I am grateful to Helen Schofield for drawing my attention to an incredibly important article on the excellent US based Naked Capitalism web site, published last week under the following heading:
The Use and Abuse of MMT
By Michael Hudson, with Dirk Bezemer, Steve Keen and T.Sabri Öncü
Michael Hudson is a research professor of Economics at University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College. His latest book is “and forgive them their debts”: Lending, Foreclosure and Redemption from Bronze Age Finance to the Jubilee Year
Dirk Bezemer is a Professor of Economics at the University of Groningen in The Netherlands..
Steve Keen is a Professor and Distinguished Research Fellow at the Institute for Strategy, Resilience and Security of University College London (www.isrs.org.uk). He blogs at www.patreon.com/profstevekeen
T. Sabri Öncü (sabri.oncu@gmail.com) is an economist based in İstanbul, Turkey
Summary
After being attacked by monetarists and others for many decades, MMT and the idea that running government budget deficit is stabilizing instead of destabilizing are suddenly gaining applause from the parts of the political spectrum that long opposed MMT: the banking and financial sector, especially the Republicans. But what is applauded is in many ways something quite different than the leading MMT advocates have long supported.
Modern Monetary Theory (MMT) was developed to explain the logic of running government budget deficits to increase demand in the economy's consumption and capital investment sectors so as to maintain full employment. But the enormous U.S. federal budget deficits from the Obama bank bailout after the 2008 crash through the Trump tax cuts and Coronavirus financial bailout have not pumped money into the economy to finance new direct investment, employment, rising wages and living standards. Instead, government money creation and Quantitative Easing have been directed to the finance, insurance and real estate (FIRE) sectors. The result is a travesty of MMT, not its original aim.
By subsidizing the financial sector and its debt overhead, this policy is deflationary instead of supporting the “real” economy. The effect has been to empower the banking sector, whose product is credit and debt creation that has taken an unproductive and indeed extractive form.
This can clearly be seen by dividing the private sector into two parts: The “real” economy of production and consumption is wrapped in a financial web of debt and rent extraction — real estate rent, monopoly rent and financial debt creation. Recognizing this breakdown is essential to distinguish between positive government deficit spending that helps maintain employment and rising living standards, as compared to “captured” government spending to subsidize the FIRE sector's extraction and debt deflation leading to chronic austerity
The rest of the piece is here.
In my opinion this adds an important distinction to MMT. It is that not all debt is equal.
It follows that not all money is equal.
And that not all QE is equal either.
The latter I have known for a long time. It was the whole basis for my argument for People's (or Green) QE back in 2010. The point I made then was that the behavioural, social and economic consequence of injecting money into the economy via banks was always going to be very different to apparently undertaking the same process through a state investment bank that invested in the real or productive economy. Hudson et al have now explained this in most convincing fashion.
I like their summary:
The commercial banking system's “endogenous” money creation takes the form of credit at interest. The volume of this interest-bearing debt grows exponentially, absorbing and extracting more and more income from industry and labor. The effect on the overall economy is debt deflation.
It may be epitomized as
Give a man a fish, and you feed him for a day;
Teach him how to fish, and you lose a customer.
But give him a loan to buy a boat and net to fish, and he will end up paying you all the fish he catches. You have a debt servant.
This article explains this logic, perfectly.
It is a big step forward, I think.
I strongly recommend reading it.
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You can add that around 80 % of all that bank lending (credit creation) is directed for property loans and shares buyouts. This just causes inflation is both sectors,neither sector is “productive” and counts not to GDP. Our banking sector does not help us ,it lends out too much money to these sectors in booms and then won’t lend in a crisis(as we are seeing)As Adair Turner once said “most of what banks do is socially useless”.
Only about 10 % of all bank lending actually goes to the real wealth generating part of our economy,businesses,mainly because it is risky compared to property backed lending.
Only MMT offers the answer to smoothing out these cycles. The system we currently have is broken.
Thank you for this Richard.
My reaction: Wow! This article calls a spade a spade.
I want if I may to say one more important thing about MMT (well I think it is important anyway, and it cannot be repeated enough).
MMT is about the sovereignty of democracy (and vice versa).
It is about who governs? Who rules?
It is not the shadowy boards of investment banks or any bank or mega rich individual who should be making decisions about the issuance of money – especially if it is interest bearing.
.
It is your Government and your government alone who should be doing that as sovereign. This is one of the lessons MMT has taught me – the potential for democratisation of the money supply.
Excellent point
Well thank you.
I am also picking up on Chantal Mouffe’s point that a really new Left populism could be helped to emerge with democracy at its centre. It seems to me that the democratisation of money as part of the ‘rediscovering democracy’ could be a starting point – an objective of a reinvigorated Left – the use of Parliamentary sovereignty to help people.