Tag Archives: MMT

The Public Money Monopoly (Pt. I)

By Dan Kervick

Modern Monetary Theory (MMT) emphasizes the central role of governments in sovereign monetary systems.  MMT co-developer Warren Mosler has described the US dollar system, for example, as a “simple public monopoly.”    L. Randall Wray has written that, “In the United States, the dollar is our state money of account and high-powered money (HPM or coins, green paper money, and bank reserves) is our state monopolized currency.”   Sometimes this crucial MMT claim is expressed more broadly by saying the US government is the monopoly supplier of “net financial assets” to the non-governmental sectors of the dollar economy.

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William K. Black: 2nd ‘German Occupation of Greece?

The Job Guarantee is Not Workfare

By Pavlina R. Tcherneva

For a couple of years Ralph Musgrave has been arguing that the Job Guarantee provides jobs that are essentially the same as those in the private sector with the same kinds of inflationary effects. For this reason, he has been treating the JG a simple job subsidy with a training component, similar to various active labor market policies (ALMP) around the world.

While the video is narrated in Italian, the message is clear in any language: When everyday people start to realize that austerity is the problem, not the cure, they will resolutely reject it, and begin to reclaim their democracy from those who would financially enslave them.

2,181 Italians Pack a Sports Arena to Learn Modern Monetary Theory: The Economy Doesn’t Need to Suffer Neoliberal Austerity

By Michael Hudson

I have just returned from Rimini, Italy, where I experienced one of the most amazing spectacles of my academic life. Four of us associated with the University of Missouri at Kansas City (UMKC) were invited to lecture for three days on Modern Monetary Theory (MMT) and explain why Europe is in such monetary trouble today – and to show that there is an alternative, that the enforced austerity for the 99% and vast wealth grab by the 1% is not a force of nature.

Stephanie Kelton (incoming UMKC Economics Dept. chair and editor of its economic blog, New Economic Perspectives), criminologist and law professor Bill Black, investment banker Marshall Auerback and me (along with a French economist, Alain Parquez) stepped into the basketball auditorium on Friday night. We walked down, and down, and further down the central aisle, past a packed audience reported as over 2,100. It was like entering the Oscars as People called out our first names. Some told us they had read all of our economics blogs. Stephanie joked that now she understood how the Beatles felt. There was prolonged applause – all for an intellectual rather than a physical sporting event.

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Addressing the Dominant Critique of MMT

By William K. Black

I’ll begin by addressing today the dominant concern critics have expressed here — the government might act badly with the funds. This is, of course, a real concern. But it is some ways a very odd concern and not a logical objection to MMT. The extreme variant of this critique argues that MMT is “fascist.”

The good news from the standpoint of MMT is that this critique agrees that MMT is accurate and makes available policy choices that are effective in increasing income and employment — and claims that MMT’s effectiveness is the problem because the government leaders might use the increased income and wealth for evil purposes.

If that is a valid criticism of an economic theory (it works — it increases income, wealth, and employment) then virtually any accurate economic theory that improves the economy is “fascist” because the government might be ruled by a fascist and the ruler might use the increased wealth and income to do evil. No one (economist or otherwise) can ever guarantee that a government ruler will not be evil and use the increased national wealth to do evil. Under this logic all effective economic theories are fascist and we should try to make the world as poor as possible so that fascistic governmental leaders have fewer resources with which to do evil.

It is also an odd criticism because it suggests that we should try to hide knowledge about MMT from governments because they might use the knowledge to improve their economies. Trying to hide knowledge about how a monetary system works is a fruitless task. There are tens of thousands of people who understand much of the mechanics of fiat currency systems. Even if we could wipe out the knowledge people would relearn it because their jobs required them to understand monetary operations.

Consider the statements by the UK leadership that the UK has “run out of money.” Does anyone think that the UK financial leaders believe that statement? If Germany declared war on the UK tomorrow would the UK surrender because it had “run out of money” and could not “afford” to increase expenditures to defend the nation? The point is that nations, when faced with the need to make enormous, emergency expenditures, rediscover through necessity the knowledge of how monetary operations actually work even if they previously were captured by economic dogmas that asserted the opposit. That means that a national leader who is determined to be a fascist, imperialist will discover in the course of creating a dramatic growth in its military that it can fund the growth if it has a sovereign, floating currency and if the nation’s debt is denominated in its own currency. (MMT explains that real resources can be scarce, and that can limit the military build up.) So, even if every academic conversant with MMT traveled on the same plane and died in a crash fascist government leaders engaged in an arms race in preparation of invading their neighbors would discover that resources, not funds, were the real restraint on the military growth if they had fully sovereign currencies.

