Richard Murphy: For MMT (Long and Wonkish)

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Yves here. Even though Richard Murphy is debunking some UK-based complaints (they don’t rise to the level of being critiques) about MMT, similar arguments come up in the US, so I thought his piece would be instructive on this side of the pond too.

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

Modern monetary theory (MMT) is certainly getting it in the neck right now. Two articles I noticed this week were direct attacks in it. And bizarrely, they come from the left and right.

That said, they have things in common. First, they agree that MMT is right: neither can deny that what MMT says is an accurate description of how the economy works. Second, they do not like the implications of that truth. Third, to achieve their goal they do, of course, misrepresent what MMT is about.

The first of the articles is by Ian Stewart, Deloitte’s Chief Economist in the UK. It is described as a personal view. The second is by James Meadway who was, for a while, economics adviser to John McDonnell but who has now left that job to write a book in Corbynomics.

Stewart provides a summary of his view of MMT in his piece and concludes:

[It’s] worth noting that both MMT and QE involve the government creating money electronically – or, more graphically though incorrectly, printing it. But with QE a central bank creates money to buy assets, such as government bonds. This injection of new money into the system drives down interest rates and bolsters asset prices. Under MMT, by contrast, the government spends the money directly on public services.

In that one paragraph he does two things. He agrees QE works. Money can be created by governments at will. That means a government issuing debt in its own currency cannot go bankrupt. And since government debt is simply a by-product of government spending not funded by taxation, government created money can fund public services. Everything he seeks to portray as fantastic (in the sense of ridiculous) about MMT is then, in his own analysis, true.

James Meadway, writing for Tribune under the title ‘Against MMT’ agrees with Stewart, albeit unwittingly. He says:

There is a sliver of truth here [i.e. in MMT]. As a technical detail, modern governments do not have to collect taxes before they can spend: they can also borrow the money, or create and spend that money directly. On a day-to-day basis, these three things can (and often do) all happen at once.

So, rather as Martin Wolf did about a week ago, here we have opponents of MMT agreeing it is a fully functioning description of how the world really works. For that, I offer them my thanks. But, like Wolf, they then suggest they do not like MMT because of what they claim it means for political policy, and not because it is not true. This moves the whole debate into political arenas.

For Stewart the objections are twofold. The first is that:

[There’s] one crucial difference [between quantitative easing and MMT][, and from it a second follows. With QE, as practised in the US and Europe, central banks have promised to reverse money creation. They can do so because, unlike under MMT, the money that has been created has been swapped for assets which can be sold. The idea is that central banks will, in time, sell these assets, withdrawing money from the system and dampening asset prices and activity. This has so far convinced investors that the new money created will eventually be absorbed back into the system. The message from central banks is that QE does not represent a permanent expansion in the supply of dollars, euros and pounds. By contrast, the money created under MMT will be spent on public services and not in purchasing assets. And, since there are no assets to sell in future, the money creation is permanent.

It’s as if Stewart is saying QE works because we still believe in fairies, but MMT does not work because we don’t. Because let’s be clear that around the world more than $6 trillion has now been injected into economies by QE, and in the UK it’s £435 billion, and to pretend for a moment that most, or even very much at all, of this is going to be reversed is to live in fantasy land. It’s true, a little has been in the US. But that was only possible to reverse the dire impact of Trump’s tax cut that would otherwise have flooded money into markets, which has been mopped up by reselling back into the markets bonds previously owned by the QE programme. And that process is likely to be coming to an end. In the rest of the world nothing like that has happened, and nor is it going to do so. QE is not being reversed, and never will be so Stewart’s claim is literally fantastical and has to be dismissed as such.

But he has another:

A related concern is that government, with its infinite spending power, could hoover up people and resources and crowd out the private sector. This would reduce the tax take and could tempt the government to print more money to fill the gap.

More fundamentally, the state could end up with a far greater role in allocating capital in the economy. The market has flaws and limitations. But it tends to be better at allocating capital and raising efficiency than the government. A worry, therefore, is that MMT could enfeeble the private sector.

I think this is what he really thinks: this is where the objection lies. And it is just wrong. First, we live in a world where most larger businesses have what is in effect a zero cost of capital right now: they can borrow for near enough nothing. If, given that, they do not drive the economy to full employment at a living wage by forcing up the price of labour – and they have spectacularly failed to do so – then there is no risk whatsoever that they will be crowded out of the economy by the state. The fact is that the state has to pick up the slack they have created. And as MMT makes clear, what a government must do must be chosen to make sure that activities by the state can be ‘turned off’ if full employment is reached – which is also the moment when the private sector may be crowded out. In other words,  not only has MMT got no plans to sweep the private sector aside, it has a plan in place to make sure it does not.

But in the meantime it will, indeed, allocate capital. Because the evidence is – read The Entrepreneurial State by Mariana Mazzucato – that it is really good at doing so. And at last as good as the banks who crashed the economy in 2008. The state will not enfeeble the private sector. That’s already feeble. What it will do is provide it with the contracts and work it needs to survive because it can’t think of what to do for itself. Stewart does complain too much, and with deeply feeble arguments, including this classic:

For centuries governments have taxed, borrowed or created money to pay for public spending. All carry risks. Heavy taxes dampen growth and upset voters. Excessive public borrowing triggers financial crises. Printing money to pay for public spending can look tempting. But, as rulers from Henry VIII to Venezuela’s Nicolás Maduro have discovered, creating money out of thin air and spending it tends to destroy confidence and send inflation rocketing.

There’s just one problem: Henry VIII was not using a fiat currency and Venezuela was running a currency perpetually undermined by the dollar: it was nowhere near the scenario where MMT might work in that case. But telling tall stories is where the opponents of MMT now are.

Which brings me to James Meadway. James’s argument is more considered, but is again about the politics he considers associated with MMT rather than MMT itself. If I might let me select just some of the arguments he uses and address them. The first is his argument with chartalism which is implicit in MMT. He says:

Chartalism holds that money receives its value fundamentally as a result of its use to pay taxes — that, in the words of leading chartalist Georg Knapp, ‘money is a creature of law’. This is dubious as a historical claim, since money has existed in many different forms throughout history, and only some of those forms have arrived with the stamp of the state — and dubious as a description of reality today, since most money is created by private banks when people take out loans, whose relationship to the state is (at most) indirect.

