I think I have shared this before, but I will again:
When will politicians learn what Stephanie Kelton points out?
Modern monetary theory is simply economics for the twenty first century where all money is just a government promise backed by tax. It really is time politicians realised.
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With respect to frequently visited notion of “re-framing” etc. I fear that you may have got the question back to front here.
There is is no objective basis for expecting politicians to realise any such thing until the case has been made and become well known – until it has been sufficiently established, articulated and advocated – like all the other big ideas of history.
The politicians will not come to the realisation. The realisation has to go to them.
True
There’s a Machiavelli quote that comes to mind, but Max Planck puts it more accessibly: “A scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die and a new generation grows up that is familiar with it”. Although economics isn’t a science, I really hope it doesn’t that long for understanding to happen.
I think Thomas Kuhn, in his 1962 book, “The Structure of Scientific Revolutions”. makes the point paradigm shifts occur when the Old Guard retire or die.
I hope we can learn faster today but I’m not holding my breath.
Do people invest in ideas, philosophies, political stances or ideologies? Maybe the old guard politicians have too much invested (time, effort, taking a stake in a particular outcome) to want to change. The investing could also be an emotional response where a particular world view places the advocacte in the home position; the holder is safe, comfy and cozy and does not want to move.
Advocates for smaller or less governmental action seem to be the largest die-hards for orthodox politics of balanced budgets as though the want the economic culture of our society to fail; this dying off would kill off their largest mythical beast -overly large governments.
At Peterloo the working men wanted honest work, fair pay in hard cash and not airy promises, paper money and so called pauper “benefits” obtainable at the local government Workhouse. It is interesting to see you on the side of the cavalry and militia.
I am finding your comments increasingly hard to understand
And on this occasion you are on the side of the oppressor
You want the gold standard and the desperate poverty that went with it?
Surely not?
Demetrius:
Imagine the global economy had operated on “hard cash” (by which I assume you mean gold/silver) since the time of Peterloo.
Do you think such a money supply would have provided the scope for the many-fold expansion of the economy we’ve seen since that time?
Here’s a clue – a fixed supply of money in an expanding economy becomes rapidly deflationary…
At the Peterloo Massacre, the Govt provided measly “alms to the poor”, seen as ‘charity’ … and I am 99% certain the Brits WERE under the Fixed Exchange Rate with political price-fixing on Shiny Rocks at that time, so in that legal-fiscal environment, taxes _were_ necessary to maintain the gold/pound ratio and deficit spending _was_ constrained by that rule.
This has almost nothing in common with applied MMT in World War 2 and the Cold War (for inexact examples) which Reagan and GOP called “military Keynesianism”. This has nothing in common with floating currency where the tap on the growth or shrinkage of the money supply is regulated by the combination of fiscal spending and bank credit creation, BOTH created out of “nothing” except keystrokes and legal agreements.
Do you think Americans in the 20th Century felt ashamed for being on the dole for working at engineering or assembly at Lockheed or Northrup-Grumman or Boeing or even at General Motors building tanks and other military equipment, or working at other private jobs earning incomes from the consumer spending of govt-contract employees? Were people moochers who worked under Govt grants for DARPA to help design the Cold War Internet?
What about Americans who built the giant socialistic Autobahn I mean the Interstate Highway Act (under Defense, by a former GM CEO), building freeways that birthed the suburbs … and eventually traffic jams and smog?
The US had an official multi-layered social-welfare system, loosely including the fact that income tax collection falls and deficits rise when people lose jobs, but also an unofficial social-welfare system consisting of extravagant spending on Star Wars missile-blocking shields and 45 years of other deficit spending aimed on defeating the Evil Empire of communism with War-Communism (albeit, often by invading poor countries).
This viewpoint on Defense or “National Security” spending as “welfare” or “communism” is really found in the philosophically-interesting but pragmatically-unworkable criticisms by “libertarian” Austrian Economics scolds, who inadvertently are propagandists for Big Banks and emergency short-term loans at 500%.
