Yves here. Since I still see readers admitting to being confused about modern monetary theory, or making remarks that amount to the same thing, I thought this post from Randy Wray would be of use. Discussions of modern monetary theory elicit far too many reactions that are akin to: “You telling me the world is round rather than flat is really a plot to make me go over the edge and fall off.”
By L. Randall Wray, Professor of Economics at the University of Missouri-Kansas City, Research Director with the Center for Full Employment and Price Stability and Senior Research Scholar at The Levy Economics Institute. Originally published at New Economic Perspectives
*I’ll return to my series on the role of taxes in MMT later this week. Meanwhile, here’s a short post on Modern Monetary Theory.
Modern Money Theory (MMT) seems to confuse two groups of otherwise sympathetic economists. First there are those like Paul Krugman who are generally of the Keynesian persuasion and who like MMT’s “deficit owl” approach. I think Krugman would really like to stop worrying about the deficit so that he could advocate an “as much as it takes” approach to government spending. The problem is that he just cannot quite get a handle on the monetary operations that are required. Won’t government run out? What, is government going to create money “out of thin air”? Where will all the money come from?
He really doesn’t understand that “money” is key stroke records of debits and credits. He still thinks banks take in deposits and then lend them out. He starts to tear his hair out whenever someone tries to correct him on this. He’s wedded to the deposit multiplier idea he got from his Econ 101 textbook.
The other group that is otherwise sympathetic is the Post Keynesians. They understand banking. They know that “loans create deposits”. They know the “deposit multiplier” is actually a “divisor”, as “deposits create reserves”. (Not in any metaphysical sense but rather in the sense that an interest rate-targeting central bank always accommodates the demand for reserves.) However, they cannot understand how a sovereign government spends. Doesn’t it have to borrow the currency from private banks? Like Krugman, they argue that (given modern arrangements), government cannot spend by “keystrokes”.
So here’s an attempt to put the fears of Krugman and Post Keynesians to rest. There is a symmetry between bank lending and government spending.
I also hope to help clarify things for a third group—the “debt-free money” folks who want Uncle Sam to spend “debt-free money”. Short answer: depending on how you look at it, he either already does, or cannot ever do so.
Here we go with the basics of Modern Monetary Theory.
For the past four thousand years (“at least”, as John Maynard Keynes put it—see note at bottom), our monetary system has been a “state money system”. To simplify, that is one in which the state chooses the money of account, imposes obligations denominated in that money unit, and issues a currency accepted in payment of those obligations. While a variety of types of obligations have been imposed (tribute, tithes, fines, and fees), today taxes are the most important monetary obligations payable to the state in its own currency.
There is an approach that begins its analysis of money from this perspective, now called Modern Money Theory (MMT). It is based on the work of Keynes, but also on others such as A. Mitchell Innes, Georg F. Knapp, Abba Lerner, Hyman Minsky, Wynne Godley, and many others—stretching back to Adam Smith and before. It “stands on the shoulders of giants”, as Minsky put it.
Its research has stretched across the sub-disciplines of economics, including history of thought, economic history, monetary theory, unemployment and poverty, finance and financial institutions, sectoral balances, cycles and crises, and monetary and fiscal policy. It has largely updated and synthesized various strands of theory, most of it heterodox—outside the mainstream.
Perhaps the most important original contribution of MMT has been the detailed study of the coordination of operations between the treasury and the central bank. The central bank is the treasury’s bank, making and receiving payments on behalf of the treasury. The procedures involved can obscure how the government “really spends”. While it was obvious two hundred years ago that the national treasury spent by issuing currency, and taxed by receiving its own currency in payment, that is no longer so obvious because the central bank stands between the treasury and recipients of government spending as well as between treasury and taxpayers making payments to government.
However, as MMT has shown, nothing of substance has changed—even though taxpayers today make payments from their private bank accounts, and banks make the tax payments to treasury for their depositors using reserves held at the central bank. And when treasury spends, its central bank credits reserve accounts of private banks, which credit deposit accounts of recipients of the government spending.
In spite of the greater complexity involved, we lose nothing of significance by saying that government spends currency into existence and taxpayers use that currency to pay their obligations to the state.
MMT reaches conclusions that are shocking to many who’ve been indoctrinated in the conventional wisdom. Most importantly, it challenges the orthodox views about government finance, monetary policy, the so-called Phillips Curve (inflation-unemployment) trade-off, the wisdom of fixed exchange rates, and the folly of striving for current account surpluses.
For most people, the greatest challenge to near-and-dear convictions is MMT’s claim that a sovereign government’s finances are nothing like those of households and firms. While we hear all the time the statement that “if I ran my household budget the way that the Federal Government runs its budget, I’d go broke”, followed by the claim “therefore, we need to get the government deficit under control”, MMT argues this is a false analogy. A sovereign, currency-issuing government is NOTHING like a currency-using household or firm. The sovereign government cannot become insolvent in its own currency; it can always make all payments as they come due in its own currency.
Indeed, if government spends currency into existence, it clearly does not need tax revenue before it can spend. Further, if taxpayers pay their taxes using currency, then government must first spend before taxes can be paid. Again, all of this was obvious two hundred years ago when kings literally stamped coins in order to spend, and then received their own coins in tax payment.
Another shocking truth is that a sovereign government does not need to “borrow” its own currency in order to spend. Indeed, it cannot borrow currency that it has not already spent! This is why MMT sees the sale of government bonds as something quite different from borrowing.
When government sells bonds, banks buy them by offering reserves they hold at the central bank. The central bank debits the buying bank’s reserve deposits and credits the bank’s account with treasury securities. Rather than seeing this as borrowing by treasury, it is more akin to shifting deposits out of a checking account and into a saving account in order to earn more interest. And, indeed, treasury securities really are nothing more than a saving account at the Fed that pay more interest than do reserve deposits (bank “checking accounts”) at the Fed.
MMT recognizes that bond sales by sovereign government are really part of monetary policy operations. While this gets a bit technical, the operational purpose of such bond sales is to help the central bank hit its overnight interest rate target (called the fed funds rate in the US). Sales of treasury bonds reduce bank reserves and are used to remove excess reserves that would place downward pressure on overnight rates. Purchases of bonds (called an open market purchase) by the Fed add reserves to the banking system, prevent overnight rates from rising. Hence, the Fed and Treasury cooperate using bond sales/bond purchases to enable the Fed to keep the fed funds rate on target.
You don’t need to understand all of that to get the main point: sovereign governments don’t need to borrow their own currency in order to spend! They offer interest-paying treasury securities as an instrument on which banks, firms, households, and foreigners can earn interest. This is a policy choice, not a necessity. Government never needs to sell bonds before spending, and indeed cannot sell bonds unless it has first provided the currency and reserves that banks need to buy the bonds.
So, much like the relation between taxes and spending—with tax collection coming after spending–we should think of bond sales as occurring after government has already spent the currency and reserves.
Most Americans are familiar with the phrase “raise a tally”, which referred to the use of notched “tally sticks” that served as the currency of European monarchs. The sticks were split (into a stock and stub) and matched by the exchequer on tax day. The crown’s obligation to accept his tally debt was “wiped clean” just as the taxpayer’s obligation to deliver the tally debt was fulfilled. Clearly, the taxpayer could not deliver tally sticks until they had been spent.
It surprises most people to hear that banks operate in a similar manner. They lend their own IOUs into existence and accept them in payment. A hundred years ago, a bank would issue its own banknotes when it made a loan. The debtor would repay loans by delivering bank notes. Banks had to create the notes before debtors could pay down debts using banknotes.
In the old days in the US, notes issued by various banks were not necessarily accepted at par—if you tried to pay down your loan from St. Louis Bank using notes issued by Chicago Bank, they might be worth only 75 cents on the dollar.
The Federal Reserve System was created in part to ensure par clearing. At the same time, we essentially taxed private bank notes out of existence. Banks switched to the use of deposits and cleared accounts among each other using the Fed’s IOUs, called reserves. The important point is that banks now create deposits when they make loans; debtors repay those loans using bank deposits. And what this means is that banks need to create the deposits first before borrowers can repay their loans.
Hence, there is a symmetry to the way the sovereign spends currency (or central bank reserves) into existence first, and then taxpayers use the currency (or central bank reserves) to pay taxes.
Sovereigns spend first, then tax. In that sense, they do not “need” tax revenue in order to spend. This does not mean that sovereigns can stop taxing, however. MMT says that one of the purposes of the tax system is to “drive” the currency. One of the reasons people will accept the sovereign’s currency is that taxes need to be paid in that currency. From inception of the currency, no one would take it unless the currency was needed to make a payment. Taxes and other obligations create a demand for the currency that can be used to make the obligatory payments.
Note that we can say something similar about banknotes and bank deposits. Part of the reason we will accept them in payment is because “we” (at least, many of us) have obligations that need to be paid using banknotes or bank deposits. We’ve got a mortgage debt, or a credit card debt or a car loan debt—all of which normally are paid by writing a check on our bank deposit account. We can fill-up that account by accepting checks drawn on other bank deposit accounts, and with the Fed ensuring par clearing, our bank will accept those checks.
While there is a symmetry between government currency issue and private bank issue of notes or deposit, there are also asymmetries.
Government imposes a tax obligation on (at least some) citizens. Private banks rely on customers voluntarily entering into an obligation (that is, they decide to become borrowers). We can all “choose” to refuse to become borrowers, but as they say, the only thing certain in life is “death and taxes”—these are much harder to avoid. Sovereign power is usually reserved to the state. This makes its own obligations—currency and reserves—almost universally acceptable within its jurisdiction.
Indeed, banks and others normally make their own obligations convertible into the state’s obligations. This is why we call bank checking accounts “demand deposits”: banks promise to exchange their own obligations to the state’s obligations on “demand”.
For this reason, MMT talks about a “money pyramid”, with the state’s own currency at the top. Bank “money” (notes and deposits) are below the state’s “money” (reserves and currency). We can think of other financial institution liabilities as below “bank money” in the pyramid, often payable in bank deposits. Lower still we find the liabilities of nonfinancial institutions. And at the bottom we might find the IOUs of households—again normally payable in the obligations of financial institutions.
A lot of people have great difficulty in getting their heads around all this “money creation” business. It sounds like alchemy or even fraud. Banks simply create deposits when they make loans? Government simply creates currency or central bank reserves when it spends? What is this, creation of money out of thin air?
Yes, indeed.
Hyman Minsky used to say that “Anyone can create money”; but “the problem lies in getting it accepted”. You must understand that “money” is by nature an IOU. You can create a dollar-denominated “money” by writing “IOU five dollars” on a slip of paper. Your problem is to get someone to accept it. Sovereign government has an easy time finding acceptors—in part because millions of us owe payments to government.
Bank of America has an easy time finding acceptors—in part because millions of us owe payments to Bank of America, in part because we know we can exchange deposits at the bank for cash, and in part because we know the Fed stands behind the bank to ensure par clearing with any other bank. However, very few people owe you, and we doubt your ability to convert your IOU to Uncle Sam’s IOU at par. You are low in that money pyramid.
Both Uncle Sam and Bank of America are constrained in their “money creation”, however. Uncle Sam is subject to the budget authority that is provided by Congress and the President. Occasionally he also bumps up against the crazy (yes, crazy!) Congressionally-imposed “debt limit”. Congress and the President could and should remove that debt limit, but we surely do want a budgeting process and we want to ensure that Uncle Sam is constrained by the approved budget.
Still, Uncle Sam ought to be spending more whenever we’ve got unemployment.
Bank of America is subjected to capital constraints and limits on the types of loans it can make (and types of other assets it can hold). Yes, we freed the banks from most regulations and supervision over the past couple of decades—to our regret. Those with the “magic porridge pot” do need to be constrained. Banks can, and frequently do, make too many (bad) loans—which can bubble up markets and create solvency problems for them and even for their customers. Prudent lending is a virtue that ought to be required.
The problem is not the “thin air” nature of the creation, but rather the quantities of “money” created and the purposes for which it was created. Government spending for the public purpose is beneficial, at least up to the point of full employment of the nation’s resources. Bank lending for public and private purposes that are beneficial publicly and privately is also generally desirable.
However, lending comes with risk and requires good underwriting (assessment of credit worthiness); unfortunately our biggest banks largely abandoned the underwriting process in the 1990s, with disastrous results. One can only hope that policy-makers will restore the good banking practices that were developed over the past half-millennium, shutting down the largest dozen global banks that have no interest in good banking.
Some have given up hope in our banking system. I’m sympathetic to their pessimistic views. Some want to go back to “greenbacks” or to the Chicago Plan’s “narrow banks”.
Some even want to eliminate private money creation! Have the government issue “debt-free money”! I’m sympathetic, but I don’t support the most extreme proposals even if I support the goals. Such proposals are based on a fundamental misunderstanding of our monetary system.
Our system is a state money system. Our currency is government’s liability, an IOU that is redeemable for tax obligations and other payments to the state. The phrase “debt-free money” is based on a misunderstanding. Remember, “anyone can create money”, the “problem is to get it accepted”. They are all IOUs. They are either spent or lent into existence. Their issuers must accept them in payment. They are accepted by those who will make payments, directly or indirectly, to the issuers.
In the developed nations we have thoroughly monetized the economies. Much (maybe most) of our economic activity requires money, and we need specialized institutions that can issue widely accepted monetary IOUs to enable that activity to get underway.
While our governments are large, they are not big enough to provide all the monetary IOUs we need for the scale of economic activity we desire. And we—at least we Americans—are skeptical of putting all monetized economic activity in the hands of a much bigger government. I cannot see any possibility of running a modern, monetized, capitalist economy without private financial institutions that create the monetary IOUs needed to initiate economic activity.
