A first visit to modern monetary theory:
Given the range of issues arising there will be more on this issue. In fact, at least two more or on the agenda for this morning's recording session.
And yes, I know there is a slip very near the beginning; that's the result of being human.
If it can be improved in other ways, let me know.
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I must admit having done some basic reading about it a few years ago, money is without a doubt one of the wierdest things I have ever come across.
I think the confusion often comes about from trying to understand macro (government) issues starting from a micro (yourself) perspective.
One way I’ve considered/adopted to extrapolate from the personal to the macro is to start from a barter trade system – as in, your IOUs hold value for someone who knows you personally, as they know that you will come good on your IOU (or face the social consequences).
Then start to think about how to expand such a system to the national scale, and which entity would be required to back the IOUs to give the IOUs value to everyone.
As a crude example: someone living in the NE probably wouldn’t trust a personal IOU from Bob, living in the SW, but if some pan-national agency (lets call it government) backed Bob’s IOU, effectively saying “yeah, he’s good for it”, then you could accept it on face value. You could even then use that IOU in exchange for something else you wanted, and hey presto! You have money.
Of course, now that this government backs the value of everyones IOUs, it makes sense to just issue national IOUs, which would be accepted everywhere nationally. But only that government would have the agency to make the IOUs, and importantly, there’s no constraint on them making IOUs. There isn’t an IOU mine providing limited IOUs.
Unless of course, the government started making more IOUs than available activity within the nation to reward them for – and at that point each IOU is worth a little bit less, and a little bit less, and so on…
Back to the personal level, that means that you do some activity and in exchange you get given an agreed amount of IOUs (obviously not neccessarily direct from the government, but follow the chain, and it has to have come from there). You are awarded IOUs, rather than making IOUs, and I think this is the distinction required? that currency users (people) can’t create money, and therefore money is a limited resource for people/households, but the currency issuer (government) can literally make as much as it wants, and in that situation money becomes a tally system rather than a limited resource.
Maybe as clear as mud? I’m still working on the phrasing, but I hope it helps
It’s useful
Was reading this review of The Deficit Myth
https://johnhcochrane.blogspot.com/2020/07/magical-monetary-theory-full-review.html and one of the comments below got the bottom response.
DoDealsJuly 8, 2020 at 7:57 PM
Venezuela borrowed in dollars. A sovereign (Treasury combined with the Federal Reserve Bank), like the US, that:
a. issues,
b. borrows in, and
c. floats
its own currency, can NEVER run out of cash.
UnknownJuly 10, 2020 at 8:55 AM
Maybe they borrowed in $ just because nobody trusted their own currency to buy import. Isn’t this a matter of fact? But why did nobody accept their currency? Because they did print too much of it?! And why do all countries accept dollars instead? Maybe because its value is stable and not too much of it is printed… When money is Fiat no central bank can run out of it, but can run out of trust and trust cannot be printed…As simple as that, a concept tha MMTers (un)wittengly fail do grab
James CarlyleJuly 14, 2020 at 6:04 PM
I would love to see the MMT fans respond to this comment.
What would be the best argument or explanation to counter it? Being a relative newcomer to MMT it is the sort of argument not yet able or confident to fully confront!
Why did no one trust the Venezuelan gov’t?
a) Because the USA was doing all it could to undermine it
b) Because there were sanctions
c) Because locally the dollar was also the preferred currency, so why not follow the locals?
d) The dollar was preferred because oil made it available
e) This undermined the local currency
f) Tax was not required in the local currency
I could go on
But that’s enough
And a) is the most important
Point (f) Tax could be paid in Venezuela in dollars? This seems extraordinary. But is this commonplace in many developing economies?
A list of six and not one mention of the incompetence of the Venezuelan government. For a country with the highest proven oil reserves to be bankrupt takes some doing, and it’s all someone else’s fault according to you.
It does take incompetence: I have never been a fan of the Venezuelan government
I have never said I am
But it is in a situation utterly unlike ours
So whatever point you’re trying to make it’s not relevant to this debate
Why not discuss the issues instead of making remarks of no relevance?