The fact is that the most conservative Americans (and other conservatives) WILL support “socialism” of a sort when it carries a patriotic “War on …” label, but have mixed opposition on the socialism of a social nature — lately even opposing high tech investment when it’s in a “hippie” technology like solar or wind and “identified” with Democratic Party particularly Obama (but weren’t vocal when it was Enron doing wind tech) — the Internet scientists said they had to employ political stealth to unveil their creation via some Republicans because if GOP knew it emerged mostly from Gore & Clinton they would have killed it.
The sticking point that transcends partisan bickering and ideology is the number of people who stop at “muh tax dollars”, which is nonsense for national fiscal policy.
+1 Like
I only have one slight criticism with this video, in that it appears to have connections with labour (towards the end). Which it does not – MMT has nothing to do with Labour, Tory, or any party. Indeed I do not think Labour have ever publicly accepted it.
But, by connecting it with Labour may have the undesired effect of losing credibility with people would would rather slit their own wrists than ever vote for Corbyn.
But, all things considered, I’d give it 99/100.
There are no links that I known of with Labour
I wish there were
I have no clue what Labour is frightened of, but it is
Tony Weston:
There are many of us in the Labour Party who are fully cognisant of MMT. I myself helped publicise and organise Professor Bill Mitchell’s well attended fringe event at conference last year.
I spoke to John McDonnell personally and encouraged him to make time to speak to Bill while he was in the country. John is aware of who Bill is and his work but didn’t have time to meet as they were both on tight schedules.
Another problem is John McDonnell’s current economics adviser is too mainstream and may well not be totally accepting of MMT. I suspect they are also afraid of going too far off the mainstream reservation and getting slaughtered by the press.
Still, we keep trying and I live in hope that as normal party members and the general public become aware of MMT it will be easier for the leadership to accept it publicly.
He should have stuck with the one he planned with whom he did not see eye-to-eye 🙂
“Another problem is John McDonnell’s current economics adviser is too mainstream and may well not be totally accepting of MMT”
The economic advisor would seem to be stuck in the equivalent of the earth-centric view of the solar-system – which says a great deal about the advisor & McDonnnell.
Not understanding – thence implementing – this basic economic fact is the biggest single obstacle to socio-economic-democratic progress. Unfortunately it requires a level of political courage & wisdom currently not in evidence among contemporary lawmakers, who will continue to shuffle the deck-chairs …. I’ll spare you the rest of the Titanic analogy.
On its present trajectory it’s difficult to see how adherence to Neo-liberal ideology can end in anything other than global misery for the many and, ultimately, for the privileged few as well. Living in separate, gated communities will only provide short-term protection from the angry masses, armed not with pitchforks but more probably AK47s.
Postscript: May I just add this YouTube link to George Monbiot for openDemocracy (Nov ’17) who adds positively to the debate more eloquently than I am capable of – https://www.youtube.com/watch?v=BPMlfHzCoUI (apologies to the many who will already have seen it).
It is very interesting but there are risks attached to everything..what are the economic risks in adopting a policy based on having no caps on government expenditure and expenditure financed by money creation where inflation is offset by the tax rate??
There is a cap on government expenditure
It is the real capacity of the economy
And the ballot box
Please don’t talk nonsense
DC
MMT is not a policy prescription – it certainly isn’t a licence to print money as infinitum. MMT just describes how the existing system operates. In that existing system there are frequently arbitrary and illogical constraints placed on government money creation. Usually those constraints are suboptimal (for the general public and the planet at least).
MMT makes abundantly clear that the only constraints are availability of real-resources and the real costs of any expenditure are opportunity-costs.
The real reason vested interests dislike MMT isn’t the risk of inflation but that it demystifies economics such that it’s really obvious when establishment shills are talking BS to distract us while their masters screw us over.
“what are the economic risks in adopting a policy based on having no caps on government expenditure and expenditure financed by money creation”
That IS the current system. Politicians know it too, and admit it, when it’s politically advantageous to admit it.
Reagan famously stated that “the deficit is big enough to take care of itself” without probably understanding MMT, but that’s the kind of “dumb” quip a Trump would say. As a matter of fact, Trump did respond to scolds by Hillary, “I hate to tell you folks, we print the money”, which gave liberal MMT people some false hopes about the GOP. Dick Cheney also said “Reagan was right, deficits don’t matter” when the topic was the cost of the Iraq War, that is, the fiscal cost not the human cost.