The answer, it seems to me, to our current financial calamities does not reside in elimination of our for-profit financial institutions, even if I do see a positive role to be played by new public financial institutions (maybe some national development banks and some state development banks and a revived postal saving system?).
We do, however, need fundamental reform—including downsizing (probably breaking up or closing) of the behemoths, greater oversight, more transparency, prosecution of financial fraud, and putting more of the “public” in our “public-private partnership” banking institutions.
Note: See L. Randall Wray, Understanding Modern Money: the key to full employment and price stability, Edward Elgar 1998; and Wray, Modern Monetary Theory: A Primer on Macroeconomics for Sovereign Monetary Systems, Palgrave Macmillan, 2012.
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Hyman Minsky used to say that “Anyone can create money”; but “the problem lies in getting it accepted”.
I can accept MMT principles within the borders of the currency issuer’s sovereignty . Where I start having problems is when it comes to foreign exchange – getting people not subject to the sovereignty of the currency issuer to accept her monetary tokens as having value. Historically precious metals were used as a way of actually injecting tokens with accepted value outside the issuers realm. And it was rare to find a situation where a tribe or statelet did not need to engage in trade with others outside its borders.
This may not be a problem for a global hegemon like the United States –but for smaller, less powerful nations it seems to be a quite serious issue. The most obvious recent example was the hard currency crisis of 70’s and 80’s in the Eastern Bloc nations, where at times they had such a shortage of hard currency (money excepted by traders outside of the Eastern Bloc) that East Germany had trouble importing coffee. The sovereigns of these nations could spend into existence as much money as they wanted but since the people who controlled the goods these sovereigns needed would not accept Communist currency (or demand ruinous exchange rates), the sovereigns were forced to borrow (or sell goods if possible) to obtain hard currency.
The key here being that the sovereign issuer of currency has no sovereignty over exchange rates offered by foreigners for her currency and is therefore at the mercy of these foreigners if she needs to engage in trade with them.
And as the Eastern Bloc example shows, it seems like an obvious tool of hegemonic power for the leading nations to refuse to accept trade or give loans in currency from smaller (and possibly hostile) states and to instead force them to use the hegemon’s coin. Isn’t this kind of what we are seeing with the current disputes with Argentina? Using the hegemon’s coin (or some recognized metallic standard) is the entry barrier to international trade for less powerful nations.
As I understand it MMT recommends flexible international exchange rates (seems reasonable) but for non-dominant nations, doesn’t this exchange rate constraint very quickly start limiting the sovereign’s ability to spend money into existence, if by doing so she is debasing her currency’s value in the eyes of foreign traders or lenders?
I think it is accurate to say that the MMT perspective prefers a free-floating currency because it gives countries maximum control over their domestic policies, but that free-floating is not necessarily the best solution for everyone at the present time.
Smaller, less productive and diverse economies are going to have a more difficult time obtaining the foreign goods and services they require for development. For one thing their currencies are not particularly desirable in real terms, because they don’t make much that anyone wants to buy. They are also consistently afflicted by currency speculators chasing yield, which in my opinion rarely works out to the benefit of their citizens.
A solution of sorts can be found in the form of strict capital controls but this is coercively discouraged by the United States and other developed capitalist countries.
Our imperial currency wasn’t quite desirable either, until we made a deal that Saudi Arabia first, and then the OPEC later, found they couldn’t resist.
+100
I wish I were an economist because then I would immediately start work on HMT, Hegemonic Monetary Theory. Because after those deals with OPEC, the US could basically print oil, and most rest of the world had to buy dollars if they wanted to buy petrol.
That’s a good point.
The question that comes to mind immediately is, was it an offer they couldn’t refuse or what did they get out it?
We can all follow that up on our own.
The 800 lb. gorilla. The US military and military might. The Saudis bought themselves a protector with their oil and we bought all the oil we needed with our weapons and treaties. So “printing oil” is a very good description. Money became a universal commodity, and the bedrock of all other commodities, and which we bartered – as a powerful military nation, primarily for oil. That was a political decision, made by a country run by an oligarchy of militarists. If theories of money transcend power there should be no necessity to talk about currency speculation – all currencies should be good enough to hold their own based on their tax laws. But that simply isn’t the case. In a country without a military power base printing money out of thin air creates a bunch of worthless stuff. It’s probably why Marx saw capital as a social relationship, not wealth. But MMT is still the best way to look at using money. The caveat being that we should control military spending. And another caveat should be that even a superpower can get into trouble when it starts to “print oil”, or any other commodity. That really is tantamount to printing wealth out of thin air. And on top of printing wealth out of thin air, if banksters try to charge high interest on that money the whole thing becomes financialized and cannot be rationally accounted for. Every problem we have now we can still have with MMT if we do not control financialism, except the idiotic argument of the budget ceiling. It would be so nice to get rid of that stupid pretense so we could spend the money we need to spend. But we’ll never be off the hook for the purposes and goals of our spending and therefore the danger of printing money out of thin air or whatever. Money is easy to create and should be created without hesitation for good purposes. Period.
We should get off the black gold standard as we got off the gold standard.
Whether money is easy to create or not, the first task we need to confront has nothing to do with creating money. We need to address wealth inequality by
1. a wealth tax
2. GDP sharing.
We should avoid creating more imperial money (with the intention of using it to address economic problems), since we have no way to predicting how or how much it harms many other countries, as our hot money rushes in and then out, wreaking havoc everywhere. We can live with (or even fare better under) economic problems, such as insipid GDP growth or even GDP decline, if we share what we have.
And when we are off the black gold standard, we can create money via the People spending it into existence. The non-imperial money we create will not impact others (too much).
Wealth is a social relation. Exploiting working people less is the answer to “wealth inequality.”
Going forward, yes, GDP sharing and progressive income tax.
Addressing the past, we need a wealth tax.
No, you just repeat the original talking point in a new guise.
“In a country without a military power base printing money out of thin air creates a bunch of worthless stuff.”
Worthless stuff? The New Zealand Defence Forces wouldn’t last half a day against the NYPD second-XI, but the Kiwi Dollar has reached an all-time record high against the $US due to international demand. Why? Because we’re up to our eyeballs in meat and milk, and you can’t eat a dollar bill.
I’m not confused hardly at all!
MMT is very simple: a fiat regime in a floating exchange rate environment need never incur public debt.
another way to say this is: cut out the central banks, the middlemen, and have the government issue currency as needed and there will be no need for interest on public debt because public debt should not exist, unless necessary. But think about it, why would it be necessary if youre not borrowing money, youre creating it. it’s simple really. kind of like public banking, but a little different in scale.
cut out the banks. simple. MMT.
man will never be free, until the last banker is strangled with the entrails of the last politician – Diderot(paraphrased and applies to the ladies too)
Randdall Wray’s colleague Dan Kervik wrote an eye opening article, very simple that has become a touchstone MMT article for me. Read it and you’ll understand how simple MMT really is. Weh nI read it the first time I had an epiphany about why dick cheney so brazenly said “debts don’t matter”.
http://neweconomicperspectives.org/2012/04/why-does-uncle-sam-borrow.html
in actuality, it is central banks that dont matter, in a fiat regime with floating exchange rates, central banks are basically parasites and rapists.
We agree we can skip the central bank and I think we can have Money Creation via the People Spending it Into Existence.
yup! you got it ; ) ….now try explaining that to your mom or brother…..lol…..it’s useless, might as well speak klingon…i mean my brother is a freaking 7 figure dentist that works 90 hours a week……hahaha….i have no job but my total debt less than 10k!…..lol…there’s yer problem…..we’re gonna need a bigger boat..
I’m not sure what you’re suggesting here. The USD was highly desirable prior to Roosevelt’s Saudi adventure by simple fact of the country’s vast productive capacity. Political stability, high productivity and diversity of output make any currency a valuable commodity. Japan has no trouble importing and they don’t have a dollar factory.
I know this is a favorite idea of yours, but military might is not a particularly efficient way of becoming a reserve currency.
Japan first had to earn lots of dollars.
Ben, when you claim your currency can be exchanged for oil at any time, as priced in the futures market, and you can print as much as you want, efficiency is not a big problem.
That’s why it’s good to have a currency backed by Black Gold.
zactly, ben is confuz-ed or biased like the rest of us….or both…
Excepting that A) .U.S, had no problems getting its currency accepted before, and B) the yen is a very desired currency on its own. You give too much credit to the oil trade; if it became diversified the U.S. would still be OK in the long term.
Maybe we can persuade the Saudis to undo the agreement.
And I would like to see if the Japanese currency is still welcome with her dollar reserves.
you would both agree that russia is very far advanced in planning to break dollar …i guess dominanace? and I hesitate to say petrodollar, because even as we see the breaking of dollar hegemony right before our eyes, we still see the GCC countries and …belgium…loading up on doelarz…so…yes….doelar “hegemony” as such maybe over but the death of the petrodollar is not here and now.
the other thing also is that russia is upgrading and building a swift type alternative….
The whole post explains why “backed by,” well, isn’t even wrong. Had you considered reading it?
Printing money by itself definitely wouldn’t help. The money has to be used as a tool to generate employment by employing labor in useful activities. This then builds a healthy domestic economy which can develop a more valued currency.
MMT views a flexible exchange rate as the one which allows the most policy space.
Stephanie Kelton gave a recent presentation on this at the Fields Institute at the University of Toronto.
“Fiscal Space and Financial Stability: A Differential Analysis”
http://www.fields.utoronto.ca/video-archive/2013/11/221-2524
“Printing money by itself definitely wouldn’t help. ”
Since “printing money” is simply running a deficit, is it really your position that running a larger deficit wouldn’t help?
What if we suspended FICA, the deficit would be exogenously increase by more than $1 trillion, meaning workers will get a 7.5% raise and the private sector will enjoy a trillion worth of increased net income, do you really believe that the economy wouldn’t be doing better if an average two earner household making a combined $100K a year got a $600 per month raise?
No, I agree with you with re FICA. Just saying that deficits are essentially the public purse and should be used for the public purpose.
I think being able to print is useful for the purpose of full employment, which is a good first step on the road to development. But you’re right that letting the presses roll isn’t a good way to buy foreign stuff. For a time at least a developing country would need to limit imports, both to avoid racking up foreign denominated debts and to protect fledgling industries until they can hold their own.
This is why it’s an article of faith among US MMTers (begging the question of just how popular is this idealogical theory in non-reserve currency owning states) that the USD can’t lose its reserve currency status, even despite the now near daily news reports of states agreeing to conduct bilateral or bloc trades in currencies other than the USD, or even (gasp) gold. MMT or not MMT a poorly managed or corrupt monetary regime will eventually lose credibility in the world, and subsequently (after access to imports collapse) even among the constituent citizens of the sovereign currency issuing state itself.
But all of the above is just so much meaningless fluff that has little to do with actual existential problems humanity is facing. Capitalism (as well as Socialism, or any other kind of economic system with centralized bureaucratic controls and an growth-dependent industrial economy) is a disease that must be done away with for the survival of our species and the survival of the biosphere. A fairer, more equitable capitalist system, as theorized would occur under MMT, is still a certain path to extinction regardless. Therefore spending so much time theorizing about it is a waste of time, and likely detracts from real efforts underway that would give us a fighting chance for survival. Such as Contractionism.
jgordon,the fact that the US dollar is a “reserve” currency at present has absolutely nothing to do with MMT which deals with the internal use of a sovereign fiat currency.
The rest of your comment betrays your membership in the Flat Earth Society. Yes,that is related to Flat Earth Economics which MMT is attempting to remedy.
I am no scholar on the topic. But i get the impression that metals were used before the concept of sovereign currencies, because early payments were done by weight. As such, sovereign currency was pretty much the sovereign “certifying” that the piece of metal was of x weight. Thus it allowed counting rather than having to mess with scales and such.
And certain metals were used because they were easy to work with (gold in pure form is pliable etc), and they didn’t corrode while stored.
I’d like to know what R. Wray thinks of G. Ingham’s position, ie basically: Yes, MMT is right, the state doesn’t need its citizens’ money, but our modern economies are the result of a historical compromise between the state (authority) and bankers (creditworthiness and sound money), and the ‘government debt funding ritual’ (that’s my interpretation of Ingham’s opinion) is what infuses trust into the whole system.
I’m not sure I agree with this point of view – bankers’ creditworthiness and sound money has all but vanished and states are vastly more powerful than they were centuries ago -, but it would be great to get some feedback on it.
Sorry for my English.
Under an MMT system we would need only one bank.
Clearing would be done within the one bank on a cash basis.
Wray explains why not in the post. Had you considered reading it?
Yes, I read it when he posted on his home blog.
Why the hostility?
His question is the politest way I know of to deal with a reading comprehension failure. And it was not hostile.
I do not have a reading comprehension problem. I read the post on Wray”s own blog. I do not see how you or anyone else can construe my comment as indicative of a reading comprehension problem. What I read in his comment, and in yours that defends his, is impatience with people who disagree with you. I would have thought by now that you and he would have become accustomed to this phenomenon, and would have learned how to cope with it gracefully.
Wray says “The best place to start for a sociological approach to money is with Geoffrey Ingham, The Nature of Money, Cambridge: Polity Press, Ltd, 2004″
A Meme For Money, Part 2: The Conservative Framing.
In my opinion, Ingham is an MMTer and is quite right to emphasize that money is a relation, more than anyone else. Yes, for a capitalist economy to succeed, there should be a compromise, a settlement between the financiers and the state. But it works 2 ways, the bankers’ saving in the state’s debt, really their organization of the national saving both supports and is supported by state debt. The state is better able to run large debts. Their bank money suddenly becomes backed by the state’s tax authority. As Ingham points out, this financial superiority, superior social technology was important in England’s rivalry and wars with France.