“When money is Fiat no central bank can run out of it, but can run out of trust and trust cannot be printed…As simple as that, a concept tha MMTers (un)wittengly fail do grab [sic]”
This is somebody who manages to grasp something very important and simultaneously manages to lose the plot entirely.
I subscribe to the view that trust is absolutely fundamental. To me monetary economics is essentially a matter first of psychology, not econometrics or any other shibboleth beloved by neoliberalism. MMT does grasp the issue of trust, but deals with it by directing its argument to the critical, key matter that in the modern fiat world that would above all else undermine trust: inflation. The reason inflation is critical is because there are tipping points; above a certain rate of inflation (unpredictable and unkown ‘a priori’), trust in Government, and the currency as a stable mechanism for transactions, will fall. Inflation is merely a short-form symptom of a problem of ‘trust’. There is nothing surprising about this for MMT. Indeed, the opposite is true; for MMT it is obvious. If it was not true, fiat currencies would not exist; they could not exist if trust in government was not high.
By trust in government I do not mean liking government or even approving of it; I mean trusting in the currency without thinking about it, and paying taxes. Fiat currencies are built on trust, they do not need Gold standards to measure that trust; trust that is so profoundly taken for granted (the reason for the success) that nobody who trusts the currency is aware it is presupposed.
I get a little frustrated that the first port of call when discussing MMT is Venezuela (followed by Zimbabwe and Weimar). Venezuela is failing due to corruption and mis-management not MMT. I do fear that the same issues (corruption/incompetence)are present in the UK but we need to address then directly rather than pillory MMT
What about Japan? Is that not a more appropriate comparison??
I think I would start by saying “MMT describes what actually happens in practice rather than what we think happens” or something similar.
Noted
agreed it is MM”Explanation of reality” not MMT
A good clear overview of MMT. One area for improvement (which could require a follow on video) is the impact on currency exchange rates. A common criticism of MMT is that it ignores external factors such as exchange rates and therefore ignores one of the biggest risks to inflation. Many of the factors that impact exchange rates are subjective. If money markets are concerned about public debt (even if MMT believes this shouldn’t be a concern) then exchange rates will be impacted. This is less of a concern if all countries are piling on debt, however, if does mean one individual country can’t fall outside common concensus on acceptable levels of debt.
I will get to it
It’s the fourth or fifth of the follow on videos….
Re exchange rate falling I think Bill Mitchell would say “so what?”. It’s good for exporters, and you holiday at home. He has dealt with the inflation aspect of a fall in the exchange rate at some length in his blogs and the evidence is that the “pass through” effects are much overestimated. The pound has tanked between 10 and 20 percent against the Euro since Brexit. If you have holidayed in Europe since then , you might have noticed, but otherwise, little effect on consumer prices, , no?
When 50% of your food is imported and when lots of mineral and fuel resources are imported, then exchange rates are not just a minor inconveniene for holiday makers. 10-20% movements are just noise. The main concern is entering into a positive feedback loop, whereby costs of imports go up so governments print more money to pay for them, causing further deterioration in exchange rates. This doesn’t happen very often but when it does happen it is very difficult to get out of. This is the main reason that governments are very cautious about anything that may cause this to happen. One of the big concerns is that exchange rate movements are often outside direct control of the government. MMT needs to have a strong story in this area. If it doesn’t, it won’t be taken seriously. I say this as a strong advocate of MMT and wanting it to become accepted as mainstream.
It has got a strong story on this
It says the government can’t change world fuel prices
So it must have floating exchange rates and a strong domestic economy
That is the story
There is nothing else that really needs to be added – no country can buck a trend
Of course, going for energy and food sustainability is a long term response – and MMT permits that
Yes… I would love to here the MMT “theory” on FX rates….. and also what the practical response from a political/real life perspective would be to a “Sterling crisis”.
On the list
Great video, particularly nailing the question of how things are paid for. It looks like you created a place holder for saying more about the relationship between money creation, unemployment and inflation. Having started to hear about MMT a few years ago and reading about it, my understanding has been transformed. Your description further clarifies that. What’s both staggering and saddening is that the only thing standing in the way of full and good employment for all who want it is a misunderstanding of money. Yet it’s our own invention.