It is a bit maddening that they OBVIOUSLY understand this to some extent, then revert to hand-wringing over deficits when it no longer matches their agenda.
The Reagan admin — I was not into economics or MMT, but I was watching the news and distinctly noted this brief period when GOP was complaining about Democratic social spending and deficits, then suddenly GOP authorized fantastic emergency spending allocations to halt and bail out the S&L collapse, then within one week had reverted back to complaining about budget deficits and calling for cuts to poverty programs and probably veterans programs too.
“no caps on government expenditure and expenditure financed by money creation ”
What about a cap on private sector spending? Private sector debt is far bigger and more dangerous than public sector debt. But you love to castigate the public sector. Look at the beam in your own eye.
If governments can never run out of money, and print money and spend it as they see fit, as the above video suggests – why does it never work when it is tried?
Surely Venezuala wouldn’t have a crisis if what MMT claims is true actually was, and Zimbabwe would still be using their own currency rather than the US dollar.
You have to have a functioning tax system
And you have to have a democracy
And you need your own currency, not one pegged to another (as oil states have)
So it did not work in Zimbabwe and maybe it cannot in Venezuela
But you may have noticed we’re not much like either so why pretend that we are? Do you always make such wild assumptions that are unsuited to the case being made?
Venezuala did have a functioning tax system and democracy, and their currency peg was controlled by the government, so they could (and did) change it at any time.
It seems though, that printing a huge amount of new currency to pay their bills after the oil price drop left them with a large government deficit has actually only led to massive hyperinflation and a devaluation of the Bolivar to the point it is near worthless.
MMT and you would have us believe that a government can simply print their way out of trouble as long as they issue their own currency, and there are no apparent risks involved. We have a real world example in Venezuala where they have done exactly what MMT and you suggest they do – print money to cover their spending – yet it hasn’t worked.
Instead of making excuses as to why MMT doesn’t apply in this particular case, can you give us reasons why MMT would work? After all, in every case of governments printing money to cover deficits it has led to the same result – literally every time. Typically some measure of hyperinflation and economic crisis.
Can you give us a single example where printing money hasn’t led to economic ruin?
You are ignoring that they are an oil currency – and that means the dollar rules
That is nothing like most currencies
This is not what MMT says will work in a country like the UK
And yes I can give an example where money printing has not led to ruin: the UK has run a deficit since 1694 and it’s been incredibly good for us
Ditto, have you noticed what has happened in the US?
Your claim is just ridiculous – all modern money is, as you would put it, ‘printred’
So what if Venezuala is an oil country. It has it’s own currency, the Bolivar, and MMT and its followers say that is all you need. I don’t see any MMTers saying that special cases exist where it suddenly doesn’t work. Venezuala challenged the “neoliberal orthodoxy” as you call it, printed money to fund their deficits and are now a complete economic basket case.
The UK has not been printing money to fund it’s deficits. It has been borrowing money to do so. They are VERY different and I would expect a so-called professor of economics to understand that. Likewise the US has been borrowing money to fund it’s deficits. Not printing it. Hence both countries have rather large national debts, something which wouldn’t exist if MMT were being used to fund deficits through directly printing money.
MMT specifically says that governments do not need to borrow. They simply need to print money to spend it, and then recover it through taxation to control inflation.
Again, I ask you: can you give me a single example where a government has printed money to fund its deficits and it hasn’t led to economic damage.
I would appreciate it also if you would also answer without dissembling – we all know banknotes are printed, but we also know that wasn’t my meaning. My meaning is a government creating new money at zero cost to fund it’s deficit spending.
With respect, I answered your questions
The UK is the country that has since 1694 printed money i.e. run a deficit, very successfully
Now tell me what would have happened if we had always balanced the books?
“Can you give us a single example where printing money hasn’t led to economic ruin?”
Well 25% of UK government debt is now held by the Bank of England. In other words the British state owes around quarter of its national debt to itself. The BoE keystroked the sterling currency into existence ex nihilo to purchase this debt and it hasn’t led to economic ruin.
https://www.ft.com/content/cadb186f-81ea-335d-a871-d45114ea1d8a
‘We have a real world example in Venezuala where they have done exactly what MMT and you suggest they do — print money to cover their spending — yet it hasn’t worked.’