So I am not sure about “ritual” infusing trust. High interest rates on government debt may have been needed back at the foundation of the Bank of England. What really infuses this trust, performs this compromise, though, is cold hard facts, the tax collection power of the modern state, the power of the state to enforce private debt contracts, the reluctance of the state to inflate the currency, at least in ways that hurts the rich, and their willingness to invest in their own country.
Perhaps the most important original contribution of MMT has been the detailed study of the coordination of operations between the treasury and the central bank
To make it more rigorous, he should have added: “in the U.S.”
For the eurozone, the relevant papers on the operations of the central bank and the payments system have been written by non-MMTers such as Garber and Whittaker.
A tout seigneur tout honneur.
MMT scholarship well pre-dates the eurozone.
MMT scholarship never dealt with the eurozone payments system.
It’s U.S. centered.
To grasp the details of that system one must read the mentioned authors.
No member nation of the European Monetary Union has their own currency. They all use a foreign currency,the Euro. In effect they are states in a federation of sorts. This is the root cause of the disastrous economic conditions in the EU.
Which is why Wray should have said…..”in the US”.
The question arises as to the relevancy of Treasury-CB relations in other sovereign, but not monetarily autonomous, countries, like those Members of the EMU.
There are non-EMU EU Members…..what of THEIR Treasury-CB inter-relations?
Perhaps we do need to read Garber and Whittaker indeed.
The mere promise (with no subsequent action to fulfill it) by the ECB to buy the sovereign bonds of the periphery was enough to promote a dramatic fall in yield levels.
This feature of the euro system (contrary to Fed practice, the ECB does not normally buy sovereign debt on secondary markets) was certainly not analysed in any detail by MMT theorists.
Yet this “detail” – this apparently minor discrepancy – can make an enormous difference for the life of sovereign debt issuers, also known as the treasuries of independent euro nations.
Said treasuries must now rely on the ECB to escape the threat of a return to higher yields. Alternatively, they could pressure their commercial banks to make direct loans to them. Clearly, this is a world light years away from the North American monetary reality so closely studied by MMT theorists. Perhaps they should start dedicating their spare time to this issue.
There is no such animal as an independent Euro nation,let alone their treasuries.
MMT scholars predicted the current problems with the Euro 2 years before the Euro even came into existence (as the WSJ recently conformed). [The applicable papers, written in 1996, are on file at the Levy Institute.]
Unfortunately, MMT scholars never predicted that a mere promise by the independent ECB would get the yields on “non sovereign treasuries” debt back to levels close to those of the “monetarily sovereign” U.S.
Perhaps the papers deposited at Levy institute will have to be re-issued with addenda explaining how, in Europe, the true “sovereign” is the Central Bank?
The devil is always in the details. MMT scholars really haven’t dedicated much time to the study of the specific institutional features of an important snd entirely new experiment (the euro) – as opposed to observing and describing the mechanisms governing the U.S. dollar.
The ECB’s Outright Monetary Transactions could have been lifted directly from Warren Mosler’s work. He has a website, you know.
Where is this determination of yours to deny credit where credit is due coming from? What’s the personal bee in your bonnet: envy of those more far-sighted, perhaps?
In fact, Mosler prescribed “tax-backed bonds” for solving the euro crisis, not OMTs.
But that is a minor point.
What is hard to understand is why pointing out the obvious (that MMT has a – btw, quite understandable – U.S. centric bias) with the purpose of encouraging MMT scholars to dedicate more of their time to the study of other monetary systems (especially the unchartered territories of the euro) seems to cause a reaction bordering on hysteria in some chartalist sympathizers.
Go figure.
As usual, you’ve only told the part of the story which assists in your personal goals. Mosler among others stated an open guarantee by the ECB would be sufficient to stabilize interest rates and that the bonds would largely be unnecessary.
So why do you have this personal vendetta?
If an open guarantee by the (unelected, unaccountable) ECB is necessary and sufficient to stabilise interest rates – then the ECB controls the system, even in the absence of a Federal Treasury.
That´s surely quite different from the U.S. system, where we have a Federal Treasury collecting taxes and the Fed is accountable to Congress and buys and sells Treasury bonds on the secondary markets as normal practice.
Monetary sovereignty in the euro case seems to mean “having the abililty to issue bonds guaranteed by a central bank”. The issuer could be a “government”, a bank, a corporation, whatever (indeed, the ECB is now toying with the idea of guaranteeing corporate debt held by banks).
But surely Mosler also anticipated that. Who needs economics blogs and critics engaged in “personal vendettas” when The Whole Truth has been revealed in sacred texts written way back in the 1990s?
:)
Jose
I would suggest that “controls the system” is a quite nebulous term the way you use it.
No one in the MMT tent has EVER stated that a determined CB can not control interest rates. If you go back youll find ample evidence of Mosler, Wray, Kelton etc stating very early in 2008 2009 what the ECB needed to do to bring down “borrowing” costs for the various EU nations.
Their criticisms have ALWAYS been about what terms the ECB was using to help out the different countries. The ECB can act as a fiscal authority when there isn’t one, thats not debatable, but in crises SOMEONE has to write a check. Someone has to act counter cyclically.
So the ECB has done a great job of controlling rates on various bonds….. but why is the rest of the economy still sucking? If the ECB is “controlling”, is this what they want? High youth unemployment? Low growth? Ive never heard anyone anywhere say “Yeah, we want unemployment of people under 25 to be the highest its ever been”
So its been like 6+ years and all that has happened is interest rates have been contained…… Yippeeee!!!
Great job ECB. You’ve shown that a determined CB can control the yield curve.
Where have we heard that before?
I wouldn’t call it scholarship, but I first heard of most MMT concepts in the summer of 1949. It was called “Rocky Mountains made of gold.” And I was able to sit in on a series of discussions about actually implementing such a system in the United States. These discussions took place several times a year until 1957.
I find that the current MMT authorities including Professor Wray have only contributed a jargonization of the whole idea.
Pray tell.
It is too long a story to tell here. But at the end of WWII my father and other young men came home and began to meet at our house to talk about what they had seen and done. They kept this up for many years and mostly they talked about our government and our economic system. I was a little boy and I thought conversations of this kind were what grown men did. I never saw anyone get angry, I never heard a raised voice, but I heard, over years, a lot of intellectual engagement. One point that kept coming up was the need to return to the gold standard. The discussion went on for a long time and did not seem to ever change anyone’s mind, then one day my father suggested that we consider that we were on the gold standard and suddenly it was discovered that the Rocky Mountains were made of pure gold–that we would have unlimited gold to back our paper dollars. He asked the simple question, “What would happen then?” His idea and his question led to a series of conversations that ended with the agreement that the government could print all of the money we needed. It was, and is, a very simple idea. Because I learned it as a child, it seems perfectly natural to me and I have been dismayed by the fact that such an idea has not been adopted.
The problem with the economics profession is some self described experts delve into disciplines for which they have a bit of a clue, but not a lot. Unfortunately, the public laps up every word they utter even when the advice is off base. The profession needs a serious re-work and fast.
First rule of MMT is: do not listen to criticism. Second rule is: do not listen to criticism.
Agreed. And we have MMT now (or a variation at least) in QE. And quite predictably, it’s been used as a political means to enrich the few at the expense of the many. The rich already know that MMT works and have put it to good use… for them! So what else is new?
Sorry, there’s gaggles wrong wit MMT, but MMT is not QE. Nor, the other way around.
Sorry, but MMT has never been attacked successfully by anyone. A lot of people have made up straw men, claiming these to be MMT, and then attacked them, but that is as far as anyone has gotten. If you think there is something wrong with MMT, perhaps you should try developing your own criticism instead of just blurting out an empty condemnation?
First rule of MMT h8ter trolls repeat talking points. Second rule of MMT h8ter trolls is see first rule. I already dealt with this one “The Battle of the Somme” multi-day MMT h8ter fest and I don’t have time to do it any more.
At the risk of appearing terribly stupid, please explain how MMT would prevent hyperinflation, and what parameters are employed (full employment?), to regulate the money supply?
MMT describes the current system, not some future system that we need to reform into it. So how do we now and how have we always prevented hyperinflation?
Thats easy:
Don’t have a Govt collapse and revolution
Don’t lose a major World War and have to pay reparations in Gold
Don’t let your deficit get too big.
Not that complicated.
Or to put in even more bluntly, how do we regulate the money supply and prevent hyperinflation?
Taxes
Is taxation the only way?
No, as I wrote above, there are three ways to avoid hyperinflation I was simply being curt in with the last sentence:
Don’t have a Govt collapse and revolution
Don’t lose a major World War and have to pay reparations in Gold
Don’t let your deficit get too big due to the first two
http://object.cato.org/sites/cato.org/files/pubs/pdf/workingpaper-8_1.pdf
So since the first two are very unlikely ever to happen to us, and since the third (which is a product of the first two) is even less likely ever to happen, then when Professor Wray says that taxation is necessary to prevent inflation he is wrong.
Hyperinflation pretty much only happens when money printing is used to fuel imports (Zimbabwe) or pay debt in foreign currency (Weimar Germany).
In both cases the issue is as much a exchange rate issue as a money printing issue.
As such i think that MMT is a updated take on Keynesian countercyclical fiscal policy. As such the money would be spent into existence (on domestic projects and services) during a slump, and taxed out of the economy during a boom.
Their main point is that the tax is not to pay down debt taken on during the slump, it is there to keep the economy from overheating and also give the currency value within the nation. As long as the nation is using a fiat currency, there is no need for the government to ever go into debt. In essence, national debt is a mental leftover from the days of metal currencies and autocratic leaders.
What do you mean by “debt?” Is it the net difference between tax revenues and spending? If so, why do we bother to keep track of it? If the government can spend whatever it likes then there is no debt. There are only computerized debits and credits, and if we wanted to do so, we could greatly reduce our use of currency in the United States.
There is no such thing as Debt for a monetarily sovereign nation, their are just different liabilities with different interest rates.
Whether you have $1M in cash, reserves or Securities, the Govt always owes you something, as these are all forms of Govt tax credits. Securities and Cash are guaranteed by the Govt to clear into reserves, and reserves are the only way to pay taxes.
What are various liabilities if they are not debts.
This is the kind of circular conversation that just kills any support for MMT. You are very sure of yourself, but based on your expositions I can see no justification for that self confidence.
Liabilities and debts are not always the same thing. A debt has principle that must be repaid along with (typically) interest. In the case of the government’s “debt” (which is a legacy term from the gold-standard era) the government has nothing to pay back, only an interest liability.
“A debt has principal that must be repaid,” that is not necessarily true and would not have to be true in a new system that adapted MMT ideas. Money can be loaned to someone to be used in a way that benefits the lender without requiring the repayment of principal, and it does not have to even the lender in direct proportion to the amount of the loan.
Liabilities usually have to be canceled in some fashion often by giving money to the party who holds the corresponding asset value of the formula. Our current is so rigid that we seem to be unable, most of us anyway, to see the different possibilities.
Ben, Auburn, that is imho misleading terminology and not standard in MMT and elsewhere. Jerry is right above. “Liability” & “debt” are synonyms. The government certainly does pay back its debt, whenever it accepts it in return for debts owed it, e.g. when it taxes or sells stuff.
Digi_owl – the “fiat” currency itself is the debt. And government debt is money. Yes, MMT is just Keynes. Keynes perfectly well understood that while net spending would be higher in slumps and lower (maybe negative even) in booms, the natural increase of tax revenue was not paying for the prior spending in the mystical commodity theory way, and was just deflating, creating currency demand.
Actually, there is such a thing as sovereign debt, regardless of in whose currency the debt is issued.
That’s another stylized meme.
It stems from the real fact that a sovereign, autonomous, and thusly independent currency-issuing government has no need to borrow.
However, we have no such countries operating a modern monetary economy because some countries give their autonomy to external currency regimes and some countries give their autonomy to private international banking interests(you are here).
On this basis, no country is sufficiently sovereign and autonomous in its monetary operations to be able to NOT issue debt in order to fund deficits.
Same for all modern economies.
Not a problem for MMT.
The private banks create and issue the currency.
In EVERY country where the private banks create and issue the currency, the state issues certificates of indebtedness, denominated howsoever, repayable at a time and place certain, with penalties aforethought.
Those issuances are public debt.
Meme, or no meme.
Sorry, but that’s the way it is.
‘Hyman Minsky used to say that “Anyone can create money”; but “the problem lies in getting it accepted.”
Quite right. That’s why no OECD government ever has or ever will fall into the hands of MMTers. If a minister of finance were to blithely proclaim that ‘we don’t need no stinkin’ taxes,’ the nation’s currency would collapse overnight.
MMT is a fetishistic form of state worship, in which the currency is seen as a magic wand (in the Hitachi sense). So if it feels good, do it!
Blah blah blah, your position is so silly, it amounts to this:
MMT is how the system currently works, but if we are not lied to about how the system currently works, then the world will collapse.
Just wanna get this straight, Auburn.
In order for our world to not collapse, we need to keep lying about how the money system works.
Is that it?
And, which side are we on?
Except that the author is saying “We DO need stinkin’ taxes.” That’s how the government gets a currency accepted – by creating an unavoidable demand for it.
I suppose that if you created your own currency and for some ironclad reason of loyalty every coffee shop and bulk coffee dealer in the U.S. accepted only “Haygoods” for coffee, then your currency would be legitimate among the caffeine addicted masses. I’m not a coffee drinker myself, but I would probably accept Haygoods as well, since most people around me would have a use for it.
The government has a monopoly on a number of important services, plus force of law and arms to maintain that monopoly, so it has the leverage to impose taxes and make its currency necessary.
A widely accepted currency is truly like a magic wand. It allows us to transport (the economic equivalent of) a cow or a house or a tracked excavator in our pockets.
