I got an email overnight that I could reply to as a private mail, or I could hide the identity of the person who sent it and reply here, sending them the link. I have chosen the second option as I suspect the questions are not uncommon.
My correspondent began by saying:
I have been reading a bit about Modern Monetary Theory, including your joint paper with Andrew Baker. I think it's a really interesting and in many ways appealing proposition, but there are a couple of things I can't quite get past. I was wondering if you might be able to quickly address them for me please?
This was the first question:
I don't understand how it wouldn't just lead to massive inflation. Or would this be solved by high levels of taxation, thereby transferring spending power from private individuals to the state without having much, if any, inflationary net effect on demand?
I admit I always find this type of question perplexing, most especially if anyone has read a paper like the one I wrote with Andrew Baker, which is about the role of tax in MMT. But the real reason why it is perplexing is that there is nothing in MMT that says that:
- Money can be created without limit;
- There are no inflationary consequences of money creation;
- Additional money, compared to existing budgets, must be created.
People who do not understand MMT, or have not read it, or who seek to undermine it might suggest it says such things, but the reality is that it does not.
MMT explains how money works. It says that government spending is in a modern economy with its own central bank is always funded by central bank money creation in the first instance. This is as true of right wing as it is true of left wing governments. There is no policy prescription here.
Then it notes that money cannot be created without limit. In fact it makes explicitly clear that such money would be worthless. That is because MMT says a government must tax to reclaim the money it has created, and by demanding that the tax in question be paid using the currency that it has created it both gives that currency value and requires that it be used for transactions in its own economy, providing it with macroeconomic control. Tax is in that case as much a part of MMT as money creation is.
What is not essential in MMT is government borrowing. This is optional, with a government overdraft with the central bank being the alternative. MMT makes clear money markets need not be involved in funding government. It's a choice to permit them to be so, but then only on terms the government dictates.
But let's be clear: MMT obsesses about the control of inflation and provides a clear explanation (money withdrawal) on how this can be managed. The impression that a description of how money works is inflationary in itself is just wrong.
The second question was as follows:
Much of the literature on MMT from the late 2010s seems to take the low interest rates/inflation of the time as a given. Now that this is no longer the case, does this significantly change the argument for MMT? And if not, why not?
MMT thinks low inflation is good. Low interest rates must follow unless the economy is to be crushed by real transfers of wealth to those already wealthy. Low interest rates are a consequence of low inflation. We had both for more than a decade.
And let's be clear that the UK Office for Budget Responsibility is forecasting much lower rates of inflation soon and deflation in 2024 and 2025. We have had disruption of markets caused by Covid and war, but not by momentary conditions. It is highly likely low rates of inflation will return. The great worry is that low interest rates might not. If so we will have recession, businesses collapsing, households bankrupt, house repossessions and a banking crisis. Why wouldn't you want low interest rates back as MMT suggests desirable?
MMT makes it clear what the linkages are that can create high interest rates. It also explains why they are so destructive now (as they already are) but the way the money system works, which is what MMT describes, does not change with higher interest rates. MMT does however explain the consequence of high rates, and they are grim. By braking the link between government spending and money markets MMT also makes clear interest rates need not be set to appease markets.
Finally, my correspondent asked:
We've seen recently in the UK that negative market reactions to changes in government policy can render them totally impracticable. Do you think MMT could withstand this?
That is an interesting claim. Markets reacted adversely to a budget that was issued without support information, that appeared economically incoherent and without any supporting theory to explain what was planned. In the absence of information the markets priced in risk. That was fair enough.
MMT is a coherent theory of money. It makes clear exactly what role each party has in government financing. It makes clear who (the government) is in charge. It makes clear that markets are given the favour of being able to save with government and that the government is not dependent on them. It also makes clear how good economic policy can be maintained. It does, therefore, deliver everything Kwarteng and Truss did not.
Of course MMT can withstand market pressure. For a start, it makes clear what's going on. Second, it makes clear that if markets want to be silly they can be, but government can just cut them out if the equation. I suggest no economics could be better equipped to withstand market pressure.
I hope these explanations help.
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Many people have not heard of Modern Money Theory (IMMT), or they haven’t read anything about it thinking it is a fringe fad. I know of at least 20 professors of economics who support MMT. People who are against it, all seem to have a vested interest in not wanting it. As they say, follow the money.
A very good introduction is the book, The Deficit Myth by Stephanie Kelton which is aimed at people, not economists. And there are also many websites that explain the basics (not least of which is Richard’s here). It will transform your understanding of how governments use politics to manipulate the economy, and how we have been lied to (not too strong a description) for decades.
If it is OK with Richard, I’ll also plug my own web site: https://www.mmt.works/
Feel free
[…] By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK […]
There is still one proposition in MMT that I struggle with…..that tax is what gives a currency its value. I can see how tax gives a currency its USE value – folk have to use it to pay tax, but does tax give a currency its EXCHANGE value? and if so how? By exchange value I mean its capacity to acquire goods and services that people need/want and its value relative to other currencies.
It gives it value precisely because it has to be used in exchange if the tax consequence of the exchange has to be settled using it
MMT does not conflict with the quantity theory of money. That is; the value of the money that is used in exchange for goods is inverse to the total amount there is in circulation within the economy. MMT says that taxation is a means to reduce this money supply. It also suggests that not all money is equal. There are some forms of money which could be circulated far less than others. There is reason to believe that this is indeed true, some forms of money do get stuck in the monetary system and does not trickle down. Hence there are limits to printing money and not all of it will add to demand equally. This description of liquidity is compatible with Keynesian economics.
@Jim, can I suggest the following for an explanation on how currency gets its value:
The Deficit Myth by Stephanie Kelton (overview) https://www.amazon.co.uk/Deficit-Myth-Modern-Monetary-Economy/dp/1529352568/
Making Money Work for Us by L. Randall Wray (more detail) https://www.amazon.co.uk/Making-Money-Work-Us-America/dp/1509554262
MMT: What Is Money And What Gives It Value? (YouTube) https://www.youtube.com/watch?v=boHE_dR159k
Thanks
I posted this on the Guardian
“this is an interesting point of view https://mobile.twitter.com/andyverity/status/1581242599913836544
Verity says govts issue money then tax it back. There is no fund from which the government spends he says.” 4 upticks
and there was one reply
The kind of MMT nonsense was more difficult to counter during the era of low inflation. It’s hogwash. 3 upticks
I noticed from the Amazon reviews of Stephanie Kelton’s The Deficit Myth, there is strong opposition to MMT ( and a lot of support to be fair)
this extract of a review, is from the USA with 623 ‘found useful’.
Unfortunately, like all MMT economists, Miss Kelton makes the mistake of equating currency issuance with the creation of money. In advanced modern-day economies, they are not one and the same. MMT economists further suggest that the governments of advanced modern-day economies create all the money that flows throughout an economy. They most definitely do not. While she clearly has a hard left political agenda, I don’t think she’s intentionally trying to mislead her readers; I believe she was simply taught something that isn’t so and then had it reinforced by being told the same by others. After well over a decade of working with people at all levels of economics and finance I’ve come to the realization that this misunderstanding of how money is created and propagated throughout an economy is so common that even a very large majority of professional economists, academics, strategists, and financiers believe it to be so.”
NOTE the assertion she is ‘hard left’.
But an argument is better than being ignored-which seems to be the case with most of our media.
But there is no argument there
How is money created? There is only one way, which is through debt creation, and that is what MMT describes
Sp what is this person talking about?
I’d assume that person is channelling the Positive Money rubbish about commercial banks creating 97% of the money supply.