Ed- it’s all printing money (by computer keystrokes) so we’re doing it in the UK NOW-and MMT describes how the monetary system operates it’s not a future system it just tells you how a fiat currency and a banking system work and what the REAL options are.
Wheeling out Venezuela is irrelevant and a form of trolling, for the following reason:
1) Venezuela has a variety of currency pegs (depending on the commodity) this causes barriers to fiscal choices. The UK has no currency peg and does not need to earn foreign currency to back its currency.
2) Venuzuela experience a collapse in its main export with little substitution available ( as Richard points out)
3) Venuzuela is being systematically undermined by the CIA which is well documented.
Now if you can explain to me the similarities with the UK here, I will accept your point.
The UK has come of the gold standard many times over the last 300 years and has ‘printed’ money ( as you put it) with no gold or other currency backing. It did it in the late 18th Century for about 30 years and did it in Worlds War One with the Bradbury pound.
You should also be aware that the major financial crises of the 20/21st Century were caused by private debt and that is the debt that we should be talking about -the only times a crisis has existed with public debt IS WHEN THERE IS A CURRENCY PEG OR GOLD STANDARD.
The point can be shown by comparing the UK with Japan: UK’s debt to GDP is about 90%, Japan’s is about 240% and growing. Since I last checked Japan hasn’t collapsed and it’s growth is similar to the UK. It also has a monetary system that is pretty much identical to the UK.
Ed- start looking at private debt – forget Government debt which is really national credit.
is it also relevant that production in Zimbabwe fell dramatically with the confiscation of farms by people who had little idea how to work them? Also in Weimar Germany the Ruhr was occupied by the French and the miners went on strike. The shortage of coal also closed factories.
Isn’t inflation an expansion of the ratio of money to production / economic activity?
No, you haven’t answered my questions at all.
It is utterly wrong to say that having a deficit and printing money are the same thing. They are quite simply not at all. The UK’s deficit since 1694 has been funded by borrowing, through the issuance of government debt in Gilt form.
This is not printing money, and not how MMT claims to be able to work. Are you claiming that MMT has been tried in the UK?
I was not asking you a question about balancing the books – I was asking you a question as to why MMT style debt financing through creation on new money, or money printing, has been tried and has failed catastrophically every time. Most recently in Venezuala. I was also asking you to give us an example where it has been tried and proved successful.
Instead you have avoided answering the questions I answered by creating straw men, and answering questions of your own design, or simply by saying it doesn’t count in the case of Venezuala.
Has it failed in Japan?
Sweden?
Switzerland?
The EU?
The USA?
The UK?
@ Simon Cohen
MMT might describe how a fiat currency and banking system work (badly, I might add, given it doesn’t have a mechanism for describing inflation), but invariably what people take away from MMT is that governments don’t need to raise revenue or borrow money to spend, they can simply print it, and also that running deficits is always a good thing. They also seem to take away that there are no limits to what the government can afford, so it is just evil neoliberal capitalists stopping everyone else from having bicycles and unicorns.
As for Venezuala:
1. The currency peg is self imposed, and is not backed by US dollars. Again, given that they can print their own money, why does this matter for MMT deficit financing?
2. Yes, the value of their exports collapsed. But as MMTers tell us in the above video, governments don’t need to tax or to borrow when they want to spend. They simply can print money. Venezuala did exactly this – what MMTers say is possible – and it was and is an abject economic disaster.
3. Please, conspiracy theories are really rather irrelevant to a discussion about why MMT doesn’t seem to work.
You also seem to have gone off topic talking about private debt and economic crisis. I am doing no such thing, and simply asking people to give me one example of the MMT policy of government printing money to finance its deficits in action, in the real world, where it hasn’t been a disaster.
@ Ian Stevenson
All quite possibly true, but missing the point. The video above and MMTers in general say that a government doesn’t need revenue to spend, and deficits can simply be financed by the creation of new money.
If this were the case, why was this not successful in the various cases you mention?
@ Richard Murhpy
None of the countries you have mentioned are printing money to finance their deficits. They are borrowing money to cover budget deficits.