This, I am afraid is just wrong. Let’s ignore history: the money to which James refers was not fiat currency, and that is what we have now. The comparison then is, to be candid, bogus. But James is also wrong about most money now being made by banks: this is the Positive Money argument that just 3% of money is government made – and is notes and coin – and the rest is bank made. This, again, is superficial at best. Firstly this assumes anyone can create a bank, and they cannot: all banking is under government licence. And second this assumes that central banks have no influence over what banks might do, which they have, albeit they exercised it very poorly for the first decade or so of central bank independence. The reality is that private banks create money – that is government backed money given its value by the promise that the government gives to accept it in payment of taxes – but do so solely because they are given a government licence to undertake this activity and take credit risk when doing so. In principle the Bank of England could take on that role, although I would not want it to do so. But to claim that the central bank has no role in money creation when it is very obvious that it does – as QE evidences – is just wrong.

I then move to James’ claim that:

[I]t is worth keeping in mind … MMT’s greatest theoretical failing — to provide any account of power and the state, or even (like neoclassical economics) to provide a reason why it doesn’t need one.

This is interesting at a number of levels. Firstly, because neoliberalism quite clearly does not say we do not need a state: it is core to that idea that government has the essential task of preserving property rights. Second, you can argue what Keynesianism in its various guises has to say on this issue. I suspect there are about as many answers as there are Keynesians. And third, I think the claim is wrong. What MMT is effectively saying, as Weber might, is that the values projected onto the state (as Keynesians would do) are in effect what the state is: it is the tool for realising values and has value so long as it continues to secure support from the population at large for the values it believes appropriate to adopt based upon its understanding of the population it serves. The power of the state is, then, reflected in its ability to read the collective will and to seek participation in it, indicated by the willingness of the population to accept the obligation to pay tax. And since tax is at the core of MMT, despite all claims to the contrary, I believe James’ claim is wrong, again.

So let’s deal with another objection. It is this:

Unfortunately, what holds as a technical description of how governments pay for their daily operations does not apply over the longer term. The grave danger from issuing money, in particular, is that it will lead to a general rise in prices, known as inflation, something readily acknowledged by academic MMT supporters. They often argue that governments should use taxes to deal with this problem: taxes take money out of wider circulation, and by reducing the amount of money chasing goods and services, you reduce the pressure on prices.

In this scenario, far from the transformative claims made by its online fans, we have ended up in a place remarkably similar to the hated mainstream of economics. Mainstream economics also acknowledges that inflation is an issue, but instead of saying taxes should be used to control it, its adherents, known as neoclassical economists, propose interest rates as a remedy. When these go up, it becomes more expensive to borrow, people borrow less, and this in turn reduces the amount of money in circulation — so the theory goes. But as two left-wing economists sympathetic to MMT, Arjun Jayadev, and J. W. Mason, have recently argued, this means that the only meaningful difference in policy terms between MMT and the mainstream on the central issue of managing inflation is whether the government should use taxes or interest rates.

Except that is absurd. That assumes that the main object of all economics is to control inflation to maintain the value of money so that the value of the claims of the world’s assets owners, to whom debt is owed, are upheld consistently. I sincerely hope left-wing economists do not think that. I hope James does not. But that is what he implies.

Let’s be clear what the difference really is. Neoclassical economics does think that controlling inflation is what economics is about. This is why it promotes independent central banks. This is why it tolerates growing wealth inequality. This is why it has no employment target. And stagnant real wage growth is fine as far as it is concerned.

But to pretend that MMT shares these views is just wrong. I’d hope I could say that for all on the left, who I rather hope should think inflation is acceptable, to some degree, not least to erode the claims of the owners of debt precisely so that inequality is reduced, but also because the issue is secondary to the creation of long term, meaningful, productive well-paid employment which is the goal of MMT, hence the job guarantee. And it should (subject to other resource constraints which redefine these relationships but do not remove them) also be the goal of MMT when mixed with the Green New Deal. That does not mean MMT is indifferent to inflation. And rather usefully – when monetary policy is dead in the water because of zero-bound interest rates that are likely to last for the foreseeable future, where that is a very long time – it has an inflation control policy that can work when nothing else can or will. But let’s not say that makes it the same as neoclassical economics. It is not. James is wrong to suggest that it is.

And it’s absurd to suggest that MMT cannot work in an economy because governments wanting re-election cannot increase tax rates, as James also claims. If that’s a measure of the left’s commitment to a) democracy and b) honesty with the electorate and c) conviction based economic management, heaven help us, most especially when we have the bigger issue of climate change to also deal with, which is much harder to address.

And as for the claim that MMT only works for the US and the dollar, again, that’s just James and the left saying that the bond vigilantes really do rule our economy and we’ll never break them. What faith James has in the power of markets to break democracy! But he’s wrong: that power exists for a few days at a time, but not beyond. That’s largely because MMT removes bond vigilantes’ power by simply saying that if they try to disrupt markets the central bank will buy all the bonds they wish to sell using QE funds created for the purpose – which on this occasion may be quite quickly reversed, I admit. That neuters the threat from the bond vigilantes then. And then that means that real exchange rates will only move on the basis of external shocks (like Brexit, or oil price variation, and MMT cannot control them come what may) or on the basis of real variations in productivity – which MMT seeks to address like no other theory does. Again, James is wrong.

So what is James Meadway really objecting to? What is all this really about? I’d suggest it’s this:

Labour has adopted a strict set of rules for how a future government will manage its finances. The ‘Fiscal Credibility Rule’ says, first, that Labour will commit to removing the deficit on day-to-day government spending at the end of a five-year period.

I hate to say it, but the objection is that Labour thinks it needs balanced budgets. It does not. We know the result is austerity. But Labour can’t countenance anything else. As James says:

Leading MMT advocates like Richard Murphy ask why bother with a rule at all? There are three main reasons. First, a commitment to the Fiscal Credibility Rule allows Labour to put together a coalition of support for its programme from across the economics profession. The party can’t expect every economist to agree with every dot and comma, but the impact of having well-respected experts onside for at least some of that programme is significant. If we want to not only form a government, but make a difference in government, these alliances are essential.