Warren Moseler (or it may have been Randy Wray, no time to check) make the clear distinction between Bank credit and government created currency with only the latter able to create new net financial assets for the non government sector. Indeed as Steve Keen points out it is precisely because governments have neglected their currency issuing duty (and perhaps more so neglected tax as a means of redistribution) that bank credit has become so widespread and detrimental to the economy. So the answer to the point is more, not less public money creation allied to a healthy bout of redistribution via the tax system (which of course is why the usual suspects are so anti MMT)
Agreed
That review is hilarious. Does the poster not realise that they, themselves may have been “simply taught something that isn’t so and then had it reinforced by being told the same by others.” The arrogance of the post is breathtaking, as is their failure to explain any of their statements of absolute fact.
I posted it to indicate the sort of resistance to new ideas-but also MMT takes away some of the power the financial sector. I think that fuels a lot of their resistance.
Reserve money can only be created and destroyed by Government (through taxation and/ gilt sales/purchases). Full stop.
Money (but not reserve money) is created and destroyed by the extension and repayment of credit (typically by/to banks). This private sector credit creation certainly does impact the economy and inflation – people/companies borrow to spend/invest and this means greater economic activity and inflationary pressure. I don’t think any proponent of MMT would challenge this.
“Orthodox” policy requires that, wherever inflationary pressures are coming from, the only policy is higher interest rates.
MMT allows a broader policy mix which is surely a good thing…. and is politically neutral.
Prof. Kelton does have a political agenda (don’t we all?) but it does not make MMT false. If you dislike her politics then challenge it on its merits rather than trashing the MMT description of the world.
The other way of viewing ‘borrowing’ by a monetarily-sovereign state is that it needs to pretend that its Treasury is in positive equity.
The institutions purchasing bonds use government-created reserves to do so. The reserve creation must precede the bond buying as a matter of fact. So the deficit spending precedes the bond sale, proving that the borrowing is not funding government spending.
The reality is that the Treasury is the only institution which can and *should* be in negative equity for the benefit of everyone else.
This is succinctly described as the “unwinnable arms race” by Steve Keen: every person and business chasing positive equity – including the government with its ‘balancing the books’ nonsense – is a recipe for economic disaster and utter insanity if you understand basic accounting.
I have understood the concept that MMT requires that money be withdrawn from the economy to control inflation. But what measure of inflation needs controlling? There tends to be a focus on retail inflation (largely because of its short term impact on us all, and the way it is reported monthly) but why is asset inflation not a similar worry?
Or putting the question another way, why is the Bank of England charged with adjusting interest rates and QE to hit a retail inflation target? Why not, say, a property price inflation target or some composite inflation target?
And in response to Jim above, it seems to me the way in which a government requiring tax to be paid in its own currency creates that currency’s value is apparent from the comparison with the new “cryptocurrencies” which don’t. Government employees and benefit recipients receive their income in the state currency, and they can conduct transactions with it because the shopkeeper (or whoever) needs the same currency to pay taxes. Cryptocurrencies have no such utility, which means there is no intrinsic value that can be determined from their use in transactions – with the result the market for them is incredibly volatile. (Richard can no doubt explain this better).
Re what inflation – credit controls are needed for asset inflation
These are not part of a revenue cycle and so require a different response
In addition to tax giving currency its value, MMT also suggests a government Job Guarantee at a decent living wage with benefits, that also gives value, as the private sector has to compete with it.
I like this a lot, as it moves the currency further away from the old Gold Standard of exchange, and makes it a Labour Standard, where the people decide if they want to offer their labour at the going rate, and retain their right to withdraw their labour if they wish.
This is also an excellent automatical economic stabiliser.
It is this that defines the value of the currency through an MMT lens. The government says “Unskilled labour is worth £X/hour, we will employ anyone at that rate”. All other prices are then relative to that. If the government does not out-compete other sectors in buying stuff, then will be no demand driven inflation spiral. If prices go up, then if it holds the line, tax will remove money from the economy until prices are acceptable again (which highlights why it’s important the state maintains strong buying power).
The JG is not just the right thing to do in terms of social policy, it is also a crucial tool in defining the value of currency.
I have to admit this goes beyond what I think MMT can say
But we can differ on that
The problem that opponents of MMT have is explaining how their alternative theory (that is, tax and spend) actually works. Plainly the actions of governments around the world since 2008 (and indeed before) show this household model just does not describe what actually happens in the real world. But it is a useful lie if it alters perceptions and behaviours.
The government does not have to tax before spending “taxpayer’s money”. Government debt is like money (and vice versa) and it does not have to be paid back any time, except with more debt. Borrowing is not deferred taxation. We are not loading a burden on our grandchildren.
There is an alternative. Things do not have to be this way.
Good, as usual.
I think it is important to emphasize that MMT is not a policy prescription but a description of the world. (Newton’s Law of Gravity does not tell you WHETHER to jump… but it will tell you what happens if you DO jump). Indeed, the current “orthodoxy” which uses interest rates as the sole means of inflation control does not contradict MMT. However, MMT DOES allow us to explore other policies that will achieve economic goals – policies that do not deliver such damage.
Macro economic policy should be looking at whether to add or drain reserves (money) from the system as well as what combination of taxation and gilts sales/purchases is needed to achieve this.
Of course, all these things are interlinked but my process would be…
1) “what do we need to spend to get the services we want?”
2) Should we be adding or draining money in order to meet the medium term inflation target?
This would give us a financing requirement (through tax and borrowing) so then
3) what level of interest rates makes sense for the economy?
4) what level of gilt sales/purchases might be required to keep rates close to the desired levels
5) the tax level is whatever is left.
Of course, there is feedback and this is a constant iterative process but the key point is that the most important question comes first – what do we need to thrive – all else then follows.
Finally, I hear a lot about “real interest rates are negative” and this is not really true. Yes, if (a year ago) you placed £1 on deposit for a year then you would have lost 10% of its purchasing power…. but that is past – what about today?
The 1 year interest rate (1 year Sonia swaps) is 4.25%… which is not substantially different tot the inflation forecasts for (end) 2023. If one looks at 3 year rates (currently above 4%) they are substantially above forecast, average inflation for the period.
My point is that monetary policy is not as loose as some would have you believe.
I am doing a lot of work in this issue right now
There will be much more from me on it in the new year
Speaking as an Economics illiterate thanks for explaining MMT’s descriptive – rather than prescriptive status. So understanding how money really works allows progressives to argue for fairer distribution? I will look at all the links mentioned in this thread.
The private sector claims that they create wealth … Because money flows through them from the bank’s. But all loans must be paid back, with interest. The private sector redistributes money creating wealth only for rich people.
Only the government can create new money by spending it into the economy, where the private sector can also compete for it before the government taxes a proportion back out.
“MMT thinks low inflation is good. Low interest rates must follow unless the economy is to be crushed by real transfers of wealth to those already wealthy. Low interest rates are a consequence of low inflation. We had both for more than a decade.”
Inflation’s 10%, real interest rates are minus 7%. So how does that fit in with MMT?
Have you noticed the impact of Covid and war? Or have those non-monetary events passed you by?
And Brexit? Our exporters have been hit with increased admin costs and our imports are attracting tariffs which didn’t apply when UK was in the EU.
True, but not obviously inflationary in amongst the other noise.
Agreed there’s plenty noise about Covid and the war in relation to inflation, but The Tories’ almost total avoidance of discussion about Brexit and its impacts, combined with the supportive editorial policies of most of the media, has deflected attention away from Brexit. An article in today’s Herald by Ian McConnell examines a report published on 21st December by the Centre for European Reform which contains some very damning data: by the end of the 2nd quarter of 2022 GDP had been reduced by 5.5% and the impact of this would be a drop of c40% per annum in UK taxation collection.
Circa 4%, surely?
Sorry, mea culpa, too much haste. The figure quoted is £40 billion shortfall in tax yield (see https://www.cer.eu/insights/cost-brexit-june-2022)
Richard is right – war and COVID are the main drivers of the jump in prices in 2022.
On the specific point about real interest rates I think you are wrong. Prices rose 10% in 2022 (that is what 10% inflation means)….. and it is a backwards looking number.