If you can’t tell the difference between debt financing of a deficit (which all the countries you mention do) and MMT style creation of new money to finance deficits then I would consider doing some basic economics and finance. One would hope a professor of economics would be able to tell the difference.
Ed
You really are wasting our time
I listed countries running QE programmes – which are money printing to cover deficits. The BoE says so.
As a professor of economics that is precisely what I can spot and you cannot.
Given this basic deficiency in you ability to spot facts you are time wasting with your questions. You will but be posting again.
Richard
Ed says:
“It has it’s own currency, the Bolivar, and MMT and its followers say that is all you need.”
No it doesn’t. Your argument falls at the first hurdle. MMT says a government can buy anything or pay any debt “denominated in it’s own currency.” That’s not the case with Venezuela. It has a great deal of debt denominated in dollars. In fact I wonder if it has any foreign loans denominated in Bolivars.
A person would never try to fit 20 gallons into a 14 gallon fuel tank or try to add 100 gallons over time when their real world conditions and usage only amounted to 90 gallons.
Nobody in MMT circles ever authorized unlimited spending without regards to real economic conditions.
What you may be referencing is Paul Samuelson’s remark that fear of deficits is like an “olde tyme religion” that keeps people afraid and obedient, but he thought that this fake fear was a good thing.
It has been rare when the USA for example tried to spend to purchase and employ MORE resources than existed: World War One and World War Two. They had to invite women to the factories. There was rationing on some things. The govt introduced voluntary rationing by selling War Bonds which didn’t actually “finance” anything (not WW2 anyhow) but encouraged consumers to not-spend by saving instead.
Then after the wars, when govt spending reduced a bit (I presume, not turning to stats), consumer spending and also credit was unleashed — the Roaring 20s was one example and also the post-war period after 1945, but even THAT needed more deficit spending on the New Enemy, the USSR with the Arms Race. Sure, there was that existential military and ideological threat, from that Satanic Govt, to inspire the Christian Right, but there was also the very real threat that a sharp drop in govt spending would push the US back into job losses and recession.
It’s not as though this is all something NEW that has never been experienced in past history, over and over, it just has this new label and new insights and language. MMT also explains how economies work when they have a Fixed or Pegged currency or when forced into war reparations in foreign currency, or when an enemy or internal actions destroys their real productive base.
The great obstacle to MMT gaining widespread acceptance is that it fundamentally threatens capitalist class interests and it is that class which controls the economic narrative. Most of the mainstream economic commentary is used to provide camouflage for vicious class warfare . Britain is a floating currency issuer and can always afford anything which is for sale in the currency is issues. The real limitation in providing public services or anything else is the availability of real resources such as workers, energy, equipment, raw material etc. and never a shortage of money. For the government, sterling is simply an accounting tool to measure and allocate those real resources. The UK can afford for example to clad high rise blocks in fire proof cladding but its ruling class chose not to. Austerity is an ideological choice, not an economic necessity.
Most people never get to hear the real nature of money and the macro economy explained properly. Instead they’re exposed to the endless mainstream propaganda which equates the currency issuing government to a household. The illusion is very powerful because it seems intuitively correct to people. Money seems to be a scarce commodity to the majority and they must struggle hard to obtain it working in low wage jobs etc. Ordinary people labour under a tight budget constraint every day of their lives and so they assume the government suffers the same financial limitation. Of course the big private owners of capital peddle who own most of the mainstream media and much of academia and the political class peddle this propaganda relentlessly.
If the majority understood that money is never a problem for the issuer they might start demanding things like properly public funded health, education, transport systems and affordable housing etc. and maybe even a universal job guarantee and realize that money is never a constraint in providing these vital social supports. The working class might begin to vote in their own interests rather than against them as they’ve been miseducated to do.
Money can be seen as the scoreboard of capitalism. The wealthiest have just accumulated a large money score in their bank accounts. But ultimately in a sovereign floating currency issuing state like Britain, the government is the scorekeeper. It can change the scoreboard at any time to give itself or anyone else access to the real resources that society has produced collectively. This knowledge is toxic to the 1% whose power and privilege rests on having a lot of accumulated keystrokes while the majority have little.
