By J.D. ALT
There’s a lot of handwringing now about how central banks have no ammunition to fight a recession. The fact that this is apparently true—and, perhaps, uniquely true in modern history—is all the more reason to explore MMT’s premise that central banks are not just instruments of private commerce, but are, as well, instruments of collective, democratic will. The bankers are in a box of their own making, but that box, in fact, is inside another box which, as MMT makes clear, has lots of ammunition not only to fight a recession, but to pursue the betterment of American society whether an economic downturn unfolds or not.
Let’s consider the central bankers’ basic dilemma: If private enterprise begins to slow, they would love to issue more money to get it back up to speed. But inside their box the only way to do that is by encouraging private enterprise to borrow more money. Private enterprise, in turn, decides to borrow more based on production and spending decisions tied to the making of potential profits. The only lever the central bank has to affect these profit calculations is the manipulation of interest rates—lowering rates to make the profitability of enterprise more feasible (hence, encouraging more borrowing and more money creation) or raising rates to do the opposite. So, if interest rates are already close to zero, the central bankers are out of ammunition if private enterprise, on a large scale, decides to slow down operations and lay-off workers.
But why do we insist on imagining that central banks are only established and managed to serve the interests of the American enterprise by issuing money (through the interest-driven banking system) for the exclusive needs of profit-seeking investment? The “American enterprise,” after all, is larger than the summation of its private enterprise: it includes the success and well-being of the whole of American society—not just those aspects which can be addressed by profit-seeking investment. To address the needs private enterprise fails to undertake, it is necessary to understand that central banks are, in fact, capable of servicing another client as well: the Investor-in-Whole-Society.
This set of issues becomes even more crucial when we realize that the whole of society is confronting a multitude of urgent (and even existential) tasks which are NOT profit-making, and so will not be undertaken as investments by private enterprise—regardless of what central bankers do with interest rates. Who will undertake those investments? Private businesses will gladly line up to do the work—for “overhead and profit”—but who will make the investment? Who will pay the “overhead and profit” to private businesses for undertaking the tasks? It can only be the Investor-in-Whole-Society.
The Investor-in-Whole-Society can do this because, uniquely, it does not require a return on its investment other than the accomplishment of the urgent tasks. The Investor-in-Whole-Society can, in fact, “lose” as much of its invested money as necessary to accomplish what needs to be done—and this, I believe, is precisely the philosophical point of MMT.
If the idea of “losing money” sounds like a bad idea to you, consider this: When money is “lost” by the Investor-in-Whole-Society, as suggested above, it is not lost at all—instead, it is earned by America’s private businesses and citizens! There is a double benefit, then, when the Investor-in-Whole-Society awakens and becomes active: 1. Urgent tasks get accomplished, and (2) American citizens and businesses earn money for accomplishing those tasks. This is the first simple, and essential, insight that MMT wants people to understand.
The second insight is equally simple but requires a more difficult shift in perspective: The Investor-in-Whole-Society obtains its investment money—the money it can “lose” as necessary to accomplish urgent tasks—only partially by taxing American citizens and businesses. Nor is there some preferred or “required” portion of its investment funds that must be derived from taxes. Taxes play a different role entirely in the socio-economic system—but their collection does, coincidentally, contribute to the Investor-in-Whole-Society’s investment funds. The remainder (and perhaps the majority) of those funds is derived by an operation supported by—and ultimately implemented by—the central bank. This operation is the issuing of “future dollars” by the U.S. Treasury.
These “future dollars” are typically called “treasury bonds”—but the MMT perspective-shift points out that it is inaccurate to think of these financial instruments as bonds (i.e. pledges to repay borrowed dollars) for three simple reasons:
- For U.S. treasuries (future dollars) to be redeemed, the U.S. Treasury (unlike corporations or municipalities) does not have to earn future revenues—and this is because of reason no. two:
- The redemption of the future dollars is guaranteed by the U.S. federal government—a guarantee the central bank implements, as necessary, (and as a matter of course) by simply issuing new Reserves. The central bank, alone, has the power and authorization to do this—just as it issues new Reserves, as necessary, to cover the transactions private enterprise has decided it wishes to undertake through the banking system.
- Since this will always happen, so long as America maintains its sovereign government, U.S. treasuries are, therefore, literally “future dollars” (unlike corporate or municipal bonds which might well turn out to be unredeemable).
These two MMT insights—(a) spending by the Investor-in-Whole-Society is not “money “lost” but money earned plus tasks accomplished, and (b) U.S. treasuries are future dollars rather than “borrowed” dollars—these insights change the formula that calculates what the Investor-in-Whole-Society can (and arguably should) undertake to accomplish.
That formula now becomes, oddly, completely disconnected from any consideration of “money.” To meet urgent and existential needs of the whole society—needs which profit-seeking private enterprise is unable to address—the Investor-in-Whole-Society can spend, in fact, whatever “money” is necessary. Instead of being concerned with “money,” the formula is now concerned primarily with the availability of the real resources—labor, professional expertise, technology, energy, raw and processed materials, etc.—that the money will need to employ to accomplish a given task. If the necessary resources are not available, the formula makes clear, no amount of money can buy them. If the resources are available, there is no “affordability” constraint to marshalling them to the task.
The question is: how can the Investor-in-Whole-Society be awakened from its stupor? Does it require a charismatic leader? Does it require a national disaster on the scale of war? We know, historically, the Investor-in-Whole-Society can be awakened. Pearl Harbor succeeded in doing that. But why is it necessary to reach such a point of crisis? You would think our currently debated list of urgent tasks would be enough: universal medical care, preschool daycare, the debt burden of education, affordable housing, failing and out-of-date infrastructure, disease control and the need for new antibiotic drugs, the looming inadequacy of social-security—and, of course, the existential challenge staring us in the face: climate-change mitigation and adaptation.
If humankind is to take responsibility for this Earth, which—Mars and Moon-dreams notwithstanding—is its only home and hearth in an infinitely cold universe, the Investor-in-Whole-Society will have to be awakened. We cannot be chopping down and burning! the lungs of our oxygen system with the argument such actions represent economic development and social betterment. What are we thinking? The problem is “we” are not thinking at all: it is precisely that “we” who is the Investor-in-Whole-Society!
Shake as many bedframes as you can find. “WE” have to wake up!