In other words, having neoliberals onside is important. And is achieved by being neoliberal.

The second argument is no better:

The second reason is that clarity and planning help cut through some of the more obvious challenges to Labour’s programme — from journalists demanding to know Labour’s plans for the debt and the deficit, and then, later on, as a guide for civil servants expected to implement its policies.

In other words, Labour cannot be bothered to do the hard work of re-education to deliver what the country needs. Which is deeply depressing. But not as desperate as this, from his conclusion:

The problem with MMT for a genuinely transformational government is not that it is too radical. Quite the opposite: it is nowhere near radical enough. It substitutes a belief in the unlimited capacity of a sovereign government to spend money for the hard reality of the political fight needed to rebuild and transform our society. It is the expression of a deeply conservative faith in the benign nature of our economic institutions. In an increasingly class-divided society, with institutions from the Treasury to the Bank of England to the City that have failed systematically to deal with crisis after crisis, we cannot simply flush away our social problems on a tide of government-printed money.

I am really struggling here. What MMT says is that there need not be a fight for the resources to deliver transformation: they exist. The need is not to have the struggle, but to deliver the outcome. That’s what MMT permits. The demand then  is not to campaign, but to do. But apparently that’s too easy for James, for whom the struggle is everything.

And yes, I do have a belief in the benign nature of government. Shouldn’t the left do so? I accept it can be corrupted but to think the government can be a force for good seems to me to be a left-wing basic. James denies it. And so I am lost as to what he is all about. And most certainly as to what his unspecified theory of government might be.

The simple fact is MMT delivers a government the chance to be free of the bogus constraints neoclassical thinking places on it. James would rather continue the ‘struggle’ to be free within the neoclassical model he believes in rather than deliver the reform we need. He makes the wrong choice whenever he’s given the chance to do so.  And I confess, why he wants to do so baffles me.

We need people who can think for a new paradigm. Ian Stewart and James Meadway are not it.

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  1. bold'un

    One problem with MMT (and QE) is that it sets annuity rates (via long term interest rates) too low; the current regime is locking in low incomes for ‘boomer’ retirees, which will effect their ability to consume and pay for services they will be needing over the rest of their lives (35 years?)

    Boomers should be entitled to an annuity rate based on a free interest rate and not a manipulated one. Failing that, governments should be forced at election times to promise what annuity rate they will aim for. This risks becoming acutely uncomfortable for ‘lefty’ candidates.

    1. shinola

      Interest rates too high or low? Depends on your POV. For a borrower, low rates are wonderful; if you’re a saver, not so much.

      For us Boomers, the current relatively low rates messes up our retirement plans; for our kids or grand kids trying to buy a house, they’re a godsend.

      1. bold'un

        I’m not saying too high or too low — just either free market or manipulated with a specific electoral mandate… the proposal of MMT is that government can afford to do anything they wish within the constraints of real resources; so better annuity rates are theoretically affordable on that basis, despite low interest rates; but then the government has to top up all pensions which is political dynamite. What is unfair is to say ‘buy your pensions in the market but we have decided to manipulate the market against you’.

          1. eg

            Thank you, Yves. Now if I could only convince my neoliberal friends that there isn’t (and has equally never been) “free trade” I might be getting somewhere with them!

    2. Yves Smith Post author

      MMT is uninterested in policy rates. Randy Wray has said that the more effective way to regulate the economy is through setting the labor price, hence the Job Guarantee.

      Moreover, you are falling for the rentier view of the world, which Michael Hudson has debunked repeatedly in his work over his career.

      Annuities are a bad investment anyhow.

  2. Jeremy

    And as for the claim that MMT only works for the US and the dollar, again, that’s just James and the left saying that the bond vigilantes really do rule our economy and we’ll never break them. What faith James has in the power of markets to break democracy! But he’s wrong: that power exists for a few days at a time, but not beyond. That’s largely because MMT removes bond vigilantes’ power by simply saying that if they try to disrupt markets the central bank will buy all the bonds they wish to sell using QE funds created for the purpose – which on this occasion may be quite quickly reversed, I admit. That neuters the threat from the bond vigilantes then. 

    Interesting analysis overall, but this is the part I had the most trouble with. Wouldn’t doing a big shot of QE outside of the 2008+ context (deflationary pressure, collapsing banks) cause inflation to soar? Wouldn’t handing the necessary newly minted pounds to foreign bondholders immediately crater the exchange rate?

    1. John Zelnicker

      June 6, 2019 at 10:44 am

      No, a big shot of QE would not cause inflation or crater the exchange rate. QE is simply an asset swap of dollars for Treasury securities. No new money is created by QE. The dollars already exist in the form of the Treasury securities and exchanging those interest-bearing dollars for dollars that do not earn interest does not create money.

    2. Grant

      “Wouldn’t handing the necessary newly minted pounds to foreign bondholders immediately crater the exchange rate?”

      What are you assuming when you say this? Seems like there are a host of unstated assumptions needed for that to be the case. Are you aware of them and are not stating them, or are you unaware of what you are assuming when you say this?

      1. Jeremy

        Re: My assumptions– if you think I’m missing something go ahead and state it but my only assumption is that free floating exchange rates function based on supply/demand for the respective currencies, thus if you pull currency supply “forward” in time with qe, those foreign bondholders become cash holders, and assuming they don’t want to sit on a pile of foreign cash they bring it back to market, increasing supply, thus depressing the exchange rate – at least in the short run.

        I’m surprised that “creating money and sending it abroad will depress the exchange rate” is controversial.

        To John: So… Bernanke was wrong when he explained where the qe money came from? (“keystrokes”) That’s a quote I’ve seen repeatedly cited by mmt people to demonstrate that the state can in fact create money and it’s fine. The author here also refers to it as “creation”.

        1. Adam1

          Ask your self what the difference is between cash/currency and a government bond that pays zero interest? There isn’t much. Plus you must be assuming that interest rates always will be at zero. If central banks desire to raise rates they have tools beyond draining excess reserves from the system, such as paying interest on excess reserves. You’re also assuming the only reason to hold the currency is because of interest earned. What if I desire that the foreign country helps me maintain high levels of employment by buying my exports. If I don’t save my excess currency earned from my export surplus in the foreign countries financial assets (even if its just holding cash) then I will drive the exchange rate lower and I will likely eventually loose an export market.