I absolutely agree , I would only add that there might also be a level of psychological resistance to waking up to the nature of money in that people will realise they have been scammed and had the uric acid systematically removed. It will be hard for people to accept this, that years of believing in something that wasn’t true and that entailed unnecessary hardship and suffering had been inflicted on them. Erich Fromm pointed out the strange psychopathology of people preferring slavery to freedom, because freedom means taking responsibility and becoming a thinking person as well as engaging and shaping the future together -sleepwalking is easier!
Unfortunately we have, by and large, a very poor collection of politicians who are not concerned about having a genuinely educative function either through inertia or through having to many vested interests in the ‘game.’
J K Galbraith, Money: Whence It Came, Where It Went (1975)
The process by which banks create money is so simple that the mind is repelled.
Chapter III, Banks, p. 18
N’er a truer word written
Indeed-will people be able to take it in without feeling anger and consternation and blame the messenger as mad?
The work is an uphill journey, for sure!
“The process by which banks create money is so simple that the mind is repelled.”
I was not repelled. That was probably about so-called ‘fractional reserves’. When I learned that banks create money by a paired set of business contracts, one a debt agreement (asset to the bank) and the other a deposit account or check (liabilities to the bank which are spendable), it all made sense.
David Graeber wrote about ancient times when “bankers” were lending out capital — and human slaves were frequently capital — credit was scarce and annual interest rates were in the 60% range, not typically 5% or less. Credit creation by account maintenance has been of vital importance to expansion of capitalist production, and stability provided by the Fed, FDIC, and getting rid of the Fixed Exchange rate to prevent speculative collapse from destroying real capital like factories, machines, and knowledge.
During the GD, Ford built a car plant in WA to build the new single cast V8, but it closed within a year. People were paying traffic fines with live chickens and bushels of grain, because there was no money to pay the court, so there was no money to buy mass-produced cars either. The losses to human productive endeavor from a mere money shortage are hard to fathom.
Galbraith was referring to the reality as you and I understand it
Ok i was will slightly rephrase a question – accepting the ballot box and capacity of the economy as the main constraints. what are the risks of financing government expenditure out of money creation (particularly when the role of the government will be much greater) and using tax to contain inflation?
The risks are full employment and economic growth, rising incomes and demand being met
what are the risks of …
That’s precisely how it works today. Politicians just harp and scold and pretend otherwise, except when a ‘justifiable’ ’emergency’ arises, like the need to overthrow Iraq. Then, budget concerns go away, however briefly.
Or when Trump wants a tax cut
I have found MMT helpful in clarifying the mental image of the economy, which is important when we are bombarded with bad metaphors and terms in reporting of the economic debate. However, I do find part of their number a little to committed to policies like the Job Guarantee to the exclusion of other policies like UBI that I happen to support. Richard, how do you see the best way of moving forward when so much is held in common, but in some fewer but vital aspects like UBI, some on the MMT side seem a little intolerant to those who support it? It seems a minor point, but UBI I believe is key in any future agenda based on sustainable growth, environmental considerations and the growth of automation that should be a positive not a negative.
All economics involves disagreement
I am not wholly convinced by the JG and prefer a UBI
So what, I say? I’ve never agreed with anyone I know 100%. I’ll live with the differences
I personally dont agree with MMT but that is irrelevant. What is relevant is that the GLOBAL financial system does not operate in the manner that MMT presents and It would take decades or centuries for this to happen. Inequality can still be reduced within the still very wide boundaries of what can be deemed “conventional economic thinking” i.e the framework within which a western political movement can be elected. The work of Joseph Stiglitz and indeed your work on reducing the tax gap are examples of this. MMT as an instant cure for the world’s economic and social problems is however nothing more than a pipe dream.
You mean you think money is not just a promise backed by tax?
And you think QE has not proved governments don’t need to borrow?
Go on then, tell me how the real world works
And don’t tell me governments must borrow because that’s not true, as we now know
and my work on the tax gap is about making sure the system works to reduce inequality – not to fund government
Richard, could you please explain, or point me to accessible material that would help with, squaring what appears to me as MMT’s explanation of retail banks creating money without cost and the role of central bank interest rate setting? Why is it that competition for mortgage loans don’t drive commercial rates below those set by a central bank?
With 25 comments to moderate and work to get to, might I ask others to assist?
