This post was first published in February 2018 on this blog and I confess I had forgotten about it. It seems worth republishing now.
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A few weeks ago I mentioned on the blog that Warren Mosler had agreed to answer some questions on Modern Monetary Theory (MMT), of which school of thought he is one of the founders. Well over 200 questions came in as a result.
I tried to summarise these and have sent some to Warren now. This Q & A is meant to be an overview of MMT. I am playing the role of sceptical enquirer: the questions I ask have to be viewed in that light. Warren has given short answers but has suggested he is open to answering responses. (NB: See the original post for these)
R: What is MMT?
W: A description of monetary systems.
R: What does MMT say money is?
W: Today's currencies like the $, yen, euro, etc. are simply tax credits- the thing needed to pay taxes.
R: But it's now widely though that banks make our money?
W: Bank loans create bank deposits, under charter, regulation, and supervision of the govt.
R: Can we trust them to do that?
W: Only to the extent you trust govt. regulation and supervision.
R: What, then is the role of central bankers?
W: Setting the policy rates.
R: And what is the role government come to that? And how do we stop there being too much money?
W: Depends on the definition of 'money'. I suspect it's more about too much spending? That can be addressed by cutting govt. spending or cutting private sector spending by various means including govt. spending cuts, tax increases, increased lending standards, etc. etc.
R: If tax is to stop inflation why do we get so worked up about it and what it does?
W: Tax increases will reduce aggregate demand and inflation to the extent the inflation is being caused by excess demand. If that's not the cause- and it generally isn't- there are other tools for addressing price increases from those other sources. And it seems people dislike inflation more than they dislike unemployment?
R: It's widely thought that interest rates are meant to be used stop inflation? What does interest do if tax stops inflation? Is there a good rate of inflation?
W: Not that I know of. There can be a good economy in the context of both low and high rates of inflation.
R: What does full employment really mean?
W: For me the best we can do is offer a transition job to anyone willing and able to work to both promote the transition from unemployment to private sector employment, and to act as a more effective buffer stock for the price level than unemployment. At that point we are continuously at a form of full employment.
R: What is the Jobs Guarantee?
W: Another name for the above described transition job.
R: Isn't that the same as `Universal Basic Income?
W: No, with the transition job you have to at least 'sell your time' to get paid.
R: But isn't that just a money hand out?
W: As above. The value of the currency is a function of what you have to do to get it from the govt. It's a simple case of monopoly pricing.
R: Surely what you're really saying is we're just going to pile debt on debt at cost to future generations?
W: The public debt is the amount spent by the government .that has not yet been used to pay taxes, and remains outstanding until used to pay taxes in the form of cash, reserves, and securities. Treasury securities are nothing more than time deposits of the currency at the central bank.
R: If we don't need debt do we need money markets?
W: Not for public debt or interbank lending.
R: But aren't you ignoring the international dimension here?
W: No.
R: You say we don't need debt but we need the rest of the world. Won't they just trash our currency instead?
W: What does that mean? Exports are real costs, imports real benefits. Real wealth is about optimizing real terms of trade. Currency fluctuations per se don't alter real wealth.
R: I'm still not convinced. What about the Weimar Republic, Zimbabwe and even Venezuela. Money printing didn't work so well there, did it?
W: There problems varied. Weimar was about deficit spending for war reparations of approximately 5% of GDP per month and a massive loss of productive capacity. Zimbabwe lost it's productive capacity, kept govt. spending as before, and the banking system was an open channel for corruption.
R: And what happens to countries that don't have their own currencies? What does MMT say about them?
W: They are disadvantaged.
R: what about countries who cannot borrow in their own currencies, as many cannot?
W: Example?
R: Given all this, is MMT just some special case with no real use or does it really change the way we should think about the world of economics?
W: It's the general case and will change how you think only if you don't already understand MMT.
R: Convince me: what would a world where the economy was managed as MMT suggests look like? Could I spot the difference, and how?
W: A form of continuous full employment is the likely outcome of understanding the monetary system.
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W: “excess demand. If that’s not the cause- and it generally isn’t- there are other tools for addressing price increases from those other sources. ”
If it’s not excess demand (what does that actually mean? Do we not want better healthcare, education, standard of living etc?). Does he mean lack of production to supply demand?
Sorry this albeit very short answer makes no sense to me anyways.
M
I read it as external to an economy sources of inflation like OPEC jacking up oil prices in the 1970’s.