“”Except that the author is saying “We DO need stinkin’ taxes.” That’s how the government gets a currency accepted – by creating an unavoidable demand for it.””
Careful…. I see that “hey, wait a minute” light going off there.
Meme 1 Taxes “drive” money. ( whatever that means).
Meme 2 Government does not need taxes.
So, in the foreseeable perfect world of modern money theories, the state could ‘keystroke’ into existence the exact amount of money needed to run the economy without inflation, and therefore….no need for taxes.
So, what “drives” money, then?
Answer…..same thing that makes national money work today…..everywhere.
Sovereignty and the national Money Statutes.
They provide the certainty and confidence that I need in order to be able to pay by check and to receive a check in payment. Or, whatever. It works.
And in the real world we live in today, the government needs tax revenues ( not taxes) to provide funding for government services, or else it must borrow money at interest.
And if we agree with one thing at MMT, it is that a sovereign, fiat money system OF PUBLIC ISSUANCE does not need to borrow to pay its Bills.
But we do.
So, what’s missing?
The problem is not with the supply of money – there’s plenty of it out there. The problem is with who’s got it and what they are using it for. The hyper-rich have the money the poor are lacking and they ain’t about to redistribute it anytime soon. And thanks to total regulatory, legislative, and judicial capture, they won’t have to. What we have is a political crisis, not an economic problem. And if we don’t get it turned around soon the sovereign won’t have to worry about it’s ability to spend money into existence because the sovereign will simply cease to be. Given all that, any talk of government spending targeting unemployment and bolstering social safety nets is beside the point. Global corporate capitalism’s end game is playing out before our eyes right on schedule. As they have done to developing nations before, they are now doing to ours at home. Question is, why did anyone ever think this was going to turn out differently in the first place?
Having missed the schedule, I have no way of knowing how the global corporate capitalists feel things are going right now, but I’m pretty optimistic.
And if that’s not a trick question…..why would anyone think a different outcome than those of the hyper-rich…… I think you were implying the potential for a different outcome yourself.
“What we have is a political crisis, not an economic problem. And if we don’t get it turned around soon the sovereign won’t have to worry about it’s ability to spend money into existence because the sovereign will simply cease to be.”
Getting it turned around soon implies someone is thinking it might turn out differently.
Let’s hope so.
Understanding the role of money within that political-economic riddle is key, agreed.
https://archive.org/details/roleofmoney032861mbp
As you all know by know, on the subject of taxes, I have doggedly harped and preached about the power of money and it’s historic use to corrupt societies and their governments! CentaMillionaire$ and Billionaire$ have now corrupted governments worldwide and need to be TAXED Out of Existence!
http://www.nakedcapitalism.com/2014/06/rich-arent-job-creators.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capitalism%29
The consumer is the true “job creator” and it is the consumer that pays for all taxes and also pays for ALL the corruption caused by and for the benefit of others. We now live in an unjust society and we have a corrupted Tax Code written by and for the benefit of the CentaMillionaire$ and Billionaire$ to thank! We drank the cool aid and we continue to pay for our own refusal to Observe that Reality!
$10,000,000 should be enough for any one individual, to extract from the existence of other$ !!!!!!!!!!!!!!
And never forget that the consumer is also the worker. Without work there is no consumption, and without consumption there is no work.
Back in reality, the US and every state currently transfer billions of dollars of interest payments from taxpayers to the wealthiest individuals and corporations that own the government debt. These dollars represent real wealth that is (often) taken from lower income families in the form of taxes and paid (most often) to the wealthiest families. The taxes collected to make these interest payments are the most regressive possible – payroll taxes (federal) and sales taxes (states).
The MMT crowd should come up with a plan to eliminate (or convert) $1 trillion of current government debt to their proposed system. If that works out okay without causing inflation or currency debasement, they can ramp it up by eliminating another $5 trillion of current government third party debt out of existence. If that also works out okay, they can use their system to eliminate all of the government debt that currently requires interest payments being transferred to the wealthiest families and corporations.
Until they can prove that adding more dollars to the economy doesn’t debase the currency or create inflation, I think most of us more sober minded thinkers will continue to harp on the federal government to slash its deficits to zero by enacting higher taxes on large passive income streams, such as rents, dividends and interest income, and much higher capital gains on the wealthiest families, especially very high taxes on all real estate transactions that don’t involve a family’s primary residence, small business or family farm.
The economic obliteration of the bottom 80% of lower and middle income families isn’t because there’s too little or too much currency floating around. These families are being decimated over the past 50 years because governments have used regressive taxes (payroll, VAT and sales taxes) to pay their bills rather than imposing taxes on large accumulated assets such as high capital gains taxes and wealth taxes, most recently proposed by Picketty, along with taxes on the largest earners of passive incomes such as rent, interest and dividend income. To re-establish some economic parity among the various groups that make up society, we need a tax shift away from workers and consumers by eliminating payroll, VAT and sales taxes and replacing them 1:1 with much higher taxes on capital gains, passive income sources and a business gross receipts tax.
To the extent the MMTer’s obsess so much on money supply issues, they divert our attention from the much more important fiscal issues that are actually causing the debilitation of lower and middle-income families.
The MMT crowd should come up with a plan to eliminate (or convert) $1 trillion of current government debt to their proposed system. If that works out okay without causing inflation or currency debasement, they can ramp it up by eliminating another $5 trillion of current government third party debt out of existence. If that also works out okay, they can use their system to eliminate all of the government debt that currently requires interest payments being transferred to the wealthiest families and corporations.”
You fail to grasp what MMT is trying to do here. MMT is basically trying to apply the scientific method to the discipline of economics. It does this by first making observation, using those observations to make falsifiable conclusions, and then rigorously testing those conclusions. It’s doesn’t “come up with” any thing, but instead simply seeks to understand it.
Of course science works. Through a better understanding how an economy or money supply works, we can begin to craft truly effective policy that dose what we want it to do. Not cut taxes and gut spending to “grow the economy”, and then be stupefied when you blow 29 million dollar hole through your quarterly budget, and then turn around and barrow from your own reserves to plug the gap as Governor Brownback has done for the state of Kansas. (Yes, we appear to have to barrow our own money. And here is the punch line; because the economy hasn’t grown fast enough – we need more tax cuts. Bu-dum-ching.)
Too your specific issue here. MMT can’t “solve” government debt because it’s not a problem in the way you have been made to believe it to be. From an MMT perspective, “government debt” is a central ingredient to a healthy economy, and “government barrowing” is nonsensical.
A fait state spends each dollar into existence, thus it must now go “into debt” for each dollar that is in circulation. To eliminate its debt has the consequence of also eliminating the same said dollars currently in circulation. And its not possible for the government to pay interest on that debt because this would imply more dollars in circulation, to which the government would have to barrow the money back into existence in order to pay its own interest rate.
This is the real reason why the “deficit” can’t seem to be brought “under control.” Every attempt to do so always pushes us into recession or has other consequences for the economy. Indeed, the interest the government must pay to barrow the money that it creates, actually creates phantom debt that doesn’t exist in reality. A point that would have been proven if Obama had minted a trillion dollar coin and deposited it with the federal reserve, the bank that the US government “owes” it’s debt to and barrows its money from.
Your debt crisis isn’t really a crisis as all and thus doesn’t need an immediate solution. It remains a crisis because it serves the interests of those in power – namely the banking sector.
Well-scribed, D.
None of it is true.
In a sense.
“To eliminate its debt has the consequence of also eliminating the same said dollars currently in circulation.”
It does no such thing.
It changes savings account dollars to checking account dollars.
What it eliminates in ‘circulation’ is a debt-contract, a marketable, interest-gaining monetary asset…..the ‘capital’ of capitalism.
The government payment of its debt removes that amount of interest-bearing securities held by the capitalists.
But………, hey
Not to worry.
Read Newman.
Due to its fear to engage public money (issuance) as a reality rather than an accounting discovery, MMT is a big supporter of capitalism as we know it.
And Dr. Wray would never engage the thought of a public money administration.
That’s outrageous.
And, besides, sovereign money can never happen.
Changes “savings account dollars” to “checking account dollars”? What the hell dose that mean?
The public debt is, in theory, savings of the private consumers, businesses and investors. Extra pocket money seeking a safe return.
It is money that, had it not been invested in public securities, would have remained in someone’s checking account, or been invested elsewhere.
That safe return had been found by putting their savings to work in public debt, and in providing the government with pocket money that circulates back into the economy…..at a cost of taxpayer interest.
Were the government to repay that same debt at maturity, using newly created dollars of sovereign fiat issuance, the saver would get his/her original savings money back, and it would end up in their checking account.
So, to the consumer/saver, the debt repayment merely moves funds from their savings to a checking accounts, from where it might be immediately re-invested in something economically productive, or not, and perhaps more risky, or not.
Final tally.
Today, the government is a user of the money system, and not its issuer, and like you and me, it merely re-circulates already created bank credit money.
It never destroys an equal amount of money, again, merely the monetary assets of the capitalists.
Pity them.
No mystery really.
As long as the public accepts that money needs to be added and subtracted from the economy the economy of that nation is according to history on the path of bankruptcy’s.
Central banks are always backed by taxes of a nation and the more debt currency produced the higher the taxes need to be.
The other fallacy is that without the central bank we would have usury interest rates; this can simply be avoided by laws.
Then we have those who want the government to provide a guarantee for making money which in the USA is bonds and treasuries.
The truth of the matter we do not need to involve a central bank or the market in creating money. For political leaders cannot be trusted, and between the central bank and the market today; it’s rigged to server the minority or sometimes referred to as the bond gods.
For those who think there’s no alternative some where in Brown’s book the web of debt; I think it some where around page 440, the page is tiled no more taxes. Thou it does not address the issue of inflation or amount of currency in the system, it does in detail show using the then current figures how quick the nation debt could be eliminated using debt free currency.
My position is eliminate fractional reserve banking, bonds, and treasuries backed by the government. Simply spend money into economy and the amount of currency in the system cannot exceed the average of the GDP of the past ten years, only exception is a world war.
My position is eliminate fractional reserve banking, bonds, and treasuries backed by the government. Simply spend money into economy and the amount of currency in the system cannot exceed the average of the GDP of the past ten years, only exception is a world war.
Under this scenario the economy would be growth constrained; a dynamic economy requires an elastic currency that can adapt to changing circumstances. If we were to limit to GDP average of the last ten years we’d never get out of our current depression. Population growth alone would keep us in a deficient-demand slump with growing unemployment.
Actually, it is ‘under this scenario’ that the IMF’s researchers modeled the Chicago Plan, and found macro-economic results the opposite of your projections.
https://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf
Perhaps you should have a word with the authors.
More importantly, the same system was modeled by Japanese Macro-economist Dr. Kaoru Yamaguchi, in a more complete Systems Dynamic modeling program, called the most sophisticated he had seen by Dr. Steve Keen.
http://monetary.org/wp-content/uploads/2011/11/DesignOpenMacro.pdf
Those who have modeled public money administration (issued permanently and debt-free) have found robust (meaning achieving GDP potential) results, while eliminating the public debt.
It is less than simplistic reasoning to state the government is incapable of providing adequate money to meet the credit needs of commerce. At present, their tool is the interest rate string.
Under reform, the tool is the supply of money.
You mean the mainstream economosts using the mainstream tools and mainstream models are on your side?
Shocking.
I understand some of MMT, the relation between the fiat state and the banks as well as how money is created is reasonably clear. But MMT doesn’t strike me as being a complete theory. I am not even sure the term “theory” even applies here, at least not in the same say that the theory of evolution has proven itself.
Its biggest problem is that it remains fiscally-centric in that is assumes that the beginning, middle, and end of MMT is nothing more than the currency created and taxed by the state. It goes without saying that a lot happens to a currency between being spent into existence and taxed out of existence again. Indeed, its all of this that happens in between that is why currency is created in the first place. But leaving this unsaid is not an option for any theory. Evolution can not claim that humans evolved from single celled organisms, then ignore fish and lizards as intermediate stages.
This goes towards the criticism that MMT doesn’t address the European system, only the US system. The problem here is that the European States are no longer fiat states. Grease under the Euro can not create its currency any more, and thus any money that is to be spent by the state, must first be taxed by the state, just as the more traditional model argues. Grease exists in that gap that MMT doesn’t address. Even more, Grease has real functions it must perform, such as maintaining roadways, water and sewer works, building regulations, law enforcement, excreta. This is a world that exists outside of fiscal-centrism, and is yet a world economists including MMT seem yet to discover.
I argue that MMT needs to start not with money creation, but with the physical world.
We are organisms, and organisms need materials and energy to survive. We need food, water, fuel, shelter, and clothing as the bare bones minimum. (Oh, and oxygen too, we need that as well.) All of these materials must come from our natural environment and are usually extracted in “raw” form that is not suitable for our needs. So raw resources must first be refined and fabricated into usable resources. They must then be stored until needed, and then transmitted to the point of consumption where resources are metabolized. This process inevitably produces waste in the form of urine, fecal, ash (spend fuel), scrap (unused materials), litter (spent tools), and carbon dioxide that also need to be processed to avoid lethal levels of toxicity, which compromise the environment in which we must live. This involves de-fabrication and detoxification which produces refined waste which can then be recycled back into the system or properly disposed of back into the natural environment.
I am not making this up. This is part of something called the “materials chain economy”, and is the whole point of why an economy exists in the first place. And yet, MMT doesn’t discuses this any more than dose neo-classical.