For 2023 the 1 year interest rate is about 4.25% and inflation is forecast (by the OBR) to be about 1.5% by the end of 2023 (ie, prices will rise 1.5% over the course of 2023). So, we are looking a real interest rates of 2.75% for 2023.
Now, we can’t be sure what the inflation outcome will be….. but we can safely say that savers will not get a return of -7% in 2023.
MMT has got a few things right, but MMT as practiced has clearly shown its roots to be lacking.
Kelton is still trying to blame inflation on supply chain; the reality is that the roots of this inflation is a combination of the massive emission of money during COVID plus massive underinvestment in commodities, particularly energy, with the camel-back-breaking straw being the sanctions on Russia.
As for the UK OBR predicting much lower interest rates soon, followed by deflation: did it predict the inflation before it happened?
If not, why exactly would it have any credibility, whatsoever, in predicting the end of the inflation it failed to detect to start with?
No government thinks QE created infaltion
And the evidence that it has not is easy to find: decades of experience in Japan and more than a decade here
So let’s cut the crap: in that case inflation had to be caused by something else and it’s near-universally agreed by serious economists (and you are not that) that it was caused by supply chain disruptions
As for why will inflation fall, because that is what always happens as the rate returns to the mean – which the way the inxcex is calculated virtually guarantees it will
Politely, you are talking utter drivel
“MMT as practiced has clearly shown its roots to be lacking”
MMT has not been practised. Quantitative Easing is not MMT. People have claimed MMT is being used in order to rubbish MMT, and to ensure that neoliberal policies succeed in the privatisation of as many public services as it can, then continue to reduce wages and pensions (the state can deal with the results), and then to pocket the profits.
And inflation has not risen because of government spending, it has gone up because of the short supply of energy and fuel, and prices have increased in response.
See also: MMT ≠ QE @ https://stephaniekelton.substack.com/p/mmt-qe
“ MMT has not been practised. Quantitative Easing is not MMT”
+1
Despite being correct in terms of explaining how a modern monetary system works, MMT remains very poorly understood, a minority view and a mile away from macro policy making. It (ie, it’s prescriptive elements) certainly has not been practiced, at least not in any advanced economy and as this post states it is not synonymous with QE, not at all.
Frankly the descriptive elements need rebranding and stripping back to their core. Start with Godley and work upwards. Unfortunately many of the leading proponents of MMT are rather cantankerous individuals (esp in AUS) – as can been seen in their websites and their very dismissive manner – which inhibits learning.
The best starting part is to separate MMT basic ideas from politics – noting in passing that this is what most MMT proponents also do in practice – and focus on the core framework.
Richard, I did smile at your Trussonomics comments. Stephanie Kelton was slightly more generous recently but that is another story.
A lot to agree with there
Especially on a particular Australian who really does not help
One makes points badly and fails to accept that MMT is very challenging for most who have been bought up with a very different macro framework, the other (who I love) is also prone to great generalisations and comes across rather cocky. His podcasts are great listening nonetheless!
But bottom line, MMT will not feature* in the next GE in the UK. The Chancellor and Shadow Chancellor will argue on the basis of the traditional (TAB)S framework. Neither will present a macro case based on S(TAB) as MMT would suggest.
* of course it will be applied incorrectly to describe fiscal stimulus and as a cause of current inflation repeatedly
Agreed
Most of the time when I encounter use of the label “MMT” it is either as an epithet or in such a way as to demonstrate that the utterer is not conversant with the relevant literature — which is to say either unseriousness or outright bad faith.
It’s almost always some variant of “they did MMT and look what happened!” If I bother to respond beyond an observation that they are macroeconomic ignoramuses, it’s usually to point out that if we had “done MMT” (itself mostly a category error since it’s primarily descriptive) that would mean the implementation of what I understand to be its sole policy prescription — the job guarantee. As there is no evidence of a job guarantee anywhere that I’m aware of, nobody has yet “done MMT.”
Correction: as someone who does not see the job guarantee as core to MMT (I know some will disagree, but I think it a policy option within it) I think the actual argument is that no0 one has done MMT because they refuse to believe that spend comes before tax
I agree, that is the huge flaw in the Stephanie Kelton book. Although she explains MMT well, that is within a book which mostly presents her own personal economic vision for a better USA – and doesn’t distinguish between what is the MMT underpinning it and what is her preferred political choice.
That’s helpful, thanks — I will try to remember that way of putting the descriptive insight into my responses
I’m aware of a couple of Government Job Guarantee programs:
“The MNREGA jobs programme, introduced more than 15 years ago, allows citizens to enrol for work such as building roads, digging wells or creating other rural infrastructure, and receive a minimum wage for 100 days each year.”
https://www.reuters.com/world/india/india-forms-panel-revamp-only-govt-job-guarantee-scheme-source-2022-11-25/
And between 1995 to 2002, Argentina ran “a limited employer of last resort program called “Plan Jefes de Hogar”. Study: https://www.academia.edu/979512/Employer_of_Last_Resort_A_Case_Study_of_Argentinas_Jefes_Program
In his book Making Money Work for Us (p. 153), Wray, L. Randall writes: “The final policy is by far the most important for MMT: a universal job guarantee that would provide jobs at decent pay (with benefits) for anyone who wants to work.
A lot of the QE spending was on the furlough scheme that only paid 80% of workers: wages so was deflationary in effect as there was less spending power in the economy as a whole. It is true the rich got richer (by a hell of a lot!) but this only caused asset inflation, not consumer spending because the rich can only spend a small proportion of their income on daily consumption and save or asset purchase most of it. Wealth inequality has grown dangerously and won’t be reversed until a huge progressive tax increase regime is introduced.
A really good post and discussion here – Clive Parry being particularly expansive – great to see.
It still puzzles me why – given what we know – that people seem unprepared to give MMT a proper go. It can only be that the way things work as it is now are designed to benefit the few but the system we live has essentially collapsed anyway.
What makes MMT more attractive to me (along with everything else mentioned here) is the opportunity to be more creative and varied in tackling economic problems. To me, the private sector does not ‘make money’ it just moves it around in a very unjust way. Other than that it just creates debt/credit money for questionable purposes. It would be nice to see differential interest rates put on the use of money and credit creation defined by its utility to society for example. It would for me at least result in the re-democratisation of money as a utility (Clive’s ‘what do we need to thrive?’ question).
Having read Kelton’s book, I’m afraid I got no whiff of any politics to be honest. I think she was restating that which needed to be restated; that the State is sovereign when it comes to money and not the markets. OK? The Job guarantee is not an integral part of MMT for me either but it is choice among other choices and also the timing of that particular choice needs to be right. MMT would create the resources to create jobs but not right away, as building up resources takes time.
But when it comes to MMT sustaining itself through market pressure I am unconvinced though. MMT might well be fine, but it will need politicians with the minerals to use it and stick with it when things get tough and that worries me because at present I can’t see any who have the minerals to give it a whirl, nor the intelligence or coolness to manage the naysayers who would undoubtedly be screaming it down.
In my view, the JG is the primary policy prescription of MMT; the descriptive part is really just banking. I’d recommend reading Mosler’s paper on it, which explains why the job guarantee is so important with a beautiful argument (he calls it the employer of last resort in that paper). http://moslereconomics.com/wp-content/uploads/2019/02/Full-Employment-AND-Price-Stability.pdf
I know the paper
But your distinction is key
MMT describes how government financing works
The JG is a theoretical policy implication
They are different
My view remains that the job guarantee is just ONE of a number policy responses within MMT. If MMT describes how money actually works, the the JG has to be considered in the same reality too.
The real world constraints are the resources to turn those jobs into something meaningful and productive (also a period of mobilisation is needed). The funding of the JG is actually the easiest part.
PSR, for the most part, labour is the real world constraint. It’s not like there isn’t plenty to do – think all the tasks and improvements around where you live that would benefit from a bit of labour, and that’s only scratching the surface.
Interesting also is having reserve projects, which need more specific resources – say skilled labour or building materials, that can be immediately implemented when those resources are underused. An example of this might be low priority public works.