Two more on this theme recorded this morning
Neil Wilson offers an interesting perspective on MMT showing how savings are an interruption to the taxation redemption flow:-
https://new-wayland.com/blog/#Bonds%20Pay%20For%20Themselves
Great video. Some ideas for follow ups: a bit more information about how things have changed since we left the Gold Standard, and why we went to the IMF for an emergency loan in the 70s and why that wouldn’t happen now. People still think we’ll end up there again.
By the way, I asked a friend recently who he thinks the Govt owes all its debt too, and he assumed we had to borrow it from the IMF.
I’ve noted it….
I will do a post in who we borrow from tomorrow…
If the government is willing to ‘sacrifice’ the exchange rate, it never has to borrow formally from abroad.
But it might well decide that a bit of budgetary restraint, to build confidence abroad, is a sensible price for the nation to pay, to get continued access to foreign currency on better terms.
This is likely to be particularly true when (as is the case for the UK) foreigners already own a large proportion of domestic-currency assets.
You do realise the exchange rate is really a productivity issue, don’t you?
You are missing the point
Can I make a suggestion for future videos:
1. What MMT teaches us about past crises in UK history.
Did Atlee keep rationing for too long and lose the election for Labour by sticking to orthodox economics?
Did the UK really have to go cap in hand to the IMF to borrow money in 1976?
Did Margaret thatcher really have to create mass unemployment to control inflation in 1980? instead of cutting taxes she should have increased taxes according to MMT
Did George Osborne have to introduce austerity in 2010 and what should he have done instead?
2. What MMT suggests by way of changes to government economic policy if it really wants to investment in making Britain great again.
Does it really matter if HS2 is a bad investment ?
Should investment be made in sectors where the domestic multiplier effect is greatest?.
Happy to add to the list
Very interesting to do some “counterfactual history” videos that cover past crises.
Plenty seem to want this
These three articles help explain why both the Conservative and Labour parties have been leading the UK into economic decline. They are tricky conceptually but worth the effort. They link together:-
http://et.worldeconomicsassociation.org/files/2020/07/WEA-ET-9.1-Gillies.pdf
https://macroeconomiauca.files.wordpress.com/2012/05/keynes_general_theory_of_employment_qje_1937.pdf
https://new-wayland.com/blog/#Bonds%20Pay%20For%20Themselves
Thanks
I think I have read the keynes before – which argument are you focussing on?Neil is right bar one thing, whch is that multipliers are not of fixed sum
The other I will look at
Best
Richard
A further topic might be :
How understanding MMT might give a competitive advantage for countries exploiting opportunities over countries that don’t.
E’g. Would following aggressive MMT give the UK an advantage over the EU bogged down by german economic orthodoxy?
I like it…
As explained by Richard Murphy, the facts of MMT are blindingly obvious. How is it that successive Chancellors of the exchequer apparently do not know or understand this truth? Admittedly they may be just ignorant duplicitous politicians, but they are advised by treasury officials, some of whom will have learnt all there is to know about economics.
So did Osborne know what he was doing or did he deliberately ruin the lives of countless British citizens? Why did no one blow the whistle? What is going on? What nefarious plan is being operated and who is gaining. How is it that hoi polloi has been excluded from the truth? Are you, Richard, in danger of being hung as a traitor for divulging this secret to hoi polloi?
I demand absolute full funding for the NHS. I demand a 20% wage rise for all NHS staff. I demand all public transport to be made free. I demand that all this public transport be made carbon-free. I demand 100 billion pounds be made available for R&D for oil-free carbon-free energy generation. Oh, and yes, a work-free living-wage for every British citizen and a free electric car for each family.
Who is going to deliver a real Democratic Party to give me what I want?
There is a conspiracy to shrink government going on
How can they call it “small state” when they are paying for everything that gets done, often corruptly by their cohorts, who always do a worse job than the professionals that they usurped?
Why else are they not going to spend what is needed?
See this morning’s post
May I recommend Stephanie Kelton’s new book ‘The Deficit Myth’ to TR readers? It’s the one we’ve been waiting for; subtitle ‘Modern Monetary Theory and How to Build a Better Economy’ . She brilliantly explains MMT in an accessible way, points to MMT’s redefinition of how to use our resources responsibly, and imagines a new politics and a new economy.