    3. Synoia

      MMT Cannot work for the UK. It runs a trade deficit, and thus is not Sovereign in its own currency.

      If you don’t believe this I refer to the the One-and-only referral of the UK, to the IMF in the late ’60s.

      The UK is dependent on the US Dollar hegemony. If it were in the Euro, it would be dependent on the EU’s hegemony, as Italy is now discovering.

      1. Adam1

        Um… A) the late 1960’s was still the period of Brenton Woods so no country was fully currency sovereign; B) you’re assuming going to the IMF was either the only option and/or the correct option.

        MMT describes how the system works and offers up policy recommendations. It is possible that the UK’s significant on-going trade deficit could complicate policy choices but all countries have resource constraints and that is specifically within the discussion of MMT policy recommendations. Being a resource constrained nation does not mean your country is not soveriegn in its currency.

      2. aj

        Being sovereign in your own currency means you can use it as much as you want and that you only have debts denominated in that currency. Not sure how trade balances play into that. Either foreigners will exchange goods for pounds or they wont.

      3. Yves Smith Post author

        Being sovereign in your own currency isn’t a function of running a trade deficit or surplus. It is of whether you fund government and significant private sector activities in other currencies. That isn’t happening at all in the UK so your statement is incorrect.

        1. Synoia

          If the trade deficit cannot be settled in the country’s currency, and must be converted to dollars, then I asset the country is the hostage to its dollar/sovereign currency conversion.

          The MMT I’ve read appear to assume that trade deficits can be settled in the Sovereign’s currency, and that holders of the Sovereign’s currency are insensitive to its value, and that are sensitive to its value.

          I believe MMT well thought out. I also believe it needs to be extended to address countries that run continual trade deficit’s, because the demand caused by exercising sovereign’s rights to issue money are probably reflected in an increase in imports, booting demand, making the trade deficits worse, and deflating the value of the sovereign’s currency.

          Thus forex becomes one of the “resources” inflated by creating money, an inflation MMT covers when it states the limit of MMT is inflation.

          When a sovereign is limited, it looses its sovereignty.

          1. Yves Smith Post author

            The trade deficit is being settled in pounds. UK producers invoice in pounds. Your claim is flat out wrong with the respect to the UK. It is not a dollarized economy. You keep trying to talk over the fact that you said something false rather than conceding the point by shutting up.

            Australia, which is a much smaller economy than the UK, ran trade deficits for many years (it’t now running a surplus, but had run them consistently when I was there and also ran large deficits earlier in this decade) yet similarly its producers invoice in A$ and its companies fund in A$.

            Stop making shit up. You do this way too often. I’ve tolerated it because most of your comments are good but you are abusing your privileges.

  3. larry

    Today, Murphy has taken on John Reynolds MP’s anti-MMT rant. Reynolds is worse than Meadway. Some of Murphy’s commenters contend that some of the Labour front bench, including the top, are neoliberal. They are not wrong. They may be neoliberal lite, but this still affects the entire approach of their critique of the Tories, which consequently is not as trenchant and biting as it could have been. The result is that it has been weak. Add to this Corbyn’s dithering about Bexit. The omens don’t auger well for Labour.

      1. larry

        As far as I can gather, both. However, not all Corbynites are neoliberal. But all Blairites are. Technically, Labourites who are neoliberal may fall into the category of being neoliberal lite.

  4. Watt4Bob

    There is now, and has been all along, only one ‘problem’ with MMT, and that is the dreaded possibility that through the application of the democratic process, the 10% might lose control of policy choices.

    The possibility that by some unlikely set of circumstances, the 10% might lose their ability to deliver the policies that enrich their donor class, the 1%, and instead start delivering tangible material benefits to the rest of us (90%) is viewed by our current set of pols as a catastrophe.

    Climate change is nothing compared to the threat to all those rice-bowls represented by Bernie, Tulsi and AOC, from the perspective of the DNC, and GOP.

    All criticism of MMT is meant to forestall the day when the masses become broadly aware of the fact that there is no real reason we can’t afford a decent life for everyone, as opposed to untold riches for a very few, and degrading austerity for the rest of us.

    1. Carla

      Since MMT describes how a sovereign, fiat money system actually works, I sure wish it were called MMR, for Modern Monetary Reality.

      1. Watt4Bob

        I think you’re onto something there, ‘theory’ does seem to imply that there is some question as to its legitimacy.

        1. larry

          Philosophically, ‘theory’ is technically the right term. A theory is an explanatory and/or predictive set of propositions, if it is true. If it is true, it applies to the real world. If it is false, it becomes a false theory and does not apply to the real world. People often confuse/conflate ‘hypothesis’ with ‘theory’. A hypothesis is a statement for which there is, as yet, no evidence, though it appears to be plausible. But the difference is a vague one.

          So, simplifying a little, technically, MMT is a theory that explains the workings of a fiat currency system with a flexible exchange rate which, under certain conditions, is able to predict what could take place were certain policies implemented. It does not recommend any particular policies, but a truly descriptive theory should explain why a given policy has the consequences it does. And MMT does this. Explaining how and why something works is an essential feature of a theory.

          There is a good reason that Modern Moneatry Reality does not work as a correct term for characterizing the philosophical/scientific status of MMT. But this reason is quite technical.

          1. Watt4Bob

            True enough, but I’m sure you understand how effective the forces of willful ignorance have been at twisting the meaning of the word theory to bring into question the scientific explainations surrounding everything from evolution, health effects of tobacco, impact of pesticides on wild life, and of course, anthropomorphic climate change.

            I would wager that a majority of Americans believe that use of the word ‘theory’ implies “yet to be proved’.

            There’s a good reason the word theory doesn’t work the way it should, the modern era has experienced an extensive attack on language by PR firms and propagandists, both from the private sector and in the employ of our county’s intelligence services.

            The result is a tragic degradation of language.

      2. Mel

        I’d been promoting “Modern Monetary System” to name the set of policies and practices that Modern Monetary Theory describes. And as you say, most of the Modern Monetary System is already in wide use.