That’s a neat, straight-forward Q & A. It’s easy to forget how much worthy material one has generated over the years. A monthly trawl through your archives would be very revealing & informative. In terms of advocating change, repetition is a necessary tactic.
However … at the risk of sounding boringly repetitive I strongly believe it’s now seriously time to focus energy towards moving the MMT agenda on to the next phase. Yes, of course the dialogue will, and should, continue among academics, economists, and (some) politicians. But C-19 has thrown the topic right out into the open. Just as you blogged about the need for a grass-roots movement to get the GND into the public mind-set in order for it to become policy – so MMT needs a level of popular understanding and impetus that will translate into votes.
Like many here, over the years I have watched & listened to hundreds of MMT presentations — all of which would be gobbledygook to 90% of the adult population (no disrespect – not meant to be patronising). Also, very few of its academic protagonists have the natural communication skills that could be transferred successfully to a wider audience. I’d like a quid for all the times it has been mentioned here that what’s needed now is an answer to the wretched household analogy. Unless ordinary people understand the basics of money creation, its function and distribution they will never have the confidence to make demands on government for the better, more equitable services, social & physical infrastructure etc. that they want and need.
Somehow or other the emphasis must be extended beyond the lecture halls, niche media and special-interest groups to the wider public. Unfortunately I don’t have any simple answers. Ideally it would be taught in schools, just as the neo-libs have successfully succeeded in brain-washing new generations over the decades. But that’s not going to happen within our life-times, is it? Just as none of the MSM popular journalists will actively inform their readership that it’s been seriously conned over the past 40 years.
Surely there must now be serious money backing the dissemination of MMT among policy makers, especially in the US and Canada. If so then some of it needs to be invested further down the IQ chain. If not then progress will be painfully slow while opponents will continue to paint an MMT-wash over their neo-liberal policies (such as we’re currently witnessing), continuing to misinform the public and further consolidating power in the hands of the privileged few. If that sounds clichéd and over-simplistic then so be it. But in order to get sustainable change on the public agenda, such as the GND, then now is the time to start moving MMT into a wider space. Although it could perhaps be part & parcel of a GND/XR initiative, ideally I think it should be a separate campaign.
Having read the above I accept it’s more of an emotional appeal than a structured argument. However, I hope I’m not sitting here in glorious isolation, indulging in unrealistic, wishful thinking. I just feel time is running out faster than viable solutions for both people and planet are making it into the main-stream. The reactionary right is punching way above its weight in terms of numbers. That’s the political challenge we’re facing and which needs to be addressed urgently.
I promise you that right now there is no money in the NGO supply chain…well, certainly not much
John D.
I share your frustrations. How to explain MMT in easy to understand terms??? It’s a difficult question.
I’ve been trying to figure out how I got my head around it?
I think a good basic starting point is to ask, who does the government “borrow” money from?
How does the government “borrow” the money? (Bonds).
What do the buyers of the bonds buy the bonds with? (CBRs)
Who is the creator of CBRs? (BoE/government)
So, how did the buyers of bonds get the CBRs to purchase the bonds in the first place?
So, why does the Government need to borrow the thing that it is the sole creator of, from someone else?
The fact that the government only accepts IT’S money (CBRs) as payment for bonds (or even tax) also needs explaining.
I think these questions are a good starting point. To go into CBRs and Broad money and interbank money transfers, interest rates etc just makes things all the more complicated to understand.
It’s the complexity that makes it hard to understand.
I personally really like to drill down into the detail of the mechanics of how money moves round the system, but for most people maybe that isn’t needed.
Just a basic understanding that the government is “borrowing” it’s own money, not anyone elses, is enough to get people thinking???
I really think you are still hopelessly confused
Ignore CBRs – they really do not matter
The government creates money by spending
It claims it back through tax
If it dies not it leaves it in overdraft (direct monetary funding) or clears the overdraft with bond sales – which it uses to control interest rates
That is it
Hi Richard
Doh! Just when I thought I had it sussed!
But the mechanism for that government spending is CBRs, right? (or have I missed something?). The CBRs only become “active” once “spent” by the government.
If the Treasury has a load of them in an account at the BoE, then they aren’t actually “money” until they are moved to a different account at BoE and “spent”. In fact, does the government need to hold any at all in an “overdraft” If the BoE can just create them on request?
The “Overdraft” you describe, does the government pay interest on it? If not, then it’s not an overdraft in the way most people would understand one. This just creates more confusion.
(As a side point, could the government clear the “overdraft” by spending in other ways than selling bonds, like on a hospital for example?
