer market coming on line. These innovation waves with the industrial revolution being the subsetter of that, have a tendency to create growth easily from debt. Now it takes a bunch of debt to just “grow” and as fast, nope.

        Reply
  14. ChrisAtRU

    Does everyone who likes to point out that the monetary power of the state “can be abused” tacitly accept the current abuse by the collective capitalist plutocracy/kleptocracy? Are they all then of the wishy-washy “we can fix capitalism” ilk?

    #AskingForAFriend

    Reply
  15. TiPs

    The 1970s inflation was not demand-side, it was cost-push with the two oil embargoes–a 400% price spike in 1973 and a 100% increase in 1979. A different era indeed…

    Reply
    1. Andy Raushner

      Inflation was becoming a problem by the late 60’s due to double the population growth growth. Yeah, the oil shocks blew inflation up, but it was already 5% by the late 60’s cycle blowoff. That is very high and financially draining. Vietnam was just the engine of growth, even when it turned off, inflation was still elevated.

      MMT does better in steady state, abolished usury socialist view of the world, where economic growth is irrelevant. Capitalism is a ponzi-scheme of debt expansion and always has been. If you were told by a Libertarian that is not true, they are lying. Capitalism was struggling by the mid-19th century. Malnutrition, low birth rates, unsteady “nations”……….it wasn’t working. Then came the blowoff to the industrial revolution between 1879-1923, debt to growth was easy and living conditions “improved”. But we know now, they had a cost, a deadly cost. The post-war era was the suburban driven consumer market…………..since then……..nothing that can compare outside the tech wave. Indeed, growth to debt has plummeted.

      Reply
    1. Andy Raushner

      MMT, it was not. MMT isn’t about cash production, its about government management of investment, which can be quite deflationary, especially asset deflationary. Its a view “crowding out” isn’t a bad thing at all. . But of course a globalist Austrian wouldn’t have anything else to say. The plutocrats are Gods and we must follow them.

      Reply
    2. Foy

      Germany had to pay WWI reparations that were set in gold marks. The level of reparations were therefore equivalent to a fixed amount of gold which then drove the inflation. In other words they had to make payments in a foreign currency. It was the equivalent of a government having borrowings in a foreign currency, just like Greece. So it is not an example of MMT, which applies to countries/governments that issue their own currency and borrow in their own currency.

      Reply
    3. John k

      Rubbish.
      MMt works in country, economy goes quickly when printing to buy imports.
      Germany was forced to pay the French war reparations at gunpoint, so the exchanged the only thing they had for foreign gold, paper currency. They desperately needed the Marshall plan, had to wait 30 years and another major war for that.
      MMT works in directing local resources such as labor, not good at commanding foreign commodities.
      So perfect now to employ locals to fix infra.

      Reply
  16. eg

    The fig leaf of “central bank independence” isn’t fooling anybody who has actually been paying attention. Central banks are always and everywhere creatures of the state.

    Reply
    1. Andy Raushner

      For correction, central banks are the plutocrats control of the state, creatures they are not. Even without a publicly legal “central bank”, you will have central banks. Banking is the heart of capitalism. Without it, it woudln’t exist.

      Reply
    2. K Lee

      So are corporations.

      “Private forms of corporate ownership are “simply a legal fiction. The economic requirements of the modern corporation no longer justify its completely private control, for “when we see property as the creature of the state, the private sphere no longer looks so private. In this regard, property reassumed the form it took at the dawn of the capitalist era when “the concept of property apart from government was meaningless.”

      https://www.counterpunch.org/2019/01/11/neoliberalism-free-market-fundamentalism-or-corporate-power/

      Reply
  17. RBHoughton

    Glad to see Yves and Richard Murphy correcting an authority figure who is promoting a view he must know to be wrong. Correction of authority is not something that happens often and is yet another prime reason why NC has the huge dedicated readership it has. Congratulations to the team at NC.

    Reply
  18. JBird4049

    Wolf is very clearly of the school that created economics to impose constraint on that judgement so that full employment, rising real wages and a redistribution from capital to labour may not happen.

    ———-

    Instead we live in an era of perpetual underuse of labour, and of politics that, if given the choice to do something would rather not do it. We have stagnation, inequality and real poverty precisely because of the maintenance of the economics that Wolf now wants to perpetuate by fear alone.

    I am going to have to reread both the OP as well as the comments again to fully understand it all; that said, these statement are very obvious.