May I recommend JK Rowling’s book ‘Harry Potter and the Philosopher’s Stone’.
If you are going to read fiction, at least do it properly.
Unless someone has a very good reason to use a social media pseudonym (for example only, a whistleblower) I do not believe an opinion from such a source (again without some extenuating evidence), can or should be taken seriously by anyone.
Therefore, why should anyone believe a word you write is any better than notably worthless fiction?
For the avoidance of doubt, it is the unjustifiable use of the pseudonym to promote views that people would not dare to promote if they had to stand behind them openly in their own name; that, more than anything else, undermines the credibility of social media.
Angels don’t make evidence free and snide comments. At least that was implied when I went to Sunday School. I was told they try to be helpful. So change your moniker, or try to be helpful, or see a counsellor!
Richard,
Very good introductions. Keep going.
@ Rob Wilcox above:
James CarlyleJuly 14, 2020 at 6:04 PM
I would love to see the MMT fans respond to this comment.
What would be the best argument or explanation to counter it? Being a relative newcomer to MMT it is the sort of argument not yet able or confident to fully confront!
‘
Richard is dealing with the intro MMT101 if you like. The question you ask is often presented – but it is a Straw Man. Randell Wray and Bill Mitchell discuss the problem. So this is a short start for you/me/us.
Marxist critics such as Chris Dillow, New Kenysian critics such as Wren Lewis pose this problem and Steve Keen very, very early on posed the problem. Does MMT just apply to the US dollar? Does the UK or Japan, (Keen’s concern is Australia) for example, down the line have the same policy room? So you are in good company. But…..
Wray argues that there is a sliding scale down from the US dollar to the poorest state with its own currency. Marxist, Chris Dillow recently worried about what would happen to Greece if it still had its own currency and wasn’t safely locked into the Euro (Chris, Yanis will answer your question). But Greece would still have ‘policy space’, compared to some of the really poor countries out there (Incidently, Wren Lewis recently said he hated this PS term 🙂 So students Google exchange rates and have a mooch about. See what the poor states can actually get in exchange rate value in day to day practice. Nevertheless, with no resourses and no abilty to exchange domestic and foreign goods and services the people of the country will: first beg for charity funds, barter, then starve and migrate. MMT says this too.So think of the US dollar at the top of a Great Chain of Being (if I can use that biblical term). Yes, its shit at the bottom even in MMT. But what about us in the UK? I feel a critical ,Neo-Liberal metric coming on 🙂
So Rob I’m a Citizen student too, I would look to Steve Keen on this point with the Austrailian data, look to Bill Mitchell in response, and give Richard the space to get around to this topic later in his series.
I am not sure what this comment asked me to do so I am simply posting it
Does MMT sovereign currency issuer power and policy space (in practice) just apply to America and the US Dollar?
Of course not
It applies to any currency issuer, but most especially those who can or do o only issue debt in their own currency
We are in that category
The idea that this is just for the dollar is an excuse by those who do not want to consider what it means
Hmph!
I agree with you but found this confusing:
‘the Government promises to pay and fulfils that promise by taking your money back when you have to pay your tax’
I think you mean ‘the Government promises to pay its bills with money it collects in taxes – money which itself is a promise to pay that the Government issued in the first place.’
Also, you say the Government is constrained by unemployment, but surely the concept of MMT allows full-employment.
Almost in passing you talk about Inflation and not wanting it but surely this is the real constraint. The Government must control inflation by reducing the Money Supply with increases in tax revenue and also (as a net importer of consumer goods) the exchange rate. Don’t we have to balance our imports/exports trade for MMT to work in a somewhat more closed system?
I really want MMT to release us from misguided, short-sighted austerity and under/unemployment and my comments are not meant as criticisms but help put it in terms most voters (and politicians) can agree with.
The government never pas its bills using taxes
It pays using credit from the Bank of England
This has to be true. If the government did not spend money into existence using credit in the first instance where would the money to pay the taxes come from?