CND,
The problem is far more profound than just how economies function. We are very good at studying the world in exquisite detail, but very poor at keeping it all in context. A point I keep making in physics discussions is that we are looking at time backwards. It is not that the point of the present ‘moves’ from past to future, but that the changing configuration of what is, turns future into past. Tomorrow becomes yesterday because the world turns, not traveling some meta-dimension from yesterday to tomorrow. It’s just that as single points of reference, we experience change as sequence. This makes time much more like temperature, than space. Time is to temperature, what frequency is to amplitude. The two hemispheres of our brains amount to a clock(linear, sequential, rational, cause and effect, etc.) and a thermostat(scalar, ie, pressure, temperature, etc, intuitive, emotional, etc.) That’s why emotions are referred to in thermal terms, such as hot/cold, etc and pressure, tension, stress, boredom, etc.
As it is, we are like molecules in a thermal medium and frequently it boils over, in wars, financial speculation, etc. and we just cannot fully understand why, in linear, rational terms.
The tie to the physical world, and left unmentioned by MMT, is that our currency is based on the Black Gold standard.
Code Name D: This article is a digest of the basics of MMT; if you want more details read more information on MMT. There is lots of information out there.
See: http://www.levyinstitute.org/pubs/wp_778.pdf
See: http://www.amazon.ca/Modern-Money-Theory-Macroeconomics-Sovereign/dp/0230368891
See: http://neweconomicperspectives.org/modern-monetary-theory-primer.html
Thanks, but I have already read these and the critique still stands. Indeed, scholars of MMT even say as much by focusing only on “Macro-economic scales”, mainly that of sovereign fiat government. It is profoundly insightful, don’t get me wrong, MMT is a heck of a lot better than other explanations and doesn’t attempt to worm its way out of scientific standards of evidence. But it’s not a complete model. Why should common people care about MMT when it doesn’t even pretend to explore real world issues, instead focusing on one narrow aspect of currency markets?
This isn’t just a mater of failing to see the forest for the trees, it’s the assumption that all the trees need to be cut down in order to study the forest.
The EU is pretty much the US without the redistribution mechanism that DC provides between the US states.
This was a central fallacy of the Euro from day one, to the point that one may wonder if it was planned that way.
MMT is virtually a complete theory, but it is not a financial system. The MMT leaders, such as Professor Wray confuse themselves and the rest of us when they attempt to explain their system by resorting to examples that are part of the current system. There is no need for taxation, there are other ways to drain excess credits from the system in a real system, but Professor Wray actually says things like “taxes drive money,” and when I have challenged this idea that is antithetical to MMT Professor Wray doubles down and publishes more blog posts on his website. In fact there is a series on this very subject there right now.
When I challenge the MMT experts by asking them to design a complete financial system using MMT ideas they quickly disclaim any duty to do it because, they say, their mission is only to explain how the current system works. This is a sham. Either the MMT experts should stick to this limited self-description of their work, or they should apply MMT to our current economy and publish their system design. But that is unsettling to them and perhaps could even be dangerous in the weird world academic economics.
Jerry-
What are you talking about?
Nobody can design a complete financial system. Finanical and monetary systems evolve they are not static. We don’t need a brand new financial system. Once people understand how our current one works, then we can make the world better for ourselves.
I understand that you can’t, but that does not prevent others from doing it.
If we pursue this exchange I am sure that we will quickly become lost in dueling definitions of terms.
But as someone who designed large scale systems for large enterprises for thirty years I know that such a system can be designed, and what is more, I have designed one myself. My goal here and elsewhere is to get MMT experts to do it. They can, but they don’t for some reason.
Of course it evolves. Which in and of itself becomes an important part of the research. To study how the economy changes over time becomes important to making predictions with how an economy functions. But this is not a barrio against building a complete model, but a critical component towards doing so, to understand how they change, why they change, and how these changes work to make the economy better or worse.
http://www.amazon.com/Web-Debt-Shocking-Truth-System/dp/0983330859/ref=sr_1_1?s=books&ie=UTF8&qid=1403970197&sr=1-1&keywords=the+web+of+debt
This was a truly well-crafted easy to understand post. But for me, it raises additional questions and comments such as:
1. The MMT framework seems to have been applied and analyzed to date against a US data set (economic, governmental and population) that has been for the most part steadily expanding. What happens (does it still work) if it had to be applied in reverse against a contracting data set (e.g. Say there was a biologic catastrophe that reduced US population, productive capacity and government)? It seems to me for MMT to be a truly viable theory it should be able to work in either direction.
2. From the post- “One of the reasons people will accept the sovereign’s currency is that taxes need to be paid in that currency. From inception of the currency, no one would take it unless the currency was needed to make a payment.” I believe an additional key requirement for the population to accept a currency is that they must believe that it will continue to hold its relative value- It seems to me people’s continued positive perception of a currency is even more important than the need to make a payment. If that perception were to change in an adverse fashion, people would seek alternative means of exchange outside of governmental control (e.g. gold, silver, bartering, etc.).
3. How would MMT explain the effects of a significant loss in confidence in the government’s ability to collect taxes (e.g. due to an increase in corrupting outside influence, congressional budget cuts, along with other internal and external factors over a period of years it became apparent to everyone that IRS could no longer effectively enforce the rules nor collect taxes and consequently the level of voluntary tax compliance dropped from between 75 to 85 percent down to say 30 to 40 percent)?
4. Closed biological or mechanical systems seem to be able to rely on the laws of nature or physics to know exactly where crucial tripwire thresholds exist, above or below which those systems will begin to break down, and thus be managed accordingly. What exactly can MMT rely upon to identify where the economic tripwire thresholds (perceptions) might be, that can cause governments and economies to deteriorate and fail, so that it can truly be managed appropriately?
Anon,
As an obligation, it still has to be a valid expense. The government can’t go out and build ‘bridges to nowhere’ and expect to last very long, if those projects don’t provide sufficient benefit. A point I keep making is that to budget requires first prioritizing and then establishing a cutoff point. Currently they just put together these enormous bills, add enough extras to get sufficient votes and then the president can only past or veto them. That’s basically designed to overspend.
I think the legislative should prioritize, possibly by breaking the bills into their various line items and have each legislator assign a percentage value to each one. Then re-assemble them in order of preference and have the Executive draw the cutoff line. That would divide the budgeting process between the two branches.
Your points are very good, but in order to answer them MMT experts will have to explain how a full-fledged MMT financial system would work. At present, they do not have such an concept in their universe.
There is no need for a new financial system. You just cant seem to be able handle the truth that we don’t need to start from scratch.
There is no need to be nasty about it. But I believe that you may be the only person on earth who thinks that a system that fully embraced and adapted the MMT ideas would not be a new system. I practical terms it would be new and very, very different from our present system.
There is no MMT financial system. Recommendations are being made based on an understanding of the current system.
What changes would you recommend that we can make to our current system?
*I would end the Fed’s role in interest rate management
*allow the central bank to directly purchase the Treasury’s IOUs
*issue a national certificate of deposit for households and pension funds
*create a national public bank
*enact a Jobs Guarantee
*legislate a household debt-relief program
*nationalize public universities and make higher education free
*pass an urban renewal program to bring opportunities to neglected segments of the population
*eliminate FICA
*increase the minimum Social Security payout
*roll out a national health system modeled on the NHS
I could keep going, believe me.
I like your ideas. And I have seen some of them expressed in books written by the MMT experts. What is missing from the conversation here and elsewhere is that such lists are not gathered into a comprehensive design of how these ideas would be implemented and how they would actually affect the daily lives of the American people.
I do not mean to be disagreeable, but I simply want to engage your ideas by offering some variations on them. One has to be very careful because tempers grow short when one makes such suggestions. Anyhow:
I would have one bank as you said, and that bank would make interest-free loans to ordinary citizens for financing the necessities of life. In addition some of these loans would have repayment programs that would take into account the fact that catastrophes are usually unpredictable and the national bank would extend payment schedules or event suspend the need to make payments for a time.
I would merge this central bank with the Treasury and the Fed, changing functions as needed, and the bank would actually issue Treasury IOU’s.
The certificate of deposit you listed would in my system pay 5% interest guaranteed, and the deposits made by citizens would be used for loans to other citizens. This would be cash for cash and would lower the danger of inflation. This does not mean that these deposits would be the only source of funds.
My version of the jobs guarantee would be to deposit a certain amount of money in each citizens’s account at the single bank that could be used to buy a certificate that pays 5%, but funds could be used as needed to pay for the needs that arise in the event of unemployment. This amount would be deposited monthly for every citizen including children.
In my system urban renewal would become urban maintenance which would pay cooperatives to maintain homes and other buildings in a community.
Not only would there be no FICA, there would be no taxes at all in my system. The interest-free loans, the monthly deposits, and the single-payer function would be more than enough to ensure that the people would always want to use our national currency thereby eliminating one of the dangers that MMT experts always warn us about but offer no solutions other than taxation.
Taxation is a terrible idea. It requires a huge bureaucracy, it is grossly unfair, and it places unnecessary stress on the population. How anyone could want to continue to tax the people in an MMT world is beyond me.
The central, single bank would be the single payer of medical costs, utilities, educations, child care, etc. The funds for these payments would be withdrawn from each citizen’s account as appropriate. If these accounts were not adequate to meet all non-inflationary demands, then additional funds would be supplied by the bank.
The single bank would set interest rates.
I could go on as well, and I have in other places. But these comments were meant to say that I agree with you and your ideas. I believe that such an exchange, if repeated many thousands of times on blogs such as this one and on Wray’s as well, would quickly define a comprehensive system that embraces MMT’s benefits. But instead I see here and in many other places open hostility to new and different ideas. One would think that MMT supporters would welcome questions and new ideas, but they don’t.
A necessary, enabling national political system would be necessary to make MMT work. Your ideas and mine would never be enacted under the present political system. So a comprehensive change to our Madisonian republic would be required and would have to come first. But the promise of the benefits of a new economic system which implements MMT benefits would be very useful in persuading ordinary people to demand political system changes.
Finally, look at this long, long string of comments. Our little exchange of ideas is not the rule. There are seeds of ideas here and there which I think would lead to good things, but this blog and others I follow has no mechanism for dialogue that is based on rationality free of personal animus. It is a pity and it is hurting our nation. The changes we need will come, if they come at all, from the people.
1. The MMT framework tells us a massive loss of the nation’s productive capacity is a serious risk for hyperinflation. The most effective response would be a massive tax increase and a serious crackdown on tax avoidance to reduce financial wealth exceeding what we can produce. You would probably still see a spike in inflation but automatic stabilizers would attenuate the effect unless we also see a national breakdown in law and order.
2. That is where Dr. Wray’s “infinite regression” explanation has some value. I accept the currency will maintain a stable value because everyone else uses it and must also accept that it will be stable. We conform to the expectations of greater society.
3. MMT would judge it (I think) unlikely that a fall in tax collection effectiveness would result in serious bad mojo. Once a currency is established in the minds of citizens it can probably continue to function on its own momentum, but there simply isn’t enough data to be certain.
4. I would argue the most useful tool in the MMT arsenal for economic forecasting (and a significant advance for the field) is the sectoral balances equation. By revealing to us that one sector’s balance is the mirror image of another’s and that all must ultimately sum to zero it is possible to reliably establish broad macroeconomic trends. A relatively acceptable summary here: https://en.m.wikipedia.org/wiki/Sectoral_balances
This may not necessarily satisfy your 4th question, but the reality of post-Keynesian economics is that most of the work done by the mainstream over the last forty years has been a waste of time, a dead end. With only a relative handful of economists working in MMT and post-Keynesianism as a whole, there is much that is still not known. We need to go back to school and get our Ph.D.s to speed this up.
1. ” The most effective response would be a massive tax increase and a serious crackdown on tax avoidance to reduce financial wealth exceeding what we can produce.” I asked the first question about how to apply the MMT framework to a declining economic data set because my read of Dr. Wray’s post was that the government didn’t really need to tax in order to spend. My interpretation of what he said was like taxation was the cart to the government’s spending side horse. See where he says… “Indeed, if government spends currency into existence, it clearly does not need tax revenue before it can spend. Further, if taxpayers pay their taxes using currency, then government must first spend before taxes can be paid. Again, all of this was obvious two hundred years ago when kings literally stamped coins in order to spend, and then received their own coins in tax payment.” So I don’t understand why there would be a need for a massive tax increase.
2. “That is where Dr. Wray’s “infinite regression” explanation has some value.” I looked up infinite regress and found an article from Dr. Wray where he says the exact opposite. “Money does need backing—and an infinite regress, arguing that we accept money and believe in its value because we think others think it is valuable, is not acceptable.”
See http://neweconomicperspectives.org/2012/05/mmp-blog-50-mmt-without-the-jg-conclusion.html for a blog post by Dr. Wray.
3. “MMT would judge it (I think) unlikely that a fall in tax collection effectiveness would result in serious bad mojo. Once a currency is established in the minds of citizens it can probably continue to function on its own momentum, but there simply isn’t enough data to be certain.” OK that is the answer I would expect to hear after reading the article. But it sounds like it is not much more than a guess. If it’s more than a guess, what’s that conclusion based upon?
4. The response to item 4 seems to suggest that there’s not enough data to answer the question. How can MMT be a theory if it cannot be tested and predict with some level of precision where those limits and parameters are within which the government make monetary decisions without creating adverse consequences. My takeaway of the article is that it’s almost like the government has an infinite capacity to spend without causing problems.
Cleary, I’m no MMT expert. I’m just trying to get a basic understanding.
So I don’t understand why there would be a need for a massive tax increase.
To tame inflation. If you have enough currency in circulation to purchase $16 trillion in output but only $8 trillion in output is available after a catastrophe then prices will be bid upward.
I looked up infinite regress and found an article from Dr. Wray where he says the exact opposite.
.
Dr. Wray’s point (if I may be allowed to speak for him, he may certainly chime in if he judges me wrong) is the infinite regression explanation does not tell us how currencies become accepted Everyone wasn’t using it when it was first introduced, so a tax was required to fix in the peoples’ minds that this is the currency we all use. Once you remove taxation from a currency that is already well established the infinite regression argument would explain why a people would continue its use.