The “fascism” critique expressed on this page does not address two other important points. There are staggering costs to refusing to use MMT to respond to a severe recession. Unemplotyment, poverty, and inequality all rise sharply. Very few democratic governments warrant the term “fascist.” We cannot stop fascist governments from increasing their national wealth by using MMT principles. We should encourage powerful, democratic governments to use MMT principles to recover from severe recessions, which will help them avoid the social disintegration most likely to lead to the rise of fascist leaders. It is theoclassical dogma that is producing the economic crises throughout the periphery that have led to the rise of anti-democratic leaders and policies in much of Europe. Fundamentally, the commenters who raise the “fascist” criticism of MMT do not trust democracy. We would urge against hopelessness. Governments typically use budget expenditures in severe recessions for generally desirable purposes. Instead of embracing over 20% unemployment (roughly 50% for young adults — this is what austerity is doing to the European periphery) as a means to starve potential fascist leaders of the funds to do evil we urge that people work to defeat fascist candidates.

The Italians who joined us for the MMT Summit in Rimini were strong opponents of the fascists. They were regular Italians and their response was overwhelming. Paolo Barnard, the Italian journalist who orgainized the Summit and we, the non-Italian panelists, are all strong opponents of fascism.

The same was true in Ireland, Iceland, and France when we discussed MMT in those nations. The response is so positive because we show that “TINA” is a lie — there are alternatives. We hope Naked Capitalism readers will work with us to implement programs that provide jobs and fund the investments in people, technology, government, and infrastructure that will make possible growth and reduced harm to the environment.

As citizens in a (yes, flawed) democracy, we are not helpless. Our job as citizens is to make our government more democratic and effective and a bulwark against fascism.

Thousands Turn Out to Learn MMT in Italy

DAVID BROOKS ALMOST GETS MMT: Sovereign Currency is a Tax Credit

By L. Randall Wray

In an interesting post today David Brooks wrote this:

“You might say that a tax break isn’t the same as a spending program. You would be wrong. David Bradford, a Princeton economist, has the best illustration of how the system works. Suppose the Pentagon wanted to buy a new fighter plane. But instead of writing a $10 billion check to the manufacturer, the government just issued a $10 billion ‘weapons supply tax credit.’ The plane would still get made. The company would get its money through the tax credit. And politicians would get to brag that they had cut taxes and reduced the size of government!”

He then goes on to rail against tax credits, not quite recognizing the major intellectual breakthrough he has made.

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Why MMT is Like an Autostereogram

By Isabella Kaminska
(Cross-posted from FT Alphaville)

We’ve discussed MMT’s recent foray into the mainstream, and the confusion it has consequently courted.

But that’s the funny thing about the theory. It is naturally divisive because most of the time it fails to communicate its message succinctly. Which is weird, since the premise is actually fairly simple to understand. We’d say it’s akin to looking at an autostereogram. Once you get it, you never see things quite the same way again. But at the same time, try as they might, some people will never be able to see the image. Ever.

And it all rests on one key fact (at least as far as we can tell!) . Rather than treating money as an object of wealth or somebody else’s debt, a means to trade … MMT treats money as a claim on wealth, a product of trade.

This one view makes all the difference. Unlike the first viewpoint, which assumes that debt and money came out of trade, MMT believes debt, or more specifically monetary credit, pre-dates trade. Coinage and all forms of monetary token are thus just a physical representation of what is actually an innate credit system. In and of itself, money — the token — has no value. And this is largely why a fiat monetary system can work. The monetary unit doesn’t need to be a ‘valuable’ piece of metal. It’s who guarantees the token that matters. In modern times, that means the state.

What’s more, suppress the credit system (which in the case of the United States is represented by the government’s debt) and inevitably you suppress an economy’s ability to trade. And this, by the way, is why MMTers believe government debt can never really constrain an economy whose government controls the official currency. Furthermore, this is also why in a time of crisis they believe you need moregovernment guarantees, not less — hence their support of higher debt limits.

If one chart sums up the theory best we think it’s this one from Stephanie Kelton:

What the chart demonstrates beautifully is the symmetry that applies to the balances of a centrally controlled credit system.

That’s to say, for the US domestic private sector to carry a positive balance, the government must in effect carry a negative balance.

This makes a lot of sense if you think of the United States as representing a completely self-contained credit system, where only one official government controlled currency is allowed (and no foreigners can buy US debt). If the economy is to be kept well lubricated and functioning, the government must be willing to take on more debt on behalf of its citizens when the situation calls for it. Think of it as the private sector positve balances (or savings) representing claims on goods and services which haven’t as yet been redeemed. If not for the government’s negative balance, these claims would be represented by billions of private negative balances instead — representations of debts/credits between individuals. Money earned, and taxed, but not yet redeemed. Everything from your right to redeem a dozen baked rolls from your baker one day in the future, to your right to claim 10 days worth of medical services from your local doctor.

Allowing the government to take on those debts/credits (and really we’re talking more about credits) in place of your counterparties allows for claim standardisation. This not only ensures claims can be redeemed more quickly, having a greater wealth effect on the economy, they can also penetrate the system more completely. Furthermore, they are given a state guarantee in place of a private guarantee.