And of course the government is contained by full employment – not unemployment
It can’t do more than full employment is what I am saying
And why must the government crash the economy to control the exchange rate? Who wants to deal with a failed economy? That’s the one certain route to a collapsing exchange rate. The reaction of markets to Brexit proves that. Your logic is how to create a currency crisis, and not how to avert it
MMT is the answer – but you[‘re looking at it through a non MMT lens and that does not work
Rather like you’re looking for an economy that does not exist when the MMT one already does
I agree the Govt uses credit to pay its bills – thats’s what I said ‘a promise to pay’ – I thought the phrase you used was confusing.
In the video you said the Govt. was constrained by ‘unemployment’ – maybe you should say ‘full employment’.
I didn’t say ‘crash’ the economy to control inflation and the exchange rate – the public spending/tax system should be a finely controlled valve not an on/off, boom/bust switch. I suspect QE has an impact on exchange rates? I’d like to know more about it.
Yes I believe MMT is the answer – but I am looking at it through a non-MMT lens because that is how the majority of politicians and voters will view it and we have to convince them – they won’t just take our word for it.
I suspect I meant ‘full employment’
Error is possible…
I do not think the phrase I used confusing – it is correct. Your version was wrong
And you did say gov’t must control the money supply to control inflation
I disagree
So does MMT
And no, QE has not had an impact on exchange rates
Brexit has
It is totally disingenuous to say tax doesn’t pay for government sponsored services..via your MMT argument the translation is just via the control of inflation. Either govt expenditure is reduced or personal consumption through higher tax. So government expenditure crowds out the individual through higher taxes…technically in your rule book this is at full employment or more so productive capacity. In the real world inflation will occur way before this theoretical construct is ever reached such that there is pretty much always a trade off between tax and govt expenditure. The two are inextricably linked. So it is disingenuous or outright misleading so suggest otherwise.
Tell me why inflation will happen?
Where is it happening?
What will trigger it?
Why has nothing done so for a very long time?
Please explain Japan
Sorry Pam it shows your mental rigidity not to be able to take a step back and ask yourself what is the primary factor that enables a currency to be created and MMT provides the answer the ability to impose redemption or reflux on that currency. Of course a government is in a perfect position to do so through taxation because it has the legal and enforcing power to do so. (Private banks piggy-back on these government powers.)
Next you need to ask why does it need to create a currency in the first place. The two main answers to this are it forces the private sector to goods and labour to the government to meet public need and secondly, control fraud by private sector banks made it very inconvenient to use the currencies they created. You had to keep checking if they hadn’t gone bust or were about to.
Finally, because economies wax and wane because future events are unpredictable people in the private sector want to save or hoard money and that amount will vary according to the stability of the economy. Remembering that private bank loan created currency is not only subject to repayment plus interest but also taxed out of existence when spent into the economy the only possible source of savings is government created currency that doesn’t get redeemed or refluxed. Governments offer a saving medium that pays interest these are called treasury bonds. The MMT literature explains the various reasons for governments doing this. So in conclusion if there’s a crisis like the current coronavirus pandemic which is causing widespread economic disruption people in the private sector will naturally want to save or hoard money more than usual and this will automatically mean less government reflux of the currency they’ve created simply because less taxing is taking place. This is called a government “deficit” with overtones of being bad by household accounting analogy or reference, technically it’s just a redemption adjustment.
https://new-wayland.com/blog/#Bonds%20Pay%20For%20Themselves
“there is pretty much always a trade off between tax and govt expenditure.”
Pretty much? Precisely what does that mean? You write as if the connection is a necessity, then it isn’t quite. This is the kind of easy, glib answer that tells us precisely nothing. Prove the close connection with clear, accurate and detailed evidence. Then give the exceptions (the ‘little’ that must be the corollary of the ‘pretty much’), and the precise reasons the exceptions are only exceptions, and not the prevailing case. Then you have said something worthwhile.
I said tax and govt sponsored spending is inextricably linked..we have had inflation continuously since I was born (in 1962)..have we been at max productivity and or full employment since 1962?? Of course not!! So inflation occurs (in the real world as opposed to a textbook ) way before full employment or max productivity is reached…so yes at this point in time post covid we can probably cut taxes and or increase Govt expenditure.. but my premise holds that tax and govt spending is linked and one counters the other and it is misleading and disingenuous to suggest otherwise.
