By Philip Pilkington, a journalist and writer living in Dublin, Ireland
Recently the eminent monetary economist Marc Lavoie published a paper engaging with Modern Monetary Theory (MMT). The paper was interesting for a number of reasons, not least the discussion of the European banking system; speculation about which in the media has generated much mythology in the past few months.
Lavoie is largely supportive of MMT and sees it as being essentially correct. However, he also finds that it has much ‘excess baggage’ that he thinks it needs to do away with. At the same time Lavoie notes that MMT has succeeded in appealing to a broad non-academic audience (Naked Capitalism being mentioned by name) which post-Keynesian economics has so far failed to do.
Unfortunately, Lavoie does not consider that what he calls the ‘excess baggage’ of MMT may well be the reason for its embrace by non-academics. In this Lavoie may well be sidestepping the underlying ideological issues that must be taken into account when considering the embrace of a given economic doctrine.
Excess baggage
While I will not go into too much detail about the arguments that Lavoie raises in what follows (the interested or critical reader can weigh my assertions against Lavoie’s paper themselves if they wish), I can sum up Lavoie’s gripes with MMT quite easily: he distinguishes between where the MMTers see what ‘is’ and where they see what ‘ought to be’.
This distinction revolves around the consolidation of the government sector in MMT – which basically means that the MMTers claim that it is theoretically valid to see the Treasury and the Central Bank as a single entity which they refer to as ‘the government’.
Lavoie raises criticisms against this which have been raised oftentimes in the past before – not least by the MMTers themselves. Basically what he is saying is that many governments that operate under their own currencies create institutional arrangements that separate the actions of the Treasury and the Central Bank.
This may seem like a nuanced point to the outside observer, but much of the MMTers rhetoric about taxes not funding spending and about governments spending by crediting bank accounts flows from here. If we accept a strict division between the Treasury and the Central Bank we can no longer make certain rhetorical claims about how the monetary system works.
MMTers consider the institutional arrangements facilitating such divisions to be ‘voluntary restraints’ imposed by ill-informed central bankers and policymakers and in this, so far as I can tell, Lavoie does not disagree. But this is where we see a distinction between what ‘is’ and what ‘ought to be’.
In academic fashion Lavoie insists that we must simply describe existing institutional arrangements and we should not prescribe what we think should, in fact, be the case. And it is on this point, I think, that he is fundamentally in disagreement with the MMTers.
MMT as a political program
My central point is that it is such rhetoric that gives MMT its strength. Ideally, MMT would like to see these constraints – which are weak and fairly inconsequential anyway –be done away with as they are viewed as leftovers from the gold standard-era. With these constraints out of the way all the MMTers rhetoric would be perfectly true.
Every heterodox economist should recognise what gives neoliberalism its strength. It is not its perfect logical consistency or fidelity to the real world (far from!), but its prescriptive capacity. It has, since the mid-1970s, given policymakers the world over – from both the right and the so-called left – a prism through which they could view the world. MMT turns this prism upside-down and that is what makes it so appealing to people who have seen the world economy led into such destruction through misguided neoliberal ideology.
Neoliberalism operates in a very similar manner to MMT in that it essentially gives policymakers a vision for what the world should be like and a toolkit to achieve this. In this regard MMT is far more humble and, rather than chasing the spectre of self-equilibrating markets or some other such imaginary entity, it merely asks that we reform the monetary system so that a functional finance approach can be taken to policymaking.
In this, MMT sees a far more stable and prosperous world in which policymakers understand that, among other things, taxation should be used as a means to stabilise aggregate demand rather than to raise funds for government spending. Without changing the very terms of debate – as the MMTers seek to do – such would be impossible, as it is clear to anyone today that politics is largely dominated by soundbites and ideology.
In my experience MMTers are aware of this and in this they are far more politically savvy than their academic post-Keynesian colleagues. If the frame of reference is not changed there is simply no hope that we can ever change the direction taken by government.
Policymakers and opinion-makers (and many economists) are not rational people. When they hear the term ‘government spending’, for example, it triggers a reflex in their mind that activates the term ‘inflation’. This is never going to be changed through rational argument – as I said a moment ago: these are not strictly rational people. Instead it has to be changed by shifting the very terms of debate.
In the past politically savvy economists recognised this. Certainly Keynes spent as much, if not more of his life trying to shift the terms of debate than he did writing academic treatises. And Abba Lerner, I think, was clearly aware of this need – and this was one of the reasons for formulating his functional finance approach (note that when examined carefully, this approach is mainly about a change in nomenclature rather than a new theoretical approach).
Where does post-Keynesianism fit in?
Post-Keynesian economists must be praised with being easily the most rational in their discipline. They should also be credited with doing some of the most impressive work undertaken in many fields – from theories of capital to monetary economics. However, they have failed to reach an audience beyond their own immediate group. Indeed, they have failed to even have their critiques and constructions taken seriously by their own colleagues and, from the point of view of an outside observer, seem to spend a great deal of time squabbling amongst themselves (which is probably more so an effect of isolation than a cause).
Every one of them can formulate a reason why this has been the case. And I suspect many will think that politics and ideology plays more than a minor role. If they are smart they will see in MMT something that they can hang their flag on – and, possibly, have their theories taken seriously by the mainstream.
Already MMT oriented blogs have begun to pay attention to post-Keynesian theory more generally (I wrote a popularised exposition of the Kalecki profit equation for this site, for example) and things will likely continue in this direction given MMT’s ever-growing popularity.
Put simply: the shift from a broadly defined post-war Keynesianism to neoliberalism was long and complex, but it was undoubtedly a key feature that its main proponents (especially Milton Friedman) had a clearly defined ideological program for governments. This program – based as it was on tenuous assumptions and philosophical trickery – now lies in ruins and there stands nothing ready to take its place.
Something will have to step in to fill this intellectual vacuum and I suspect that, should the academic cloisters be left to themselves, I can confidently predict what this ‘something’ will be: namely, a new Samuelsonian Keynesianism that will be as weak and as watery as its post-war cousin (most likely with someone like Paul Krugman as its leading media light). If this occurs all the fine work of the post-Keynesians will again be confined to the dustbin of history and the ISLM model – which Lavoie rightly presents in the paper as the guiding principle for the majority of the profession – will remain king.
When Friedman stepped into the breach he was largely ignored by his colleagues. “Keynes,” they all assured themselves confidently, “had proved him wrong years ago”. But through a careful refining of his message – together with a formulation of a broad new program for society – he found himself well-placed to fill the intellectual vacuum leftover from ISLM-Keynesianism in the inflationary 1970s (even though, in retrospect, his arguments were at best a sideshow as to what were truly the causes of the inflations of the 1970s).
It was the moral clarity that Freidman gave that found him an audience. And while the MMTers (thankfully) do not construct the sorts of metaphysical systems that Friedman peddled, they do allow us to once again raise fundamental questions about the role of government in advanced capitalist economies. They allow us to raise these questions in a fundamentally popular, interesting, but also eminently post-Keynesian way. To retreat from this because MMTers currently have no say in obscure institutional practices between certain Treasuries and their Central Banks, is a gross error; the equivalent of Freidman fleeing from his prescriptions for controlling the money supply because central bankers were then not adopting this approach.
For too long one gets the impression that, closed in upon themselves and shunned by the outside world, the point of being a post-Keynesian was to win the argument. Today, as this fine tradition gradually emerges from out of the shadows, the point is to win more generally. And one cannot win unless one has a clearly formulated game plan. MMT is the only positive game plan currently being put forward.
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Neither post-Keynesian theory nor MMT address the actual economic system we actually have which is kleptocracy. MMT provides interesting insights into the post-gold standard nature of money, but failing to take into account kleptocracy leaves it making policy prescriptions as divorced from reality as those of the neoclassicals, neoliberals, and Austrians.
They also don’t address inheritance nor accumulated ownership of property.
So while their theory may work in our world, how does it affect the underlying unequal starting point of the 99% being current and future Rentiers and wage slaves to the global inherited rich?
What good is MMT to the public at large? Not much I say.
Yep,
this is my main criticism of it too. It concentrates on the flow of money (and I think what it says about that is correct), but ignores the flow of ownership. I just can’t agree with their indifference to trade deficits.
I get the feeling the answer of the MMT people would be, well if that is a problem you increase taxes. But they are then being politically naive.
Agreed. I have raised this point a number of times on different blogs with them and never had a satisfactory answer.
Strict adherence to MMT now would only entrench the banksters and 1%.
Strict adherence to MMT now would only entrench the banksters and 1%. 4D
I believe you are correct. Some of the “not yet sufficiently rich” are concerned that too much blood has been drained from the victims of the bankers, the entire population. They do not wish to fundamentally fix the system, they just want it to last a bit longer.
> What good is MMT to the public at large? Not much I say.
I disagree.
In a world where every western government is arguing for slashing social spending in the name of austerity, in order to reduce government deficits, which they claim is necessary to increase confidence and economic growth, MMT explains why that chain of reasoning is 100% wrong, and that what we should be doing is in fact the opposite, i.e. increasing govt. deficits and putting more money into the hands of people. MMT provides a coherent rebuttal of the mainstream neoliberal consensus on macroeconomics that is poised to destroy our economies.
The US & UK governments have a significant popular backing for austerity because people (and all mainstream media and politicians, left or right) have been sold on its necessity, backed by incorrect (neoliberal) economics. Explaining MMT to them will show that there is an alternative, that austerity is not remotely justified by economics, that austerity will push the economy towards recession for no good reason, and remove the pretence that it is anything other than a ploy by the 0.1% to further entrench their place in society and further increase their wealth.
Which brings us full circle. As Philip said, without changing the terms of the debate, MMT has no chance whatsoever of changing policy makers’ minds – which is to say constituents’ minds – of the fallacy that government debt is equivalent to household debt. That’s the hardest sell of all IMO. It’s totally counterintuitive to the lay public and would require a monumental leap of faith at the very time that faith in public institutions has rarely been lower. Not to mention the Judeo-Christian punishment ethic that seems to be coming into play now as well; i.e., we all (the 99% at least) somehow “deserve” this and must now atone for our sins.
we all (the 99% at least) somehow “deserve” this and must now atone for our sins.
Not at all, people’s desire for a free lunch far outweighs their desire to be punished. Otherwise how did Reagan sell the country on “cutting taxes to increase government revenue”? Even if an argument contradicts common sense, as you suggest MMT does, people will lap it up. Just suggest they can get something for nothing. The easiest sell is telling people what they want to hear.
People want to hear deficits don’t matter. They just don’t know it yet.
Sorry for massacring my I tags. Here’s a redo:
we all (the 99% at least) somehow “deserve” this and must now atone for our sins.
Not at all, people’s desire for a free lunch far outweighs their desire to be punished. Otherwise how did Reagan sell the country on “cutting taxes to increase government revenue”? Even if an argument contradicts common sense, as you suggest MMT does, people will lap it up. Just suggest they can get something for nothing. The easiest sell is telling people what they want to hear.
People want to hear deficits don’t matter. They just don’t know it yet.
Actually, right now I think people do want to hear that deficits matter. Their personal finances say that they do, and they want their governments to live by the same rules that they do, under the mistaken assumption that the US Government plays by the same rules. Even if it hurts them personally. Most people can’t make a direct connection in any case.
By the way, Reagan’s original contention that deficits don’t matter (refuted repeatedly before he even left office) was primarily directed at the rich from the start, so the idea that this could or would be redirected at some sort of government sponsored mass “free lunch” for the poor is way of base. Given the current political climate, the poor themselves would not support it.
Actually this is where Post keynesian work actually contributes to MMT. MMT cannot be an ideology that will work on its own. Post-Keynesian economics takes sociology and psychology very seriously and in fact incorporates them into their grounded theories on economics. Post Keynesians understand how the system works because they are, at heart, institutional economists. Being a strict MMT’er and not actually reading Post-Keynesian works causes one to miss this fundamental point. This is why the real students of MMT, that come out of UMKC, take a more pluralistic approach to problems.
I didn’t read Lavoie’s piece, but judging from Pilkington’s post I would have to say that I agree with both of them…but I also agree with those that say that MMT can merely be a tool for the 1%…it very well could.