No more is there a risk that the doctor’s services you earned (by fixing the boiler at the medical centre) are lost because the doctor in question has passed away. You will still be able to redeem the services due to the intermediary role played by the government. Your claim is now against the government, not the doctor. You can thus redeem it with anyone who feels inclined to settle transactions with government paper instead of private paper. And why wouldn’t they? Everyone, after all, has a use for official government currency since it’s the only payment unit which will be accepted for the settlement of tax bills — a.k.a the government’s redemption of the claims it has against you.

In a way, the government, via its debt issuance and willingness to take on negative balances, acts as the ultimate central counterparty, clearer and intermediary to the trillions of transactions and trades that take place in its economy every day. The system’s claims against counterparties (of lesser credit quality than the government) are transformed via the financial framework into claims against the state. This is achieved either by convincing those with positive claim balances into signing them over to the state (via debt auctions) or by having the government “spend” on services directly, creating entirely new claims in the process that then circulate through the system.

Taxes, meanwhile, reflect the government’s own ability to redeem the claims it holds against you, generated in the first place by spending on your behalf.

The budget surplus issue

Of course, if the government runs a budget surplus, and receives more tax receipts than it spends — things can get tricky. Some believe surpluses are actually the equivalent of eating away at the stock of wealth in the system. That’s to say, worse than mere monetary tightening.

That’s largely because there are limits to what the government can do with the surpluses. For example, it can use them to pay down existing government debt (by buying back securities), or to borrow less in the new budget year. Alternatively it can offer more tax cuts, or deploy the surpluses into foreign or private investment securities (a la China).

This, though, is dangerous territory for an economy which is already suffering from ashortage of safe assets already (safe stores of value). That is to say, an economy which has generated more claims than it is currently prepared to redeem.

John Carney at CNBC’s Net Net, for example, has explained the problem as follows :

More importantly, even when it isn’t wasted on stupid government projects, the surplus itself is a waste. If it bothers you that the government spends tax money on bridges to nowhere, you should apoplectic when the government takes tax money and spends it on nothing at all. That, of course, is exactly what happens when our federal government taxes more than it spends. The financial assets of the people are simply confiscated.

But more to the point, if the government runs a surplus, it stands to reason that the private sector has to take on a negative balance in exchange, (see Kelton’s chart once again).

Though, if non-domestic claims against the government enter the frame things get even more complicated still. The debt which was originally intended to help mediate the credit transactions of its own citizens is sucked out of the system entirely, forcing the private sector to mediate transactions with non-government securities (and thus more risky guarantees) instead.

The more demand there is for US government securities from abroad, especially in an environment where the government is not willing to generate additional debt, the more the private sector’s negative balance is forced to rise to compensate.

This, by the way, is a situation we are now arguably seeing in Australia.

The MMT response, of course, would be simple. Issue more government debt and let the government take the negative balance, not the private sector.

That’s not to say, however, that there is never a constraint to debt.

It is possible that the state ends up guaranteeing many more claims than are actually possible to redeem — like with our doctor’s example above, because the counterparties who issued the credits are no longer around to make good on them. In that sense a fair share of the claims circulating through the system routinely represent a surplus. As that share rises, the purchasing power of active claims is reduced, since there are more claims than available redemption options. This will naturally be inflationary, and calls for the government to limit the amount of credit stock in the system, which can be achieved by taxation.

So the question is, which situation are we in now? One where there are more claims than redemption options (capacity to satisfy claims) — thus the rush for safe stores of value, of which there are not enough to guarantee everyone’s claims — or one where there is enough capacity to match claims, but not enough government credit to lubricate the system?

Hard to say, really (presuming you buy the MMT view in the first place).

MMT Had a Banner Day

By Mitch Green

Via Animals Explain Economics

MMT received some love from the mainstream press today.  WashPo ran a story titled, “You know the deficit hawks.  Now meet the deficit owls.” via Ezra Klein’s Wonkblog.  Jared Bernstein, Dean Baker and Kevin Drum have each responded with a few words regarding their take on MMT.  For the initiated, this comes as a welcome surprise:  First they ignore you, then they ridicule you, then they run a story about you in the Washington Post.

Every now and again the planets align, and we are presented with an opportunity to do what just moments earlier seemed out of grasp.  There is now space for MMT to influence policy debates beyond the fringes of the blogosphere.  The time is ripe to clarify and strengthen MMT, especially given that as it spreads through new channels we are bound to encounter misinterpretations of our central positions.

It is also important to bear in mind that as MMT spreads beyond the confines of its corner of the blogosphere, we are likely to encounter hostile or opposing views.  Remember to be patient:  you’ve studied this stuff for awhile now; stay classy and offer resources where appropriate.  It’s easy to lose our sense of civility when we forget that at the end of a long chain of cables, routers and wireless cards are two human beings trying to have a conversation.

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Via WaPo