        1. Todde

          Apparently now its a religion, not a theory.

          Or the only taxes that fund government spending is the fica tax.

          Fica tax should be used to control consumer inflation.

          Cap gains tax to control asset inflation.

          Sin taxes to control what we deem unwanted.

    2. lyman alpha blob


      From the Stewart quote in the article above –

      The message from central banks is that QE does not represent a permanent expansion in the supply of dollars, euros and pounds.

      It really was quite the trick they pulled off with QE in the US, printing trillions of dollars while supposedly keeping inflation under control. Buying up worthless assets for 100 cents on the dollar served to keep the bankers and the rich whole without having to redistribute anything to the poor. Had that happened, the value of rich people’s money would have been diluted and we can’t have that. So rather than losing trillions of dollars as they should have, the bankers got to keep it all. And since nobody bailed out the homeowners who were foreclosed on, the bankers still had plenty of money to buy up all those poor peoples’ assets on the cheap.

      QE is simply MMT for the rich and they do not want to share it with the rest of us.

  5. Stadist

    I wanna jump in at the inflation:

    What is up with the USA and EU obsession with below 2% inflation? Most common arguments for these targets are to ‘protect savers’. But how does savings rate change really in different income percentiles, isn’t the net saving rate progressively higher with higher income? So following this logic the low inflation target is beneficial for capital accumulation?

    People talk about MMT and criticize MMT, but the discussion quickly turns to inflation and the assumingly virtuous below 2% inflation becomes almost main argument against any MMT suggestions. Even Trump tariffs were critcized because they would cause runaway inflation.

    Neoclassical economics does think that controlling inflation is what economics is about. This is why it promotes independent central banks. This is why it tolerates growing wealth inequality. This is why it has no employment target. And stagnant real wage growth is fine as far as it is concerned.

    To me it feels like this quote refines the largest problem we have into single paragraph, the obsession with inflation and keeping it really low, as this target is then used to discredit certain approaches to managing the economy, like MMT in this case.

    1. JEHR

      By keeping inflation low, for whatever reason, the economic result is low wage and salary increases also. Corporations do not like wage inflation (where labour gets its due) although they adore asset inflation (which most companies profit from).

      1. Susan the other`

        Seems that taxation is the best way to control inflation. It is usually asset inflation that takes off like a rocket. The necessities can inflate but only to a certain point. And Inflation itself is evidence of some logjam in the economy, some inequality or accelerating inequality. With MMT funding the economy by allocating money equitably and progressively those inequalities are considerably lessened. And thus, those inequalities are politically driven. And rationalized like the two pundits being picked apart above. When Murphy says “The need is not to have the struggle but to deliver the outcome.” He points the finger straight at all the political rationalizations as the cause for economic imbalances. I hope Liz Warren is reading this just for the logic and the vocabulary. Whatever she wants to call it. She gets it.

      2. Left in Wisconsin

        By keeping inflation low, for whatever reason, the economic result is low wage and salary increases also.

        This is precisely the point. It has nothing to do with inflation, per se. Low inflation is the (bogus) target but power over workers is always the objective. But mainstream economists are too wedded to their models to notice.

        1. deplorado

          That said, higher inflation is also always more harmful to the nothing-owning workers, and much less harmful to the asset-owning class. Unless you limit directly asset owning in some sweeping, institutionalized, law-bound ways (i.e. limiting private property and free movement of capital – good luck with that short of being Lenin), the asset owner have myriads of ways to protect themselves better than the proletarian counting on selling his labor for a good price and falling back on a job guarantee. So I don’t understand any blithe dismissal of inflation concerns, as not infrequently committed here.

          Those inflation concerns by MMT critics may be misguided, while MMT claims they are adequately addressed (I’d like to see more on the job guarantee) and the debate about that seems sensible — but you’d do well to understand that inflation is not “not a bogeyman” for the 90-ish percent and labor (also, inflation is never uniform, we have lots of inflation already as is well known in some assets… another angle that needs to be researched deeply). Do not wish it upon yourselves. This has been discussed here before, to some extent. It may be worth more discussion, just to ground the discussion closer to some hard-nosed realities.

          1. eg

            Think about it. Inflation is only a concern for those who actually have savings. Given the recent news that about 40% of Americans have insufficient cash to handle a $400 emergency, you may wish to recalibrate how many are actually in danger of being seriously harmed by the inflation bogey.

  6. Grant

    “More fundamentally, the state could end up with a far greater role in allocating capital in the economy. The market has flaws and limitations. But it tends to be better at allocating capital and raising efficiency than the government. A worry, therefore, is that MMT could enfeeble the private sector”

    At this point, this is essentially a religious belief. Who could look at the environmental crisis, look at the fact that private interests create most money and make most investment decisions, look at how out of whack the economy now is, how inequitable it now is and long term macroeconomic trends, and still claim that their decisions are more socially beneficial than the state? Maybe in some instances it is the case. Like, the state under Trump might use its power to benefit coal and a private interest might invest more in renewable energy or reforestation or something, but from a system perspective? I guess it helps to define efficient in a particular way. Ignoring non-market impacts, and how economic and social benefits and costs are distributed throughout society might help with that argument, I guess.

  7. Chauncey Gardiner

    Insightful article. Particularly appreciated Richard Murphy pointing out Ian Stewart’s differentiating how the government can spend money directly on public services under MMT versus how central banks’ creating money under Quantitative Easing (QE) is not necessarily MMT. In my view this differentiation is key to understanding the nature of the political opposition to MMT.

    Under QE, central banks buy assets such as government bonds, mortgage-backed securities, or as in the cases of the Bank of Japan, the Swiss central bank and some other central banks, buy Exchange Traded Funds, corporate bonds, or even stocks issued by corporations directly. Under QE, the injection of this new money into the financial system drives down interest rates and bolsters asset prices. Therefore, QE primarily and disproportionately benefits particular constituencies: Those who benefit from or speculate on rising asset prices; i.e., Wall Street, corporate CEOs with stock options, those who own stocks and bonds, politicians seeking donations who conflate a rising stock market with the performance of the real economy.

