By L.Randall Wray
The attacks on MMT continue full steam ahead. Janet Yellen (former Fed chair, but clueless on money and banking)—a centrist–has joined the fray. Jerry Epstein—on the official left–has ramped up his ridiculous claims, now associating MMT with “America First” and fascism (you knew that was coming—it has always been the refuge of critics who couldn’t come up with valid critiques).
But there are some rays of light. Bloomberg published a more balanced assessment (https://www.bloomberg.com/news/features/2019-03-21/modern-monetary-theory-beginner-s-guide). The authors of that piece actually took the time to go through our new textbook (Macroeconomics, by Mitchell, Wray and Watts—now available for purchase in the USA : And in Australia).
However, here is the best response to the critics I’ve seen:
WHY DOES EVERYONE HATE MMT? Groupthink In Economics, by James Montier, March 2019,
Not only does he take down prominent critics like Summers and Rogoff, he also provides a very useful 400 word summary of MMT. Some of you have asked for a concise statement, and this is as good as you’re likely to find.
- Money is a creature of the state. Money is effectively an IOU. Anyone can issue money; the trouble is getting it accepted. The ability to impose taxes (or other obligations) makes a country’s ‘money’ valuable.
- Understanding the monetary environment is vital. The monetary regime under which a country operates matters. Any country that issues debt only in its own currency and has a floating currency can be thought of as being monetarily sovereign. This means it cannot be forced to default on its debt (i.e. the U.S., Japan, and the UK, but not the Eurozone or most emerging markets).
- An operational description of the monetary system is critical. Understanding that loans create deposits (which in turn create reserves, aka endogenous deposits create loans. For example, knowing that government deficit spending creates reserves and drives down interest rates is vital to understanding Japan’s bond market.
- Functional finance, not sound finance. Fiscal policy is much more potent than monetary policy. Fiscal policy should be aimed at generating full employment while maintaining low inflation (rather than, say, achieving a balanced budget position). A Job Guarantee scheme is an example of a useful policy option to effect this outcome (acting like a buffer stock in a commodity market) in the eyes of MMT.
- Limits are real resource and ecological limits. If any sector of the economy pushes it beyond the limits of capacity, then inflation will result. If a government spends too much or taxes too little, it can create inflation, but there is nothing unique about the government sector in this regard. These are the limits that matter – people, machines, factories – not ‘financing’ constraints.
- Private debt matters. Even in a monetarily sovereign state, private debt matters. The private sector cannot print money to repay its debts. As such, it has the potential to create a systemic vulnerability. Think Minsky’s financial instability hypothesis: stability begets instability.
- Macro accounting (Godley style) keeps us honest. One sector’s debt is another’s asset. So, the government’s debt is the private sector’s asset. Understanding how one sector relates to another using a sectoral balance framework is very helpful, as is understanding the Kalecki profits equation, or the way reserves work in a financial system. Accounting isn’t glamourous and identities shouldn’t be taken as behaviours, but they can help us spot unsustainable situations.
I urge you to read the rest of his piece. It is spot-on.
It is good to see some readers other than MMT academics posting rebuttables to the frenzied critics. The summary is good, and could even save some critics from embarrasing themselves if they can get through 400 words without succumbing to apoplexy, but even that seems beyond their capability or inclination.
Can MMT be synthesized with ecological economics? This is concerned directly with the ‘externalities’ concept of mainstream economics, by which our biosphere can be killed off by the profit motive. If MMT contained some biological/ecological accounting that would flag/prohibit activity the equivalent of ecological/planetary suicide, that would be good imo .
In other words, there is an ecological balance sheet concept that MMT could incorporate.
Certainly, this article was a refreshing change from the recent slew of hit pieces aimed at caricatures of MMT. But its single reference to “ecological limits,” following and lumped together with “real resource limits,” was a great disappointment. Neglecting real resource limits can lead to inflation. Neglecting ecological limits will lead to ecocide. To me and to many others, the most important and beautiful revelation of MMT is that money itself cannot prevent us from beginning to heal our planet and forestalling the extinction of innumerable species, including our own. So when, I continue to ask, will the proponents of MMT learn to lead with their best foot forward–BY FAR, their best foot?
This item is also very effective at addressing the critics. It is a very extensive defence yet published in an unexpected application
MMT: Sense Or Nonsense?
John T. Harvey
Can someone please explain to me how fiscal deficits create excess reserves? To me, it seems like this would only be the case IF the central bank buys bonds on the secondary market. Let me know if I’m getting something wrong here, this is how I understand deficit spending:
Treasury issues ($100) in bonds on primary market, banks buy with reserves-
Private Banks: -$100 reserves (asset), +$100 bonds (asset)
Treasury: +$100 reserves (asset), +$100 bonds (liability)
Treasury deficit spends by purchasing goods-
Private Banks: +$100 reserves (asset), +$100 demand deposit (liability)
Treasury: -$100 reserves (asset), +$100 goods purchased (asset)
So at this point, it seems to me that reserves are unchanged even though a demand deposit has been created. Now I can see why excess reserves would be created if the central bank bought the bond in exchange for reserves it created, but that would be a monetary operation, not fiscal.