Anyway, those of you who continue to attack Post-Keynesianism quite frankly don’t know what you’re talking about. What makes MMT strong is that it also incorporates PK work when it comes to policy proposals. Those that don’t take such a pluralistic approach cannot make a lasting change to anything. This is why Lavoie most likely insists that we describe what is rather than what ought to be.
The core of MMT is based on close observation of the banking and monetary systems and operations of the Fed and Treasury. It isn’t about ownership and doesn’t pretend to be a moral theory of everything for the field of economics as does virtually every other school.
Put bluntly, politics and empirical study of our monetary system do not mix.
In which case the empirical study is worthless.
Aw, come on this is neither descriptively correct (the MMT blogs I have read are almost all very concerned with the welfare of the common man), nor apposite when you think that the MMT supporters make policy recommendations. That means they have at least implicitly a social welfare concept in the back of their heads (or how else can they make recommendations).
As I said, the core of MMT is a series of empirical observations of how our system ACTUALLY functions. What you’ve been reading are sites devoted to the prescriptive aspect, meaning theory, policy and politics. Spend more time at The Pragmatic Capitalist, who does a good job of keeping politics out of what is by nature a politically agnostic school of economics.
No such creature exists in the real world Ben. Politics and economics are intertwined because economic policy is essentially social policy.
Freedman’s moral clarity was useful, but the reason and the only reason his empty ideas came to the top is that they served the interests of the plutocracy in-waiting, which was the group with the $$$$.
Exactly, which explains why his theories only gained traction where democratic environments were severely diluted or eliminated entirely as, for example, in Pinochet’s Chile–neo-liberalism’s first victim.
“Neither post-Keynesian theory nor MMT address the actual economic system we actually have which is kleptocracy.”
Oh yes it does. Read Part III of Warren Mosler’s book. You can find it online if you don’t want to buy it.
For me, MMT illustrates how the modern monetary system operates. This understanding helped me to see how certain interests have captured a perfectly acceptable appartus and abused it for their own gain, at the expense of the rest of us.
I think many of us want to believe here is some procedural or technical way to address our economic problems. But it seems clear to me we need to focus on getting the locusts out of the corn field.
You are confusing macroeconomics and morals. MMT doesn’t do morals. Churches do.
It is interesting to see how some supporters of MMT say that it absolutely does address kleptocracy while others say it absolutely doesn’t and was never meant to.
Among economists and economic historians, I have only ever heard Michael Hudson actually use the word kleptocracy and that in a limited fashion. And there many be one or two others as well. But even Bill Black eschews the term talking instead of a criminogenic environment. This misses the central point that kleptocracy is a system. It is not crime in the system but crime as the system.
If Warren Mosler or any other MMTer discusses kleptocracy in this sense, I would appreciate a quote. Indeed just lay it out briefly what his position is.
As psychohistorian notes, MMT misses wealth inequality. Wealth inequality is both the purpose and goal of kleptocracy. And again if MMT does not address this, and I think it doesn’t because let’s face if it had we would have heard about by now, its prescriptions for the kleptocratic economy we have are just not relevant.
MMT was not originally an attempt to answer issues of power, class and social well-being. One can perhaps develop related theories after understanding its core but both left and right politics can be entirely consistent with its observations, some of which are:
1) Money is a creature of the state in a modern economy.
2) Governments which have full control of their own currencies cannot become insolvent, nor are they ever revenue constrained.
3) Deficits tuned to the needs of the private sector are necessary to increase the private sector’s financial wealth.
4) Government does not tax or borrow to fund spending; it spends by crediting accounts.
5) Taxes drive fiat currency.
6) The Fed and Treaury coordinate closely and therefore the Fed is not really independent.
7) The banking system leverages government money via horizontal transactions which do not increase net financial assets in the private sector. Only vertical transactions by government can do so.
MMT is valuable BECAUSE its core eschews politics in favor of accurately describing how our banking and monetary systems function. This gives it unparalleled capacity for correctly predicting the effects of economic policies.
>>7) The banking system leverages government money via horizontal transactions which do not increase net financial assets in the private sector. Only vertical transactions by government can do so.<<
Thanks, Ben. Proof to Philip that MMT indeed asserts this preposterous notion. Each act of bank lending creates new deposit money. Brand new claims on real assets, usable to extinguish tax obligations and requiring additional deposit insurance. And an additional new asset — the mortgage or promissory note that can be sold around. These have independent existences and do not offset each other for the economy as a whole. MMT nets to zero, when it should add to two or more.
“And an additional new asset — the mortgage or promissory note that can be sold around. These have independent existences and do not offset each other for the economy as a whole.”
You keep missing a step, dude. When the new asset is sold it creates a liability with the buyer. So, it all nets out. It’s just accounting. You see?
>>You keep missing a step, dude. When the new asset is sold it creates a liability with the buyer. So, it all nets out. It’s just accounting. You see?<<
You've just crossed the line into disrespect, while defending as gospel truth an argument which moments earlier you said was no part of MMT. After having written a putative thought piece about MMT.
Both the newly created mortgage and the newly-created money represent positive claims on real-world production and wealth. That's the banking privilege, it's extractive, and MMT describes it inaccurately. Under it, money flourishes briefly and dies, while debt grows like kudzu. If you'd like to propose -reclaiming- monetary sovereignty through some analog of the Chicago Plan, that's another story.
What newly created money? A mortgage was loaned to someone. The loan creates deposits (to the seller). But that is netted out by the liability on the side of the buyer (he owes the money on the mortgage).
Now repackage the mortgage and sell it on. That creates a liability on the side of the buyer of the repackaged mortgage.
The only time an asset is created is when the mortgage is taken out. But that either has to be paid back or defaulted on. Thus, it nets out — like MMT says.
Again, MMT says that too much private sector money creation is a terrible idea because you’ll get loads of defaults. That’s all MMT says: the government creates much more permanent money. That’s it.
>>What newly created money? A mortgage was loaned to someone. The loan creates deposits (to the seller). But that is netted out by the liability on the side of the buyer (he owes the money on the mortgage).<<
Both the mortgage and the deposit are new, freestanding financial assets, new claims on real wealth. That's the textbook account money creation. MMT, by the way, also denies that new Fed money is offset by the Treasuries the central bank buys. There they imagine the money is net. MMT is a wish-fulfillment fantasy of how money operates.
What newly created money? Philip P
The newly created deposits which function just as well or better than paper currency would.
But that is netted out by the liability on the side of the buyer (he owes the money on the mortgage). Philip P
Only over time. While that credit money exists it functions just like paper currency or coins. The bank has indeed created money – temporary money. This is the source of the boom. Moreover, the bank has stolen purchasing power from every other holder of that money including and especially the poor since they are typically less credit worthy. Worse, the repayment of that loan is deflationary. Hence the bust. Moreover, the interest does not even exist in aggregate thus guaranteeing at least some defaults.
Now repackage the mortgage and sell it on. That creates a liability on the side of the buyer of the repackaged mortgage.Philip P
Irrelevant. The money to buy that mortgage was likely lent into existence too.
Banks are worse than counterfeiters since the latter only cause inflation while the former create depressions too.
MMT, by the way, also denies that new Fed money is offset by the Treasuries the central bank buys. There they imagine the money is net. MMT is a wish-fulfillment fantasy of how money operates. EconCCX
Zing! Excellent point. A clear double-standard. Of course, newly created fiat does not necessarily have to be repaid (as taxes for example) or with interest, so with true deficit spending, net financial assets may be created.
Under it, money flourishes briefly and dies, while debt grows like kudzu. EconCCX
Well said!
MMT doesn’t “miss” wealth inequality. Different writers focus on different things. Some separate “descriptive” elements from “prescriptive”. If you looked for five seconds you’d find plenty of examples.
Like this from Bill Mitchell:
Last I heard, casinos might be dubious enterprises but they are not criminal ones. Again kleptocracy is not criminality in the system. It is criminality as the system. This is an enormously important distinction. Criminality in the system can be rooted out. Criminal practises can be reformed away. But neither of these is possible if the problem is with the system itself. Then the question can only be of how the system is replaced.
Reform, or rather Potemkin reform, is the sop our elites hold out to us. But it is an illusion. Our elites can neither govern nor reform. They can only loot.
Liberal economists who acknowledge that there are problems in the current system but persist in thought experiments about how it can be jiggered here or there to bring it back into line miss the point that as long as the current elites are in place any changes will simply be diluted out of existence by our elites or turned to their use. The ultimate result is that the problems we need to be solved won’t be and the looting will continue.
To repeat virtually no economists that I know of have really grappled with the implications of what kleptocracy really means and consequences it has for their theories.
Agreed!
Why is it that folks (economists) insist on building closed systems that disregard the context within which they are built?
It makes them and their theory of questionable if not of evil value to society as a whole.
You are completely wrong. Dr Wray has used the word kleptocracy and Mosler has pointed out on many occasions that the financial sector is to big, a brain drain, and needs to be reined in.
Actually, friend, it does, but you wouldn’t know that because you’ve probably been lucky to only read a single paper by a post keynesian. Go read the works of Fred Lee and come back and tell me it doesn’t talk about a “ruling elite” or kleptocracy in your words.
Hugh said:
“address the actual economic system”
The biggest impediment to “getting MMT” or “Keynesian Economics” (I see MMT as just a validation of Keynesian Economics) for the common man on the street is:
“Hmmm.. so you telling me I can get something for nothing” (i.e., the gov should print money and spend!).
Keynesian Economics is nothing less than a Copernican Revolution. It flips the “household” understand of economics upside down. It insults the common sense.
The voting masses will remain economically enslaved until basic Keynesian ideas spread to much larger portion of the population.
Even college graduates who have taken economics 101 don’t get the very basic Keynesian ideas right.
Most people implicitly believe in Say’s Law even though they never heard of it. And this Lie is of course promoted and cultivated by the 1% (it keeps them in power).
The ruling church of our modern civilization (i.e., university economics departments) are truly bought and paid for corrupt priests for the 1%.
mansoor h. khan
I have gotten into it with MMTers on numerous occasions. It usually runs something like this. They get hyper-defensive about MMT. They tell you that if you only understood it (like they do) you would accept it too. This combination of over-sensitivity and arrogance generally precludes any real discussion.
And yes, initially MMT ideas come across as counter-intuitive, but the real problem is that MMTers are generally the most ungodly awful explainers of MMT out there, and I say this as someone who is sympathetic to many of their ideas. I think it would be a wonderful exercise for them to come across with a formulation of it that they could sell to the person in the street.
There is also the question of what MMT is. I used to catch hell from MMTers for pointing out to them that, as its name implies, MMT is a monetary theory and monetary theories have limitations as to what they can and can not do. But as can be gleaned from the comments, there are those who take the line that MMT is indeed only a monetary theory while others assert it goes far beyond that. So it is almost will the real MMT please stand up so we can discuss it.
As I have often written the three great facts of our times are kleptocracy, wealth inequality, and class war. Together they describe the political and economic world in which we live. Now, as some here have asserted, MMT has nothing to say about these. If that is so, it is irrelevant to me. If I am on the Titanic, I want to know how to get lifeboats in the water and how to plug a ruptured hull. Manuals on how the ship’s engines really run or should run don’t mean squat to me at that point. Others maintain that MMT, in fact, does treat these subjects. These are the core determinative forces of our times. There is no politico-economic theory out there, including MMT, that accords them the centrality they deserve. Rather there is only a partial recognition of some of them, references to bad behavior and even acts of criminality, all of which fall far short of the reality. It is like equating problems with a couple of the Titanic’s engines with the iceberg. The former is about optimization, the second is existential.
A final point, there are inconsistencies or unclear statements about say taxes. On the one hand, it is asserted that taxes are needed to give money value since the government can demand payment with it. On the other, it is maintained that taxes are not needed by government, that it can simply credit accounts without them. For those who have been around MMT a while, we can what each means, but MMTers need to explicitly reconcile these. The same goes for the point raised by EconCCX: Where does money creation occur? At the bank, the central bank, or the government, and how does it net out or not at each level? And it is really up to the practitioners of MMT to explain clearly what they mean, not ours to try to figure out what they may mean.
Hugh,
Thanks for a thoughtful and detailed comment/reply.
To take your line of thinking one more step forward here is what I see:
The reason most people have a huge problem with MMT is because MMT is a statement of accounting of some reality.
But you haven’t explained the reality itself (i.e., the relationship of currency to the goods and services production process, the “real” economy).