Oh no!!!! Just thought. If the government clears it’s “overdraft” by selling bonds, doesn’t it get paid for the bonds with more CBRs?????? Now I am confused!!
I for one, need to understand the mechanics of HOW the government spends into the economy.
For people to get their heads round it (I have first hand experience of this!) the concepts need to be clearly defined in terms that are easy to understand. Like describing what the government does as “debt”. It frames the picture, but not in a positive way.
I think that people who “get” MMT fail to see why others can’t. To get MMT out there in the general population, then a way of framing the debate needs to be found that deals with fundamentals in an easy to follow way.
That was what I was trying to do in the above, (probably badly, granted!)
CBRs do matter, because they are part of the puzzle.
I guess it all comes down to the language used and different people have (slightly) different meanings for different words, which is enough to cause confusion.
These concepts are abstract, and we try to define them through existing vocabulary that has prior meanings.
It reminds me of Orwell’s Newspeak. Once you remove the words, you can’t imagine the concepts they are used to convey.
(I’m not suggesting this is what you are doing Richard!)
Ignore CBRs!!!!!!!
They are bank reserves to allow clearance between banks
They have nothing to do with government spending at all
The government spends on current account with the BoE. That’s it.
Right now that is being seen. For the last decade it has been hidden by Treasury Bill and gilt issues
But CBRs have an entirely different role
I seriously suggest you forget you ever heard of CBRs – they are just interbank clearing mechanisms in effect, that happen to mean the BoE can also control short term interest rates
Long term ones are controlled via QE now
Now I am confused!! (Again)
But aren’t CBRs the government Sovereign fist money?
The government only accepts payment with them and only spends with them.
How else does government actually spend money into the economy without CBRs?
With what does a government pay the wages of a NHS nurse with? Does the government not use CBRs which are converted to Broad money by private banks and credited to the nurse’s current account?
I’ve just read through some J D Alt again and he describes reserves as the government fiat currency?????
CBRs are deposits by banks with the central bank
They’re just bank accounts with conditions attached
But the government has other accounts it can run at the BoE
These react with CBRs when payments are made into the banking system, of course. But there is nothing special about CBRs except for their role in guaranteeing central bank liquidity and the use made of them to control short term interest rates
I repeat: to understand this just call them accounts with the BoE
You are overblowing an issue and getting confused by it
When the government wants to pay a nurse it could do so direct from ten BoE
It happens to use another bank to do so
So it first credits the intermediary and the intermediary pays the nurse
That’s it
And all currency is as a result government fiat currency
CBRs are just there to help ensure banks can fulfil the o promise to pay which – as we now know – is something only the government can really do. They’re just a risk management tool. They are not what fiat money is
I seriously suggest you forget them for a while. You are getting everything wrong by giving them a significance they do not have in MMT an explanation of the economy
@ Vinnie
I’m convinced one of the reasons the ‘Handbag analogy’ has so much traction is that it doesn’t contain a single bloody acronym which only people with specialist knowledge could possibly know the meaning of. For example, what on earth does CBRs mean?
I googled it and all I could come up was Citizens Broadband Radio Service or Cost Basis Reporting Service; neither of which made any sense when applied to your post.
As a bog standard member of the general public, without any education or training in economics/finance whatsoever, who is trying to educate myself via Mr Murphy’s blog and others, I would very much appreciate it if when using acronyms posters would put in brackets what the acronyms actually stand for. This need be done only once (the first time it’s used in a post) and would take like all of 5 seconds.
Acronyms are all well and good, I use them a lot myself, but if you’re trying to communicate your ideas/theories to a much wider public then they are the kiss of death causing most people to glaze over and cut off. I couldn’t give a toss about displaying my ignorance and actually asking what an acronym means, but a lot of people won’t ask for precisely that fear of displaying ignorance and thereby compounding their ignorance; it becomes a vicious circle.
So, please, pretty please. what does CBRs mean in English? Without knowing this I can’t make head or tail of your post past the 2nd question…. most frustrating.
Mr Murphy says that these mysterious (to me) CBRs are unimportant but I now want to know what they are for no good reason other than it’s stuck in my head like an annoying jingle and google is of no help. I don’t need an explanation of what they are (I can look that up myself) but I do need to know what it actually stands for before I can look it up as I’m fairly certain it sure as hell has nothing to do with some citizens broadband thingy!