    Setting aside that “free markets” no longer really exist, a key tenet of capitalism, we instead now have a hybrid system that disproportionately benefits some while being prone to creating asset price bubbles and Minsky moments that, as we have seen, can require government/central bank bailouts to keep the nation’s and global payments and credit systems functioning. Essentially free money under QE has also led to increasing numbers of zombie companies, who feasted on QE-ZIRP and whose operating cash flows are inadequate to service their debts.

      1. Todde

        Von Mises.

        I love to tell libertaria s that our founding fathers didnt fight a war under the dictates of a European aristocrat.

        1. Yves Smith Post author

          Stop arguing with readers and me when you are wrong. You need to get over your need to one up people. It’s not on here.

          Had you bothered clicking on the link, you would see the site is Mises Institute.

      2. RickV

        Sorry, I was in a hurry. Had to take my wife in for surgery today. It was the first reasonably accurate history I could find. I think with a bit of effort a better source could be found, if it is an issue.

  8. Left in Wisconsin

    A very insightful piece. Demolishes the right-wing critique. (On the other hand, the argument that propping up asset bubbles is a more worthwhile use of public funds than “spending money directly on public services” tells you all you need to know about that author.)

    And I think he hits the nail on the head with the left-wing critique, which is that it is a political critique, not a technical critique. But I think Murphy then tries to demolish a political critique with a technical argument. As far as politics goes, Murphy claims: “In other words, Labour cannot be bothered to do the hard work of re-education to deliver what the country needs” and “it’s absurd to suggest that MMT cannot work in an economy because governments wanting re-election cannot increase tax rates, as James also claims. If that’s a measure of the left’s commitment to a) democracy and b) honesty with the electorate and c) conviction based economic management, heaven help us.” Left politics is always a balance between education and retail politics but I think Murphy is way too dismissive of the political challenge.

    1. Left in Wisconsin

      So I read the Meadway piece a couple of days ago and wrote this proto-tweetstorm to myself to think things through. Appended here unchanged from 2 days ago but I think consistent with Murphy. Key point is #4:

      1. First of all, MMT’ers deserve huge credit for opening up economic debate, dragging the Overton Window a considerable distance in the progressive direction. Even anti-MMTers on the left have come to accept important parts of the MMT diagnosis.
      2. In a nutshell, what I think drives left anti-MMTism is paranoia about inflation.
      3. It can be argued that the inability to address “the inflation question” is what killed left politics in both the US and UK in the 1970s (even if that inflation had nothing to do with the left and the right’s “answer” was a complete lie with devastating consequences).
      4. The fear is that the current left moment will yield to left-ish politicians nominally following an MMT-ish program that yields inflation or at any rate is ineffectual in dealing with a new bout, thus driving the left back into the political wilderness.
      5.To say it another way that I have not seen it articulated (obviously I have only seen what I have seen):
      6. MMT’ers argue that inflation is not a present concern because we are way below potential AND that we can employ everyone who wants to work at decent wages without stimulating inflation.
      7. Left anti-MMT’ers accept the first point but not necessarily the second. (I personally believe we should employ everyone who wants to work even if it is inflationary.)
      8. MMT’ers take from that analysis the policy view that putting everyone to work at decent wages will likely not be inflationary, at least in the near term, but if turns out to be that is a good problem to have and one we should be able to solve.
      9. I think left anti-MMT’ers believe that large increases in government spending paired with a belief that inflation can be dealt with down the road would inevitably lead, relatively quickly, to real production bottlenecks and constraints, and thus inflation.
      10. To me, this is where the debate breaks down, because economists (on all sides) tend to think about production as governed by economic relationships whereas it is actually governed – as Veblen tried to tell us – by a) physical-technical processes and b) corporate behavior.
      11. As an aside, the left discussion of inflation is still weak. When low inflation suits our argument, we focus on government statistics. When our concern is the high cost of living in many places, we argue that the statistics understate the real inflation people encounter.
      12. I tend to think the anti-MMT’ers have a valid, if not always clearly articulated, political critique: if a jobs program or other massive government spending program unleashes a lot of additional purchasing power, …
      13. Why won’t corporations use that as an opportunity to raise prices? And why won’t we see another, possibly worse, housing bubble?
      14. MMT’ers seem to think the current supply of available domestic capacity means that US corporations would of course raise domestic output – raising supply to meet demand. I’m not convinced.
      15. In many economic sectors, the US is not a low-cost producer. Trump is having no success getting US corporations to increase domestic investment. Why would they do so under a left government?
      16. Unless there were even more substantial domestic incentives/non-domestic disincentives. Which I don’t think the US corporate class – not to mention the entire US professional class – would be too happy about.
      17. So ultimately, we have only two economic choices – dramatically increasing public spending/investment/employment by taxing the rich or doing so without taxing the rich.
      18. Both involve taking on the corporate class directly, the first with some (non-MMT) economists as potential allies, the second with a few class traitors as allies but no economists.
      19. This is the real (political) point that left anti-MMT’ers are trying to make.

      1. deplorado

        Thank you, lots to think about here.
        #10 to #15 — you are capturing real problems that I fear are not well accounted for and which fiscal or monetary policy alone cannot resolve. So like many have said, MMT needs real policies and working Congress to be able to deliver… otherwise, just another round of the game, where the usual socioeconomic losers will get back to being losers and maybe even more of the population will join them.

  9. Jon

    The perpetual blind spot of liberalism is the power of the state and their trust in it.

    When confronted with the question of the power of the state, the author pretends its goes no further than the power to implement sound policy, completely ignoring the ruling class interest in not changing the status quo. MMT is otherwise nothing more than an theoretical academic exercise because the liberal/conservative paradigm will not allow it. Like Keynesians do MMTers actually believe the ruling class is interested in a sound economy for the masses? That the establishment is dismantling reforms and regulation ought to be a clue.

    Advocates of MMT have to make common cause with socialists and those who confront power, otherwise they are just liberals with an agenda they know won’t be implemented.

    Just look at universal health care in the U.S. The Democratic party used to “favor” it, but now that a majority of Americans favor it as well, they take the conservative line that “we can’t afford it”.

    1. aj

      Just look at universal health care in the U.S. The Democratic party used to “favor” it, but now that a majority of Americans favor it as well, they take the conservative line that “we can’t afford it”.