That is like giving someone an income statement and a balance sheet (the accounting) for a business they don’t know what it sells and how it makes its product or service (the reality).
We need to come up with a very simple childlike explanation of Keynesian economics. Something like:
step 1: Spending of currency generates demand (does not matter where the currency comes from, existing savings or currency printed by the government or currency printed by a bank).
step 2: Entrepreneurs react to this demand signal in step 1 above and make stuff and provide services. Entrepreneurs (and workers) can and will work just to accumulate currency itself as savings (for future buying).
Looked at this way the entire economy can be viewed as a giant converter/transformer of raw materials to finished goods and services with demand (as expressed by spending currency) as the driver.
mansoor h. khan
I think we need to stop talking about “class war”,(unless we are talking seriously about waging one), wrt to the current situation. The current situation is the class war is over and 99% of us lost. The state of the class war, at present, is the men are dead and being burned in heaps and the women are tied together being led onto ships for the trip back to Argos. MMT ignores the problem as you point out and “post keynsians” AKA “centrists” AKA neoliberals with a normal human capacity for empathyy, are hostile to the idea that anyone has been immorally screwed over.Pilkington calls Marx a “cult leader”. Thats the place they are willing to start the “conversation”… That any analysis which defines the present system as theft and expropriation is forbidden, virtually garaunteeing thats where it will begin when the majority get around to having it.
Bullshit. MMT does not ignore the problem. If you look at the policy prescriptions which MMT advocates are possible because of the insights into the monetary system ( especially government finance, banking, an international trade) that MMT has given us, you will see that you are wrong.
rotter said:
“MMT does not ignore the problem”.
Still MMT sounds like “magic” from a common man’s point of view. More attempt should be made to relate the macro of MMT to the Micro (supply, demand, inflation and the goods and services production process). I believe the foundation of Keynesian economics does that nicely.
If the foundation of Keynesian economics is true about the relationship of demand, currency, inflation and capacity to produce goods an services then MMT kind of follows (that is how we got out of the Great Drepression –deficit spending for WWII).
mansoor h. khan
With regard to the separation issue I think you forget that politicians as much as bankers can distort money creation for their own ends under the aegis of Agency Theory. The trick would seem to be to meld, or leven, the will of the people with experience and needs from the various sectors of production together with those with perspectives outside production processes such as consumers and pensioners.
Yes, it’s ultimately a political question: the nature of representation.
MMT may be “true” in a functional sense but not in a political sense, where nothing is true or false, as many have observed.
Since money is atomized communal spirit and property and force and protection, Friedman’s radical money-uber-alles was a predictable reaction against the 20th centuries’ collectivist monsters — the fascists, the communists — and their dystopian atavistic incarntions of the God-empowered priest-king.
We have arrived at a similar place, to some extent, although so far without the obvious bloodshed, with our deification of free markets and elevation of the priest-king technocrat central banker and their clergy in the form of banksters, and the neoliberal singularity. It’s a new version of a collectivism, a new aggregation of group self-determination into a deified absolute. It is, very nearly, a neo-Freudian slow return of the repressed.
This is entirely predictable given the laws of the mutation of group consciousness. And Where Friedman succeeded, as Phil indicates, was in linking money-uber-alles to a form of freedom from that very tyranny of the absolute
Now that the absolute has, though a Hegelian process of Protean transformation, reposed itself in its former opposite. So must MMT, and find a way to proclaim itself as a torch of liberty and not an embryonic Trojan horse of incipient collectivist tyranny.
But this is not easy at all. It would seem to require an entire new language of money, an entirely new lexicon that illuminates what wealth and money is. It’s a profoundly moral question, even though that is a queasy term. It demands a new transcendant vernacular, like the point, line and plane that liberated Greek thought and created Euclidean geometry.
once again, my Albert Camus REBEL iPhone app comes through in the clutch.
MMT is a form of intellectual rebellion against so-called “orthodox” economics. In that respect, it’s similar to an artistic rebellion against a decaying and exhausted form of expression, and like all artistic movements, it must contain not only its rebellious energies but also it’s innate recognition of natural form, without which it is nothing.
And so I point my phone at this thread and push the REBEL app’s Go button and BAM! up comes an appropos quote — relating to MMT and the historical memory of tyranny — from Camus’ THE REBEL! Wow, this is cool! LOL
“And so the real drama of revolutionary thought is announced. In order to exist, man must rebel, but rebellion must respect the limit it discovers in itself—a limit where minds meet and, in meeting, begin to exist. Rebellious thought, therefore, cannot dispense with memory: it is a perpetual state of tension. In studying its actions and its results, we shall have to say, each time, whether it remains
faithful to its first noble promise or if, through indolence or folly, it forgets its original purpose and
plunges into a mire of tyranny or servitude.”
-Albert Camus’, THE REBEL, Part One
OR, reject Orthodoxy in the first place. That’s why the YOUNG reinvent the world, and the OLD die with their ideas of how things “should be.”
“But this is not easy at all. It would seem to require an entire new language of money, an entirely new lexicon that illuminates what wealth and money is. It’s a profoundly moral question, even though that is a queasy term. It demands a new transcendant vernacular, like the point, line and plane that liberated Greek thought and created Euclidean geometry”
Always hard to tell where “craazy” leaves off and “man” begins, but I would have to agree with that. If MMT were to be taken seriously at all, it would most definitely require a major rewiring of the world’s financial circuits. Perhaps just another reason why it won’t happen any time soon?
Fantastic post. I really hope we are in the verge of the MMTer/Post Keynsians to breakthrough into the mainstream of the debate, at least enough to be considered as an alternative in these debates. At a minimum, i’m seeing occasional migration to a “sectoral balances” view of the Macro-economy atleast among some “mainstream” Keynesians
I think you are spot on that a broader political frame that is easy to understand is critical for success in the “ideas wars” – something that Friedman in his old “Free to Choose” columns in Newsweek and shows on PBS was totally brilliant.
If MMTers can breakthrough with a cohesive moral/political paradigm, it would be a grand development
It’s not hard to figure out how MMT would be politically sold to the public by the hard right were it to ever gather a serious foothold: as just the latest communist, socialist, far left liberal “big gummint” scheme to steal from the “hard working job and wealth creators of this once great land” to give to the “shiftless, no-account, vagrant and/or migrant welfare kings and queens” who are dragging us to the bottom. And you know what? Even those who would be (presumably) unwittingly targeted by such a tune would dance to it all day long. MMTers would be wise to remember economics is first and foremost a social science, and from a purely social standpoint, they’ve got miles to go before this thing will ever fly in public. I hate to say it, because I really hate marketers, but they need better marketing.
If we got MMT today it would be used to justify trillion dollar bank bailouts and welfare for big agriculture. It wouldn’t be used to help people. In that sense MMT cuts both ways.
But at least an argument is possible. How do you argue against “deficits are bad”? The best you can do is say “deficits aren’t so bad right this minute, mostly”. Weak tea. And as for people who complain MMT doesn’t fully explicate the kleptocratic nature of the system, well — that’s not its purpose.
MMT is not unique. Any monetary/economic theory adopted in our present environment would be used as a weapon against the people.
I interpret the Lavoie paper as a sign that people will soon begin to evaluate the best way to co-opt/corrupt MMT.
reslez,
Excellent points! Time to sharpen the saw.
reslez said:
“Any monetary/economic theory adopted in our present environment would be used as a weapon against the people.”
Solution to all problems of ignorance (lack of proper understanding) is knowledge (enlightenment).
You are correct true social change only comes when a new idea spreads like a religion spreads (the common man must know and understand and have enough understanding to recognize a lie or else ideas will always be manipulated for the benefit of 1%).
The chicken first vs. egg first problem you mentioned in the above comment is solvable. Educate people around you!
mansoor h. khan
Kepp going, Mansoor Khan. You get warmer and warmer, but I think a leap will be required.
Blunt said,
“but I think a leap will be required.”
what do you mean?
mansoor h. khan
MMT is one of those things I really don’t know about, but I must ask, is there a relation? http://en.wikipedia.org/wiki/Don_Lavoie
Biologically? I’m not sure.
Intellectually? Definitely not.
I am curious.
Does it matter to the change in public sector deficit (and thereofer change in private sector savings) if all the citizens spend their time collecting firewood for the coming winter on a government holiday versus if all they all stay in and watch TV all day long?
That would depend on the quality and quantity of the firewood and their derived marginal utility from watching television and not working on said government holiday. We’d have to plot all this together and then we might be able to say something about the private-public balance…
This is an example of the “Economic Incompleteness Theorem”, which I developed after years of intense solitary research into the functioning of deep reality: In every economic discussion, the total quantity of influencing variables always exceeds the number recognized in the argument. It is a universal law.
e.g.
in this case, it depends on what they watch
if it’s the NFL there’s a big economic stimulus everywhere.
if it’s a 24-hour chick flick re-run marathon then nothing happens but comatose guys and women sitting there staring.
and another example of the “Economic Incompleteness Theorem” on a boring Tuesday afternoon.
This one relates to MMT.
At what number of souls does a household become a government?
My guess is someplace around 20,000. But that’s just a guess.
MMT says the deficit is immaterial, what matters is real economy productivity and inflation.
What could be less productive than paying people to sit around watching TV? Is collecting firewood a productive occupation or is it make-work?
Why not pay the people to teach pre-school, insulate houses, care for the elderly/sick, plant windbreaks to prevent soil erosion, design solar panels?
Paying people to do useful things makes the economy more productive, raises overall quality of life, and enhances private sector savings. Paying them to do nothing just increases private savings.
rezlez,
Forgive me, but MMT (actually, western socialist democracy) merely asserts that people should be paid in the form of common currency something for merely being alive. That’s a basic assumption of what we’ve currently going on here in the west, whether or not any of us actually wants to acknowledge it or not. In the alternative, we at least need to begin to act all “grown up” about it and recognize that there will be repercussions. Such as beggars, homeless, criminals, and/or dead people in the streets. In LARGE numbers. Maybe even in (dare I say it) upscale NY and LA!
James said,
“In LARGE numbers. Maybe even in (dare I say it) upscale NY and LA!”
Such extreme economic insecurity also kills the creative spirit of a society.
Just go to any third world country and see for yourself.
mansoor h. khan
Friedman? MORAL CLARITY? That would be bad comedy if it were not so vile.
The essence of Friedmanism: The freedom to choose to own slaves.
This is both morally disgusting, and also self-contradictory.
If foreign countries have legalized slavery, Friedman said that our businessmen MUST be free to employ slaves for anything else would be – wait for it – a restriction on freedom that is effectively slavery!
So the Friedmanites say that the rich must be allowed to use cheap foreign labor. Oh, but private citizens must not be allowed to purchase legal foreign pharmaceuticals or DVDs because – wait for it – that would interfere with the FREEDOM of the rich to make money by restricting trade!!!
I am not making this up. Whatever the faults of Keynesianism, in all its variants. the neo-liberal Friedmanite dogma is simply vile and should not be taken seriously.
The problem with Friedman is that he did not advocate the “freedom to choose” which money to use for private debts. That makes his advocacy of choice dangerously incomplete.
Milton Friedman’s views on the matter of currency monopoly offer a particularly interesting case study. Despite having been an unflinching champion of classical liberalism and free markets, he at first (Friedman 1960: 4–9) shared the common view concerning the necessity of official currency monopolies. But Friedman came to revisit and revise his original opinions in light of the renewed interest in the question Hayek’s work helped to stimulate. Although Friedman ultimately concluded (Friedman and Schwartz 1986: 52) that there is, after all, “no reason currently to prohibit banks or other groups from issuing hand-to-hand currency,” his opposition to official paper currency monopolies remained lukewarm. In effect, he took a stand resembling Walter Bagehot’s of over a century before: although Bagehot thought competitive note issue a better and more “natural” arrangement, he considered it futile to oppose the Bank of England’s monopoly, which was by then already firmly established. “You might as well, or better, try to alter the English monarchy and substitute a republic,” he wrote, “as to alter the present constitution of the English money market” (Bagehot [1873] 1999: 330).
I plan to argue that the case for abolishing official paper currency monopolies is in fact much stronger than Friedman believed it to be even in his later writings. By way of doing so I hope to convince at least some economists, and followers of Milton Friedman’s work in particular, to take up the cudgels for competitive note issue.
