I like this by Momentum Economy on Twitter:
That is spot on.
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Well, that’s a welcome & valuable Tweet for a change. Thanks. Reading through some of the responses to date, it’s clear there’s still a lot of education required. As expected the usual reference to Zimbabwe, Venezuela & Argentina. Surprised nobody’s mentioned the Wiemar Republic yet. Anne Pettifor’s not happy either. Another says it’s ‘pure sophistry’. And ‘Utter delusional nonsense’ from someone else. Etc. etc. Early days but at least it’s one more small step in the right direction.
I agree, I thought it very good, too. Every MP should have it in card form in their wallet next to their debit cards so they can use it as an aide-memoire when they’re mentioning the economy!
Odd reply from Ann Pettifor’s on twitter:
“I don’t agree with MMT & @MomentumEconomy that tax collection is simply to control inflation etc. Tax collection is vital to maintain balance/equilibrium as the sovereign issuer spends…Tax revenues pay for the spending, they do not finance the spending…”
The ‘inflation’ and ‘balance/equilibrium’ points are related.
On the 2nd sentence, I guess to ‘finance’ means to create credit/debt, whereas ‘pay’ means to cancel the credit/debt. Anything that disagrees with MMT there?
Ann and I know each other well
We do have a difference of emphases on this issue: Ann is, if I might say so, much more inclined to a conventional view, as she also is (very strongly) on central banks.
In detail: ‘Tax collection is vital to maintain balance/equilibrium as the sovereign issuer spends’ seems to be agreement with MMT.
But that conflicts in itself with ‘Tax revenues pay for the spending, they do not finance the spending’. Ann does not accept that money is created by a government when it spends as far as I am aware, hence this view. That is because she makes the central bank the pre-eminent power, which I think is simply not backed by any evidence in a fiat money system.
I think Ann is arguing against MMT. Which is a shame.
Interestingly if the government’s central bank, the Bank of England, is the monopoly supplier of reserves ( and can logically only be so) created from nothing then why should Ann Pettifor believe the BoE can’t also create money from nothing for the government to spend? Additionally if the move to the BoE paying interest on reserves is taken to its conclusion there is in theory no need for the UK Treasury to issue Treasury securities to help it target a specific Official Bank Rate:-
https://poseidon01.ssrn.com/delivery.php?ID=101111070070113114005005080013012073116000017019026088089089070026079007095071107025052012063126123028115126112069023005125080044005075034012092074081084101086027055080001119066095110112090026076022007086103113098064118111074009031005010068075027113&EXT=pdf
I wish I could answer
I get very confused by Ann’s position – and I have tried to discuss it with her
It’s more than a shame for any group trying to present a united front against neoliberal economics with a view to offering a stable, accepted and agreed-upon alternative 🙁
” ‘Tax revenues pay for the spending, they do not finance the spending’. ”
“I think Ann is arguing against MMT. Which is a shame.”, says Richard.
If she is capable of coming out with a statement like that quoted above, I’m not sure how you can be at all sure what what she is arguing for (or against).
I thought she was a ‘bright lady’. A cloud of doubt has drifted across my horizon.
How can the Central Bank be pre-eminent when it is owned by the government? (That’s as sensible as saying Network Rail will tell the government how to run the railway.)
Without government a sovereign currency has no legitimacy – it would not be able/available to pay taxes. The other facts don’t matter, as money necessarily works how the government wants it to work – that’s how the current government informs us that austerity is a necessity.
Ask Ann and Simon Wren Lewis
Are they frightened of democracy?
As I state above the UK government through its central bank, the Bank of England (which was nationalised in 1946 by Hugh Dalton, Chancellor of the Excheqeur, the country’s first and only Post-Keynesian), is the monopoly supplier of reserves created from nothing. If it didn’t have this monopoly not only would it lose control of the ability to target a specific bank rate it would run the risk of control fraud if the clearing banks had the ability to also create their own reserves from nothing just like their loans. Do Ann Pettifor and Simon Wren-Lewis advocate that clearing banks should be given reserves creating power. Why also if the BoE and clearing banks can create money from nothing for reserves and private sector loans respectively cannot the government have this power to create its spending money in the same fashion should be the question Ann Pettifor and Simon Wren-Lewis ask themselves. Why do they specifically not address this question in what they write?