Central bank reserves
It is not a term widely used
It is popular with Positive Money – and they do not understand money
I would really ignore the issue – it does not help many people, as I keep telling Vinnie
The Bank explains such things here https://www.bankofengland.co.uk/-/media/boe/files/ccbs/resources/understanding-the-central-bank-balance-sheet.pdf but good luck with that!
Sandra.
Sorry.
I share your frustrations and I am no expert, I assure you! I, like you, am just trying to get my head round how it all works!?
I am just in a conversation on the role (or lack of!) CBRs (Central Bank Reserves) with Richard. It’s a bit self indulgent and probably of little interest to anyone else on the blog, but I am looking for clarity and answers.
For what it’s worth, when I say “government” I don’t mean the Tories. I mean BoE (Bank of England) and Treasury. The “State”.
I’m still not sure I agree with Richard. CBRs are a term used to describe the sovereign fiat currency of the State. (Not just by Positive Money) In the US they are called Federal Reserves, and it’s the means by which governments “pay” for (and receives) stuff.
They are just entries in various accounts at the BoE. (And never leave it) Accounts held there (by various private banks) in CBRs are marked up or down in the various accounts. It is different to the money you and I have in our current accounts. ( This is called “broad money”) least that’s my understanding of it!!!???
I will put a couple of links below that helped explained reserves for me. It’s based around the US system, so some of the terms vary, but the system is basically the same.
Good luck!!!!!
http://neweconomicperspectives.org/2019/10/the-peoples-money-part-1.html
http://neweconomicperspectives.org/2019/10/the-peoples-money-part-2.html
http://neweconomicperspectives.org/2019/11/the-peoples-money-part-3.html
http://neweconomicperspectives.org/2019/12/the-peoples-money-part-4.html
Sure they are different – only banks can have them and they are only held with the central bank
They are there to regulate inter bank credit, hence the massive increase after 2008
And they are useful to control short term interest rates
Thereafter, ignore them
The money system would work the same without barring these points
And the debate is over now. I have had enough of repeating myself
Richard.
Confused Vinnie here again!
But how can the Government instruct the BoE to pay the nurse directly? How does that work?
The nurse’s bank account holds “broad money”. I thought that broad money is only “magiced up” by private banks? How can the BoE do this same function direct into the nurse’s current account?
Does it ever do this?
The BoE only handles/creates CBRs, not broad money???? (I appreciate that the BoE just marks up a private banks reserve account rather than “creates” reserves. It’s no more creating anything than I do when I press a key on my calculator.)
Reserves are used for interbank payments, but they are also used by the government to pay for schools hospitals etc are they not?
The government decides to pay someone….
They tell the government department to pay
They make the payment
It’s done through a ‘High Street’ bank
The bank makes a claim on the department’s account at the BoE
The BoE pays
It charges the government
The gov’t clears the claim through tax receipts or the Debt Management Office
A deficit is covered by Treasury Bills, gilts the Ways and Means account
CBRs are just a conduit in that
And the BoE is the underpinning of the payment made
It marks up the money
I admit I do not think I can say yet again, just ignore CBRs
They’re a conduit: that’s it
There is nothing else to it
The claim is made on the BoE and it pays because the government tells it to
That’s it
And that is gov’t created money
Thanks for your patience and replies Richard.
I’ve had more than my fair share of your time on this and will leave you in peace.
I’ll chew over your last points and ponder.
John D,
On the need for simple explanations, Warren Mosler’s description of the currency as a “public monopoly” is (like almost all clear incisive thinking), essentially simple, transparent and powerful*. There is a telling starting point. The public will understand it, and it will resonate. I cannot recall anyone else using it.
* It is the “public monopoly” starting point that leads to the trenchant illumination of key issues: “These include …. the object of monopolization – in this case the currency – is, necessarily, not ‘neutral’; that a monopolist is ‘price setter’ and not ‘price taker’; that the monopolist has the choice of setting price or quantity; and, critical to public purpose, unemployment is necessarily the evidence that a currency monopolist is restricting the supply of the financial assets need to pay taxes and satisfy savings desires.”
Of course the clear articulation is all Mosler’s….
I do like this idea…
Hi Richard.
I have another “Question of the Day” proposal.
Job Guarantee (government backed) or UBI? Discuss!
Now on the blog…
This Q&A bit just stopped. How would it continue do you think?
“R: what about countries who cannot borrow in their own currencies, as many cannot?
W: Example?”
…?
Hello.
I am Japanese.
I reading and writing with machine translation.
The following is an article by Matt Bruenig.
Let me hear your opinion.