George Selgi from http://www.cato.org/pubs/journal/cj28n2/cj28n2-12.pdf [bold added]
The split between central bank and treasury (of a sovereign country with their own currency) has to be defined more clearly. Currently it’s the central bank policy makers, who primarily set rates who are ‘independent’, but if you look at the institutional arrangements you see that this does not mean that the bank as a whole is separate from government. A couple of clues:
* The head of the central bank is appointed by and answerable to the government.
* Central bank profits are paid to the treasury. This is the clearest sign that the central bank is part of the consolidated government, that they share a balance sheet in reality, and that the central bank is ‘owned’ by the government, regardless of ‘independence’ rhetoric, or supposed ‘shareholders’.
* The central bank’s privilege of printing money is clearly under license from the government.
Added to this one has to consider whether a central bank would let government go bankrupt and its bills unpaid. Although this is not explicitly spelled out, it seems clear to me that everyone (market, government and central bank) operates under the assumption that government payments cannot fail.
In conclusion, although policy and rate setting functions may be independent, operationally MMT is right to consider the central bank part of the consolidated government sector.
Yes, I agree. But Lavoie is arguing from the most technical perspective imaginable. And in that he is — technically — correct:
“This expression comes back like a leitmotiv on many of the blogs devoted to modern monetary theory, but it can also be found in academic writings: “Government spends simply by crediting a private sector bank account at the central bank. Operationally, this process is independent of any prior revenue, including taxing or borrowing” (Mitchell and Muysken 2008, p. 209); “The government spends simply by writing Treasury cheques or by crediting private bank accounts” (Tcherneva 2006, p. 78). These statements are at best misleading. They skip one fundamental step that makes incomprehensible the leitmotiv sentence that “government spends first”. Any agent must have funds in a banking account. Before being able to spend, the Treasury must somehow replenish its deposit account at the central bank (or at private banks)…
Neo-chartalists usually give the USA, or Japan, as the standard example of a nation with a sovereign currency. However, even the USA may not be a perfect example of a nation endowed with a sovereign currency. The USA has two self-imposed limits. First, the Fed can only “buy directly and hold an additional 3 billion dollars of obligations of the Government for each agreed period…”.20 This means, as pointed out by Akhtar in the quote found above, that the Fed can mainly purchase federal debt on secondary markets, and not on the primary market. Thus it would seem that Table 2, the post-chartalist view, is a better representation of the American case. Second, as most people are now aware since the debt ceiling crisis of July 2011, there is a limit, set by Congress, on the total amount of debt that can be taken on by the US government. This ceiling must be raised periodically, and it will most likely generate another crisis in 2013 or so. These limitations are recognized by Bell and Wray (2002-03, p. 270), who say that “most nations have opted for self-imposed constraints. These include both ‘no overdraft’ provisions for the Treasury as well as ‘debt ceiling’ legislation”.
Despite this, Bell and Wray (2002-03, p. 266) held on to the idea that Table 1 is the best representation of the American case, and criticized those who brought up the issue of these self-imposed constraints, putting forth the view that consolidation of the Fed and the government allows to abstract from these restrictions: “Post Keynesians like Lavoie (2002) and Van Lear (2002-03) are misled by formal prohibitions on the Treasury. Yes, the Treasury is prohibited from physically ‘printing money’ and from selling bonds directly to the Fed…. We prefer to consolidate the Fed and the Treasury, and leave the minutiae of coordination between them to the side”.21
Neo-chartalists have however put some water in their wine, as the French say, now admitting that things are not as clear-cut as they originally had it, as can be ascertained by the two recent blog comments from neo-chartalist leaders that are shown below. The first comment recognizes that there is no logical necessity in arguing that government spending must occur before taxes are levied: “I have always bucked the tendency of many on the MMT side to argue that the Treasury sells bonds ex post, in order to drain excess reserves…. My position has always been more nuanced. The Treasury coordinates its operations (spending, taxing and bond sales) in order to minimize disruption in the private banking system. In absence of coordination, banks would constantly see large swings in their reserve holdings, and this would be disruptive. In essence, it would force the Fed to intervene on a much larger scale” (Kelton 2010). The second comment recognizes that the US government may need to borrow from the private sector before it can spend. So it is not clear anymore that taxes and bond issues do not finance government expenditures!”
“The first comment recognizes that there is no logical necessity in arguing that government spending must occur before taxes are levied . . .”
You can’t tax until the populace has the currency, and they don’t have the currency until government spends it. Government spends so it can tax.
Where does the trillion dollar coin fall into this analysis? Some writers seemed to think it was perfectly legal and wouldn’t require a corresponding increase in debt.
The fact that such a workaround exists or is even imaginable isn’t good for Lavoie’s case.
Certainly, I don’t want to get into lexical battles, but I think I almost vomited at the first use of “post-Keynesian”; it’s difficult to imagine that I made it through almost a dozen uses of the phrase. It’s taken me years to just get over the first time I heard the idiocy of “post-modernism”. I mean, seriously, anyone who uses either phrase in earnest is daft, aren’t they? I mean, I guess, any combination of letters is just as good as another, but to not notice the determined attempt to construct a phrase that makes one seem as stupid as possible would be rather hard at this point.
And yeah, a political entity is not exactly like a brick of gold, you know, with all the same atoms, non-sentient and the like. To not understand that the people who compose the government and the people who are being represented through that government are, in fact, sentient and differing in values, goals, ages, genders, etc. and etc., is kinda to miss the point, no? The government is fluid and hard to define, no? Is it just me? I guess it is.
Certainly, the different arms of government are changing over time, subject to different influences, and without question not exactly as one would imagine them in theory, whether that be MMT or any other “post-x” idiocy. I guess I am “post-Hammurabian” at the very least; so who am I to judge at this point? Not qualified, surely.
I don’t know much, that is for sure; I still think I can smell hokum and hubris from a good distance at the same time.
It does seem that it’s difficult to live together in harmony. We seem to have different values, even though it seems like everyone seems to think there is only one universal set of values. We seem to convince ourselves of the craziest things. I kinda try to think of all this in the sense of “cui bono”. I doubt any agent, whether in the private sector or the public, really can escape thinking about how any policy affects the policy maker or the policy maker’s family. Not sure how we can think of something as malleable and uncontrollable as a representative government as just “one thing”, but certainly, theorists will, probably until the end of time.
That is all. Grazie mille!
Does anyone at the Treasury know they do not need to have funds in the revenue accounts in order to spend?
If so, whom?
If not, why not?
If not, then how do you know it is true?
Well, the Federal Reserve certainly knows it.
I am no economist or financier, but I disagree with Lavoie’s conclusion (from his paper) here:
“There is nothing or very little to be gained in arguing that government can spend by simply crediting a bank account; that government expenditures must precede tax collection; that the creation of high powered money requires government deficits in the long run; that central bank advances can be assimilated to a government expenditure; or that taxes and issues of securities do not finance government expenditures. All these counter-intuitive claims are mostly based on a logic that relies on the consolidation of the financial activities of the government with the operations of the central bank, thus modifying standard terminology.”
I think there is a lot to be gained because it begs the question: who and what is the economy, then, to serve? The answer, of course, is society and not an economic index, or theory.
It then becomes a matter of what we “ought” to do, not what we “can” do.
Exactly. I don’t understand why Lavoie takes this approach — or, rather, I suspect I do and its because he wants to undertake a purely academic exercise, which is fine.
But as I said in the piece: if you look at how Friedman changed the terms of the debate in the 1970s it was not by objectively describing the monetary system, but rather suggesting how the monetary system could be used in a different way to (ostensibly) bring down inflation. MMTers are saying that the monetary and fiscal systems can be used in a different way to bring down unemployment.
Philip…I didn’t read the Lavoie article, but knowing how academics think I would state that he believes MMT’ers are doing themselves a disservice. PK economics takes a sociological point of view when discussing economics like it does an institutional one(which, MMT is essentially an institutional analysis barring other arguments made on the side). Perhaps by not taking a pluralistic approach, which only those who have sat down and read all the various books and articles necessary to do so, one inhibits their cause or, worse, does exactly what many anti-MMT’ers on this blog like to argue: that you are simply substituting one ideology for another for the 1%. For in fact you must remember, MMT says nothing about the social provisioning process nor how a broad range of institutions have came to develop, and without that an internet MMT’ers arguments for what ought to be simply falls short in understanding the deeper complexity.
Yes, this is a concern. But the difference between PK theory and MMT is the same difference between, say, Austrian school theory and Friedman’s monetarism: both the former are far more comprehensive in their scope and provide a better view of the world (I’m comparing Austrian school here to monetarism, I think Austrian theory is a joke but its all relative), but both the latter have an easily digestible policy message:
“Do X and you can fix Y”
They point to very simple and readily available levers that can be pulled by policymakers.
This is where MMT fits in. It is to Post-Keynesianism as monetarism is to Austrian economics: a vehicle to transmit the ideas of the latter into the policy sphere. That is its genius. And THAT is why — like Friedman in the 70s — it has a chance of changing the very frame of the debate.
MRW: “Who and what is the economy, then, to serve? The answer, of course, is society and not an economic index, or theory.
It then becomes a matter of what we “ought” to do, not what we “can” do.”
Yes. Excellent. Simple.
One thing I liked about this piece was its very neutral description of the MMT movement’s origins and influences. I’m always on the lookout for a clear, cogent and neutral description of MMT to use as an introduction to those unfamiliar with it.
The Wikipedia article has improved a lot since the last time I looked at it, but it’s still not to the level of clarity of the Lavoie paper, at least at the high level. Nonetheless it’s probably the best thing I’ve found. Maybe some of the people here — where the technical writing is often clear and illuminating to me as a layman — would consider contributing to it.
`MMT makes logical sense from the perspective of an explanation of money, the Fed, and the Treasury. However, it does not, and should not try to make justifications for policy actions as good for the country, or morally preferable for the masses.
Just as Newtonian physics could not predict Einstein’s theory of relativity. or Einstein explain quantum mechanics in a unifying theory, it is fruitless to try and expound a all in one explanation of the economy with one theory. Just as the dark matter of space makes up over 70% of the known universe, and yet no one knows what it is, MMT is just a current theory of a non-scientific field which is ruled by the dark matter of psycho-history, emotion, and diversification.
When something is good for some people, it hurts other people. Only one theory is constant-change.
There is a very good article by Aditya Chakrabortty in yesterday’s Guardian entitled “Britain is ruled by the banks, for the banks” which clearly has a global resonance but also significance for MMT supporters in the sense that it suggests the best line to build support from Main Street is to show how private banks undermine economies. By extension the argument has to include their negative power is through their licence from society to create money:-
http://www.guardian.co.uk/business/2011/dec/12/britain-ruled-by-banks?commentpage=7#start-of-comments
Reading a number of economics blogs I find it fascinating the different tacks that they all take in addressing the economic crises that we face.
For example, one finds on let’s say a ZeroHedge, the viewpoint of traders – more or less – and people who directly deal in the markets, their movements and consequences.
Here, at NC we often have the opposite. The discussion revolves more often around theories and their applications to economic systems as a whole with detailed market analysis falling by the way side.
Mr. Pilkington, last week, you claimed that Marx and libertarianism were cults, fantastical ideologies that found support only among the most deluded of populations. The theoretical constructs of each were fundamentally flawed in regards to their economic underpinnings.
However, having read your latest dissertation above, I think the reason that you may believe them to be “failed cults” is reflected in your viewpoint and the not infrequent viewpoint of NC: namely, that modern MMT or post-Keynesian economic theories, their application and the debate of their effectiveness is really the means by which society as a whole should come to understand how economies work. A failure or unwillingness to engage in such – dare I say it? – technocratic bantering bespeaks only of a mind that is prone to the more cultish pseudo-theories of economics which exist on the fringe of polite discussion.
Could it be that Marxism and libertarianism are enjoying such rebirths – even as failed cults – is because that for all of the supposed theoretical “missteps” these theories take at the very least they start their reasoning from the level of the worker/individual rather than the overarching superstructure of banks/governments that dominant our current system?
Yes, the misguided and perverted applications of these theories taken to extremes may provide the world with authoritarianism, totalitarianism, etc etc but at the end of the day they address matters which everyone can understand and thus participate in.