      They were never really in favor of it, but they knew most people were. They were publicly in favor of it because they new it couldn’t pass but would drum up votes. Now that it has a chance of passing we “can’t afford it”

  10. aj

    The problem of MMT for those in charge on both the left and the right is it puts the lie to their inactivity. It’s real easy to argue that we can’t have nice things because we can’t afford them. If we can afford to do anything, then you have to argue that you don’t want universal healthcare because “screw those people that’s why” and we can’t solve climate problems because some rich guys might make slightly less money if we make them cut out what they’re currently up to. You can’t have a job because I want to keep you poor and the price of eggs might go up a little bit if you start buying them too.

    Much more moral cover for the elites to just claim we can’t afford any of it. Keeps them from looking like the amoral selfish a**holes they really are.

    1. eg

      This was the premise of the neoliberal “there is no alternative” (TINA) con — to put decisions properly within the sphere of political discourse “out of bounds” politically by appealing to an economic orthodoxy that eventually established hegemony over most of the political spectrum in the West.

      MMT puts the lie to the whole enterprise, which is why it is currently under such vicious attack.

      Don’t fall for it — demand that your democratically elected representatives take responsibility for policy decisions; never accept the “how are we going to pay for it?” dodge from any currency issuing entity.

  11. rtah100


    It appears to be the season for this kind of thing. There is a guest post on FT Alphaville by Tony Yates (ex BoE, apparently thinks Milton Friedman unambitious in his hopes for monetarism!) which, on the pretext of discussing the recruitment for the new BoE Governor, argues against Positive Money and MMT and for apolitical technocratic “don’t hit me, Mr Bond Market!” central banking.

    The OP who mentioned assignats made a fine straw man – these were claims on a land pool so the more that were issued, the less they were worth. The rising prices were a result of revolutionary disruption, poor harvests, economic “sanctions” by neighbouring states and counterfeiting by the same neighbours. The repudiation of the assignats is like any hyperinflation, the loss of value stemmed from loss of confidence and not vice versa.

  12. RMO

    I dunno… those MMT opponents make a lot of sense. After all the U.S. economy was in an utter shambles after WWII… all that government deficit spending crowding out private investment, government involvement and control of the economy being so much less efficient than the private sector resulted in massive waste and basically nothing being produced and unemployment was (I think) 90 or 95% right? It wasn’t until you rolled back all those evil FDR era reforms, deregulated the banking sector and bled the unions dry that you once again had an economy in which everyone was working happily at a job that paid well and (thanks to that invisible hand) had good food, water, shelter, education and medical care. If I remember correctly the Commodities Futures Modernization Act also gave every citizen a rainbow-coloured, sparkly unicorn on their birthday…

    1. rob

      so, what color is the sky on your world?

      As, your description of the post WWII era has no resemblance to the one we had here on earth.

      1. drumlin woodchuckles

        The comment just above yours may have been meant as satire or sarcasm. It goes to show once again why blogthreads are such a very poor place to attempt sarcasm or satire.

        1. RMO

          Yeah, it was sarcastic – every now and then I forget that it’s now almost impossible to say something so ridiculous and divorced from reality that It can’t possibly be taken seriously. Sorry about that.

          This is a world where highly influential economists have spent decades saying essentially “that may be all well and good in practice but it will never work in theory” and still get listened to after all. Most of the attacks on MMT I’ve come across are the equivalent of a physicist claiming quantum theory is wrong because it would mean we would blow up the planet with thermonuclear bombs.

  13. rob

    so this author is claiming that positive money’s number of the percent of money created by banks, isn’t @ the 97% bandied about in places…… then what is?

    And who says “not just anyone can start a bank”…. they need a license… given by the government . So a pool of investors is no longer allowed to form a bank, and apply for a license?…..

    the “central bank” we have in the US is the federal reserve, it is a coalition of private banks. The fed is a group of private banks, who pay their staff, the fed committees and boards, to implement national policy and is enshrined by the federal reserve act to reap profits and rewards ad infinitum ; under the guise of being a private contractor of services provided for the citizenry..; which is all those corporations… who are people too.

    So if the voodoo MMT says works from a technical point of view, for the “central bank” (including the debt creation which the citizens are obliged to pay,(ad infinitum);, the profit for the banking system and financial services sector, and the inherent conflicts of interest (being the banking sector will naturally and always benefit its “clients”/corporations/wall street first),
    Why don’t these people be bold and get rid of the fed, ( a private group) and roll their function back into the treasury, (where it belongs, according to the constitution before the FRA). And let this public function of money creation actually be used to HELP the people of this country…. so maybe we could stop screwing the rest of the world, for the perceived loss we accumulate in debts to our bankers.

    According to the MMT crowd, fiat money is fine. we can just create money, and use it for public good. letting go of neo classical myths SHOULD be done, and the sky will not fall….. so why the lack of courage to end the free lunch the banking system gets for handling the debt servicing and money creation?
    When in fact it can be done “in house” i.e. the treasury.. with no debt.

    Why bother having interest rates at zero… when we could just not have the debt in the first place…..
    Having an unnecessarily complicated system, with lots of useless parts just draining away energy/money every moment the system is operating, is kinda stupid.
    Is this another example of american exceptionalism?
    When what is lost is the fact that The USA, actually could create its own money, and the world would use it… yet we don’t…. we just contract out the right, we as americans ought to benefit from..
    What good is the current fed /treasury relationship? and for whom?

  14. Steven Greenberg

    What it will do is provide it with the contracts and work it needs to survive because it can’t think of what to do for itself.

    Doesn’t anybody remember John Maynard Keynes? It is not that the private sector cannot think of what to do. It is that the private sector is behaving perfectly rational in the face of low demand and high risk. Few individuals in the private sector can afford to take the risk of using their free cash to manufacture stuff that people can’t afford to buy. An individual could bankrupt herself or himself bu tying up all their money in producing goods that it might take years for the economy to recover enough to buy.

    Only a government that is sovereign in its own currency, etc. and can never go bankrupt has the deep enough pockets to fund the economy into recovery.

    It is so simple, so logical, and so true, that I cannot understand how economists can fail to understand this or to remember this. How come all those people in the FDR administration could be so smart, and now people cannot even look back in history to read their explanation of what they did and why it worked?