Peter,
I’m not sure I’m quite comfortable with this analogy:
“(That’s as sensible as saying Network Rail will tell the government how to run the railway.)” There’s sure as ‘ell nobody in the government knows how to run a railway, actually or metaphorically, it seems.
The surest way to run the Railways would be to hand the job over to the (albeit unelected) House of Bishops 🙂
Useful as an aide-memoire, I agree, but only if the MPs have at least a grasp of MMT. There’s a huge chasm between writers on this blog and the general understanding of how the economy works – including MPs. It’s difficult to see how that can be bridged and how the steps can be small enough to get from one side to the other.
We just have to keep trying…
I will endeavour to do exactly that – viz find out why Simon Wren Lewis and Ann Pettifor do not accept why MMT is reality. We’ll see how we progress…
jan b says:
“Useful as an aide-memoire, I agree, but only if the MPs have at least a grasp of MMT.”
It is not incumbent on MPs to understand what they say. You must surely have noticed this.
It was in recognition of the failure of the majority of MPs to understand anything in policy terms, that the Blair government instituted the ‘soundbite’. And enforced it with the injunction to ‘stay on message’.
If lies oft repeated gain acceptance as truth, surely the truth oft repeated has at least a half chance of being accepted ?
Amasing Richard, Thank you.
I think it should coloured conservative blue. To show true fiscal
responsiblity. And used in an public education broadcast.
Labour should use it. Along side: Austerity never works.
I can only think that both Ann and Simon don’t actually know. Given the fact that it took until 2014 before the Bank of England formally acknowledged that banks create ‘ loans ‘ on a computer and that the ‘ loan ‘ only comes into existence when the ‘ borrower ‘ promises to repay it , but thousands of economics students are still being taught the banks lend out of their deposits, why should we be surprised that two prominent economists have not got this straightened out in their minds. I wrote a letter at the beginning of last week to the editor of the FT making the point about ‘ spend and tax ‘ and asking why this ‘ dirty little secret ‘ was still hovering over this subject and the fiction of ‘ tax and spend ‘ was still being maintained by the FT. She told me a few days later my letter was on the shortlist for publication, but so far it hasn’t appeared. I also referred to Alistair Darling’s letter to Mervyn King in January 2009 ( which was reproduced on this blog recently ) instructing him to make £50bn available – i.e. to create on a computer – as the first tranche of QE as proof of the money creating power of the government .Behind this obfuscation – deliberate, or not – is a wall of fear, the fear that the whole belief system of the power of money in our society and those that wield it will collapse . Well as far as I can tell that is already happening , but the powers that be will maintain until the last that it isn’t.
I should out that letter up again
I hope the FT take your letter – they sometimes take ages
Any chance of publishing John’s letter here on the blog? Just in case the FT don’t get round to it.
John?
This is it :
3rd April 2018
Dear Sir,
Today you published an editorial on reform and funding of the NHS. The comment on reform was apposite, but on funding fundamentally flawed. Here’s why : We do not ‘ tax and spend’ we ‘ spend and tax ‘ . Anyone who has delved into this subject sufficiently reaches this conclusion simply by investigating the operational reality of money creation and taxation. The government can create as much money as it needs to run the services under its control effectively, without ever having to concern itself with the amounts it will potentially receive in taxes, which it can never know with any degree of precision in any given year. In terms of its ‘ balance sheet ‘ as it were , it can, and does, make up the difference between what it spends and what it receives in taxes by the issuance of bonds which is just a way of giving the public the opportunity to save safely. If any further proof were needed just look back to January 2009 when Alistair Darling the Chancellor of the Exchequer instructed Mervyn King, the Governor of the Bank of England , to create out of thin air £50bn as the first tranche of Quantitive Easing ( swelled to £435bn by successive tranches ) in exactly the same way.