The “playing of God” by technocrats is what infuriates the common person when viewing the EU mess, the US financial crisis, the IMF, the World Bank, etc etc.
And discussions and debates – as are frequently seen here – which only hypothesize on which move our “exalted” leaders will take next, often leave the battered and fatigued common citizen cold.
Sure, one may be intrigued which quarterback the Vikings will field next Sunday but will it matter on Monday morning in the unemployment line?
I’m sure your response will be, “But it’s the only game in town so it’s incumbent upon the individual to understand and engage in the MMT/post-Keynes/neo-liberal philosophical mindset.”
In other words, “there is no alternative”.
My point in writing all of this?
To address the one of the true problems concerning economics in the 21st century – the great technocratic divide in comprehension between those steeped in theory and power and the billions of people affected by the first group.
If you and others believe that the rudiments of MMT or whichever theory you are promulgating are going to catch hold amongst the masses, then I guess you’re more optimistic than I.
OTOH, if you believe that the masses in general should just be kept ignorant and in the dark concerning the underlying constructs of the economic system under which they live and often suffer, that’s where the problem begins in my estimation and again which addresses why the masses cling to such cults.
“Could it be that Marxism and libertarianism are enjoying such rebirths – even as failed cults – is because that for all of the supposed theoretical “missteps” these theories take at the very least they start their reasoning from the level of the worker/individual rather than the overarching superstructure of banks/governments that dominant our current system?”
I don’t think Marxism does at all. Like Ricardian classicism Marxism is an economic theory that takes societies as class-based phenomenon. It doesn’t treat society as an aggregation of individuals, but instead an aggregation of classes.
Neoclassicism and Austrianism claim that they start from the individual, but I don’t think they do. I think, as I have written in the past [http://www.nakedcapitalism.com/2011/10/philip-pilkington-marginal-utility-theory-as-a-blueprint-for-social-control.html] that they strip the individual of his/her individuality in such a way that society is then an aggregation of these abstractions — which are essentially static wants and consumption preferences.
In this, I don’t think that either is ‘misguided’ in its authoritarian outcomes. These are disciplines that essentially claim to know what people want — or, in the case of Austrianism/Neoclassicism, claim to know exactly what policies to pursue to ensure that people get what they want (which is effectively the same thing).
All I claim that MMT can do is allow citizens to understand that their governments have significant control over important economic variables — like the unemployment rate. Right now, high unemployment is taken as a given. 30 years ago people would have realised that it was the governments job to hire people when no one else would. We need to go back to that.
Thanks for the comment. I liked your train of thought.
I continue to not understand how the MMT folk can think they will get the socio-economic change they profess their theory will provide by not addressing the underlying class structure that exists because of inherited wealth and the control over society that those that have it exert.
Implementing MMT will not guarantee everyone a job at a living wage.
MMT doesn’t purport to guarantee anything, not even a minimum wage. What it does do is remove a lot of stupid reasons for saying we shouldn’t have a minimum wage. The rest is up to us.
So here we are posting comments on the web site of the author of ECONned who posited that economics without the inclusion of politics (ie political economy) is seriously lacking (I am being kind).
So the MMT folk here admit it very possibly can’t stop or change the class based system that controls us but we should do it anyway and get us some more hopium about the rest.
Please come back when you have a theory or proscription for a political economy solution to our problems. Making a better rope to hang ourselves with is not the answer.
Fine, but without an economic alternative your political solution will always be shouted down by deficit terrorists.
Debt has a huge hold on the average psyche. How do you propose to break it without re-imagining economics?
We’re caught in a vise between money and power. We need to smash through both. If you focus purely on the political fist, the economic fist will crush you. And vice versa. No one said this would be easy. No one said it would be possible.
It’s like you want to argue over the chicken and the egg when you don’t even have a chicken and the eggs are all smashed. Let’s get an egg first, then we can discuss the chicken. Right now we have neither.
Benedict@Large: “MMT doesn’t purport to guarantee anything, not even a minimum wage. What it does do is remove a lot of stupid reasons for saying we shouldn’t have a minimum wage. The rest is up to us.”
Well put. I want the t-shirt.
A central purpose for a society having a sovereign currency is that it can be used to achieve social cohesion and to protect that cohesion from being destroyed or disrupted. Accordingly if it’s internal social cohesion the ability to create money from thin air pays for a police force and army that can be used coercively to reinforce cohesion. If it’s threat of attack or invasion from another society again the ability to create money to pay for defence forces is essential. Social cohesion is the bedrock of society and so creating money to facilitate this is going to take the most direct route which is to create it from thin air and not wait for it to be collected from privately created sources.
The problem with a single money supply for both government and private debts is at least three-fold:
1) It allows the government to tax via the “stealth inflation tax”. This disproportionately hurts the poor.
2) It allows the banks to steal purchasing power by credit creation in that money supply.
3) The strength or weakness of a single one-size-fits-all money supply cannot possibly be optimally adjusted across the entire economy, neither domestically or for foreign trade.
“This disproportionately hurts the poor.”
Really? How? Inflation is not naturally biased against wages. To the extent that it becomes so, it is by the choices of employers; not by the choice of the government.
Oh, I forgot. “The government made me do it.” Sure.
Really? How? Benedict@Large
1) The poor can less afford inflation.
2) The poor typically are the last to receive new money so that by the time they do, prices have already gone up.
The problem with a single money supply for both government and private debts is at least three-fold:
1) It allows the government to tax via the “stealth inflation tax”. This disproportionately hurts the poor.
2) It allows the banks to steal purchasing power by credit creation in that money supply.
3) The strength or weakness of a single one-size-fits-all money supply cannot possibly be optimally adjusted across the entire economy, neither domestically or for foreign trade.”
The issues you raise are democracy implementation problems.
Number 3) is impossible to solve, democracy or no. As for 2), the banks have proven they can outmaneuver those who attempt to regulate them. They will complain “You are hurting growth” and to a degree they would be correct.
Want a sound economy? Then build on a honest foundation.
I would suggest that some of you spend time reading today’s post @ Bill Mitchell’s blog on the notion of free markets.
“As for 2), the banks have proven they can outmaneuver those who attempt to regulate them. They will complain “You are hurting growth” and to a degree they would be correct.”
Take their money creation power away from them as opposed to their risk assessment role and how do they argue growth is being hurt? The money is there for them to allocate but in particular sector allocated volumes and democratically regulated forms they have not decided.
The money is there for them to allocate but in particular sector allocated volumes and democratically regulated forms they have not decided Schofield
What? You propose giving or lending the banks new money and saying “Here’s $X, lend it for housing. Here’s $Y lend it to small business. Here’s $Z lend it to …”? And how do you propose to know what X,Y,and Z should be relative to each other and in absolute terms?
Plus, you do not eliminate the fundamental problem with credit which is discrimination as to who and who does not receive it.
Isn’t growing a housing bubble discrimination? In other words doesn’t discrimination already take place? And isn’t this precisely the cause of the two Depressions that the banking elites were able to exercise political power to choose the discriminations they wanted? In other words democracy was over-ridden because nobody would sensibly want the consequences of burst bubbles.
Excellent article. Thank you.
From a private citizen’s point of view, discovering MMT has been an enlightening experience, on the level of an awakening. It tells important truths about an essential aspect of social and political life which, it must be said, people have been mislead in. The truth is important for people to know. How else can they make informed decisions?
What Lavoie calls baggage is an essential part of the message MMT conveys: There’s more potential for government action than you think. The voluntary constraints the system has imposes on itself function as limits to potential government action, and at the same time they mislead the public into believing falsehoods about how government finance works. Those constraints are an ideological choice, and not one the public was free to make.
Misinformation about notions as basic as government vs. household budgets, the real relationship between revenues and expenditures, or the true purpose of federal taxes also conveniently ensures the public won’t be demanding a different ideological choice any time soon.
Yeah, I don’t know. When it comes to generating publicly convincing rationales for fiscal policy, I think the Keynesians were far more compelling in saying it’s unwise to shrink the economy, and that “deficits” can be reduced when the economy recovers. That’s pretty straightforward.
The explanation for fiscal policy from the MMT cult reads more like “unsubstantiated technical statement, unsubstantiated technical statement, because I said so, and at least so long as conditions pertaining today still pertain tomorrow, but I do know more than all other economists combined including all your favorites, and–Oh, did I mention how stupid the public is?”
The public has just been scammed out the wazoo by allegedly financially sophisticated hucksters inserting themselves into the democratic process. “Because I’m the uber-economist in this pissing contest and I said so” is simply not convincing.
It’s also disingenuous to say that the public doesn’t know the government can reduce unemployment. That Obama hasn’t done so is the #1 populist complaint about him. Media amplified squawking about the deficit and the tax cuts for
Teh Job Creators is necessary in order to drown out the din of real complaints about government inaction.
It’s also pretty clear that the MMT cult’s minimum wage government work farm idea is indicative of a 1% neo-liberal mentality that indicates they’re marketing themselves to do God’s work Walmartizing the US public.
If this is actually supposed to put a floor under labor rates as opposed to driving down all public employment and then collapsing labor market rates in the private sector, I sure haven’t seen the research that substantiates that theory.
Who needs it. Go shut down a port.
“It’s also pretty clear that the MMT cult’s minimum wage government work farm idea is indicative of a 1% neo-liberal mentality that indicates they’re marketing themselves to do God’s work Walmartizing the US public. ”
One of the more popular post-keynesians, Paul Davidson, called the employee of last resort program “slavery” when he first heard it described.
Yet MMT, neither in describing how the economy works nor in describing what ought to be, say anything about unions or etc. So like Davidson you go a bit too far.
Like I said. I haven’t seen the work. If they haven’t done the research, they shouldn’t be making unsubstantiated claims.
(While crowning themselves the winners of the technocrat pissing contest).
“If they haven’t done the research, they shouldn’t be making unsubstantiated claims.”
That seems reasonable. But hang on… you said:
“I haven’t seen the work.”
So, what’s with the unsubstantiated claims about MMT’s unsubstantiated claims? Double standard, much?
Now this is SO stupid I’m not even going to give you my typical stupid response. The cult has no clothes or you’d be showing them off already.
Substantiate it. Go on. Specific criticism. We’re all waiting.
“unsubstantiated technical statement, unsubstantiated technical statement, because I said so”
Juvenile. I’ve never seen you call any MMTer on their empirics before. Call them first on a specific point.
“It’s also disingenuous to say that the public doesn’t know the government can reduce unemployment. That Obama hasn’t done so is the #1 populist complaint about him.”
That’s what I mean by the ‘terms’ of the debate. The public doesn’t at the moment think the government can DIRECTLY reduce unemployment. The whole debate centers around ‘incentives’ and ‘spurring private sector growth’. Even when stimulus is talked about it’s always wishy-washy nonsense.
The terms of the debate run that deficits matter and are unsustainable. They’re not. (Oh, whoops… I just made a statement, better substantiate that… hang on: http://www.tradingeconomics.com/japan/government-budget). Until the terms of this debate are changed its impossible to even have an argument — otherwise it will be all about bringing down the deficit.
OMG, Pilkie. What was all that brouhaha about the “stimulus bill” all about? Whether it was effective is another set of questions. Since it mostly went to the states to support existing operations, I don’t see how it stimulated much of anything.
But, the question was never “is there money”? They were throwing 10 times as much at the banks at the same time. It was obvious there was money.
Do most Americans want to *permanently* grow government employment, OTOH, I think the answer is “no” if that employment is the workfare byproduct of shrinking private sector employment because we have crappy trade policies that are deliberately anti-labor. I think that’s true across the ideological spectrum.
The whole appeal to untax private sector “job creators” is further misdirection that nevertheless hits another bullseye in public concerns, (although not everyone buys that).
As for MMT, I find their bureaucratically correct claims not that earth shattering and their appeal bizarre. (If only I could declare myself Queen by telling my boss where to send the blue form).
Me: “Even when stimulus is talked about it’s always wishy-washy nonsense. The terms of the debate run that deficits matter and are unsustainable.”
You: “What was all that brouhaha about the “stimulus bill” all about?”
I’m not going to respond to you if you don’t read what I write. And scanning for keywords to pin an argument to is not reading. It’s the internet equivalent of shouting.
And this:
“But, the question was never “is there money”?”