John,
Here’s how MMT would respond to your question:
“If the government is running a deficit, then it is creating more money than it destroys through taxes. This means that the banking system will have excess reserves, more than they need to settle inter-bank payments and meet reserve requirements. Normally, banks don’t want to hold excess reserves, they’d rather purchase some other higher-interest-earning asset.
So they will take the excess reserves and try and loan them to other banks (note that they cannot loan them to the public. That would be impossible, because the public does not have accounts at the Fed, and reserves only exist in accounts at the Fed). The market for interbank loans is called the “Federal Funds market” in the United States. The system-wide position of excess reserves, that everybody is trying to get rid of but nobody wants, will drive interest rates down, potentially to zero.
If the central bank doesn’t want to have a zero overnight interest rate, if they prefer a higher rate target, then they need to drain the excess reserves, and the government does this by selling bonds and destroying the reserves. (And it’s identical whether it’s the Fed or the Treasury doing the selling.)
The government does not need to do this. They could simply leave excess reserves in the banking system, and then have a permanent zero overnight interest rate. Or, they could stop selling bonds, but raise the interest rate by directly paying interest on reserves, because no bank will lend out reserves for less interest than they could get by simply leaving them parked in its Fed account.
So, bond sales are actually part of a monetary policy operation to sustain an interest rate higher than the interest rate paid on bank reserves (which is usually zero). A government might also offer bonds to its citizens if it would like to give them risk-free interest income.”
See the whole lecture here: https://www.youtube.com/watch?v=i35uBVeNp6c
Thanks
Thanks for that. It’s still half a response though.
Unless I’ve missed something, the link to retail bank lending is not there. Reserves are supposed to be irrelevant.
Irrelevant to what?
Irrelevant to commercial bank loan creation. Isn’t the term: “loanable funds theory” MMT’s?
I am still struggling to see your point
Banks getting a certain rate for their reserves on the overnight market, as determined by the central bank, would appear to be relevant for the rate they can get on their reserves and their reserves only.
What I can’t find in the MMT literature is how this relates to loans to the public. If the latter is supposed to be double-entry book keeping and determined independently of reference to these same reserves, why is the overnight rate of broader significance? What is it’s role in market rates for mortgages? What is stopping banks in a supposedly competitive market reducing mortgage rates below that set by the central bank?
Wow
That needs an serious answer and I have not got the time today
Sorry
But feel free to remind me
DC -MMT is a description of how the monetary system works, it is, not a political movement although its proponents tend to be on the Left.
It often describes itself as ‘a lens’ through which to properly see the operations of the monetary system. If it seems counter-intuitive, it is because it contradicts a lot of the ways we use language in relation to money and banking. So it requires a sort of shift of ‘Gestalt.’ So the Global system DOES operate as MMT describes it’s just that people use language, through misunderstanding or intent, which obfuscates things.
Simon, I hope my brief and somewhat sarcastic examples and story-telling represents a window to how people can comprehend MMT organically. I haven’t gotten much pushback on attacking the idea of “taxpayer dollars” on various forums or the idea that “Govt stole social security” so the well has run dry.
A new creative analogy hit me the other day getting out of the shower, but I’ve forgotten what it was. Hope it comes back again. In the meantime, watch out for excessive Govt funded ponies.
“MMT as an instant cure for the world’s economic and social problems is however nothing more than a pipe dream.”
Seriously? Who ever claimed that it was?
MMT only describes how different fiscal and monetary designs work, now, or fail to work well, and proposes solutions only to problems directly or indirectly caused by inadequate public spending and inadequate aggregate demand, especially inadequate overall consumer demand including augmented by both public spending and private credit creation.
MMT isn’t giving everyone a pony … not unless there exists a sufficient supply-source for ponies, sufficient desire for ponies, and sufficient workers available to clean up the inevitable pony poop problem.
DC — one more thing.
If MMT-friendly policies focused on job creation, such as creating JG jobs for NILF (Not in Labor Force) people, a possible result will be a deflationary effect bigger than the inflationary effect of new workers with new consumer powers. How so?