But it sounds like it is not much more than a guess. If it’s more than a guess, what’s that conclusion based upon?
I would characterize it as an educated guess, though that may not make much of a difference. When a country institutes a tax to force acceptance of a currency, everyone does not automatically start thinking, “this is now acceptable for all monetized transactions”. It would take time for the currency to propagate throughout society and be accepted in daily use. If you have the sovereign’s currency but I have none, and you want the baking pan I just made while I need to settle a tax obligation then we make a trade. Monetizing the economy with the currency isn’t a conscious act but a realistic adaptation to new circumstances.
Having said that I also do not think it likely that should a sovereign become relatively ineffective in its collections at a later time, people will simply start using other currencies in its place. They will continue using the sovereign’s simply because it has always been done that way and as any student of history will tell you, cultures can be very difficult to change. However should the sovereign become so deficient in tax collection that inflation becomes a problem people may well abandon it, but I consider that a separate issue.
How can MMT be a theory if it cannot be tested and predict with some level of precision where those limits and parameters are within which the government make monetary decisions without creating adverse consequences.
Because precision in economics is an illusion. The mainstream has pursued it for forty years with ever-increasing levels of abstraction and irrelevance to the real world. In a complex adaptive system where billions or trillions of transactional decisions are made every day precision is impossible unless we somehow implant wireless electrodes in everyone’s brains. I’m sure you’ve noticed economic forecasts are commonly off by as much as 1000% as they try to make a call within a tenth of a percentage point.
Wynne Godley (who was Wray’s teacher) used sectoral balances to become one of the UK’s top economic forecasters, by taking a step back to establish a trend rather than a precise number. It has been used to project the 2000 (about which James Galbraith was laughed at by other economists) and 2008 recession in the U.S. and also the continued economic slump in Europe and it is more easily tested for the very reason that it is simple. Anyone willing to put in a little time can understand the basics.
The core problem with understanding how the system functions is that money is a contract, which we have come to regard as a commodity. As such, Capitalism evolved to mediate economic exchange, but has now devolved into a fetishistic production of money for its own sake.
This is both the fault of the state, which benefits from having its currency mediate all economic relationships and of individuals, who feel the accumulation of excess wealth provides them with more security(and wish fulfillment). Unfortunately what is good in moderation, is harmful in excess and the financial sector has become an enormous tumor on the rest of the economy.
If we can go back and recognize that it is simply a system of obligations in the abstract, then we can better understand the real store of value is a healthy environment and society, rather than treating them as resources to be mined for this “money.”
As Working Class Nero notes, one flaw in MMT’s theories is to be found in the contradictions of globalization. Wray and Minsky correctly note that money is debt, inherently and inescapably. They further explain that the main task of those who wish to create money is getting it accepted. Wray’s colleague Dr. Michael Hudson in “Super Imperialism” and its sequel “Global Fracture”, published one and six years respectively after the last vestiges of the “barbaric metal” (gold) were removed as a constraint on the creation of money and debt by the U.S. government and its banks, detailed how through a combination of clever diplomacy and economic threats the U.S. secured that acceptance. The problem is that all of these clever tricks are wearing thin. Old Europe no longer needs the protection of the U.S. military-industrial complex in the absence of a Red Menace. And the Global War on Terror is increasingly being seen for what it is – a thinly disguised attempt by the U.S. to control the world’s remaining supplies of oil.
The U.S. increasingly has nothing but bombs to offer the world – that and debt. And it is here that the laws of supply and demand are taking over. The oligarchy that now controls the governments in many Western nations may want the debt (money) but they don’t want the bombs. Even the debt is becoming problematic, however. As Hudson is fond of repeating “Debts that can’t be repaid won’t be.” That would be OK with the world’s oligarchy because it doesn’t need the money anyhow. But one requirement that must be met if the debt pyramid to be maintained is the ability of money to earn yet more money – what Frederick Soddy called the “perpetual motion machine” of capital. That may be impossible in the physical world. But in the world of MMT, ‘financial engineering’ and creative accounting, who knows?
One last objection to MMT… It appears to want to keep us all working even as the world’s ‘job creators’ are busy automating and off-shoring those jobs out of existence. The ‘services’ industries and jobs up the food chain were supposed to take up the slack for the jobs the Chinese and workers in other developing nations could do more efficiently (read ‘profitably’) by paying their workers less, ignoring environmental costs and, yes, by working harder. But since the beginning of the 20th century, those services industry jobs have been mainly in the military services.
And soon, nationalists in other countries may tire of being paid with more debt that can’t be repaid and decide to keep the real wealth their people are creating for themselves. All they have to do is wait for the U.S. and other Western nations to be completely taken over by their ‘financial engineers’ and they will find themselves the sole possessors of the ability to create weapons as well as wealth.
Your points are excellent, but you are talking about the real world and MMT experts, such as Professor Wray, have yet to apply their theories to designing an actual financial system.
I see MMT as fundamentally a powerful Nationalist policy while its proponents strangely tend to be ideologically committed to Globalization. And if we accept that there is a sort of yin / yang pendulum of ideal balance between particularism (Tribalism, Nationalism) and universalism (Globalization, Internationalism, Imperialism, Colonialism) that has swung way too far in the direction of universalism, and that the ultimate correction must now be in the direction of particularism; then MMT will play a role in pushing things towards again empowering particularist sovereigns. It is not an accident that the only major political figure in the world who pushes MMT is a Nationalist, Marine Le Pen. And the ultimate enemy of MMT is the, albeit slowly declining, hegemonic power of the US with its ideological war against Keynesian economics.
The only remaining theoretical problem that I see is in a post-US hegemonic world, is how a series of MMT-practicing issuers of sovereign currency deal with international trade. Surely the basis is Keynes’ bancor concept but it needs to be fleshed out a bit further.
How is MMT different than Reaganomics (no silly, not what Reagan said, what he DID)
That is, great big deficits? There seems to be this implicit notion that with MMT or deficits, the money will be spent on the poor, education, and health care.
REALLY????
Look around….hope and change…..money for drones….money for bankers…..
Money can and IS created out of NOTHING now. SO WHAT. Its where it goes – its politics, not economics.
It is “political economics”, not one or the other. That’s what economics used to be called before it became the real ‘values free’ science it purports to be today. Wall Street and its bankers know it is “political economics”. That’s why they own Washington. The only ones who don’t know it is “political economics” are those of us who were victims of public ‘education’ (IF we could stay away through high school and college economics classes).
Reaganomics was bread and circus.
MMT is a return to Keynesian economics without the commodity money fetish of the neo-classicals.
Presumably Volcker cured inflation with higher interest rates, but that presumed to cure an oversupply by raising the cost(and rewarding supply). Inflation was brought under control by Reaganomics.
There is little difference between the Fed selling debt and the Treasury issuing fresh debt, other than the Treasury gets to spend the money it collects back into the economy in traditional Keynesian fashion.
Oil prices increasing 400% and wage indexation because of higher worker bargaining power were what caused the inflation, and breaking the oil cartel stopped the inflation, Volcker and interest rates had nothing to do with it:
https://research.stlouisfed.org/fred2/graph/?graph_id=182857&category_id=
It wasn’t a question of what caused the inflation, but what cured it. The Fed does draw money back out of the system by selling the debt it bought to create it in the first place. Both the Fed and the Treasury selling debt are going to have the same effect and by ’82, the Deficit was over 200 billion, which was real money in those days. As it is, Volcker’s higher rates mostly slowed economic activity and so reduced the need for capital.
Sorry but you completely ignored the 800 lb gorilla in the room. Oil prices went up 400%. Just ask yourself what the world would be like if in 2016, a barrel of oil costs $400 and gas is $15 a gal.
“The Fed does draw money back out of the system by selling the debt it bought to create it in the first place.”
This is actually not true. Selling and buying T-bonds does not alter the size of the Govt’s liabilities (minor interest rate spending changes notwithstanding), and as such doesn’t create or destroy any money.
Reagan’s deficit to GDP weren’t that big at all, they only average a little over 4% of GDP:
http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=200
Auburn,
I get it that monetary responses to the oil crises, as well as Johnson funding the Vietnam War and Great Society programs with loose money policies created inflation and that getting the entire worlds oil markets onto a dollar based system went a long way to bringing the fuel component under control, but this then gets into a much larger topic, ie. how our surplus dollars are used to make those markets function, but I do see it as significant that the deficit coincidently exploded around the time inflation finally came under control. 4% of GDP isn’t exactly pocket change. As I recall, inflation wasn’t exactly at Weimar levels, so that would have had some impact.
“Selling and buying T-bonds does not alter the size of the Govt’s liabilities (minor interest rate spending changes notwithstanding), and as such doesn’t create or destroy any money.’
It doesn’t alter the govt’s/Treasury’s liabilities, but it does reduce the amount of money in circulation; (http://money.howstuffworks.com/fed10.htm), when the Fed sells.
My point being the absolute quantity isn’t the problem, but relative to economic activity and when the Government borrows and spends it, that’s classic Keynesian pump priming. The money gets borrowed out of financial markets, where it is mostly just speculating against other monies, rather than being invested in actual economic activity and spent in ways which might be long term unproductive, such as military spending, but which creates short term activity.
Ack, erased my reply
AP,
4% isn’t exactly pocket change. Inflation wasn’t exactly at Weimar levels.
Yes, the oil crises, as well as loose money to pay for Vietnam and the Great Society caused inflation, but when the Govt is borrowing money out of the financial markets, where it often just speculating against other monies and spends it in ways only the govt will, such as military, it might be long term stupid, but short term, does create more activity than just keeping a few bankers busy.
Then there is the whole issue of getting the world oil markets to be dollar denominated, soaking up lots of surplus currency, but that does get mentioned. I’m just point out that Reaganomics did have some ulterior motives.
Hey we had 5% REAL growth rates under Reagan. Of course, the deficits were spent stupidly and inefficiently with the defense spending and tax cuts for the wealthy and he also presided the first of the big private debt increases that the banks and the Fed experimented with after going off the gold standard.
MMT would prefer deficit based off of tax cuts for the middle class (FICA suspension) and spending on jobs for the middle and working classes. In that sense, MMT is far more just than reaganomics.
I see no one really answered your question. In fairness to MMT, two things make it different.
1) MMT would hire a bunch of people at minimum wage to anchor prices. Reagan embraced unemployment to anchor prices.
2) Wray and I think most MMTers would disagree with how Reagan spent the money.
Of course, the problem that Wray, Mitchell, Mosler, and others run into is that they offer no explanation of why political economy requires a buffer stock at all (#1) or how they will change the management philosophy of governance in the good ‘ole US of A (#2).
For MMT to describe our current system means that MMT is consistent with our current system – warfare, oppression, injustice, inequality, crony capitalism, etc. If MMT didn’t allow for these things, then it wouldn’t describe how things work :)
From the article above:
Indeed, if government spends currency into existence, it clearly does not need tax revenue before it can spend. Further, if taxpayers pay their taxes using currency, then government must first spend before taxes can be paid
It’s more likely it happened like this:
1. A king minted coins backed by gold or silver
2. A new government came along issuing new paper currency.
3 Forced everyone to exchange old coins for new paper currency.
4. After popular acceptance (or compliance), print new paper currency like there was no tomorrow (spending it into existence).
5. End of said government.
6. Another new government came along and declared responsible government money creation. Let’s say this is year 0.
So, for example,
Year 1, government creates $100 paper currency, backed by gold in sufficient amount, which it collects in taxes and then spends back to the private sector.
Year 2, government collects $5 in taxes. Spends $4 and retains $1, for example or it could be $6 spent and $1 borrowed.
And so on.
That is to say, every subsequent year, it needs tax revenue before it can spend – because that is the basic agreement reached in year 0. We might call that the Constitutional Way.
And then in year 300, some one comes along and discovers that the government is violating the year 0 agreement and, instead of advocating rectification, calls the discovery, descriptive…that is, hey everyone, that is how it works, let’s go from there.
nope, not backed. Instead the king’s stamp “certified” that the coins where of a certain weight and purity. Thus the king was backed by a earlier system of payment by weight. The metals used was valued for its ability to last, and thus hold its weight. The weights again was based on (backed by) a ration of a certain food stock, like wheat grains.
The earliest traces of accounting are from Mesopotamian grain stores, documenting how much grain an individual had delivered and so could later claim. Pretty much a early form of no interest banking.
Certified or backed.
It could take many forms.
What do you mean, “backed by”?
From above:
First there are those like Paul Krugman who are generally of the Keynesian persuasion and who like MMT’s “deficit owl” approach. I think Krugman would really like to stop worrying about the deficit so that he could advocate an “as much as it takes” approach to government spending
I hope that does not get him to start rationalizing to himself backwards.
“This is where I want the fact to be, so let me see how I can get there.”
From above:
MMT recognizes that bond sales by sovereign government are really part of monetary policy operations. While this gets a bit technical, the operational purpose of such bond sales is to help the central bank hit its overnight interest rate target (called the fed funds rate in the US). Sales of treasury bonds reduce bank reserves and are used to remove excess reserves that would place downward pressure on overnight rates. Purchases of bonds (called an open market purchase) by the Fed add reserves to the banking system, prevent overnight rates from rising. Hence, the Fed and Treasury cooperate using bond sales/bond purchases to enable the Fed to keep the fed funds rate on target.
There could be another explanation (that waits to be disproven):
The operatoinal purpose of bond sales is to raise money.
The operational side effect = reducing bank reserves
Another by product: The Fed can purchase some of them to hit overnight rates.
That is, we have a different operational purpose (raising money) and, reserves and overnight rates are a side effect and a by-product (but not the operational purpose).
I would like to see this explanation proven wrong.
Your explanation is proven wrong very simply.