In the spirit of healthy debate, I’ll add Bill Mitchell’s perspective, which is rather how I view the JG:
http://bilbo.economicoutlook.net/blog/?p=38829&cpage=1#comment-56973
The whole debate on that page is a really interesting read (Richard’s views are discussed somewhat in the thread without any input from him himself, but I hope that doesn’t cloud the points).
I admit I will not go near Bill Mitchell, not even to read this
Life has taught me sime people are not worth engaging with
I know I am far from alone in MMT
I have been chewing this over since I asked my question this morning; how does tax give exchange value (purchasing power) to a currency?
I accept the general premise that by taking money out of circulation taxation is a means of managing inflation in general price levels in the economy. Current experience, however, suggests that it is not a sufficient explanation – we currently have high inflation which taxation can do nothing to reduce (nor can raising interest rates). So this suggests to me that there is something else important which gives exchange value/purchasing power to a currency – and that something else is government spending. It seems to me that it is the balance between the two and, also, that it is the purposes of the spending and what is taxed that matters.
If inflation is caused by the shortage of goods and services, particularly those which are classed as “essentials” – such as food, energy, housing, as well as provision for health and education – then it is purposeful government spending that is more important to maintain the exchange value/purchasing power of the currency, combined with taxation which removes money spent on undesirable (non-priority) purposes.
Which brings me to a thought about Henry Gomersall’s comment – the value of labour is derived from the prices of the essentials required to maintain a healthy and educated workforce (even unskilled labour needs education). If government spending ensures that those essentials are provided in sufficient quantities then price inflation of these essentials can be managed. (In saying this I do not mean that the state has to provide these essentials directly itself but that the state facilitates that provision by whatever mix of state production and private sector production is most effective.)
If I am right then it follows that the value of a currency depends upon the productive capacity of the economy, particularly a minimum level of self sufficiency in essential goods and services. That productive capacity can only be fostered by the state through purposeful public spending, credit controls and ensuring savings are recycled into productive investment. Taxation supports that process by taking money out of circulation if it is being used for purposes inconsistent with those objectives but, it seems to me, tax on its own cannot give value to the currency
Jim
As usual, I despair at your inability to think logically.
Politely, wtf do you think MMT should explain inflation caused by war when that is not a monetary phenomenon?
I did not get to the rest because if you can’t work that out the rest really isn’t worth noting, and feint as daft when I scammed it
Richard
Fiat money has no “purpose” or “use” value. It has exchange value, yes but that’s not enough right now, in my opinion. What we need is a new kind of money that adds value to society and the economy and the way to do that, again in my opinion (I work in community) is to turn waste within the current system into value that can be unlocked, stored and then traded, for fiat. Think of it like a hedge against the financialisation of the economy (and debt).
I am not sure what that has to do with money, per se
Money is debt, is what that has to do with “money”. And debt levels are unsustainable. So how does MMT address the debt issue? Print more money? Even if it is of the MMT variety, it will do nothing to pay down debt.
How do you pay down debt without money?
And which debt is unsustainable?
Please explain
Let me see if I’ve understood this right. Suppose a government which is a currency issuer wants to spend more on a particular programme then it can do it in one of the following ways:
1. Cut spending on something else
2. Increase taxes
3. Borrow
4. Print
Orthodox theory says that all 4 are always an option. MMT says that there are circumstances where 4 is not an option as it is false to claim that “Money can be created without limit”
Sorry, but you have this wrong
A government that is a currency issuer has one option when it comes to spending, and that is to borrow from is central bank, which happens every day in the U.K.
MMT discusses which choice then makes sense
Conventional economics pretty much ignores 3 and 4 but pragmatically recognises 3 for all the wrong reasons
This is a bit like saying that all trains into Victoria cross the River Thames.
It tells you next to nothing useful about where the trains really came from.
I thought you were a troll
You very clearly are
Find some of this easier to grasp and/or discuss – when summarised in some kind of aggregated/consolidated accounts and/or input/output tables , maybe year by year plus flow charts – maybe with backup equations.
I think that has been done – here and elsewhere.
GIMMS do that
The GIMMS paper of which we were reminded by Mr Gomersall, is here: https://www.ucl.ac.uk/bartlett/public-purpose/publications/2022/may/self-financing-state-institutional-analysis.
Everyone – everyone – should read it, because it provides the first detailed ‘pro forma’ analysis of the critical Government/Treasury/BoE double entry that Richard has long explained is important, and argued for; it reveals the best description we currently have of the structural innards of the machine that I have seen (lacking the transparency of Government’s over its books, that it seems only too anxious to protect); and the ‘deus ex machina’ is, we find – the Government itself.
I think it follows that there are two ways we should focus on challenging the Government on its neoliberal ideology. We should keep asking the same two questions, until the Government and its neoliberal apologists are obliged to reply. Given the failure of this twelve year Government to cope with national crises; all of them.
Following the financial crash 2007, when it was claimed by everyone in Parliament that the technical monetary, banking and liquidity risk failures had all been fixed; yet that illusion collapsed in a heap when the BoE spent £30Bn in hours to prevent the LDI pension route turning into financial Armageddon. We may add to that, a 12 year self-induced austerity policy that neither achieved the stated (pointless) claim it would reduce the national debt, produce any economic growth (it didn’t), or increase productivity (failed yet again here); and failed to sustain the Public Health support necessary to secure the British against a long predicted Pandemic; and when Covid struck, a catastrophic failure to manage Covid with basic executive competence, save by relying on science to bail out Government’s demonstrable, endemic failure to resource Public Health adequately to meet the challenge; instead, panicking by making waves of ideological, amateurish, bad investment decisions in Test and Trace, or PPE, leading to wholesale waste, bad practice or downright fraud. Compounded by a failure to provide a secure and robust domestic energy framework, able to withstand fundamental international threats to supply. Foisting on the British people a badly conceived, ideologically obsessive, phoney ‘free market’ domestice energy system which collapsed as soon as its economic viability was tested in a crisis. Yet more dereliction in the long-drawn failure to modernise the infrastructure of the UK, for example in railways (compunded by a privatisation melt-down, just like energy), and which actually could drive growth, but never does; a total failure to protect the standards of living of the British people for the last twelve years, and probably the next twelve to come – as long as the economy is in neoliberal Conservative hands; and the disasters of public pay policy, for example in the NHS which seems to determine that nurses, ambulance staff, and the care services work without the resources required to provide a properly functioning service, with staff leaving in droves, agency staff paid fortunes, yet NHS staff offered conditions and rewards more in keeping with serfs than free agents.
Afer each failure neoliberal Government does one single thing. It claims the failure is because the regime is not neoliberal enough. The solution is give more work for less pay. And when that fails in the next crisis, they return and say: the regime is not neoliberal enough. Give more work for less pay; on and on, learning precisely nothing from failure. Cameron, May, Johnson, Truss, Sunak? The answer is always the same. Give us more. It fails. It isn’t ‘more’ enough. Give us more, for even less. An endless repeated cycle, until there is nothing left but desolation.
The question to government that requires to be insisted on is simple: having failed, time after time, If the government just claim endlessly to have met the challenge of the crisis. It is well summed up by Philip Mirowski, which I paraphrase in this form:
Question 1; Where, precisely is the fix?