  15. Peter L.

    I have comment about the way “MMT defenders,” for lack of a better term, are defending and promoting MMT. This is probably a comment about rhetorical strategy, or public relations.

    I’m annoyed by the implicit insistence that, in and of itself, MMT is a set of policy proposals. Consider this one example, “In other words, not only has MMT got no plans to sweep the private sector aside, it has a plan in place to make sure it does not.” I think this is representative of many comments made by people promoting or defending MMT. It suggests pretty clearly that MMT is, in itself, a plan for running the economy.

    My hunch is that it would be of great benefit to distinguish between two different areas of thought. On the one hand there are the observations and hypotheses put forward by scholars who fall under the banner of modern money theory, such as Wray, Kelton and so forth. On the other hand, there are the political solutions and policy plans favoured by people falling under the MMT banner. Randy Wray, even if not consistently, has been explicit that the insights gained from understanding money can be put to use by anyone with any political values. For example, if we have the resources to run a prison-based, imperialist war-making society we can arrange our money system so that rich people don’t have to pay much in the way of taxes. If we have the resources to make war and destroy the planet, that’s “great” and MMT theory and observation tell us that there is no inherent financial constraint to this activity.

    Thus when I hear that “not only has MMT got no plans to sweep the private sector aside, it has a plan in place to make sure it does not,” I am confounded. As far as I can tell, the theory and observations of scholars like Kelton, Wray, Tcherneva and so on don’t really imply this, although they themselves seem to favour plans like this. If we did favour “sweeping away the private sector” it would be important to understand how we would need to run our money system, and the theory and observation coming from the MMT school of thought probably would give us a lot of insight into how to do so.

    I believe the debate would be clearer and more useful if this distinction was made by those seeking to bring the insights of MMT to the wider public.

  16. Sound of the Suburbs

    We actually need MMT, policymakers just don’t realise that yet.

    The good times of neoliberalism can never return as they relied on filling economies up with debt and most economies are still pretty near full.

    It’s time to stop waiting for the impossible to happen.

    The unsustainable debt fuelled growth model of neoliberalism.

    The UK:

    The private debt-to-GDP ratio rises until the economy blows up in a Minsky Moment (2008).

    Japan, UK, US, Euro-zone and China:
    At 25.30 mins you can see the super imposed private debt-to-GDP ratios.

    The sequence of events:
    1) Debt fuelled boom
    2) Minsky moment
    3) Balance sheet recession

    China was the last real engine of global growth, and that was growing by adding more and more debt, but it can’t do that anymore as they have seen their Minsky Moment coming.

    QE can’t get into the real economy during a balance sheet recession as there are too few borrowers. They are still paying down the debt from the earlier debt fuelled boom, and don’t want to take on more debt no matter how low the interests rates go.

    Richard Koo shows the ridiculous levels of bank reserves built up by the FED, BoE, ECB and BoJ that can’t get into the real economy due to a lack of borrowers.

    It’s time to learn from past mistakes.

    For the system to be sustainable, the debt has to rise with GDP so the economy can withstand the repayments on the debt. GDP is actually a measure of the real wealth creation in the economy, and knowing what GDP measures helps a lot.

    If there is no debt, there is no money.
    The money supply ≈ public debt + private debt

    The money supply should rise in line with the new goods and services in the economy.

    A growing economy needs an increasing money supply and therefore increasing debt.

    Now we understand the requirements of the system, we can put together something that works.

    How can banks grow GDP with bank credit?

    The UK:

    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)

    What happened in 1979?
    The UK eliminated corset controls on banking in 1979 and the banks invaded the mortgage market and this is where the problem starts.

    The private debt component of the money supply is not that flexible and we should make up the difference with the public debt component.

    Fiscal policy gets injected straight into the real economy with new jobs and wages.

    Monetary policy relies on the money being borrowed and can’t enter the real economy if people are already loaded up with debt. We saved the banks, but left the debt in place after 2008. The banks are ready to lend, but there aren’t enough borrowers.

    This is what happens when you get it wrong.

    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 (a shrinking money supply).

  17. Sound of the Suburbs

    Everything about debt, money and banks is obfuscated to the nth degree and the last thing they want is anyone revealing how things actually work.

    Banks don’t take deposits or lend money and this is quite clear in the law. It is important for the legal system to know, but they don’t really want anyone else knowing.

    You are not making a deposit; you are lending the bank your money to do with as they please.

    They are not lending you money; they are purchasing the loan agreement off you with money they create out of nothing.

    Richard Werner explains in 15 mins.

    This is RT, but this is the most concise explanation available on YouTube.

    Professor Werner, DPhil (Oxon) has been Professor of International Banking at the University of Southampton for a decade.

    Money is power.
    Money is control.

    Most of us spend our lives working to earn the money to live.

    They have spent a lot of time and effort taking power and control away from Governments and giving it back to the private sector.

    Government created money takes power and control away from the private sector and gives it back to the people, which is the last thing they want.

    This paper written in 1943 shows just how much they have managed to hide since then when the majority of economists new full employment was perfectly feasible.

    They had recently seen the private sector at its worst in the 1920s and 1930s.
    They had seen the unlimited spending the Government was capable of in WW2.
    They had seen the full employment during WW2.

    Almost everything that had been learnt then has since disappeared, until MMT has brought it back again.

    They don’t want that knowledge back, they put in a lot of time and effort to make sure it disappeared before.

    1. Sound of the Suburbs

      Japan rebooted itself after WW2, when no one in Europe seemed to know enough to realise they could do that.

      Europe needed the Marshall Plan to reconstruct after WW2, Japan did it all by itself using the money creation of the central bank and private banks, and Japan was just as broken as Europe.

      The BoJ cleared all the bad debts out of the banking system, fixing the banks to lend into the economy.

      Japan didn’t issue bonds until 1965, the BoJ created the money for the Government to spend.

      Money comes out of nothing and is just an instrument for carrying out transactions within the economy.

      Japan rebuilt itself from the wreckage of WW2 by creating money out of nothing as the monetary system is extremely powerful, but few know just how powerful it is.

      Governments bailed out the banks after 2008 as they didn’t know the central bank could do it at no cost to taxpayers.


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