Why do we have this dirty little secret hovering around this subject the whole time ? If the FT wants to be a global leader in financial journalism then surely it can come clean and tell it like it is .
Yours sincerely,
Spot on
Hi John,
Really interested to read your comment and this thread in general. I’m one of those people who was very much taught that banks take in deposits and lend from them, and that governments take in taxes to fund their spending. I must confess I have no idea what MMT is. Can you point to a good ‘beginner’s guide’ on this sort of thing please? I’ve heard/read many arguments that government spending (debt) should not be likened to private spending (debt) but I want to understand the specific reasons for this, which rarely seem to be elaborated upon. I’ve heard it argued that the government should NOT even try to have no debt – why is this? Be very grateful for any thoughts.
Try these for starters
http://www.taxresearch.org.uk/Blog/2013/12/05/why-a-budget-surplus-is-the-last-thing-we-need/
and
http://www.taxresearch.org.uk/Blog/2018/02/09/modern-monetary-theory-in-a-nutshell/
There is ample more here and by searching the web
Paul
I find it helps to understand MMT knowing there are three different types of money in fiat money economies like the UK and USA and all created from nothing. These are:-
– “Reserves Money” (a sort of “wholesale” money which is the monopoly creation of the government for regulating payments settlement and the Official Bank Rate the later now controllable by paying interest on reserves obviating one need to issue Treasury securities, see link below)
– “Economy Money” (the creation by clearing banks as “loan credit” all of which has to be repaid or refluxed)
– “Special Economy Money” (the creation by government as “tax credit” to purchase goods and services for public need. It’s “special” because not all of it has to be repaid or refluxed. This enables satisfaction of the private sector to save and it allows the government to intervene and regulate the economy because the private sector rarely optimises the economy on its own in terms of employment and therefore demand because of the risk uncertainty in investment, see link below)
https://poseidon01.ssrn.com/delivery.php?ID=380124069122111091091014070118072081059089022064027023064107068125082025119005000123033062000029047123108127078074088117009018058071007053078064067085071000099095064050012092101102078114116066020117016069083112120091114121092125124124105067011070091&EXT=pdf
https://www.srcf.ucam.org/marshall/documents/KeynesGeneralTheoryLecture.pdf
To better understand what is meant by the term “fiat money” see link below:-
http://neweconomicperspectives.org/2017/11/wouldnt-great-america-fiat-money-system.html
Thank you Richard, I have spent the last several hours tumbling down the rabbit hole!
Paul,
I would just add to Richard’s excellent analysis Warren Mosler’s ‘ The 7 Deadly Innocent Frauds of Economic Policy ‘ which you can find on Amazon and elsewhere .
Alistair Darling’s letter
http://webarchive.nationalarchives.gov.uk/+/http:/www.hm-treasury.gov.uk/d/ck_letter_boe290109.pdf
I will be using this on the blog tomorrow, I suspect
By which I mean that’s my plan but I never know what tomorrow’s blogs will definitely be at this time of night
MMT can only fail if resources are finite and citizens and other countries lose confidence in a country’s currency.
So far that has happened every single time printing endless piles of currency has been tried.
Every single time.
MMT is the fiscal equivalent of Zeno’s paradox which ‘proves’ that Achilles cannot overtake the tortoise or that an arrow can never reach its target.
In the real world the tortoise always gets beaten and only an idiot would stand in front of the arrow.
So ‘prove’ all you like about MMT in theory. As a dinner party paradox it’s mildly diverting but in the real world it doesn’t work.
MMT does not, and never has, suggested printing endless piles of money and I would never, ever suggest doing so.
MMT says a government with its own currency creates money out of thin air (just as commercial banks create all commercial loans in the same way) to pay for its spending.
And then, without exception right now around the world states reclaim that moeny with tax. They can and should do so to the point where inflation is constrained to the limit agreed upon macroprudentially.
What you are describing is soemthing that is not MMT.
What MMT describes is the real world.