Would you care to ‘substantiate’ that? No? I’ll tell you what, I’ll substantiate the following counter-claim: THAT WAS ALWAYS THE CASE:
http://minx.cc/?post=287678
Who cares what Obama says? Everyone knows Obama lies.
Right…
>>Call them first on a specific point.
Reposting from a few days back:
MMT is founded on the premise that, because new bank money is created against a mortgage, it represents a zero net creation of new financial assets. In fact, the bank creates two or more such instruments: a negotiable medium of exchange, and thus a claim on real assets, PLUS a salable mortgage that can collateralize more money creation. These don’t net to zero; each has a financial life of its own. For each new dollar of exchange media, 1.x dollars of compounding debt.
Since the repeal of Glass-Steagall, banks can use that newly-created “deposit” money to buy investment properties on their own account; they thus have every incentive to book fraudulent loans.
MMT proponents argue as if we’d chosen the Chicago Plan of 100% money. Would that we had.
http://www.nakedcapitalism.com/2011/12/rob-johnson-on-real-news-network-on-the-feds-lifeline-to-eurobanks-and-the-rationale-for-austerity.html#comment-554325
“MMT is founded on the premise that, because new bank money is created against a mortgage, it represents a zero net creation of new financial assets. In fact, the bank creates two or more such instruments: a negotiable medium of exchange, and thus a claim on real assets, PLUS a salable mortgage that can collateralize more money creation. These don’t net to zero; each has a financial life of its own. For each new dollar of exchange media, 1.x dollars of compounding debt.”
No, this isn’t what MMT claims at all. I think you’re thinking of the endogenous or circuitist theory of money. And yes, the circuitists do realise that the liabilities and the assets cancel out.
Sorry, I just reread that. You’re talking about collataralised mortgages and various other debt instruments. That has absolutely nothing to do with MMT or circuitism or anything else.
Circuitism is about how banks determine how much to lend. You’re just talking about repackaging already existing debt. That is an entirely different thing altogether. And yes, your characterisation of the repackaging process is essentially correct, but it has nothing to do with money creation.
>No, this isn’t what MMT claims at all.
From http://pragcap.com/resources/understanding-modern-monetary-system :
only the consolidated government can create net new financial assets. All horizontal banking transactions net to zero. As Randall Wray says:
“Credit money (say, a bank demand deposit) is an IOU of the issuer (the bank), offset by a loan that is held as an asset. The loan, in turn, represents an IOU of the borrower, while the credit money is held as an asset by a depositor.”
Banks merely leverage the currency introduced into the system via vertical transactions.
—–
From Sunday’s NEP at
http://neweconomicperspectives.blogspot.com/2011/12/mmt-doubly-retrospective-analysis.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+EconomicPerspectivesFromKansasCity+%28Economic+Perspectives+from+Kansas+City%29 :
But the point is, debts and credits are always in balance. In the private sector, as we always say, inside debts net to zero. Balance.
When we include a government, its IOUs are balanced by credits held by the nongovernment sector. The nongovernment sector’s net credits are claims on government. The government’s deficit means a nongovernment surplus. It balances.
And when we include an external sector, a domestic deficit must be balanced by a foreign surplus. It, too, balances.
There is always financial balance. Imbalance can arise only due to arithmetic errors. Looking at our global mess as a financial imbalance—as almost everyone does—is a mistake.
(MMT: A Doubly Retrospective Analysis
By L. Randall Wray)
That’s right. All horizontal assets net to zero.
You create a mortgage you get an asset and a liability. They balance. Then you repackage that mortgage and sell it on and you get another asset and another liability. But they all net out.
The problem is that one of the agents might default. No MMTer or circuit theorist ever says that this doesn’t happen. In fact, that’s what the circuitists work is all about: the potential for private debt deflations.
On paper though all private sector (horizontal) transactions net out. So, no ‘permanent’ money can be created. It is always either paid back or defaulted on. Government High Powered Money is never paid back and rarely defaulted on. That’s the point of MMT.
>>So, no ‘permanent’ money can be created.
Absolutely correct. Temporary money creation, offset by permanent, compounding, never-payable debt, which is either defaulted upon or rolled over with new “lending”, i.e. new private money creation. That’s the world we’re living in. The monetary sovereign…isn’t. All government can accomplish by additional expenditure under the present fractional reserve scheme is to deliver additional claims on real wealth to the lords of finance.
Yeah, Minskyian Ponzi pyramid. That’s why MMTers prefer government money creation. It means that the private sector don’t have to do it. That’s what the sectoral balances approach is all about.
>>Yeah, Minskyian Ponzi pyramid. That’s why MMTers prefer government money creation.<<
Prefers it while falsely maintaining that private money creation nets to zero and is therefore benign, as the links show. While purporting to describe the world that is, rather than the social arrangement they'd prefer.
Anyway, you were seeking a substantial exception to MMT. You've at last acknowledged the Ponzi nature of private debt-based money creation; but I've shown you where MMT's authoritative proponents do not.
MMT grew in part out of Minsky’s work. Wray learned all he knew about banking from Minsky and went on to develop MMT. Here is Wray on Minsky:
http://www.youtube.com/watch?v=gRE-IDYfi8Y
To say that MMTers don’t recognise the malign effects of too much private sector credit issuance indicates that you’re not familiar with the developers other work or their backgrounds.
>>MMT grew in part out of Minsky’s work. Wray learned all he knew about banking from Minsky and went on to develop MMT. Here is Wray on Minsky<<
Wray on Minsky isn't Wray on MMT. He's responsible for his own position; it's futile to assert his cluefulness by association. The Wray cites I provided absolutely deny the creation of new financial assets by lending, nor does this clip assert it. Wray's depiction of Minsky's argument describes the "moment" when banks begin to lend recklessly; it does not describe the provenance of those funds.
Temporary money creation, offset by permanent, compounding, never-payable debt, which is either defaulted upon or rolled over with new “lending”, i.e. new private money creation. That’s the world we’re living in. EconCXX
It is an understatement to say “you get it.”
>It is an understatement to say “you get it.”
Nice. Hope I can persuade a few more to forswear MMT, as a false home and diversion. It’s in the nature of academics, unfortunately, to be “locked in” once a particular idea becomes their calling card or stock in trade.
Service-backed money is our only way out. Fear the greenback.
Fear the greenback. EconCXX
Paradoxically, fiat is necessary for a true free market in private money creation so long as we have government and taxes. Otherwise, any money or money form accepted for taxes will have an advantage over monies or money forms not chosen.
@EconCCS said:
“The Wray cites I provided absolutely deny the creation of new financial assets by lending, nor does this clip assert it.”
You evidently didn’t read Wray’s whole article (speech). In the very link that you provide, he goes on to say:
“Here’s the rub. Bank money is privately created when a bank buys an asset—which could be your mortgage IOU backed by your home, or a firm’s IOU backed by commercial real estate, or a local government’s IOU backed by prospective tax revenues.
But it can also be one of those complex sliced and diced and securitized toxic waste assets you’ve been reading about since 2008. A clever and ethically challenged banker (is there another kind?) will buy completely fictitious “assets” and pay himself huge bonuses for nonexistent profits while making uncollectible “loans” to all of his deadbeat relatives.
The bank money he creates while running the bank into the ground is as good as the government money the Treasury creates serving the public interest. And he will happily pay outrageous prices for assets, or lend to his family, friends and fellow frauds so that they can pay outrageous prices, fueling asset price inflation.
This generates nice virtuous cycles in the form of bubbles that attract more money until the inevitable bust.”
So you see, MMT does not deny that banks create money by making loans, on the contrary. The whole point of Wray’s speech at your link was that governments have allowed banks to usurp their monopoly position, thereby reducing their own power to shift private production to purposes that enhance the social welfare.
You ought to understand before you criticize, especially if you want to do it with attitude.
OK, one more for tonight. “Mosler’s Law” at MoslerEconomics.com
“MOSLER’S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.”
No understanding of the root of the crisis in leveraged free-ride money creation. None. MMT authors and academics are ensnared, but MMT bloggers should know better by now.
“MOSLER’S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.” via EconCXX
While probably true, it just enables the exploitation to continue longer. It’s like handing out new Monopoly money so the game can continue but with the same inevitable result – a few own everything.
>So you see, MMT does not deny that banks create money by making loans, on the contrary.
I did read the whole piece, and responded to it. MMT denies the creation of net financial assets through the lending process. Wray states repeatedly that the financial system is being done in by fraud and imprudence, not imbalance. Soddy’s adherents, of whom I am one, argue — no, understand — that accounts do not balance when interest accrues on the books after principal has been extinguished. That’s true whether the bank’s temporary money creation is cautious, reckless or fraudulent. Whereas Wray’s arguing, in his own words, “debts and credits are always in balance. In the private sector, as we always say, inside debts net to zero. Balance.”
I’ll wrap up here in the morning if there’s anything else. Barbara, thanks for the well-supported response.
EconCCX, you appear not to understand basic accounting or finance terminology.
Net financial assets mean assets exceed liabilities as represented on balance sheets. If Assets – Liabilities > 0, then net financial assets exist.
That’s different than a ‘new financial asset.’ One might say a bank loan creates a ‘new’ financial asset, but a liability is created along with it, so it’s not ‘net.’ Debt or “leverage” is created.
But a new financial asset not created along with a liability, which would be a net financial asset, is a deleveraging of the balance sheet. This is different.
Your ponzi stuff again, is quite well understood by MMTers who are heavily influenced by Minsky.
BTW, if you want to refute this, show me the accounting, literally. The T accounts.
>EconCCX, you appear not to understand basic accounting or finance terminology.
Yep, guilty. Good thing this discussion isn’t about me and my notational skills, but about MMT’s reckoning of deposit money creation. Mine is indeed secondhand, but entirely in accordance with textbook economics. I’ve got Samuelson’s 1980 in front of me; the description and balance sheet sequences go on for 12 pages. A concise account is here:
http://www.colorado.edu/Economics/courses/econ2020/section10/section10-main.html
A fairly authoritative one, by Anna J. Schwartz, co-author, with Milton Friedman, of A Monetary History of the United States, 1867–1960):
http://www.econlib.org/library/Enc/MoneySupply.html
And a marvelously succinct description of the process from the Federal Reserve Bank of Dallas:
Banks actually create money when they lend it. Here’s how it works: Most of a bank’s loans are made to its own customers and are deposited in their checking accounts. Because the loan becomes a new deposit, just like a paycheck does, the bank once again holds a small percentage of that new amount in reserve and again lends the remainder to someone else, repeating the money-creation process many times.
http://dallasfed.org/educate/everyday/ev9.html
Most of these accounts use a 10% reserve requirement for simplicity. But Schwartz notes:
—————————————————
“In 2004, banks with a total of $7 million in checkable deposits were exempt from reserve requirements. Those with more than $7 million but less than $47.6 million in checkable deposits were required to keep 3 percent of such accounts as reserves, while those with checkable accounts amounting to $47.6 million or more were required to keep 10 percent. No reserves were required to be held against time deposits.”
—————————————————
So private money creation is accomplished through recursive lending. Since this is all textbook, what’s the beef? It’s with MMT’s assertion that the entire process leads to zero net financial asset creation in the system. MMT subtracts where it should add. Money creation through lending creates at least TWO financial instruments, brand new in the world: 1) Somebody’s valuable, resaleable promise to pay, often secured by a claim on a physical asset, and 2) Spendable bank money, requiring fresh deposit insurance, and which can be used to discharge debt or purchase real-world goods, services and assets. And with which, post Glass-Steagall, financial institutions can buy and sell properties for their own accounts.
These two values begin life unequal, and change at dramatically different rates. The money is created as an overdraft. It may pass through a few hands transactionally, but is very quickly used to pay back principal, at which point it needs to be loaned again, else money contracts. But the debt compounds on the books. In the aggregate, it can only be rolled over as claims against the assets of ever-more-indebted businesses, governments and individuals.
And no, contra Wray, this outcome isn’t a consequence of Ponzi finance or slow growth but a product of the money-creation process itself, as money is presently constituted. And thus it can’t be countered by governments spending more taxing less, issuing greenbacks or running deficits. Easy money has made for debt peonage, for ownership of entire societies by free-riding financial entities rather than producers. Hence the case for SBDM or service-backed money, where the only debt inherent in money creation is the issuer’s obligation to perform some standardized service.