All T-securities are purchased with reserves +
The Fed is the monopoly supplier of reserves +
The TSY is the monopoly supplier of T-securities =
How can the operational purpose of issuing T-securities be to raise reserves when the Govt is the monopoly supplier of reserves?
How?
Because the government has to have a story to tell the People.
Thus, the government says the purpose is to raise money.
That’s the same government which was founded by people who fought and died so that there would be no taxation without representation.
The same government whose Constitution was ratified under the belief that there would be no taxation without representation.
We are not going to say the story was fraud.
You are delusional.
You think we must lie to the people about the way the system works, thats just insulting.
There is representation and taxation, what the hell are you talking about.
And yes, the story about Govt finances is a fraud, perpetuated by the wealthy so that the regular people won’t know that prosperity is possible for the masses.
I didn’t say the government lied
The government has had a consistent narrative – they need to raise that money by issuing bonds.
MMT’s ‘discovery’ is that the government lies…that the real operational purpose is overnight rates and adjusting reserves, etc.
“The government has had a consistent narrative – they need to raise that money by issuing bonds.”
That is lying, especially today. In the 1800’s our system of money was not nearly as well developed and understood as it is today. Just like our understanding of physics was worse in the 1800’s.
“MMT’s ‘discovery’ is that the government lies…that the real operational purpose is overnight rates and adjusting reserves, etc.”
So what are you complaining about?
If it is a discovery, it implies a different previous narrative.
And if the new discovery is correct, then the implication is the previous one was a lie, if done intentionally.
People are lying right now, every second of every day.
Are we just going around in circles?
Yes, we are going around in circles. Because your arguments have no real meaning, no logic and no consistency from which we can have a discussion.
I can only try again.
Reserves move and overnight rates change as a result of bond sales.
That does not equate to proving that the purpose or the operational purpose of bonds sales is to move reserves or changing overnight rates.
Operationally, they are the by-products or side effects. The purpose is for the government to raise money by borrowing.
That is another way of looking at it and not Wray’s way.
This one makes more sense to me.
From above:
For most people, the greatest challenge to near-and-dear convictions is MMT’s claim that a sovereign government’s finances are nothing like those of households and firms. While we hear all the time the statement that “if I ran my household budget the way that the Federal Government runs its budget, I’d go broke”, followed by the claim “therefore, we need to get the government deficit under control”, MMT argues this is a false analogy. A sovereign, currency-issuing government is NOTHING like a currency-using household or firm. The sovereign government cannot become insolvent in its own currency; it can always make all payments as they come due in its own currency.
How do you respond to those who say
1. Government is entrusted to coin money and manage money supply (regulate the value thereof)
2. That is like a card dealer being entrusted to provide playing cards and manage them
3. A card dealer is not entitled to any card any time, but to play by the same rules; similarly, a government is expected to have an annual budget*, like every household.
That is to say, to coin money doesn’t imply that that money is free for the government to spend.
For example, the government can coin money and hand it over to the people to spend it into existence (1).
* Taxation is then regarded as how much the people want the government to spend….NO TAXATION WITHOUT REPRESENTATION…unless that is another lie my teacher ‘taught’ me and the country is a fraud – that we didn’t fought a revolutionary war for taxation with representation.
(1) Some people confuse Money Creation via the People Spending it Into Existence with this: Hyman Minsky used to say that “Anyone can create money”; but “the problem lies in getting it accepted”. No, it’s not you and me freely printing money to spend it (with each currency having a different human face on it). We are talking about Congressional authorization and crediting people’s accounts (each has one) at the Fed.
Basically you turn government into “buyer of last resort”, pretty much the Keynesian system used between the end of WW2 and the 80s. As long as the economy is running along at nearly full employment, it does not buy much (enough to balance out the taxation needed to maintain the value of the currency and avoid deflation). Whenever a slump happens, it steps in and provide the demand to avoid the economy stalling.
The people can be the last resort.
Let the people spend money into existence (which is not the same as each of us printing our own currency).
A citizen wage, perhaps?
Better than wage.
It’s exercising our sovereignty under the government of the people, for the people and by the people, that is, a monetary sovereign of the people, by the people and of the people.
If we organize ourselves under the ideal (yes, the ideal) that the people can choose their leaders, surely, we can let the people, ourselves, vote on how any new money is to be spent.
We already do. People just dont udnerstand it. MMT is trying to help on that front, so why are you complaining?
There are 2 choices
Money creation via the government spending it into existence.
Money creation via the People spending it into existence.
The people are the Govt, which is why all your points are irrelevant.
But that’s where we disagree.
meaningless
The people are not meaningless.
The whole thing is about the people…or should be about the people.
How do you let people spend money into existence?
Like I said, your claims are devoid of all meaning and thought.
Please read above.
Here it is, again:
(1) Some people confuse Money Creation via the People Spending it Into Existence with this: Hyman Minsky used to say that “Anyone can create money”; but “the problem lies in getting it accepted”. No, it’s not you and me freely printing money to spend it (with each currency having a different human face on it). We are talking about Congressional authorization and crediting people’s accounts (each has one) at the Fed.
You just described what we already do.
We do Money Creation Via the People Spending it Into Existence?
Yes, the Govt makes budgets via our elected representatives. Ergo, the people spend money into existence through our collective decision making mechanism aka Congress.
What do you say to the Congress approving the amount of new money, and instead of the Pentagon, for example, spending it into existence by buying drones, that money is put into people’s accounts at the Fed for the people to spend into existence?
Your criticisms of MMT are wanting.
“1. Government is entrusted to coin money and manage money supply (regulate the value thereof)”
I’m glad you recognize with your first statement that Govt’s are not like household’s in that only they have the authority to coin money and regulate its value.
“2. That is like a card dealer being entrusted to provide playing cards and manage them”
Loosely
“3. A card dealer is not entitled to any card any time, but to play by the same rules; similarly, a government is expected to have an annual budget*, like every household.”
The Govt does have an annual budget, and no Govt’s don’t play be all the same exact rules as a household. That would be non-sensical. People make contracts, Govt’s enforce them. We don’t accept individuals enforcing contracts through force, but we do accept the Govt to do so.
“That is to say, to coin money doesn’t imply that that money is free for the government to spend.”
Money is practically free for the Govt to spend. It costs next to nothing nominally for the Govt to spend, as Bernanke made clear, they just use the computer. All the results are on the real side of the economy, as MMT makes perfectly clear over and over again.
“* Taxation is then regarded as how much the people want the government to spend”
I agree with this line. The necessary or “right” size deficit will fluctuate with time and the business cycle, but the outer bounds are indeed set by society’s acceptance level of taxes. For example, lets compare the EU to the USA, similar populations and GDPs. Lets say that the right size deficits for both areas are roughly between 5% and 15% of GDP, If Americans are only willing to tolerate a tax level of 20% of GDP then spending would fluctuate between 25% and 35% of GDP. Whereas, in the EU the people may prefer to accept a 35% of GDP tax rate and so they would have their public sector spend between 40% and 50% of GDP.
The main point is that its a cultural subjective thing and there is no “right” choice.
“….NO TAXATION WITHOUT REPRESENTATION…unless that is another lie my teacher ‘taught’ me and the country is a fraud – that we didn’t fought a revolutionary war for taxation with representation.”
Ummm, we do have representation
“1) Some people confuse Money Creation via the People Spending it Into Existence with this: Hyman Minsky used to say that “Anyone can create money”; but “the problem lies in getting it accepted”. No, it’s not you and me freely printing money to spend it (with each currency having a different human face on it). We are talking about Congressional authorization and crediting people’s accounts (each has one) at the Fed.”
How is this a criticism of MMT?
We do have representation to make sure that:
Coining money and regulating the value therefore is not to be interpreted to mean that it’s free money for the government to spend, but for the representatives to decide how to collect in taxes, how to borrow and how much to spend. That we don’t commingle the funds.
“Coining money and regulating the value therefore is not to be interpreted to mean that it’s free money for the government to spend, but for the representatives to decide how to collect in taxes, how to borrow and how much to spend. That we don’t commingle the funds.”
More garbled thinking.
Its free for the Govt to create and spend money, Bernanke has made this very clear. It doesn’t matter what you believe.
and yes, we have budgets.
What does any of this have to do with MMT?
MMT says we do our budgets badly, what about that do you disagree with?
That the point of this discussion – government to create money (and not some quasi-public/private entity) but that money is not free for the government to spend.
Perhaps it is for the people to spend.
Yes, and you have gotten the entire point of the discussion wrong over and over again.
Money is free for the Govt to make and spend for all practical purposes on the nominal side. Just ask the Fed chairs themselves:
http://www.dailykos.com/story/2014/03/12/1284050/-Proof-that-Our-Govt-budget-is-not-like-a-household-budget
That’s the point.
I want to challenge it.
By the way, just because the Fed chairs say so doesn’t mean we should agree. Maybe they are right or maybe they are wrong.
My case is still this: Government to create money, but not free to spend it. The People can spend it.
You can continue to assert otherwise, or you can try to say why the government is free to spend it (instead of asserting it). My point is it is not free to do it. Perhaps the people are the ones to spend it.
Your points have been meaningless from the beginning.
The Govt creates and spends money for free (nominally)
The People are the Govt
Therefore, the People create and spend money for free (nominally).
Not complicated.
The people are not the government.
No, we do not have representation. Representation means that the will of the people will be obeyed, and in our country the will of the people is ignored. Those who control our elected representatives control our country and they do not “represent” the mass of the population.
And our teachers did not lie. They believed that the standard story about American democracy was true, they bought it hook-line-and-sinker, and they passed it on to their students. But our system is not a democracy, it is a Madisonian republic and no matter how often we may claim it is a democracy the facts will remain. In fact, the Framers were quite proud of the fact that our system is not democratic and they said so in plain English in several of the Federalist essays. It is all there for anyone to see. Even you.
I see the point that a sovereign government that issues its own currency doesn’t need to borrow or tax in that money first. They can print it, or the electronic equivalent, which households cannot (legally). And a point omitted: the government can also REQUIRE residents to accept that currency in payment of all obligations – “fiat currency.” This, as much as taxation, creates the value of slips of paper or electrons.
However, I see a major glitch in this explanation. Government spending and taxation are only a small part of the economy. Where does the rest of the money come from? Bank lending, of course; that’s where the “reserve multiplier” comes in. What about people who neither lend nor borrow? Granted that’s a temporary situation, it’s pretty common, and covers a large part of (eg, my) life. Of course, if you have money in the bank or lent to a purchaser, that’s lending. Still, Wray leaves a large gap in the process.
I’d be interested in a discussion of where local currencies fit in. My town has one, called Hours. Very similar to the traditional bank notes, of course, but convertible into federal currency. What are they? Personal IOU’s? Indeed, accepting them is voluntary. But they might become important in a financial crash – a way for communities to generate economic activity.
And a caveat: all of this, like Keyneian economics, ignores the grim reality that we are up against – in fact, we’ve far overshot – physical limits on economic activity. Keeping the economy rolling is actually harmful, as in catastrophic, and stimulating it merely makes it worse.
What we really need is a way to CONTRACT the economy with the least harm to people. A conference with Herman Daley and the institute based on his work (Center for the Advancement of the Steady State Economy – steadystate.org) is called for.
The reserve multiplier is pretty much bunk. Private banks lend money into existence right now, and only worries about reserves when the accounting period comes round (and they can always cover their reserve requirements by loans from other banks or the central bank).
The major difference is that private bank debt comes with a interest attached. As such, it acts as a break on the overall economy long term as the money created eventually ends up on the books of the banks themselves (and the accounts of their shareholders). And there it sits unless the banks can find something to invest in them, or it gets transfered to the government via taxes.
Or they can hire string theorists from MIT to formulate enormous piles of speculative leverage, ie. derivatives, to hold all that excess capital.
Remember that entire universes can spring from the musings and calculations of string theorists, but accountants only know it irritates the authorities if they get too inventive with the math.
I never understood this ecological argument against MMT. Playing more rounds of golf is not destroying the planet. Watching more and better TVs is not destroying the planet. Going to sporting events is not destroying the planet. Buying more digital music is not destroying the planet. And on and on….
So what is destroying the planet?
Carbon pollution for transportation and energy creation predominantly
So lets stop using fossil fuels, simple.
“but how are we going to pay for it?”
MMT answers that question and as such, should be every environmentalists best friend. MMT is the only chance we have of saving our current ideal climate in the near term. We need maybe $2T in renewable energy investment and spending over the next 2 years and we won’t raise taxes or cut other programs $200 B per year in order to do it, so unless you believe $200 B larger deficits for the next decade would lead to unacceptable levels of inflation, than there is absolutely no excuse, in fact its actually immoral not to do the investment.
Unfortunately, the population thinks we are broke, that we are completely dependent on the wealthy and China for our money, debts to our grandchildren and that Govt budget’s are just like household budgets. The only possible response to any of these myths is MMT.
Oops, please note that this line:
“We need maybe $2T in renewable energy investment and spending over the next 2 years and we won’t raise taxes or cut other programs $200 B per year in order to do it….”
should be: ‘$2T in…spending over the next 10 years…..’
That our imperial currency has not collapsed is due largely to our imperial might that protects our Global Fort Knox 24/7.
More vacuous statements from you.
The Petrodollar is not vacuous.
No, but your asinine comments are.
We just questions and reason the best we can.
If we sound stupid, that’s the price we pay.
This has been explained to you repeatedly and you keep coming back with the same debunked arguments. The dollar is accepted as a reserve currency because:
1) you can buy almost anything you want with it.
2) its value is stable.
3) the U.S. is the only economy able and willing to run persistent trade deficits of sufficient size to meet global demand.