The second question goes to the heart of the problem explored by Berkeley, Tye and Wilson in GIMMS, 2nd edition. If Government is just like a household, but writ large and properly managed; like a business, or a corporation, then the question can be simply framed. The key account (and mechanism) for the operation of Government is the Consolidated Fund. As backround, here is an excerpt from the Berkeley, Tye and Wilson analysis (p.11):
“The Consolidated Fund (CF) was established in 1787 and is the legal centrepiece of UK public revenue and expenditure . As a bank account it was transferred to the Bank of England in 1834, when the ancient office of the Exchequer was abolished, and named ‘The Account of His Majesty’s Exchequer’ (‘The Exchequer’ for short). Payments from this account must be authorised in advance by acts of Parliament. The majority of UK public expenditure is made out of the Consolidated Fund, and it is the final destination for the majority of taxes and other public income. As such, it can be conceptualised as the Government’s “current account”. However, it comprises more than just a bank account as it is the holding entity for the various government departments and the assets each of them own. The Consolidated Fund is administered by the Exchequer Funds and Accounts team (EFA), a department of HM Treasury, such that the Exchequer Account at the Bank ends each working day with a balance of zero. This is because any surpluses or deficits at the conclusion of daily business are balanced by transfers to or from the National Loans Fund Account.”
Berkeley, Tye and Wilson provide a pro forma example of a Consolidated Fund Balance Sheet (p.13), but containing negative equity of a rather distinctive kind, because in following this through to ‘Whole of Government Accounts’, they go on to summarise the result of the audit trail much later (p.127):
“The Consolidated Fund, however, has no deposit with any other body, and the apparent negative Equity is the reflection of the provision of a net money supply to the private sector. Implicitly, the Consolidated Fund does hold a sui generis balancing asset, though this is never formally enumerated as the Consolidated Fund does not prepare a balance sheet in the Whole of Government Accounts it is described as ‘liabilities to be funded by future revenues'”.
There is no balance sheet in the Whole of Government Accounts. We can therefore ask a simple question about the Government’s ultimate consolidated financial position.
Question 2: Where is the Balance sheet?
This is a question only government can answer. Once we have a balance sheet it can be examined, and the status of the assets and liablities (their form and substance) properly scrutinised, and detailed questions asked.
The last is an especially difficult question
To ponder on
If there is no Balance Sheet, and no resolution of the double entries; how can Neoliberals possibly know who is borrowing from whom?
They can’t
Why is it necessary, or advisable, to have ‘low’ inflation?
Doesn’t inflation take wealth away from people indiscriminately?
Why not aim for zero and use taxation to redistribute resources?
As we see now, inflation causes losers amongst working people and those on low fixed incomes too
Tax is a much better instrument for redistribution
Speaking as a person who does not understand much about accounting or how governments are financed, but who regularly reads this blog to learn, I found this contribution from Clive Parry particularly enlightening:
“Of course, all these things are interlinked but my process would be…
1) “what do we need to spend to get the services we want?”
2) Should we be adding or draining money in order to meet the medium term inflation target?
This would give us a financing requirement (through tax and borrowing) so then
3) what level of interest rates makes sense for the economy?
4) what level of gilt sales/purchases might be required to keep rates close to the desired levels
5) the tax level is whatever is left.
Of course, there is feedback and this is a constant iterative process but the key point is that the most important question comes first – what do we need to thrive – all else then follows.”
It does seem that sometimes ‘we’ get the cart before the horse, don’t we—and discuss a potential end result without understanding the practical process it takes to achieve it. This explanation from Mr Parry, of the steps our government should be taking, certainly puts the horse back in the traces and gets the cart moving again. I actually found myself breathing more easily as I read it, light bulb flickering above my head. What do we need to thrive? A great place to start. Thank you, Mr Parry. (And of course, Richard, who makes these discussions possible.)
Great explanation of how I had come to understand it.
As you say, all processes are clear so those ‘markets’ are never given a shock, and we can manage without them anyway.
I think people have in mind that money has some value in itself rather than value being maintained by the transparent MMT processes.
When I talk to people I always try to have ‘money creation’ and ‘taxation’ in the same sentence. Also, if an economy grows such as if more people become economically active you need more money in it anyway otherwise everyone would have to be paid less.
Needs a more radical approach than MMT which threatens the status quo. More “money” is not the solution, whether MMT or not.
MMT does not say just add more money
Why pretend it does?
MMT is just so political. That’s why I don’t believe as a policy tool, it will never see the light of day. Yes I agree that as a sovereign nation we should be in control of our own money supply, but when I say “we”, I mean the community, not the technocracy.
A description of what actually happens is as political as the theory of gravity, unless you are a troll of course
But the status quo has:
1. Crashed the economy
2. Produced the highest interest rates in 32 years
3. Produced the highest inflation in 40 years
4. Resulted in the highest tax burden in 70 years
5. Resulted in the lowest Sterling/US Dollar rate in 50 years
6. Two million more food bank users
7. The highest energy costs in Europe.
More money would alleviate the plight of the lowest paid without increasing inflation, which I due to drastically reduce next year anyway.
‘More money’ !!
What an asinine statement that is, I mean really.
Since 2010, money has been stripped out of the economy by this Tory government. There’s been LESS money mate – understand?!
Why is it that because we’ve had low interest rates some people think there has been ‘more money’ or enough?. Sure, we’ve had low interest rates for credit, but wages (real money) have continued to drop over this period.
MMT explains how that money can be put back into the economy because it should not have been taken out in the first place.
End of.
I appreciate where you are coming from Pilgrim but do not agree that money has been stripped out of the economy by this Tory government. That hypothesis is falsified easily with reference to money supply data.
Wages are not real money either, IMO. They are simply part of the velocity of money, not it’s supply. Steve Keen does a good job at explaining this.
Maybe….
Richard, It would help me to reflect on my logic if you can explain what you mean by “value” in the context of the MMT proposition that “it is tax which gives a currency its value”
Jim
Value in exchange
Even as a store
Because what else could it mean?
It could also mean “use value” as I mentioned in my first comment – tax gives a currency “use value” because you have to use it to pay tax. I accept that tax plays a role in managing the exchange value of a currency is so far as it takes money out of circulation in order to manage inflation by reducing excess demand. But if the excess demand is caused by shortages of the necessities of life due to structural problems in the economy then I fail to see how tax can then help support the value of the currency. Isn’t it the case that the long term decline in the value of sterling is related to the long term decline in the productive capacity of the UK economy? Tax may have a role to play in addressing these structural problems if it is used in the process of reallocating resources but I don’t see how it can be the most important determinant of currency value as MMT seems to say.
Bluntly Jim, stop being a fool
Of course MMT does not explain an exogenously imposed price change
Why look for an answer it does not pretend to supply or pretend all inflation is the same as the BoE and must therefore be treated in the same way
You like to present yourself as a thinker. Try thinking, I suggest
I think it is important to restrict the definition of MMT. Basic MMT is morally and politically neutral. It is simply a description of how money works. It gives a better fit to the data than conventional or neoliberal economics, and it generally makes a better prediction of the effect of a given monetary decision. Economists who use MMT may advocate particular policies, but those policies should be distinguished from basic MMT.
A second point is that because MMT is a working description, it should be expected to develop and evolve. There are several areas where I think MMT has further to go. A favourite saying in our scientific papers was “more work needs to be done”.
I was heartened by a Steve Keen podcast a few weeks ago, to which Richard linked. Steve actually said that banks destroy money (as opposed to cancel it). When a bank loan goes bad, the money that the bank created may be circulating elsewhere, but some of it may no longer exist. How much goes missing is vital to understanding inflation and we need a better explanation of how it disappears. Dare I say, I think Richard underestimates the importance of money destruction.
Bill Williams, in a comment above, points out that not all money is equal. This is another vital but difficult area. As a simple starting point, I would distinguish between circulating and resting money. Resting money would include money tied up in assets. How much resting money can affect inflation is another difficult question.
This is a key point.
MMT is not some policy or programme to be adopted, it is a lens which allows us to see through the fog, obfuscation and cant of mainstream economics and understand the realities of currency issuance in a modern economy.
By doing so it blows apart the facile “how will you pay for it?” lie and switches the focus to the real questions – are there sufficient resources available to support the spending and what will be the impact on employment and the wider economy? Which are exactly the sort of debates we should be having e.g. around a Green New Deal and will encourage the return of courageous politics (and dare I say it – ideology instead of the current bland but deadly managerialism)
🙂
Exactly so. We are one of the richest countries in the world, with one of the biggest economies. There is much we can do, if we put our minds to it. We are collectively much richer today than we were in 1945. We could recreate the NHS afresh, if we wished to. But first we have to reconsider the allocation and distribution of resources.