“Understanding Claims About Basic Income and Inflation”
https://www.peoplespolicyproject.org/2020/03/18/understanding-claims-about-basic-income-and-inflation/
As I have said before, there is nothing “modern” or “theoretical” about MMT but, nevertheless, Warren Mosler has been a good evangelist for MMT.
But countries do default on their local currency debt occasionally. Russia in 1998 is an example (they defaulted on their ruble debt but not their dollar debt) and, if I recall correctly, it was a very harsh lesson for Warren’s I.I.I. hedge fund. Funnily enough, I.I.I. had just published a “paper” about MMT with a header on the paper “First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as self-evident.”. A few days after the default I saw it pinned to a notice board by the kettle as “First, it is ridiculed. Second, it is violently opposed. Third, it is ridiculed again”.
I guess the lessons are.
(1) MMT is not a guard against mismanagement, corruption etc.. Countries still have to face up to their economic (an other) problems.
(2) A bit of humility is essential to your longevity as a trader…. although to be fair to Warren, he was a pretty good and long-lived trader.
I agree that explaining MMT is a difficult challenge – they say that the job of a great preacher is to appeal to all sections of the congregation. What that means is that enough story telling is used to engage the audience, pithy examples are used and small sections of technical argument are answered rather than opened up. That way the ‘clever ones’ get the shorthand that the speaker understand the complexities without the rest of us being overwhelmed and feeling stupid. It is also apolitical, inspirational and non judgmental.
Few preachers achieve it.
Probably need an Alistair Cooke to do it.
FWIW…this is my attempt https://www.amazon.com/1000-Castaways-Fundamentals-Clint-Ballinger/dp/0648390616
I think MMT does dismiss the external trade piece a little too lightly. It states exports are a real cost and imports are real benefits but you cannot import if you have no surplus to export otherwise the “best” solution is for an economy to produce everything it needs and not to conduct any external trade. Countries can get the benefit of imports only if it also produces exports in whatever form be that tradable goods or sales of capital. It is possible for MMT to contain the seeds of currency fluctuations which change the cost of imports and exports which in turn effects external trade. This is unlikely to be seen now as all countries are in a position of falling demand but it is a possibility if a single country with a significant balance of trade difference embarked on a policy of money creation to pay for internal investment at a time when world GDP was increasing. External trade could see rises in import costs and falls in export prices which could disadvantage a large importer in consumer goods. I would like to see MMT theory explain how external trade is affected by the policy in a bit more detail.
I think this remains one of its weak under bellies
You are right
I personally think that if MMT drives to full employment and stable inflation the issue is in fact resolved by default but that’s not a theoretical case to make and MMT dismisses the whole issue of trade too readily in many cases
Interestingly whilst rooting around on the subject that Warren Mosler recognised a sovereign currency issuer was a monopoly power that could be used beneficially and “religious” libertarian market fundamentalists never have (because monopolies screw up the smooth working of markets) it turns out that Friedrich Hayek did recognise this sovereign state power of monopoly and did recognise its beneficial use but never understood why it had to have the monopoly in the first place which undermined his truer Keynesian position:-
https://fee.org/articles/hayeks-free-market-money/
https://www.federalreservehistory.org/essays/feds_formative_year
Of course not understanding how her own country’s monetary system and why it evolved this way was a huge weakness of Margaret Thatcher who famously declared “government has no money of its own.” Thatcher was a big Hayek fan, of course!
For those interested in better understanding MMT Pavlina Tcherneva’s review of Mosler’s “Soft Currency Economics” is well worth a read:-
http://moslereconomics.com/wp-content/uploads/2019/02/35433741-Critical-Review-of-Soft-Currency-Economics.pdf
Thanks
There’s also a good article by Robert M. Solow worth reading that discusses the concept of a “Good and Bad” Hayek which sets the scene why the UK got Thatcherite Hayekianism and now continues with the half-baked market fundamentalist Tory government of “Britannia Unchained.”
https://newrepublic.com/article/110196/hayek-friedman-and-the-illusions-conservative-economics
It’s only in the last paragraph that Solow hints that the Hayekians and Friedmanites of this world failed to understand fiat monetary systems although they ought to have wondered why Friedman’s monetarism failed!
This all suggests within the context of the massive coronavirus stimulus the time is ripe to explain why its forcing a reconsideration of market fundamentalism purely through the notion that a sovereign government monopoly over currency does exist and is clearly able to be a force for good!
Mz Schofield,
You are on fire. Read the Solow, first class – but could scarcely keep up with the blizzard of good stuff. Do you have a fire extinguisher handy?