I agree with Newton Finn: “Neglecting real resource limits” might lead to inflation… But “Neglecting ecological limits will lead to ecocide!”
We need a whole new planet-wide political system on earth (the whole earth) that will be totally withing the bounds of earth’s “ecological limits” while putting every other earthly issue into its proper perspective (including economics, privacy, and/or private ownership of anything…more than what the “owner” can carry with them when they’re on the move).
After much reading a think there is a critical identity problem the world is struggling with. This point is simply the relationship between the Central Bank (FED) and The government. (AKA monetary vs fiscal policy interlinks) , people who oppose MMT have a deep belief (or claim) that a central bank (FEDs) are independent, therefore, the actions of the government weather it is sound fiscal policy or not (e.g. run a deficit and government not FEDs trying control inflation or other ways) will always create problems because they are two different entities.
Now the real problems are:
1- We don’t know for sure if the FEDs is controlled by the government (or others) or not.
2- The FEDs is not elected, not punishable, and has control over critical issues with no real touch with real time day-to-day or hour-to-hour (unlike facebook for example) or the public sentiment (no way to quantify how 90% of poeple/workforce are at)
J Fagg Foster + ecological economics?
“If something is technologically possible, and ecologically acceptable, then financing is possible.”
#3: Montier writes that loans create deposits. Yes, so far so good. But then he adds that these deposits (created by the loans) in turn create reserves, “aka endogenous deposits create loans”.
I couldn’t understand that. 1) How can deposits created by comercial bank loans create reserves?; 2) How can endogenous deposits create loans?
Would someone be so kind as to explain to me how that can be?
With respect, and also a belief in what I see as the basic principle of MMT, I would like to argue a few of the concepts.
To start with, I believe we need to look at the purpose and use of “money” in today’s world, and basically, that means we can divorce it from history.
In today’s world “money has become an essential tool for survival of the vast number of people around the planet. The real, and in fact, the sole purpose of having a money system is to provide an acceptable and guaranteed medium of exchange for the daily buying and selling of goods and services.
MMT does not seem to emphasise this purpose, and in fact, may possibly refute it.
1. Creating a nation’s money supply is an essential public service and obligation of a responsible Government. Can anyone imagine what the society would be like if it didn’t have a money system?
2. I do not understand why MMT chooses to define “money as an IOU. Who is the “I” and who is the “U”? If it is an IOU then it means someone is in debt to someone else. I’m sure the people who elect a Government do not do so for the purpose of placing themselves in debt to the creators of their money system. Really, if money is simply a medium of exchange, then it is just like a ticket system. There is no debt involved as it only carries the obligation to be acceptable within a given society. Of course, the “ticket” needs to be guaranteed as a legal medium and acceptable within that given society.
3. As far as I can see, there is no need to coerce people into accepting a money token as their recognised essential means of survival. The nation’s medium of exchange is absolutely necessary for everyone’s daily survival. As long as the token can be guaranteed that it is not a false token it will be accepted. A Government does not need to impose a tax regime to force people to accept their means of survival. A tax regime fundamentally represents a method of control over the people but is can be portrayed as a cover-up for poor management of the economy.
4. The money tokens do not need any intrinsic value, as long as they are genuine and acceptable as legal tender. Only the Government is in a position to fulfill those two requirements. MMT is correct in saying, “The world still hasn’t come to terms with the death of the gold standard in 1971, ….. In the modern era of “fiat” currency, MMT says, the U.S. and other big economies no longer need to worry about having enough gold to back their paper money”. However, I don’t believe MMT advocates, “they’re free to print however much they need” other than perhaps, in a hypothetical sense. My reading of MMT always emphasises that there are controls on how much money any Government can create.
5. Why must money be issued as a debt? To me, this seems to be an acceptance of the status quo in respect as to how the bulk of today’s money is created. As the article says, “The process of credit creation by private banks is not under the control of the Central Bank” and that would seem to imply that the bulk of creating the nation’s money supply is outside of the Government’s control, apart from some “ineffectual tweaking of the interest rates”. A nation’s currency only needs to “float” in relation to other currencies and not when used within the nation. In fact, it is far preferable for the nation’s currency to be stable. Issuing a nation’s money supply as a debt and allowing it to “float” internally would seem to deny any relationship to “sovereignty”. People grant their Government the responsibility to create the nation’s essential medium of exchange, they certainly don’t grant the Government the authority to impose a debt on everyone as a condition for the people’s survival.