Spot on
I would say on the last point, the BoE demonstrated this fact by putting a floor under the gilt/pension sell off by buying certain maturities
Henry
I have not said that the JG should not be used. What I’m saying is that it should not be the only game in town in the context of MMT. The risk with going all in on JG is perception management and expectation management around getting it done. I would favour a JG approach for example AFTER (say) the major setting up of funding for green technology (Green QE), setting up supply chains etc. The nuances of pacing and scaling would need to be applied otherwise things could be very chaotic in world which would be manifestly I tell you hostile to the idea, quick to point out where it was going wrong. We’ve had a lot of time for the State to forget how to manage initiatives like this too. The key will be in the mobilisation and supply chains in this particular context – not just labour. Oh – and what about training? You see – it’s very complicated – it would need to be a public/private partnership and a well managed one too unlike the PPE scandals we’ve had etc – so a JG would need to be part of a raft of other polices aimed at bringing relief from 12 years of Tory stupidity and indifference.
Colin
Your response is all too redolent of one the problems with MMT discourse. You forget that it has to exist in the real world. As Henry suggests above, in our towns, cities and elsewhere we can see the effects of budget cuts – the stripping out of money. We can see it in the decline of the NHS, schools, railways, infrastructure, wages, lost jobs, etc., and that the austerity imposed on us (and the subsequent BREXIT debacle) have led to a huge drop in output that has been tracked in this very blog. So much for talk about ‘money flows’. MMT will be successful when it moves from discussing high macro concepts to micro benefits – when it is seen to improve people’s lives. Ordinary people are not interested in a concept of the ‘velocity of money’; rather they weigh up what is going based on the health of their wallet and if the services they want can meet their needs. They don’t. Are you saying that they do?
As for not seeing wages as ‘real money’ Steve Keen highlights that the reductionist Neo-liberals are blind as to whether money is ‘real’ money or credit – it’s all just money to them. The major problem there then is that the inflationary effects of credit are ignored and the tune of the day is to blame inflation on – guess what ! – wages! So, low wages are encouraged in a high property value society with obvious (except to the Neo-liberals) consequences. I’ve worked in the public sector this last 12 years Colin and your assertion about there not being some sort of stripping out of money just does not stack up. Whatever money has been floating about, or not, we can agree that wherever it has been going, it has not been going to those who need it the most. And to those – including myself – that is an effective stripping out. And that has to be asserted even during this season of goodwill to all men. Sorry!
Merry Christmas.
Thanks
PSR,
Thank you telling me what I think, what is should think, and what I have forgotten. A seasonal bonus!
I do not dispute much of what you say, merely pointing out that your specific observation that money has been stripped out of the economy by the government is factually incorrect.
I was listening to Keen’s podcast on the concept of wages and we can agree to disagree on that too. (simple question – if I pay you a Christmas bonus in cash what has happened to the stock of money?) Ditto velocity of money, although I would argue that Keen’s distinction between the supply of money and velocity of money is critical to much of what is at debate here. I will, however, leave it to you to decide if you want to absorb what he is teaching over the Christmas break.
In the meantime, Merry Christmas all.
Cash is a token of debt
It is not money in itself, except at first issue
Interesting Richard, I will have to think about that one. My gut feel is different because
1. Cash sits in narrow money (M1) which suggests to me that is is considered as “money”
2. It functions as a means of exchange – I used it to pay for my haircut today, for example
3. “Through the ages, money has taken various forms – from gold and silver through to the two types of money used today: cash and bank deposits” BoE website.
I accept however that there is an argument that money (including cash) is debt….
It is issued as debt and remains as such
Agreed, since all money is debt. No dispute there.
But that is not the same thing as saying that cash is not money in itself. We disagree on that point, not the first 😉
It is only money because it is debt – you can pay your tax with it
Surely it depends on context. A £5 note of government debt will always be so for the government, but if you would like me to unburden yourself of any debt that you may be holding, I am happy to oblige. Some of it may be taxed back to the government, but it has value to me, and whoever accepts it as a means of payment.
Agreed
I say this when lecturing and no one hands over their money
Incidentally, notes are in the national debt
@PSR
If the object of government spending money is, in broadest terms, to get stuff done, then apart from the impracticalities of the Job Guarantee’s operation that you suggest and also discussed here:
http://www.progressivepulse.org/economics/modern-monetary-theory-is-logically-inconsistent-with-a-job-guarantee
the Job Guarantee is a logical non-sequitur.
If you are a government that wants to get things done then why would you not ensure that everyone is contributing to the general effort? There is simply no need to have a buffer stock of unemployed given tasks to do while awaiting a ‘proper’ job, because that same government has as its very purpose full employment, which it achieves by spending its money. If it has a ‘stock’ of unemployed then it is an indication that the government is failing.
And if there are jobs available that are not being done then it will mean there are not enough people available to do them and it is time to look at what is essential….
Isn’t evident that governments do not make sure everyone is contributing? And indeed, isn’t it monetary policy to deliberately use unemployment as a means of controlling inflation (e.g. The Phillips curve)?
Yes, burning is also failed policy as they do not understand it
@Peter May. I strongly disagree with that Peter. What you suggest implies an all-knowing government and a highly centralised state. The JG works on the principle of subsidiarity – there are loads of things that communities need to get done and they don’t get done because at present communities rely heavily on volunteers. We need a JG so that we can employ local people to do valuable community based work and do it for a decent level of national wage which can then act as a wage floor across the whole economy. I can envisage that folk like me who do voluntary work in their community would welcome the opportunity to do more in return for a proper living wage. Personally I’d be happy to carry on volunteering – I have enough money to live on – but paying a living wage via a JG would create great opportunities for local people who don’t have any employment right now but who could make a valuable contribution if they are liberated from the stresses of grinding poverty.
But @Jim Osborne I’m looking at MMT theory and not current practice!
I agree and also think the state is over centralised – really because money creation itself is entirely centralised. That is why I’ve always suggested local currencies (not ideal) or better still local creation of ‘national’ money:
http://www.progressivepulse.org/economics/fiscal-federalism-and-getting-to-grips-with-local-spending
We disagree here Peter
Local currencies are a macroeconomic nightmare that must never be allowed to happen
I mean, never, and most especially under MMT
I get that MMT is not a set of policies ,but the best description that we have of what actually happens, and that it describes more economic options available to the government than they admit they have or choose to see. I understand it suits the political agenda and ideology of this UK government not to do things differently. What I don’t understand is why isn’t MMT or are aspects of MMT , or at least those options that our government refuses to take and which conventional economics denies exist eg. spend then tax, practised in other economies and countries around the world? Or is it being practised, or at least aspects of it are? I know it’s a lot more nuanced than that, and this is overly simplistic, but for the risk of being shot down, I’ll ask it anyway, as I’m sure they are lots of people wondering the same. What is this barrier between talking about it and governments actually doing it? You can say political choice, yes I agree for the UK govt, but surely that is not the case of every other country which issues its own currency in the world?
I would answer this, but the brain has turned off….
In essence it is being used; the,problem is in the denial that is the case
“why isn’t MMT [..] being practised”
Lots of reasons:
1. Most people don’t care about economics (6 months ago, I knew next to nothing, and didn’t care)
2. Most who know something of economics have not heard of MMT (me again)
3. A proportion who know something about MMT see it as a threat (to their wealth streams)
4. Some have heard only negative things about MMT.
5. Aspects of MMT are counter-intuitive, so people assume it must be wrong.
It is OK to disagree I suppose.
All money is debt – I get that – ever since I read ‘The Ecology of Money’ by Richard Douthwaite (2000) which was one of the few publications dealing with this subject until I discovered Richard’s blog (here). And thank goodness we’ve had a whole slew of insight into the origins of money from David Graeber (RIP) to Christine Desan.