4) the U.S. has one of the most stable governments in history and is in no danger of being conquered by a foreign invader. That means if you have dollars, you don’t need to worry about their value disappearing as happened to the Confederate Dollar when the Confederacy was defeated in war.
Are you saying it was a waste of time we got OPEC to agree to an existing practice that oil was to be traded in dollars only?
It was indeed that post WWII, here I am quoting Wiki, more or less, that the world oil market had been priced in dollars.
I suggest you read Rachel Bronson’s Thicker Than Oil, in which she unasailably lays out the nature of the relationship between President Roosevelt and King Saud, that it was about much more than oil and certainly not about making a dollar become worth a buck fifteen. The primary purpose of the arrangement was as an anti-communist alliance.
Remember the planet will go on just fine without us, the plea for economic moderation is for our survival not our aesthetic abstraction of the planet.
Endless rounds of golf does in fact harm our ability to survive, water waste, fertilizers, labor spent on maintaining acres of various tiers of short cut lawn to hit around a white ball with a club.
What are more and better TVs made out of? More and better resources? They are not produced magically.
Major sporting events waste food, labor, capital that could be spent on anything outside of privileged society’s obsession with over the top bread and circuses.
Digital music uses servers, electricity, production equipment, etc.
The problem is not with art, goods, fun, whatever. The problem is our inability to perceive the cost of commodities in relation to the resource base. Those things you mentioned as harmless, when produced and consumed excessively are disastrous for us as a species living on the planet because it depletes the resources we need for our lifestyle, and more importantly, our survival.
“MMT answers that question and as such, should be every environmentalists best friend. MMT is the only chance we have of saving our current ideal climate in the near term.” Yep.
OC,
I suspect nature will contract it just fine, thank you. What we need to do in that window between the next financial heart attack and the eventual descent into the abyss, is to get the media and the public truly interested in a discussion about the nature of money. When you have a system based on public debt and private accumulation, the public has to keep borrowing it back to keep it circulating and that can only go so far.
Money is a public medium, just like a road system. We own our cars, our houses, businesses, etc, but not the roads connecting them and no one cries socialism over that. Effectively money is the same idea. We really no more own those pieces of paper in our pockets, then we own the section of road we are on. We don’t have the copyright and we are not personally responsible for the value, so it’s not really ours. That it is fungible is what makes it work.
It’s just that the government and the banks like us to think it is ours, much as a fisherman wants the fish to think the worm is its. If people really understood all the ‘strings attached’ and ways they are pulled, they would be far more careful what value they would take from their social relations and environmental resources, to trade for this currency. They would also be far more willing to set up and use local currencies. This would all go to storing and restoring trust, value and strength back into society and not have us a bunch of atomized and commodified individuals, with little network outside what the monetary economy provides for us.
Good try,Randy Wray. You sure as hell ain’t preaching to the choir here.
But some of the congregation are mired in economic ignorance and appear to enjoy that state. Closed minds and cloth ears,I’m afraid.
“The old is dying,the new cannot yet be born,in the interregnum all manner of morbid symptoms appear.” Anton Gramsci
Never fear asking ignorant economic questions.
By my observation, the precious metals as currency community has always been leagues off in their actual understanding of its implementation and use in markets (including its disastrous effects), but they unknowingly, and sometimes knowingly, grasp the problem with MMT, lack of economic restraint (or an awareness of a resource ceiling). When a currency supply surpasses the estimated “value” of all of the resources on earth many times over there is a problem, and no amount of MMT jargon and theory can solve it. A currency has to, in a clear way, link itself to the resource base of the environment it is exchanged within. MMT does not have a realist (or materialist) bearing. It is rooted, along with countless other modern political dogmas, in European continental philosophies that sought to build the perfect state society by any means necessary. A monetary theory operating completely in the abstract reflects this as these societies would have to represent absolute or perfect ideals, and only infinite capacity could allow that. Exchange must be constrained with respect to the actual resource base not a perception. This could be done by linking modes of exchange to various resources (food, water, fuels, ect) in an interconnected mesh. It would be a great deal of work developing such a system, but the reward would be a sustainable, healthy society.
Our currency is linked to a very important resource – oil.
And we can all see for ourselves what disastrous effects it has lead us to.
MyLessThanPrimeBeef: Our currency is linked to a very important resource – oil.
No, it isn’t. There is no fixed price for oil, which is what real linking to oil would mean. Stories about the US insisting that oil be sold denominated in dollars are meaningless, even if accurate, which they are not, to my recollection. So what if they were? How would it matter – except psychologically? Pounds and yen would do as well, they are both convertible widely traded, liquid currencies with enormous amounts of real goods and services.
The problem is philosophical. People very much want to make money into something it ultimately is not – a thing, a commodity. Money is ultimately a credit/debt, a relationship, not a thing. But money is precisely that sort of credit/debt which is treated as a thing, a commodity by being negotiable, exchangeable, transferable. The transfer of money creates another credit/debt relationship, just the same way that receiving a burger at the counter of McDonald’s creates a credit/debt relationship, an indebtedness of the customer to McDonald’s. So the philosophical confusion is inherent to the very nature of money, which is why it is so very hard to get rid of and think clearly about.
Rosario:A currency has to, in a clear way, link itself to the resource base of the environment it is exchanged within. Only in the everyday way that money has always worked. The only clear linking to the resource base that makes any sense at all is linking to the source of all increases in real wealth – human labor. That’s the Job Guarantee. Any other standard, any other linking is immoral, absurd and colossally destructive of real resources.
We will see we can get off the black gold standard.
This isn’t commentary. It’s sloganeering.
MyLessThanPrimeBeef: We will see we can get off the black gold standard.
Sigh. We can’t get off it, because we aren’t on it. Are the prices people pay at the gas pump or for home heating oil fixed, or are they affected by international price movements?
At least it is finally clear what you mean by Money Creation for the Little People.
Apparently it is just a BIG. BIGs of some sort are OK, and they already exist, but they are inflationary and feeble by themselves, without the defense of full employment, a JG. Plutocrats have always understood the defects of a BIG, which is why they prefer it to the Job Guarantee, which they hate above all. BIGs either are extremely inflationary – and thus not true money or income at all, or they are encumbered with degrading restrictions & used to divide and conquer. But the JG makes everything work better – especially the erasure of plutocracy. But only MMTers through the ages & plutocrats understand that.
We spend a great deal of time laboring on things that have absolutely no purpose. Link to David Graeber’s “Bullshit Jobs” (http://strikemag.org/bullshit-jobs/). Though I don’t think we need his article to realize that. I’m not getting the human labor equals wealth paradigm. We can labor at a lot of things that are harmful to ourselves and everything around us and get paid for it and buy crap and continue doing it. What is immoral about asking humans to behave responsibly to nature (which provides for them), kin, and most bizarrely themselves? We have been more or less following the human labor as capital, etc. etc. etc. track for some time. We can insist on it further or we can try something else. We have done it before.
I think if you reconsider Calcagus’ words you’ll see that rather than treating “labor as captial, etc.” as you say, it will become clear he is stating that labor is what creates real wealth and is therefore superior to capital. We can labor and create without the capitalist but he cannot invest and own without us.
Rosario: I tried to phrase myself in an irrefutable way on this point: “the source of all increases in real wealth – human labor” expresses something rather tautological.
Yes, people can & do things that make things worse. The people who organize this on a large scale nowadays are usually called “capitalists”. As Chomsky likes to point out, it is the supposedly primitive, indigenous 3rd world people who tend to have responsible positions on environmental issues, while the uber-rich Western capitalists, the beneficiaries of millennia of advancement of thought and technology, whose life style would not be affected at all by sanity & responsibility, are fanatically reckless in a way that would be embarrassing to a 5 year old getting behind the wheel of a car.
Your points about “A monetary theory operating completely in the abstract ” & ” lack of economic restraint (or an awareness of a resource ceiling)” are well taken, but they are inside MMT, although this is one of the many things that may not be immediately clear, and expositions must always be constantly improved. But just getting it right in the abstract – the monetary, the financial – is not nothing, especially if you don’t want to have your money abstracted by the uber-rich financier con-men.
One thing I don’t understand is that on the one hand one of the main tenets of MMT is that domestically the sovereign gives value to her currency by maintaining an ongoing tax obligation. But on the other, when the US convinced OPEC to ONLY accept dollars for oil, thus imposing on most of the world an ongoing obligation to hold or buy dollars if they wanted to import oil, that MMT seems to be saying that this policy has no impact on the value of the dollar?
These two takes seem inconsistent.
If oil denomination in dollars disappeared and the dollar fell sharply in relation to other currencies this would be more reason fro countries like China, Japan and Germany to buy them up in order to maintain a favorable exchange rate. If the U.S. still didn’t like the result a combination of monetary policy and taxes can drain sufficient liquidity to restore whatever level of parity is desired. Ultimately the U.S. government is setting the price for the dollar whether oil is involved or not.
“”I also hope to help clarify things for a third group—the “debt-free money” folks who want Uncle Sam to spend “debt-free money”. Short answer: depending on how you look at it, he either already does, or cannot ever do so.””
Yeah, that’ll work for the ‘debt-free money at issuance’ crowd.
Depending on how you look at it……
Taking on Keynesians, Post Keynesians and monetary reformers in one fell swoop, Dr. Wray offers another stylized ‘short answer’….they always are…… anecdotes, euphemisms jingoisms.
This one is a good example.
Either we (the people) do it now, or it can’t be done.
Actually, the way we see it, what we hear from MMT is ….. WE do it now(stylistically), AND it can’t be done by YOU. MMT is the good guys, after all.
It’s like this little MMT secret handshake memism. Put some words together……”the government neither has nor doesn’t have any money.
Move on…..
It is way past time to stop pretending.
To claim that the government issuing of debt-free money is not possible, one must both ask, “why not?” …(they did it with Greenbacks, and it’s what Lerner advocated….and Fisher, and Simons, and Friedman, and Turner ….and others.), and how are they doing it now?
What is the source of the magic government money power?
The empty “government IS the monopoly issuer of our money supply (currency)” theme is lain waste by the truth that the government needs to have “money” in its accounts(positive balances denominated in the national unit), BEFORE it can spend any ‘money’.
Because they do not have the money power.
It belongs to the private banks.
And MMT intends to keep it that way.
That lack of money power is what the government shutdown is all about….. around the arcane debt-ceiling debate.
IF the government could spend simply by keystroking, then they would tell the Congress to STFU on this debt-ceiling thing.
More important, if the government could just “spend until full employment”, there would be no need to borrow anything, and the debt ceiling would be part of a bad dream.
Until we achieve that public money power, we are left with the modern capitalistic ploy of using tradeable capital assets, crated by private banks, to issue the national money supply.
Throughout our political economic history, the call of progressives has been for public money over this wealth-concentrating confidence trick.
Sorry, Dr. Wray, we are NOT doing it now, and we can certainly, and MUST, do it in the future.
Well said, June Town.
To claim that the government issuing of debt-free money is not possible, one must both ask, “why not?” …(they did it with Greenbacks, and it’s what Lerner advocated)
No, debt-free money was not advocated by Lerner, and was not what the Greenbacks were. The money we have right now is neither more nor less “debt-free” than it would be if the USA decided to stop issuing bonds. Speaking of “debt-free money” always ends up as being – I have decided on doing accounting in a Martian fashion, using imbalanced balance sheets that don’t add up. There is nothing wrong with the current monetary system in theory the way “monetary reformers” insist, no constraint on the government. The money the US Congress decides to spend is what is spent into existence right now. The very existence of debt-ceiling debates prove this. End of story.
I would like the thank Professor Wray for this lucid article.
There’s a third, fourth, and fifth critique of MMT, as well:
1) It ignores distribution in favor of aggregate demand at precisely the point in our history when concentration of wealth and power is at an outrageous extreme, to the point where fundamental checks and balances and Constitutional rights have largely been shredded. MMT simply does not justify why economists and doctors and lawyers and other highly paid public employees should be given such a higher standard of living than tens of millions of workers in crap jobs.
2) It is focused on increasing the amount of hours worked at a time when too much work is causing problems for everything from public health to family stability to environmental destruction.
3) A JG is far less efficient at spending currency units into the economy than social insurance.
It ignores distribution in favor of aggregate demand. . .
Guaranteeing every American a job offer will force redistribution from profits to wages.
It is focused on increasing the amount of hours worked at a time when too much work is causing problems. . .
Tell that to the twenty million Americans who wish to work more but aren’t allowed to. You are siding with the capitalists who keep them from producing.
A JG is far less efficient at spending currency units into the economy than social insurance.
You have not taken even the slightest step toward a convincing argument on this. It is the same mindset present in the economic mainstream, where assumptions trump evidence.
1) Propose a specific job plan and then we can evaluate it.
2) You make it sound like Americans work less than others. You do realize that Americans actually work more than our industrious friends in Germany, for example, right? The obvious solution is not more work. Rather, it is to spread out work over more people. Or, return to a breadwinner model, which is far more stable than a two-income model for a variety of reasons.
3) Um, I was just pointing out there are other critiques. I wasn’t explaining any of them. But this is patently hilarious. The knee-jerk reaction that MMT has to social insurance demonstrates to me a lack of intellectual curiosity in actually solving the problems that make people desperate to obtain the basics of a standard of living.
So here’s a simple proof of #3. The Social Security Administration has a staff of about 65,000, give or take. The defense sector, whatever exactly we want to call it, has a staff of about 4 million, give or take.
Yet they both spend about the same amount of currency units into the economy. That’s about $200,000 per defense employee, and about $12 million per SSA employee. In other words, a social insurance employee is about 60 times as effective as a defense employee at emitting dollars! The fact that those dollars go to average citizens rather than connected insiders and the technocratic elite makes universal unemployment insurance even more valuable than JG/ELR.
I did not know that. Thanks for telling us.