6. If you are talking about a 100% reserve system for banking, then it would be correct to claim deposits create loans. However, it is an oxymoron to say that all deposits are created as loans. I am sure the people do not accept the proposition that the only way they can get access to money is by borrowing it. People earn money through trade – either selling their labour or selling products, they do not consider it as “borrowing” what they thus earn their money. Theoretically, the employer and/or the buyer may have borrowed the money, but it is also possible that people can deal with and/or work for the Government and get paid directly without borrowing.
7. Sure people, machines and factories matter, but it really doesn’t matter what or how much is produced, if it is not consumed then it is a waste of energy, materials, time and effort, not to forget money. In today’s world, the only way any production can be consumed is by using money. It is totally ridiculous to say that “financial constraints” do not matter. They are the very thing that will control the consumption.
8. “Stability begets instability” only if there are no rational controls on the way money us distributed and used. If there is a correlation between production and consumption in relation to a nation’s population, then the risk is instability is minimised because “investment” gambling and excessive risk taking are also minimised. A rational control of the money supply would be for the Government to sell access to credit to the private retail banking system. The investment banking system should be left to their own responsibility as their only real motivation is to make a profit irrespective of any social factors. As far as “investors” are concerned, if there is no profit potential then nothing will be attempted. It has been proven that the banking system is an efficient and effective way to distribute the money supply to the private sector. The Government can use that vehicle to sell credit access to the private retail banks, as long as the credit application comes with acceptable due diligent analysis by the banks and reliable collateral. That way, the Government would have much better control of the money supply but allowing its distribution to be based on market parameters.
9. When you talk about the way reserves work it appears you are accepting the way the current financial system works. As the article says, “It is not true that banks first acquire reserves and then they make loans. Rather, Banks make loans and then borrow reserves to meet reserve requirements”. I do not see how deposits create “reserves.” under the MMT concepts. “Reserves” should be the responsibility of the retail banks. If MMT accepts that the fractional reserve system applies as the way the retail banking system is allowed to operate, then it should be the responsibility of the banks to maintain the legally required reserves to hold their licence. The Government’s and/or the Central bank’s responsibility should be confined to overseeing that the retail banks comply with the regulations. If the Government were to control the banking system and the money supply (as suggested in 8 above) the Government’s responsibility would be in enforcing the regulations. Investment banks should be entirely responsible for their own operation and should be required to operate on a 100% reserve basis and denied using the fractional reserve system
Who is Mitch Green?
I asked at the Gower Institute for MMT Studies, and got the answer [https://gimms.org.uk/2019/02/24/central-bank-operations-interest-rate-policy/?unapproved=42&moderation-hash=4990b8cae538b65e5618d7b3c23a97e5#comment-42]
Reserves are kept topped up as a matter of policy. It would be a national disaster if the inter-bank clearing system ran out of reserves, so banks are granted a short-term automatic overdraft on their reserve accounts.
It’s not automatic as an accounting identity is, but the policy is so necessary, and so depended on that we can call it automatic.
Hello, Frederico Carvalho:
this is from US banking law: (put in search engine to find… )
“Banks with less than $15.2 million in assets are not required to hold reserves. Banks with assets of less than $110.2 million but more than $15.2 million have a 3% reserve requirement, and those banks with over $110.2 million in assets have a 10% reserve requirement.”
The idea that loans create deposits, and deposits create reserves is state specific, institutional. Money is a creature of the state, it is an institutional, legal, enforcement phenomenon, subject of courts, jurisdiction, etc.
Some countries have no, or little reserve requirements. All statements about MMT principles need to be read with state/institutional law, recognition/sensitivity/appreciation.
I also agree with Newton Finn. How can MMT more clearly align with ecological limits to what we produce and consume? Steady State Economy has a long history (longer than MMT). An economic system functions within a larger but finite ecosystem. Integrate MMT with Steady State Economics and I think you will expand your audience.
These are good questions. The ones I think I know about are:
2. Money as an IOU. The I is the government, the U is the person who carries the cash, or the bank with the money in its reserve account, or the bank customers whose deal with the bank allows them to spend some of the bank’s reserve money as though it were their own.
It’s a funny kind of debt the government owes. There’s no due date, the lender has no recourse, and can’t call the loan in[*]. The lenders wind up transferring the debt to other people in the course of doing business, as you point out, and we all agree that that’s generally just fine. The debt only gets retired when the government creates debts to itself, often as license fees, taxes, and what not, and allows its outstanding debt to cancel the new debts.
So it isn’t the people putting themselves in debt. They do put themselves under the power of the national laws. You might see the government’s debt to them as some kind compensation. I don’t think a financial debt is compensation enough. I expect that there be a moral debt too.
[*] The way the loan might be called is even funnier. You could take your IOU (say a dollar bill) to the treasury and demand to be paid. They would give you a dollar for it.