But if you Colin had not been able to get your haircut because of factors with money supply beyond your control how would you feel about that?
Money is a man made phenomenon. The way some people talk about it, they imbue it with mythical qualities and make up fantastical stories and laws of nature about how it is made which are totally contrary to how it is actually made.
Whether base money or credit, money is man-made and whilst Colin I grant you that that total amount of money is significant in any one year, it is its mal-distribution as a utility that is the root of the problem. It is a problem of allocation, and the use to which it is put -something that GDP does not pick up.
It is such a problem that those parts of the economy which have not been allocated enough for need or to thrive (thank you Clive Perry) and have seen money withdrawn (reduced) from previous years have every right to say that money has been ‘stripped out’. This is an operational perspective – downstream of any strategic macro money creation.
If we’ve created a lot of this utility (as you seem to be suggesting Colin) , then surely we must ask then ‘What are we doing with it’? Why is the CBRA effectively minted whilst artificial limits have been set on the NHS and other public services?
Because money is continuously mis-allocated as a resource. That is why.
That is my position. This is why I say money has been stripped out this last 12 years especially through austerity. I don’t know any other way to explain what I have seen with my own eyes.
If your argument is not enough has been spent compared to need you are exactly right
Neatly put Richard – that is exactly and always my perspective.
As I’m always quick to say about myself, I work in the public sector, a sector whose wages and budgets have declined since 2010 rather steeply. And we have also been picking up where this under funding is negatively affecting other policies that were designed to deal with social problems. The only conclusion is therefore to compare things to pre-2010 and conclude that money has been stripped out.
And it has been wasted. One of the biggest crimes the Tories committed was to halt investment based projects in the public sector mid stream – millions of committed pounds were just thrown in the bin when the Tory bastards came to power in 2010.
There has to be a proper parliamentary enquiry about this and the Tory party needs to be made accountable for it’s nonchalance.
I do hope that if there is a change of government that there is a thorough and far reaching review of exactly what they have been up to. It cannot be business as usual.
PSR – and cash is money IMO too, even though Richard seems to disagree.
In the current world, only two actors create money – governments and banks. The latter create by far and away the largest amount.
I largely agree with your concerns but that doesn’t lead me to misrepresent money in the same way. When Richard posted the relevant Steve Keen podcast you said that you would listen to it. I would suggest re
“only two actors create money – governments and banks”
Not sure whether I understand this fully. Do commercial banks create money? They give out loans, which have to be paid back, with interest. Businesses use their loans for products or services which the public has to buy from their savings, which looks like money redistribution. Overall there is temporary money creation that has to be paid back over the lifetime of the loan.
It looks like Government money is the only new money, as only some of it is taxed back. Public spending is the only way to create money that stays in the economy.
Quantitative Easing does not factor in this, it is only the Bank of England buying (loaning money) to the government, that eventually has to be paid back.
I think banks do create money
But solely under BoE licence
Yes, the vast majority of money in circulation is created by private sector banks (see BoE 2014, Bundesbank 2017)
Richard is correct to note that this is under licence, hence Steve Keen’s joke about if an entrepreneur told him he had “made a million this year”, Keen would report him to the police for counterfeiting – you have to accept his distinction between money supply and money velocity to enjoy that little joke!
I think I’m being pedantic, so having done a little homework:
BoE 2014: https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy
It says that “the majority of money in the modern economy is created by commercial banks making loans”.
So yes, the money has been created (under license), which results in a liability for the bank, and asset (the loan) for the customer. This is sometimes called horizontal (or endogenous) money, created within the banking sector. There is no net money creation as the money that repays a loan “vanishes”.
This contrasts with vertical money created by the government which it spends through the banking system (public spending), but it has no corresponding liability in the banking system, and does not need to be paid back. Money is created until it is taxed back.
There is a good summary here:
http://moslereconomics.com/2010/04/04/tom-hickey-on-mmt/
Correct
Yes and no Ian.
Money is certainly created when the bank makes a loan – it’s recorded in the counterparts of broad money. But yes, there is an important distinction that you allude to….
..when the bank creates a loan there are matching assets (the bank) and liabilities (the customer) that do net each other out*. The money is only destroyed however when the loan is repaid. The difference with government spending is that when the gov gives money to the HHs the latter have an asset but (in contrast to macro teaching) there is no corresponding liability for the private sector. This is key, but rarely understood.
* Wynne Godley’s approach explains this clearly – the only way that the private sector can increase its net financial wealth is by running a surplus against either the government or the RoW.
There is a good question among this for those who don’t agree in money creation. How does the money supply increase?
By government money creation
But now the real question, which is what is the credit? Is it a liability, or is it capital? I increasingly think the latter, which is why John Warren is right: the balance sheet matters
Ian – if you believer that there is not money creation when the bank creates a loan, why does money supply go up?
I agree banks do create money, but this is nit the same as government created money in macroeconomic terms
Indeed, they (banks) create the most money.
The most important difference in my mind is the one I have referred to already. When money is created by banks, there is an asset and liability for the private sector. This is not the case when the government creates money.
…sorry hit the wrong button…
Listen again, especially after minute 21.
I am sure we agree on austerity…
Colin
It is the air and water divide of perspective that will get us to continue to disagree albeit on friendly terms. This is not about winning, it’s maybe about validating what we are experiencing. It is for me.
There is no ‘misrepresentation’ element at all Colin – that is a too strong a word to explain our differences on this issue. It’s all relative I’m afraid. My perspective is driven by anger as a result of seeing and being amongst the tangible results of needs being unmet in an area of society that has born the brunt of austerity, Covid etc.
Keen is right? You are right? And I am right? Maybe that is the truth based on each perspective, where we place our selves in the ‘money system’. Therefore there is no ‘misrepresentation’ as such – we should be heading towards a synthesis of these concerns.
So, over to you Colin.
How would you contextualise from your perspective the austerity policies of the Tory government? How would contextualise the maintenance of out of date budgets in the face of inflation? How would you contextualise the years of no pay awards to public sector staff? How would you contextualise budgets that are below inflation or compare weakly with previous years?
This is not a challenge born of aggression – just a means by which I can understand your perspective – or Keen’s.
Sometimes, perspective is sovereign.
PSR, I fear you are conflating too many things here.
To repeat, I do not disagree with many of your points (eg austerity etc) merely the factually incorrect statement about money being stripped out.
There are certain conditions when that can happen. They have not been satisfied. However, if it helps to make your point to say otherwise then fair enough…carry on.
I’m off to chop some mistletoe..Merry Christmas.
p.s. if you give your postman some money for Christmas has the stock of money gone up or has the velocity of money increased?
In the years after WW2 we had low inflation and low interest rates . Credit was tight but cheap. Then currency was allowed to be bought and sold. This was not allowed under the Bretton Woods agreement the wise men there knew it would bring inflation. Am I right in thinking some of the 1970s inflation was the result of freeing up currency.?
The 1944 Labour Party were of the belief that banking and finance should be the servant and not the stupid master of economic policy. Churchill himself said that bankers should be on tap and not on top.
Ann Pettifor in her book The Production of Money is clear that finance must be relieved of its power over the economy
Ann Pettifor in her book The
Colin
I’ve been a good boy and listened to the pod cast again as exasperated as I have become.
What is plainly said is that the concept of velocity is related to money creation by Government. If there is less money created by Government, it is made up by private bank lending or debt money plus interest. Keen believes that private money issuance should be more tightly controlled.
Private debt fiat money is one of the reasons why we have a very unstable capitalist system according to this discussion and I would certainly agree with that observation. Because it is this debt fiat money that is the real cause of inflation (not wages, as the lie goes).