Why does your premise hold
The sun has risen every day since you were born. Does that mean it produced inflation?
And how much inflation do you want? Do you have any clue how hard it is for governments to create it now? So where’s the link? What do you know that they don’t?
“So inflation occurs (in the real world as opposed to a textbook ) way before full employment or max productivity is reached”
MMT does not say there can be no inflation at all; what it says is that inflation is created by scarce resources, whether labour or other resources. The purpose of policy should be full employment, and tax is the “instrument of fiscal policy to help stabilise the purchasing power of the dollar” (Beardsley Ruml, 1946). Randall Wray puts it this way, “Ideally it is best if tax revenue moves counter-cyclically – increasing in expansion and falling in recession. That helps to make the government’s net contribution to the economy counter-cyclical, which helps to stabilise aggregate demand”. (R Wray, Modern Money Theory, 2105; p.141-2). Full employment is the aim, and is a goal that it is realistic to achieve, but if resources are scarce and inflation accelerates then tax can be used to stop it. Stephanie Kelton writes this (following Keynes); “Coming up with the money is the easy part. The real challenge lies in managing you available resources – labour, equipment, technology, natural resources, and so on – so that inflation does not accelerate” (S Kelton, ‘The Deficit Myth’, 2020; p,260). Notice, “accelerate”, it isn’t expected inflation will disappear, or that resource problems disappear forever.
It follows that if there is a period of no inflation (as now – and with 50 year bonds at 0.5% as Mr Parry pointed out, or even perpetual bonds it does not appear anyone is expecting it some time soon), then there is more scope to achieve full employment without government having to intevene with tax policy to check inflation accelerating to the detriment of policy. That is all. This is real world MMT; not a neoliberal, ideologically driven, boom-and-bust rollercoaster to disaster, with no capacity to cope with real crises (whether in banking or pandemics).
Thanks John
To add to my point, I was born in 1962 and According to the Office for National Statistics composite price index, today’s prices in 2020 are 2,047.63% higher than average prices since 1962.
So inflation occurs even when we are not at full employment or max productivity.
And….Taxation of the individual creates space for Govt expenditure
So we need to tax house price increases…
Next issue?
And yes, MMT does say taxation makes space for goiv’t expenditure, but there is no need to do so until full employment
So what is your point?
“And yes, MMT does say taxation makes space for goiv’t expenditure, but there is no need to do so until full employment”
Inflation 2,047.63% since 1962. Has there always been full employment?? Of course not. Inflation occurs well before then, the evidence is there and is beyond doubt.. so again my point is government expenditure and taxation are linked and so tax effectively funds govt spending..to claim otherwise is misleading and disingenuous. So my point is you are misleading and disingenuous
I have never said gov’t spend and tax aren’t linked
I actually say they are linked, as does MMT
Tax cancels gov’t spend
But nothing let’s you date your conclusion after 1971 and house price inflation certainly does not
I think you’re wasting time now
Unless you have something reasoned to say I woul;dn;’t try again
So we agree govt expenditure replaces tax. For all intents and purposes that is the same as tax funds govt expenditure. The man in the street can have less or more money in his pocket depending on govt spending .
But you say inflation only occurs at full employment. This isn’t true. Strip out house prices and we still have inflation year in and year out… and during this time we have not being at full employment or max productive capacity ( this is indeed impossible to calculate in any instance).. MMT is a faith to some and those who promote it are disingenuous. I can’t say it any other way. Sorry to burst the bubble.
No we don’t agree at all
You’re utterly wrong
Tax cancels gov;t spend
But of course the person in the street has more to spend because o0f gov’t spend – that;’s how money is created
And not all inflation is for the same reason
You’re as absurd as the people who claim in Denmark that stocks bring children because as a matter if fact in years with high birth rates in Denmark there are more storks
That’s because the summer before was warm and there was kore sex – in humans and storks
But it does not mean that storks bring babies
And tax does not fund gov’t spending
You’re now on the banned list for time wasting