Your world only exists in that fantasy universe where you are invited to a dinner where you might be considered an expert on this issue.
Just happened upon this brief and concise explanation from Stephanie Kelton. I believe you have contact with her so apologies if you’ve already seen it – https://www.youtube.com/watch?v=ja_qHRvZNRU. This particular channel has posted several from her dealing with various aspects of MMT, which may be of interest to paul and others.
John
Thanks
Now blogged
Richard
Jake clearing banks “print endless piles of money” as you put it that is their business. Sometimes in a corrupt country like the UK they aren’t adequately regulated and can cause house price hyper-inflation off and on over quite a long period. It is also true that politicians can cause hyper-inflation too by not understanding money’s relation to real resources. There will always be problems with money creation from nothing from either the public or private side unless you have politicians and civil servants who thoroughly understand the dangers stemming from money creation. However, it is not true that government ‘deficits’ automatically generate abnormal inflation the main culprit appears to be a sudden surge in oil prices whether beyond man’s control or deliberate.
https://mythfighter.com/2018/03/17/what-is-the-complex-relationship-among-inflation-deficits-interest-rates-oil-prices-tax-cuts-and-gdp/
Jake LePiquet says:
“MMT can only fail if resources are finite……”
Resources, strictly speaking, are not finite. Matter is neither created nor destroyed so with effective recycling we have resources as long as the Sun provides an adequate energy source. (And that’s before we look beyond our home planet) Sustainability is not a pipe dream, it merely requires proper management of resources, which is the true purpose of the study of economics. Economics has been hijacked by bean counters – a long time ago.
“…..and citizens and other countries lose confidence in a country’s currency.”
Other countries do not lose confidence in countries which have a strong (and dare I say ‘Stable’ ?) economy which is precisely what MMT enables us to achieve.
“So far that [loss of confidence aka rampant inflation] has happened every single time printing endless piles of currency has been tried.”
Yes; because governments which did this in the past did not understand what they were doing and even when they did, they did it anyway. Printing the money is only part of the MMT process; if the destruction through taxation is ignored hyper/inflation follows eventually. Also it matters greatly what the newly minted currency is spent on. Give it all to the, supposedly savvy, financial industry and you get asset inflation on a grand scale. QED ?
Have you any more straw men you would like incinerated ?
Good one
This is in response to Mr Schofield and the first of his links – extract::
“It has long been recognized that uncompensated reserve balances act like a tax on banks and that banks as a result expend scarce resources to avoid holding them”
A tax on banks… & that is a bad thing why?
Extract 2:
“In other words, loans create deposits while reserve balances only settle payments” looking at my company’s bank charges it does seem as if the banks are happy to be licensed for usury whilst at the same time charging the great unwashed for the priviledge of banking with XYZ bank – & goodness me don’t they charge.
Or perhaps I’m missing something? 🙂
Well Mike to get into the clearing bank business you have to buy reserves. The old way to get any return on that money was when the Treasury issued interest bearing securities to reduce the quantity of reserves to drive up bank rate. If BoE wanted to lower bank rate they’d simply not arrange for the Treasury to issue any interest bearing securities. Automatically paying interest on reserves just simplifies matters for bank rate targetting. You may think banks are feather-bedded already. There are a lot of people who would agree with you. Many MMTers agree with Keynes that bank rate should be kept at zero to encourage investment and bank under-writing constraints deployed to prevent reckless bank lending leading up to a Minsky Moment. They also argue that a National Savings Scheme should be set up to replace Treasury securities. Presumably that would be value limited and may or may not be index-limited. Banks and businesses and pension funds would no doubt protest the loss of Treasury securities even perhaps the BoE because they are “gold-plated” collateral for different types of lending usually short term.
Great Bumper Sticker and or T Shirt.
how does this claim fit in with what the DMO says it does? surely there is a difference between “do not fund” and “do not have to fund” ?
https://www.dmo.gov.uk/media/14965/dmodmarep2017.pdf
For a very long time the Bank If England denied banks created money by lending
Now they do admit that
One day the DMO will catch up