    Even if I was some screwy Social Darwinist, I could not ascribe success or failure to some innate qualities because the economic system is a crooked casino masquerading as an honest economic system; the American Empire and the international Neoliberal regime reminds me of the ancient Assyrian Empire with its yearly military campaigns that extracted protection money from its neighbors. “Nice country you have there. It’d be a shame if someone razed it to the ground.”

    I have also seen too many of our “leaders” falling upwards to have any belief in this supposed meritocracy as well.

    Reply
  19. Steven Greenberg

    I do not understand how we get to the conclusion

    The result is we need to sweep away the central bank and the independence it has that is this impediment to progress.

    I don’t see the central banks as an impediment to progress. I see that central banks only have monetary tools. Those tools are not enough to do the job. The government spending for things like the GND are using fiscal policy tools. The impediment to progress is the part of government that refuses to make use of its fiscal tools.

    Back in the 1930s and 1940s, John Maynard Keynes explained exactly why monetary tools are not enough to stimulate an economy out of a deep recession or depression. Just because the word money or monetary is in MMT is no reason to forget that monetary policy is only half of the set of economic tools that must be applied to run an economy.

    Reply
    1. K Lee

      Exactly. For over 40 years, the conservative revolution’s goal has been to remove government investment in the public sector and create a credit-dependent nation controlled by private banks, who hate sharing power to create money with the nation-state. Why? Deficits hurt banking profits.

      The Legacy of Friedrich Von Hayek:
      Fascism Didn’t Die With Hitler

      “Remove sovereign nation-states from a role in economic development and all you have is the oligarchy’s cartels.”

      https://archive.schillerinstitute.com/educ/hist/1995/von_hayek.html?fbclid=IwAR0SUSiAaridi8hMYl3oVL8fIql5rO_IavRB6

      Reply
  20. nbtt

    unemployment is basically due to cornering of resources by well financed entities.

    the bank will essentially only finance real estate – which means all purchasing power concentrates in this sector.

    Reply
  21. mpr

    I don’t know why MMT advocates have such a tendency to obfuscate their positions in response to people who are trying to engage with the theory. Here Murphy splits hairs on Wolf’s account of MMT’s treatment of inflation (I’m pretty sure I’ve seen MMT’ers write that inflation is a limiting factor), and response to Wolf’s assertion that MMT underestimates the effects of inflationary expectations, he rebuts a strawman. Wolf isn’t saying the central bank can’t hold down interest rates – i.e prevent a collapse of the bond market. He’s saying there could be inflation, which can’t be cured by exchanging bonds for currency.

    Reply
    1. Yves Smith Post author

      Wolf is incorrect to suggest in MMT terms that exchanging bonds for currency stops inflation, so I don’t see what is a straw man here. Murphy may not have unpacked his objection sufficiently.

      Exchanging bonds for currency is an asset swap. MMT sees raising taxes, or better yet, having countercyclical programs so that net spending falls off when the economy gets too hot, as the way to stem inflation

      Reply
      1. mpr

        Where does Wolf suggest that ? I was referring to this

        Suppose holders of money fear that the central bank has also become entirely subject to the government’s whims (which has happened often enough in the past). They are then likely to dump money in favour of some other asset, causing a collapsing currency, soaring asset prices and booming demand for durables. This may not lead to outright hyperinflation. But it might lead to a burst of high inflation, which becomes entrenched.

        Murphy takes this to mean the usual objection about bond vigilantes, but that isn’t what Wolf is saying. He is saying that an MMT policy regime might lead to higher inflationary expectations, and hence entrenched inflation. There is certainly nothing in MMT which precludes this, if policy is carried out badly. A better response would have been to explain why it shouldn’t occur if the policy is carried out well.

        Reply
        1. Yves Smith Post author

          Well, the collapsing currency goes with investors not being willing to hold the financial assets of the country, even though Wolf really confused the issue by then saying “soaring asset prices” which under inflation would be real estate, gold, minerals, etc. In the US during high inflation, and countries with even worse inflation (lots of Latin American countries at various points in time) the prices of non-inflation indexed/non-variable interest rate assets (bonds and stocks) did fall.

          So Wolf isn’t making the “bonds will collapse and the government won’t be able to fund” argument. But collapsing currencies always go with trashed financial asset prices. Murphy did a bad job in the shorthand he used for Wolf’s argument, but I don’t think he is as wide of the mark as you do.

          Reply

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