Since 1979, and the severe rolling back of the state, I still think that government money has been stripped out of the economy. We have seen a growth in the amounts of private debt driving the economy both in the banking sector and household sectors. As governments create less money, the liability for money creation and economic activity falls on companies and individuals. This is all well documented. Yet it’s governments that can actually bear these liabilities more robustly than any of them according to Keen and I agree with that based on the the notion of sovereign money creation.
Since 2010, in the name of austerity government money has been removed again from public services and a whole range of activities (such as remediation grants to release brownfield sites for housing development) have been retarded.
There is no way I am confusing the turnover of money with the creation of money Colin.
What seems to be happening is that the private sector is encouraged to supply more of our money which instead of funding services that we need, goes into new ways to buy consumer goods for profit or to boost asset prices (housing). The private sector is competing with government and government seems happy to take a back seat.
Government thinks that by stripping its money out, markets/the private sector will fill the gap. The result is that public services collapse, people are funnelled to the much more expensive private sector instead or the private sector is reluctant to fill the gap because there is no money in it and need is still unmet (for example building executive style homes generates more profit than starter homes).
So, my contention about stripping money out (government money) still stands and that government is reneging on the liabilities it committed to in the post war period.
And, as long as it continues to do that, it will never command the economy, and be able to deal with some of the very serious problems we face – such as global warming and shocks to supply chains and the like. It’s a recipe for disaster.
Well third time lucky perhaps PSR since you are still not getting it (ie, whether the government has destroyed money) correct.
That said, we agree on the folly of austerity and the fact that if the government reduces its net deficit or even goes into surplus this is (other things being equal) going to result in more private sector debt. In my own research, I make exactly the same point as Keen re the US and Spanish examples he uses.
This is why the current U.K. policy and OBR forecasts are fundamentally flawed. So at least there are some things to agree on!
For what it’s worth, I think there is strong evidence that the public sector is being defunded (per capita, taking inflation into account). The money may have gone elsewhere in the economy, but that doesn’t help the public sector .. as we can all see.
@colin and @PSR, could both statements be correct:
(1) The government has put more money into the economy,
(2) But:
.. .. .. a. Since the population is larger, there is less money around per person
.. .. .. b. Due to wealth inequality, fewer people have a disproportionate share of that money, so public services are indeed defunded
It reminds me when the government was stating (correctly) that it had put more money into education. But the truth was that it worked out at less money per pupil.
I’m not really sure what I am not getting to be honest Colin. Are you sure that it’s not the other way around?
As this discussion has gone on I have refined the concept of ‘taking money out of the economy’ to mean taking money out of the public sector (which is still part of the ‘economy’, otherwise George Osbourne would not have gone about shrinking the public sector contribution to GDP via a dodgy spreadsheet when he was chancellor).
You introduce the destruction of money – which I read as taxation (could also mean saving but I doubt it) – so, given the low taxation our governments have favoured then, by not destroying money though taxation in the creation/destruction process, you could say that there is actually MORE money floating about and therefore money has not been stripped out. It also explains the well known proclivity for our economy to suffer inflationary cycles which get blamed on anything but credit production (and we know who benefits from that don’t we?). That’s a perfectly valid statement to me.
But one of the things I’ve always been consistent about is that for me its about the ALLOCATION or divvying up that money or even the under-taxed money. Where is it going? What is it being used for? And then also, is there enough of it for what is needed?
The Central Bank Reserve Account (CBRA) has been increased since 2008. It is now reportedly generating interest for the private banks too (generating even more money into the economy arguably – but what part of the economy Colin?). So the banks have a cushion to spend even more money into the economy at risk and guaranteed by the government which they will take advantage of when the bonfire of safe guards the Tories are planning happens. Yes – that will be EVEN MORE money into the economy as well. But WHERE? For what use?
It’s not just a folly of austerity – it’s where money is going, what it is being put into. And it is not the NHS, or other public services at anywhere near the levels it should be or where it is needed the most. Look at the subsidy of the railways. Our railways get more subsidy in their privatised state than they did when they were state owned. And where does it go? It certainly is not going into the pockets of workers. And the government client wants to cut more jobs in the name of ‘efficiency’ but likes talking about levelling up and ‘highly paid jobs’.
When people tell me that money has not been stripped out or that there is some sort of bigger picture we should all be aware of I become very sceptical about that because out here and as a public sector worker the perception is that money is short – there is not a lot of it around. My LA is about to curb its much needed affordable housing development programme because it faces more cuts on its budgets and they are shitting their pants – they’re virtually bankrupt. The general fund of my LA is on its knees – no it’s ankles. The housing revenue account is literally propping it up and is being depleted as it does so.
Whether there is actually more money in the economy or not, it all depends on where it ends up and if enough to thrive has been allocated. And in my sector of the economy it has not. And that is a fact irrespective of whatever your view is on the amount of money in the economy. Money is not being allocated effectively – to the right areas and in enough quantities compared to what has been happening from the post war period. This last 12 years has actually been a continuation of government retrenchment from the mid to late 1970s if not before. It’s an ongoing process the Tories have decided to finish and it involves taking money out. It’s the effectives of money mis-allocation or under-allocation.
Colin – there is a feedback loop in other words. I’d be happy to hear what Steve Keen thinks about that. The feedback loop is at the coalface. Its at the end of line. It’s foodbanks; long housing waiting lists; poorly designed benefits systems that punish work by removing benefits too quickly for every pound earnt; it’s longer waiting lists at hospitals. I could go on. None of this is about thriving.
As we’ve discussed here many times, this is a rich country. But the allocation of those riches is a joke. And the public sector part of the economy has been stripped out – and had it assets stripped out too. I hold my position Colin. But I think I’d rather talk to Steve Keen now if you don’t mind. And I’m going to.
Ian Tresman
Thank you for jumping in – I must be getting on people’s nerves. It’s Christmas after all. In answer to your well-meant comments:
1. If we are going to say ‘more money’ – then compared to what? What year(s)? How much? The key is as Clive Parry said recently, Is it enough.? That’s the salient point. Cast your mind back. When social security was set up during Attlee’s government there would have been a mindset that did not see this as a problem? Because they knew they could print the money from a newly nationalised central bank (and pay off the debt to the US for war materiel too). Somehow, that capacity for government to pay has been forgotten or should we say, swept under the rug on purpose by Neo-liberalism and bad economics. That’s because Attlee’s was a government of ideas and not a government of no ideas as we have now (and potentially also with Keir Stymied at Labour).
I think that this also extends to your points 2 and 3. How a government can plead that it has been caught out by population growth is beyond me, since it is government departments that collect data births and deaths. And for people to say that government finance causes inflation when its only got to meet the needs of most ordinary people and not millionaires is a joke. Where Government may contribute to inflation is by not collecting taxes and padding out the CBRA with more money guaranteeing dodgy private bank investment – or should we say credit issuance that extracts rent.
All government has to do is make sure its benefits and pay are in line with inflation, if not slightly above and that its budgets to the services it committed to in 1946 are also in line with inflation. And if they don’t like inflation – then sort out taxation, sort out the private banks as Steve Keen suggests – stop running what has primarily become a bloody rentier economy for goodness sake.
Merry Christmas Ian.
PSR, I do not doubt that you will hold your position. That’s your choice, as I said before. Enjoy the conversation with Steve. I hope he is able to help you better. Merry Christmas…
Ryan Bourne in The Times on Wed https://www.thetimes.co.uk/article/the-year-that-killed-off-economic-daydreams-of-both-left-and-right-hgk2cqjp3
is complaining that Modern Money Theory (MMT) has failed. I think he’s making the following incorrect assumptions:
1. Quantitative Easing is MMT-style “spending” (“MMT would reject the bank funding/lending channel since it is premised on reserves driving loans and deposits.”) https://gimms.org.uk/fact-sheets/quantitative-easing/
2. Inflation is caused largely by spending, when it is due to resource shortages, and public services are actually being defunded
3. The opinion piece conveniently forgets 12 year of Tory policies.
I think he’s looking for a scapegoat.
Agreed
But Bourne is Tufton St of origin remember
They need excuses right now