Oh my. There are so many accounting errors in that example, it’s hard to keep track. And you continue to not understanding accounting terminology.
Let me first note, that while the accounting taking place in the colorado.edu link is embarrassingly wrong as it proceeds through the steps (this will be confirmed by any academic or practitioner banking expert and is fully laid out in the pertinent economic literature, and that includes mainstream orthodox authors far outweighing any published MMT literature), note that even the flawed example ends up with the same result I am arguing: the net financial asset position of the bank did not change after loan!!!!!!!!
Before the loan, net financial assets (NFA) were 3. It’s represented as ‘net worth’ on the balance sheet (net worth or equity is commonly presented on the right side of a balance sheet, but would be calculated by the difference b/w the entity’s assets and liabilities). Afterwards, guess what? It’s still 3! And your whole argument is teared to shreds, just like that, even with your own extremely flawed examples! I’ll explain the proper way a couple paragraphs below.
“Banks actually create money when they lend it.”
Like I said, yes, “new” money is created and can be used, but it’s not “net” since a liability is also created.
“Here’s how it works: Most of a bank’s loans are made to its own customers and are deposited in their checking accounts. Because the loan becomes a new deposit,”
Correct, but note that the new loan, which creates a new deposit, also creates a liability in the same exact amount along with it.
“just like a paycheck does, the bank once again holds a small percentage of that new amount in reserve and again lends the remainder to someone else, repeating the money-creation process many times.”
Yes, but nothing is new here. Every time a bank loans, the process I explained above repeats. Asset and liability. Asset and liability. Ad infinitum.
How the accounting actually works:
When banks make a loan, an asset and liability is created. One flaw in the accounting above is that part of the ‘loans outstanding’ is transferred to the ‘reserves’ entry. This is completely wrong by any basic standard of accounting. The accounting entry for the loan remains as much as the nominal amount of the loan that was created, in their example – $1M. So loans outstanding should be $101M. Regarding reserves, if the banks need reserves to meet the reserve requirement, there are 3 basic sources: attracting new deposits, borrowing in the interbank market, or borrowing directly from the Fed. Let’s go with #2, the interbank market; I am sure you’ve heard of it. The federal funds rate (FFR) is the rate at which banks can borrow in that market. So Glen Echo bank, which needs .1M reserves after that loan, will go borrow .1M reserves in that market. Guess how that shows up on its balance sheet? Yup, you’re right! They receive the .1M reserves as an asset and also a .1M liability as their loan! Still, no change in net financial assets!
The major motivating belief leading to the flaws in the above accounting is there discussion of the money multiplier, which is a flawed concept, and the reserve accounting which follows. Unfortunately, the MM is still featured in intro econ textbooks in the US, but up to date economic research in these specific matters runs completely counter, as well as the proper accounting. Even empirical research from the Fed is agreeing, although this paper doesn’t explain the logic behind why it’s wrong, just the empirical data http://www.federalreserve.gov/pubs/feds/2010/201041/201041pap.pdf
Actually, sorry, I used the wrong number ($1M) to explain the flaw in the colorado accounting. Ignore that, and just pretend my example stands alone and banks create a $1M loan.
The problem with the colorado example is that they are skipping accounting steps, explaining things misleadingly, and assuming to casual events that won’t necessarily happen. But as I note, they end up in the same basic place I am arguing: no change in NFA. My critique of it specifically was a little off-base though; I didn’t realize they were skipping some steps and consolidating. None the less, conceptually, it’s flawed in its causal descriptions and could benefit from the detailed accounting I describe above.
This entire discussion is preposterous because it says everything about what the Economic Powers That Be want us to believe about an aspect of financial theory, and nothing about how the international banking cartels actually operate.
It may have escaped the notice of some, but the financial economy has increasingly worked the real economy simply to plunder it – regardless of whatever theories, contracts, and laws may have to say about it.
Professional economics is itself largely a sham that is already well-exposed:
Economists are Trained to Ignore the Real World
http://www.nakedcapitalism.com/2009/12/guest-post-economists-are-trained-to-ignore-the-real-world.html
Our Entire Economy is Built on Fraud
http://tinyurl.com/28ky3m8
Honestly, how can you have a sophisticated economic theory when all the data are corrupted by the motivations of greed and power?
“Let me issue and control a Nation’s money and I care not who makes its laws”.
Amschel Bauer Mayer Rothschild, 1849
“It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
Henry Ford
And speaking of Fraud Please help me understand who are “investors?”
Every day the mainstream press relates how “investors”: have driven up or down the price of European sovereign debt and other bonds and commodities.
Could it be that with the deregulation of the financial sector we really have no idea from these bastards actually are? certainly hedge funds are among them as quants use sophisticated algorithms to buy and sell on the basis of formulas that very likely few people know or even begin to understand. Marching hand-in-hand with these investors are the Wall Street banks with their bond trading offices. and added into the infernal brew is high-frequency trading.
Indeed one wonders whether the speculative financial markets have created and unleashed a predatory monster that step by step is bringing down the economy of the euro zone nations along with that of the United States.
the trading of these bonds is running effectively is an entirely speculative operation benefiting the bond traders and the one 10th of one percent with so much wealth that they have nothing better to do than to bet in the casino. As of 30 or 40 years ago markets were supposed to raise capital for productive investments in education or infrastructure. today it would seem than bond rating is largely destructive but that it also goes on and on without question and without anyone even daring to raise a tax on financial transactions that might slow down the speed of destruction. How can this be? How is it possible for the mainstream media to talk solely of unknown “investors”?
does anyone really have an idea of who these investors are? they surely are very very different from those of the 70s when investment banks were still private partnerships and global finance had not yet become a casino.
Are readers here aware of anyone anywhere raising these questions?
Investors in bond markets surely include pension funds but from what I have seen most of the pension fund managers entrust their investment decisions to bond traders at Goldman Sachs and the like who then take a proprietary algorithmic approach to doing “investment” on behalf of their clients. What is inside the algorithm other than profit for the traders? it seems that no one knows. Is this really correct? What am I missing? Surely I’m not the only one asking these questions?
It seems as though the profits are to be made by undercutting confidence in the ponds and raising interest rates beyond sustainable levels have been since the banks capture the economy prevents interest rates set by central banks and anything above essentially 0, the only place left to gamble or “make” money is the bond market. And yet we have this powerful high-frequency trading system running on automated pilot being left on question to wreak its destructive path. Because all of this is the market magic of “investors”. How can it be that we are still allowing our futures to be determined by this allegedly free-market of “investors” of unknown identity.
What am I missing?
Not much. I think you’ve pretty much captured it all.
“Free markets,” are pretty much an illusion/hallucination for all involved.
All else is hyperbole. And profits/losses of course.
Pretty much THE statement for a generation (or two or three), don’t ya’ think?
So these mysterious investors in sovereign debt are just that? Mysterious because we really don’t know who they are? How many they are? Do the central banks know? Or are the auctions really blind?
I suppose a large number are assumed to be ordinary banks but we don’t really know that I guess do we? Are there any public records to speak of buying or selling? Or holding? Is this really some kind of a charade where no one dares to say the Emperor is naked? Is this perhaps a variation of the idea of derivatives as financial weapons of mass distraction?
Is there much of any kind of answer in Rogoff and Rheinhardt This Time it is Different? I bought it and started to reads it when it came ourt but did not finish. are we condemned to live in a matrix like world of algorithmic trading where unknown forces suck the life out of economies and perhaps the only thing that could slow the predators down and give them second thought would be defaults? And the sooner the better?
Walter_map said,
“Our Entire Economy is Built on Fraud”
Do you have any ideas about how to deal with this fraud?
mansoor h. khan
How about this? Recognition, education, prosecution, indemnification, incarceration, and reiteration with a new goal in mind.
Call me.
Mansoor,
hint
BURN IT DOWN!
James said,
“BURN IT DOWN!”
I thought we don’t need to do that because we have ballot boxes.
Mansoor H. Khan
Granted. Except when the ballots say near unanimously “burn it down!” Not there just yet? Take a breath. Take another. Won’t be long now.
James Said:
“Won’t be long now”
I know that the following statements are a very un-westernern thing to say in 2011:
But the world is ultimately NOT under the control of the 1%. Think about:
1. This problem is mostly a problem of the public having the wrong understanding of the economic universe (household finance vs. how the economy really works).
If those of us who possess the correct understanding could teach it to the “man on the street” the global 1% can be laughed into the court at the hague (like a commentator on NC has said many times).
2. If the 1% had done the right thing (not screw us) we (humanity — the common man) would have started to worship them. Without an understanding (knowledge) of how the economy works humanity (99%) would have equated the 1% with a just and merciful god (implicitly/psychologically/mentally).
3. I see this as a opportunity for humanity to go one notch-up as to how the universe works. And since all knowledge is interdependent, connected, complementary and gives a message that the universe is NOT random and follows specific rules and laws (not only in the physical universe) but also in the economic universe this is just one more step in validating that of all accumulated knowledge and experience has done so far: There is just ONE god.
4. Therefore, I don’t see that burning down is an inevitable result but I see this as opportunity to turn around this human spaceship via knowledge (enlightenment) and cooperation (become aware of our connectedness) and for the humanity to grow spiritually (but not necessary follow on specific religion, although I do think the major world religions will be revived if we make it through this storm).
5. Yes. It may be a bumpy ride and we may not make it but all I can do is pray and do my best.
Mansoor H. Khan
This is going to sound kind of cynical on my part but I always thought the use of the term “job guarantee” by MMT was not the best term.
If they changed it to something like “work requirement” or something that smacks of some sort of punitive measure it would be more palatable for those that complain of “hard earned tax dollars going to deadbeats” or whatever.
Of course this would negate what I think really is the moral argument made by MMT which is that access to an honest days pay for an honest days work is a right not a privilege. That would be a shame.
Choices
Yves, in her introductory chapter in “Econned” states that “This book takes a critical look at the foundations of the ideologly of “free markets” and then explores how this world view came to drive government action.” She goes on to say that “…the work takes a broad historical sweep. It first looks at how developments in economic thinking primarily in the 1940s throught the 1980s translated into new policy initiatives from the 1970s onward that set the stage for the current crisis.”
For Yves, as for all of us in our respective theoretical analysis, there is always an initial choice or decision as to where to conceptually “cut” our(in this case historcal) focus.
By cutting her conceptual focus to that time period(1940s to 1980s) she is able make a strong empirical case for a return to the “embedded liberalism”(stronger state) which was established during the New Deal and later dismantled by the neo-liberalism that gained ascendency by the mid-1970s.
For myself, on the other hand, as a critic of both the market and the state, I prefer to “cut” my conceptual focus to an even broader historical time period, beginning in the late 19th century. By choosing this conceptual “cut” I am able to gather an abundance of persuasive empirical material to support my hypothesis for the fusion of the market and the state, beginning in that time period, and ultimately leading to our present post-democratic regime–the increasing collusion of market and state.
From my perspective, the MMT/Circuit theory debate(with Steve Keen being a prominent proponent of the latter) is also built partially around where one choses to place one’s conceptual “cuts”
Both MMT and Circuit theory seem to agree that the operation of the fiat system responds to the operation of the endogeneous banking system in the sense that the fiat money producer satisfies the requirement for reserves attributable to the lending and deposit activities of the endogeneous banking system.
Yet the circuit group seems to emphasize the supreme importance and perhaps operational dominance of private credit creation(this is where they appear to place a conceptual “cut’ while much of the MMT group emphasizes the supreme importance and operational dominance of the fiat money producer (this is where they appear place a conceptual “cut.”
I would hypothisze that both historical conceptual “cuts” and categorical conceptual “cuts” are the type of conceptual/classifcatory maneuvers all of us use in order to be able to help situate a particular problem.
Such “cuts”/choices also seem to indicate that all problem identification may be metaphoric–that they doe not transparently reflect a situation that exists independent of our respective conceptual formulations.
Despite our attempts to often hide these kind of choices behind a facade of objectivity, perhaps, all we are primarily doing, in our theoretical efforts, is presenting various kinds of normative visions of human life.
Good observations in your last three sentences. But a source of confusion is in NOT realizing that money itself – the monetary side of a monetary economy is nothing but a “metaphoric” “conceptual/classificatory maneuver”, a “normative visions of human life”. When you talk about money, the map IS the territory. Because money, finance IS already a map, to the territory, the real economy.