3. Coercion to use money. Once people get the habit of money, and as long as the nation keeps some smidgen of prosperity, people will be satisfied to keep using money. The national market where the national money is used is just as handy for provisioning me as for provisioning the government, I’m not going to rock the boat.
National taxes payable in national money might be giving the national money a little boost. It might be keeping people in the U.S. from using Deutschmarks, or lire, or yuan, or other things they might think are convenient.
We really see tax policy come front and center in imperial history, when the imperium is wrapping up a conquered territory into a colony. We have a quote from a Belgian official published as part of _The Casement Report_ [https://www.gutenberg.org/ebooks/50573] relating to taxation in the creation of colonies in Africa. The official is quoting a British parliamentarian on British policy:
[I’ve decided not to post this quote here. It’s in the translation of the note from Congo Government in answer to despatch of 8th August to Powers parties to the Act of Berlin, included by Sir C.Phipps. The note contains a quote from a speech by a Mr. Chamberlain in Parliament in 1901.]
The ideas in the quote do show tax in a bad light. I can only say that an abusive government has lots of ways to abuse, the money system being one instrument among many.
(2. I do not understand why MMT chooses to define “money as an IOU.)
Because, anthropologically speaking, that’s what money always was. Money started out as debt that could be exchanged between trustworthy parties for literal millenniums.
The liberal theory of money, that of being pegged to precious metals (later refined to be nebulous resources) is a lazy crank theory that John Locke pulled out of his ass. It was easily disproven in his own time — like all cranks, he just chose to ignore the evidence in front of his eyes. In this case, government literally burning tally sticks, which, unlike the previous metals, was actually money.
You can see the liberal theory of money being disproven constantly in places where the state collapses or was never there at all. For example, Ireland in the 70s.
Brad Delong seems a little upset that you liked James Montier’s summary but didn’t like Brad’s own summary. He didn’t seem to appreciate my explanation of why that might be either. I think you might have hurt his feelings. Maybe you can send him a nice note or something. He doesn’t seem to want to hear anything more from me.
Thanks for your comment, Mel and Deadl E.. I still can’t see that money can be an IOU. In reality, the Government is performing a public service in providing a much more acceptable and convenient way for people to trade on a daily basis. Without a “money system,” the only practical alternative is the cumbersome barter trading. In today’s day and age having to revert to barter would be virtually impossible. I’m sure the South Sea Islanders did not consider a debt was involved when their villages agreed to use a particular shell as their medium of exchange. If there is any anthropological interpretation involved that would have come from the colonialists. Thue, the Europeans stuffed up the Islanders system and culture when they imposed the European money system on them.
I do not believe that using money has anything to do with a habit – it is simply the most logical and practically efficient way to conduct trade that we humans have yet devised.
I simply repeat the question – what is the alternative?
As for taxes – if the MM theory is true – and I believe it is not a “theory” at all – it really is the proper way an independent, democratic Government can and should create and manage the nation’s money system. If that is accepted, and if the Government were to balance the money supply between production and consumption in relation to the population, then there would be no need for taxes at all. Inflation wouldn’t be a problem and the people would demand an acceptable and guaranteed medium of exchange as their tool for survival. Coercion simply would not be needed.
Oh, the poor dear. How do you know he doesn’t want to hear from you, Jerry? Maybe he is out to lunch. He really didn’t like your JG approach, did he. First, he misquotes you. Then he says something stupid, something you wouldn’t say, but implies you would. I haven’t cared what he says for some years now. He should be ignored.
The coercion is in the taxation, fees and fines — try not paying them, and you’ll end up on the pointy end of the sovereign’s monopoly on the use of force (including incarceration).
Very true, EG, but my question is, “Why is coercion necessary when, in this day and age, money is an essential tool for survival for virtually everyone?” People need access to money and they don’t need to be forced to use it.
Why does MMT use that approach? Do they assume people will not use the nation’s legal tender, which any rational Government would decree as the nation’s medium of exchange, unless they are forced to?
I can’t imagine that any nation would willingly allow any or every foreign currency to be used for the daily buying and selling. It would be a nightmare for everyone to keep up with the floating exchange rates. Lincoln said it years ago in 1861, ” the long-felt want for a uniform medium will be satisfied.” He was talking about his creation of the original ‘greenbacks’ as the nation’s currency.
Wouldn’t it be poetic justice to see members of the first family feel the pointy end of the sovereign’s monopoly on the use of force?
Think of the “money as an IOU” this way:
When the government issues $1, it is issuing an IOU (I owe you) in exchange for some good or service. The government is saying “I owe you $1 in tax credit”. Therefore, the $1 is a liability of the government and asset of the recipient. The liability comes due when the government imposes a tax, and is cancelled upon tax payment.
I think the issue is that there not be rival currencies to threaten the nation’ sovereign power to be the exclusive issuer of the currency?