I posit that while some crime is caused by “criminals”, a LOT of crime is caused by idleness, so Govt’s must pay for more cops, courts, various officers and staff, probation, prison staff, monitoring, and much more like heightened private security measures, just to attempt to halfway contain the ill social effects. I imagine cleared rosters for cases to flow without haphazard rushing, and probably also layoffs of surplus “poverty managers” which are no longer needed. Some will probably switch to JG managers, guiding formerly unemployed people on a path towards private sector full employment … to whatever extent this is feasible.
MMT can’t change cultural problems, though it can fund resources to deal with cultural problems. MMT can’t change IQ problems but it can fund whatever solutions are available.
MMT can’t work magic here but it might seem like magic in certain areas of urban decay, where even a little magic would seem like a huge blessing.
I know the arithmetic behind MMT, I absolutely don’t agree with the assumptions that are needed for it to work and I think it would prove a dangerous financial experiment. But that is my view. I have studied economics but have learnt 1000x more working in industry and private equity. I occasionally lend support to academic research as a practitioner in financial markets and I am more than aware of the gap between working knowledge and theory. Globally there will not be an acceptance of MMT as the way the economy functions and so policy predicated assuming otherwise is absolutely pointless.
Your problem is that MMT describes how the economy functions.
It says how money is made.
It relates how government works.
What you are actually saying is you dogmatically oppose a proper description of reality because making the economy malfunction suits your purposes.
May I posit another problem here with DC’s approach which I think he should consider?
I think DC might be making the classic error (as evidenced by Steve Keen in ‘Debunking Economics’) of conflating micro economic dynamics with macro economic dynamics.
DC says he has learnt ‘1000s more’ by working in industry which is actually part of the micro economy. This maybe is what is driving his perspective?
I mean how often do we get some ‘leading’ CEO commenting in the media on the Government management of the whole economy when in fact their working area is really a small part of the micro economy (and a self-interested one at that)? Too often in my view.
Good point
The household fallacy
[…] MMT is economics for the twenty first century where all money is just a government promise, backed b… tax […]
Why are exports so important if we can simply print as much money as we like?
Because moeny printing enables activity in the real economy and is not a substitute for it
Why ask pointless questions to which the answer is obvious seems a more appropriate question for you to address
Ed is an idiot who clearly hasn’t even looked at the actual accounting between HM Treasury and the BOE.
He Says ” It is utterly wrong to say that having a deficit and printing money are the same thing. They are quite simply not at all. The UK’s deficit since 1694 has been funded by borrowing, through the issuance of government debt in Gilt form ”
Well where did everyone gets the £’s from to buy the gilts ??? – Previous Deficit spending of course so of course it’s money printing. Without previous deficit spending nobody would have the £’s in their pockets to buy the gilts.
He also doesn’t seem to realise it is just an asset swap from the commercial banks reserve accounts at the BOE to their gilt accounts held at the BOE. So that people can earn interest and the opposite of QE which was just an asset swap from gilt accounts held at the BOW to commercial bank reserve accounts at the BOE.
As for Venezuela please give us all a break. Venezula borrowed in $’s the cardinal sin and now needs to get $’s to pay off its debts.
All UK debts are in sterling and are so for a reason.
Thanks
Richard lists a number of countries who have adopted an MMT based economic policy. UK, US, Japan, EU and Switzerland. The first four used QE to suppress market interest rates (longer dated gilt and corporate bond yields) to promote economic activity to avoid deflation. Switzerland used QE because they are a big exporter to the EU and wanted to depreciate the Swiss franc – that was their motivation. Most of these entities are moving in the opposite direction in the sense they are signaling rate rises and and have stopped bond buying ( exception Japan).. this far from proves an endorsement of the economic policies emminating from MMT thinking..i.e. printing to fund government expenture and using tax to control inflation. What these examples have shown is bond buying in the secondary market influences market interest rates and is a currency management tool..Also this conventional QE experiment hasn’t yet played out and we know it has created bubbles and excesses which might yet destabilise the world economy. In recent years the TMT bubble, the “ponzi” schemes called split capital investment trusts and CDOs and the housing bubble made a lot of negative commentators look foolish for a long time until the sh@t finally hit the fan.
So although there is not a hint of a crisis in bind markets from this course you say there is
There is elsewhere, because the process was not done appropriately, I agree
But you draw all the wrong conclusions
I am bored by all this false comment now