Austrian/neoclassical/mainstream economics is just one big confusion of the nominal & the real. Keynes, Lerner & the MMTers are just latterday Ockhams/Buridans/Descartes/Hegels/Lukasiewiczs who carefully separate the “real” & the nominal, the “objective” & the subjective.
I’ve just read through all 126 or so responses to this fine article and did not once see the name of Australian economist Steve Keen mentioned. Yes, it is critical for MMTers to change the frame of the debate, but it is also critical for there to be a verifiable theory sufficient to overturn the neoclassical/neoliberal Friedmanite frame which currently dominates the economic world.
Keen is doing just that and doing it very effectively, thank you. Anyone seriously interested in how this works should immediately run out and purchase his latest revision of Debunking Economics, read it and then make sure that everyone in his or her circle knows that it exists. Keen is, to be sure, either an MMTer or an MMT sympathizer. But he is laying the foundation for everything the MMT movement is attempting to accomplish. Furthermore, his research has demolished the Friedmanite neoclassical interpretation of economics as a policy instrument.
Unless and until policymakers at the government level come to understand that neoclassical economics and its neoliberal political counterparts are delusional fixations which are incapable of promoting rational policy, no effort on the part of MMTers will come to mean anything. All such meme shifts require a firm foundation in theory and Keen’s research and writings provide that foundation.
He is currently devising a working model of capitalism which thoroughly overturns the neoclassical illusion of capitalistic operation and thoroughly supports the MMT synthesis. This is an extraordinarily important effort and should not go unnoticed.
>>Keen is, to be sure, either an MMTer or an MMT sympathizer.<<
No, he isn't. He's a circuitist. I consider him a leading light, though with a few points of disagreement. Caught his talk in NYC in September and we chatted about this all at length. If you're confident he's in the MMT camp, by all means share your cites; I and others would be most interested.
Circuitists and Neochartalists (MMT) agree on the horizontal transactions – that’s transactions within the banking system that do not involve the government or taxes.
They usually agree on the accounting on the balance sheet but they differ in how it became that way.
Steve Keen, as a circuitist has not considered the vertical circuit, that’s the one with the government and taxes involved. On his YouTube lectures he cites he has sympathy for the MMT view listing of Randy Wray and others but he disagrees with it.
I would suggest that, so far as I’ve seen, MMT falls victim to the same delusion as the prevailing “school” of economics, in that it is constantly, falsely, evicting other realities from the discussion completely. For instance, the choice to place the US on a permanent war-footing post-WWII and creation of the National Security State has had profound economic consequences far, far beyond those brought by the shift in prevailing money system thinking that got underway in the latter ’70’s. Absent that enormous and still compounding error, for instance, the US would have had no Korea, no Vietnam, no militarized Persian Gulf cheap oil “security” policy that led directly to expensive OPEC oil, an oil embargo, the fiasco in Iran in ’79 (second oil price surge), or the inflation it all caused creating the very conditions for Reagan, the right, and Wall Street to begin their relentless ideological attack on taxes, “handouts”, other government spending (with their own military exempt “cut” version of course) deregulation, the works.
Or take the current situation. Which would be of greater import, a conversion of the money system to MMT with all else left as is, or the enforcement of existing and enacting of new laws to eliminate the current cesspool of Washington/Wall Street corruption? Or saving a trillion bucks a year by getting right out of the Empire business? Or actually convincing the public to spend what’s really needed to address the issues of the permanent, growing underclass, a sum and commitment that now dwarfs what was needed to be spent over a period of decades 50 years ago – and wasn’t? Or finally moving to tackle the enormous transformation needed if we are to survive past mid-century?
In other words, MMT, admitted on all sides to be as readily a tool for good or evil policymakers, is very badly in need of the sort of radical grounding in the paramount requirement for individual and social justice as that provided by visionaries from Christ through the Enlightenment, through Marx, to Martin Luther King, who I view as the last great man America has produced.
In this instance, it really doesn’t matter which theoretical “gun” is used – it’s who is holding and aiming it that counts. Only the environment subsumes all else. It is a terrible error to believe “economics” or the “economy” does.
I completely agree with Philip Pilkington when he says MMT does not describe any current monetary system, but an ideal one, a system with treasury and CB integrated in a single entity.
The fact i’d like to point out is that when reading the most known document of MMT (that is “understanding MMT”), you dont find it clearly written.
you find a number of hypotesis under which the model holds( one of which is of course the one we are talking about, even though it’s not explicitly stated)
Then the author says the the USA are one example of these condictions being respected, so the MMT actually describes the US monetary system. This is exactely the opposite of what Philip Pilkington says in this article.
@EconCCX (from an earlier post)
Ok, here’s my best shot at how I understand MMT on this point (of bank loans as new money) and why I think you’re mistaken:
MMT (correctly) distinguishes the government’s iou — high powered money — from bank credit, a bank’s iou for HPM.
When the government spends into the private economy, that new money has no corresponding liability in the private economy; it increases the base. Contrary to this, when banks make loans, they are not creating new money (HPM) or increasing the base — they’re issuing their own iou, bank credit in the form of a bank deposit in the borrower’s name (i.e., the principal loan). Whenever bank credit is actually paid out in money, it must come from the already existing supply of HPM in the private economy because it couldn’t come from anywhere else. But most often it is not paid out in money. It’s only transferred within the private economy via bank checks representing bank credit (promises to pay HPM), issued by one bank and deposited in another. Bank credits are never all paid out at one time. They couldn’t be, because there isn’t enough HPM in the private economy to cover them all.
Now from the borrower’s point of view. In exchange for the bank deposit of bank credits, the borrower signs a promise to repay — via, for example, a mortgage, which includes not only the principal loan, but also interest. It’s true that the two instruments, the mortgage from the borrower and the deposit from the bank, are not of equal amounts, since one includes an additional promise of interest. But neither instrument is actual money, and certainly not NEW money. They are both promises of money facilitated through the issuance of bank credits.
To the extent that the bank ‘makes good’ on its promise, it does so either with more bank credits or with money that already exists. To the extent the borrower ‘makes good,’ he does so with money that already exists. No new money is created. That’s why it’s called debt. The bank has a debt, and the borrower has an even bigger debt.
Of course, the bank usually pays off its debt by making more promises (in the form of more bank credit). The borrower, not being a bank, pays off his debt by getting HPM one way or another from the existing pool in the private economy. This puts the borrower at a disadvantage, of course, because he has to get that HPM from somewhere (for example, by working), and since he’s promised to pay interest, he has to work even more over time. The bank meanwhile (a) never actually pays on all its promises, and (b) earns its living, over time, from the borrower’s payment of interest.
This may not be a just way to run an economy, I agree. But still, as MMT says, bank loans don’t create new net money.
I hope I haven’t misrepresented MMT in any of this. In any case, this is how I understand it.
Good explanation BarbaraNH, no confusion in it, unlike some other commenters above. There are just some semantics to quibble about. Banks can create money in the form of bank deposits or old-fashioned banknotes – “bank money”. What they can’t create is HPM/reserves/currency/cash – which is state money. You tend to use “money” above to mean only “HPM” / “state money”.
Because the bank money is indirectly backed by the state, it trades at par, it is used as money in the private economy. F Beard, opposing this, says that banks are given the privilege of being a counterfeiting cartel.
It is perfectly obvious that the private sector transactions must net to zero when taken as a whole – because wherever there is a private debtor owing a private creditor, there is a private creditor owed by a private debtor. Obligations of the state to the private sector can only be created by the state – of course! Only you (or the state) can create your own debts.
Some of the confused people, including apparently the author of the main post, above think that a loan like a mortgage & the deposit the bank gives you in return for their asset “cancel each other out” making things net to zero. NO! The deposit cancels ITSELF out. The mortgage cancels ITSELF out. The deposit is your asset, the bank’s liability. Take you two together, combine your balance sheets, think about you two as “the private sector” and by definition you have cancelled each other out already.
MMT really does describe the current system, contra Lavoie’s and others’ confusions on things so simple they repel the mind. In fact it describes all monetary systems everywhere. Once you have said the word “federal government” and noted that it is a meaningful economic unity in the USA (unlike the Eurozone) you have combined the Fed / Treas balance sheets. The psychotic division of the government into the Fed & the Treas, the cult of the central bank is the recent novelty, not the combining, which is how everyone always naturally thinks. Lerner just called it one pocket owing another, and a century ago, the Fed did not even exist.
Thank you. Excellent post. I would add that I think Lavoie’s premise is even wrong ( although I greatly appreciate the quality of his penmanship and the presumed meticulous research he must have done to dig up those citations). Lavoie’s says that it is wrong to assume Fed + Treasure as one entity because its not true today and thus the priciples of MMT cannot be applied but I disagree. First MMT maintains that fiscal policy is the lever to control net financial assets in the private sector. The “debt ceiling” which Lavoie cites as proof of his assertion is nothing more than a fiscal lever itself imposed by Congress. And, we have seen that the lever(or perhaps wall) is malleable. Next Lavoie states that the Treasury cannot spend in unlimited amounts because it must first have a positive balance in its account at the Fed and in order to fund that account it must sell treasuries which cannot be purchased directly by the Fed. This accounting portion of this statement is true. However, the Treasury can sell to intermediaries which can then sell to the Fed. This process may be repeated ad-infinitum if you consider that in the current accounting period a bank/intermediary can overdraft at the Fed to acquire the reserves to purchase the securities which are then later spent back into the system by the Treasury.
The borrower, not being a bank, pays off his debt by getting HPM one way or another from the existing pool in the private economy. BarbaraNH
That’s not necessary or even likely. The borrowers can repay all the principal they owe with the very “money” (bank money – so-called “credit” – temporary money) that they borrowed. As for the interest (in aggregate), that must either be new HPM from government deficit spending or be lent into existence itself.
Yes, I shouldn’t have said HPM. Borrowers could repay with other bank credit. But it would still be from money in the private sector, which balances to zero.
Although interest is a sum that’s an addition to the principal, both are created in the private sector and both will be paid with money in the private sector, however and whenever it gets there, and private sector money sums to zero. It isn’t necessary to separate the two conceptually since neither the principal nor the interest parts of loans are ever due ‘in aggregate’ at a single time — it’s just not a real situation. The notion of payment-over-time is what makes banking possible in the first place.
I recognize the injustice of private citizens having to pay interest to other private citizens in order to use their own country’s money, however.
I recognize the injustice of private citizens having to pay interest to other private citizens in order to use their own country’s money, however. BarbaraNH
Even if the “credit” was lent interest-free there is still the moral problem of where the purchasing power for that new money comes from; it comes from the entire population including and especially the poor who are usually not considered so “credit-worthy” themselves.
Banking is wrong every which way.
Although interest is a sum that’s an addition to the principal, both are created in the private sector BarbaraNH
Actually not. Money is “sterile” as Aristotle said. It does not reproduce itself as for example, cattle do. It is either lent (via the banking system) or spent (government deficit spending) into existence.
Well it’s good to know I got that straight.
So ‘money’ refers to both (1) state money, otherwise known as HPM/reserves/currency/cash; and (2) bank money, otherwise known as bank deposits/bank credit/bank checks/ commercial paper.
Which means that the total amount of state money in the private economy at any given moment is equal to all the currency currently existing anywhere + all reserves in bank accounts at the Fed, correct?
Sorry, previous post was meant for Calgacus.
One gentleman stated that “If I am on the Titanic, I want to know how to get lifeboats in the water and how to plug a ruptured hull. Manuals on how the ship’s engines really run or should run don’t mean squat to me at that point.” Well, he would certainly want to know how to lower the lifeboats–this is part of an explanation of “how things work” on the Titanic.
MMT describes the operation of a financial system. This is an important aspect of our economic reality. It is admittedly not a complete explanation of our economic-political reality. It does not claim to be.
Too many people today have impassioned opinions about matters that actually require serious study before being able to issue opinions worth considering seriously.
The shorter Lavoie is put MMT into standard economic terms so all ready trained economists can understand it.
Lavoie fails to recognise by doing this it will make MMT incomprehensible to the lay public just like all other economics.
Whether intentional or not (I don’t believe it is), it hides economics back behind the veil.
It should also be noted that the Lavoie paper is a Working Paper.