I posted this video on YouTube this morning:
The transcript is:
People keep saying to me that modern monetary theory says that governments can create money without limit to spend on anything they like and there will be no economic downsides from doing so. I've got to tell you, that is complete and utter nonsense. Anybody who really understands modern monetary theory will say that is nonsense as well.
The person who says that more loudly and more clearly than anybody else that I know is Stephanie Kelton, the author of ‘The Deficit Myth', and she is absolutely adamant that that claim is wrong. So don't believe anybody who promotes the idea of modern monetary theory and spouts this sort of nonsense because they are wrong.
Let me explain what the real limits in modern monetary theory are.
Of course, the government can always create more money. There is no technical constraint on that. After all, all it has to do is go to the Bank of England and say, “will you please increase my overdraft?” And because it owns the Bank of England, the Bank of England will automatically say yes.
The government could, as a consequence, try and spend that money into the economy. But - and this is an enormous but - it won't if it's wise if there is nothing for it to spend that money on. In other words, if there is already full employment, or we are already at our physical limits with regard to the capacity of the economy and the environment to expand without causing harm, like climate change.
So, of course, there are limits on what the government can do, however much money it can create and MMT - modern monetary theory - recognizes that fact and says the government can spend until it reaches the limits of full employment, and I would add, the limits of environmental change, or rather the limits that environmental change impose upon us.
That's the reality of what MMT says.
This totally changes the understanding of MMT. Instead of being utterly indifferent to inflation, which a lot of conventional economists say it is - because some people who promote MMT say the government can spend without limit and without consequence, which is wrong - modern monetary theory is actually all about controlling inflation, subject to also achieving full employment. within environmental constraints.
So, MMT is the economics for the 21st century because we need full employment - because people want to work at living wages - and MMT could deliver that.
And we need to do so within environmental constraints because we know they are real now, which we never did last century.
So, therefore, MMT provides us with the framework in which we can make the decisions that we need, knowing that the government can always provide the money, subject to those limits.
But never believe anyone who says those limits don't exist. They're talking nonsense. MMT is about economic responsibility and working to use the resources of the world to best effect, knowing that money can be found to mobilize them if they are available. But it's not about reckless spending, and never has been and never will be.
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What if spent we the money outside of our economy, what would the constraints be then?
I would guess that the constraints would be based on the ability of the recipient country to absorb or use that extra money, and that any negative effects that occurred if they could not absorb the extra money would be felt by the recipient country.
In which case why wouldn’t we create lots of (but not infinite) money to give as foreign aid. Or create billions to spend on solar panels from China, or drones from Turkey or missiles from America (to give to Ukraine) or whatever? Especially if any negative effects of spending too much would be felt by someone else (obviously it’s more important to avoid this with foreign aid).
My theory is that it has to do with money supply. We can create Stirling, but to spend that abroad we have to convert to (say) Dollars. The Stirling that we created doesn’t dissappear (although I don’t understand where it goes), and so it will keep sloshing and circulating around our economy (not the recipient’s), potentially causing inflation not by increased government spending within our economy but an increase in the amount of our money in our economy.
Am I anywhere near the right answer??
Nowhere near
If we over create sterling to spend abroad the exchange rate declines. That’s it.
And I think you need to do a lot more reading about the nature of money. It never ‘sloshes’ around
THIS COMMENT (I AM TRYING TO AVOID THE WORD NONSENSE, BUT THAT IS WHAT IT IS) HAS BEEN POSTED BY SOMEOINE WHO HAS NEVER BEEN HERE BEFORE. I HAVE DECIDED TO REPLY IN POST IN CAPS AS THAT WILL MAKE MY LIFE EASIER
This is a prime example of why no-one outside of a few hardcore MMTers takes MMT seriously.
You say you explain what the limits on MMT money creation are, but then give vague moving targets. You say a government won’t spend “if it’s wise if there is nothing for it to spend that money on.”
DO YOU REALLY THINK THE WORLD PROVIDES FIXED ECONOMIC TARGETS? WHAT WORLD DO YOU LIVE IN?
Yet there is almost always something to spend more money on. Not only that but the “limits” you describe are so general as to be meaningless. What do you define as full employment? Many would say we are there now with unemployment under 4%. What are the physical limits of the economy with regard to the environment etc?
HOW CAN 4% UNEMPLOYMENT BE FULL EMPLOYMENT? IT IS NOT. FULL EMPLOYMENT IS FULL EMPLOYMENT.
How do you even define such things, let alone control money printing based on them? Do you think politicians will always be wise, or do you think they’ll keep spending more money to buy votes for the next election?
I THINK POLITICIANS CONSIDERABLY WISER THAN THE LEADERSHIP OF MANY COMPANIES. THEY HAVE DELIVERED MUSK AND TRUMP, AND CLIMATE CHANGE. I ACCEPT THOSE POLITICIANS WHO THINK MARKETS WORK MAKE MANY MISTAKES. MOST OF THE REST TAKE THEIR RESPONSIBILITIES VERY SERIOUSLY
MMT also has no theory of inflation. Originally it claimed that there would be no inflation until the capacity of the economy was met. This has obviously been shown to be nonsense, so the claim has quietly been dropped. MMT still doesn’t provide an explanation as to what it would do about external inflation shocks and their second round effects. Nor does MMT have a great deal to say about how inflation would appear in an economy once money printing does start. It basically ignores it, then claims it will raise some taxes to control inflation, but never goes into any detail about which taxes and how much they would need to be raised.
MMT IS A THEORY OR INFALTION ABOVE ALL ELSE. IT SAYS GOVERNMENTS AS A MATTER OF FACT PRINT MONEY EVERY DAY AND UNLESS YOU TAX IT OUT OF USE THEN YOU GET INFLATION. THAT IS ITS CORE ARGUMENT. HAVE YOU EVER READ ANY MMT?
WHAT MMT DOES NOT SAY IS THAT SPECULATIVE MARKET FAILURE CANNOT HAPPEN – BECAUSE IT CAN – AND DELIVER INFALTION. WHAT IT DOES SAY IS THAT THIS PASSES WITHOUT INTERST RATE RISES OR AUSTERITY. SPECULATION FADES AWAY.
One often overlooked problem with MMT is it’s treatment of money theory. The accounting identities MMT relies on require money to be endogenous. Yet then when it comes to actually printing money MMT relies on that newly printed money have intrinsic value, which would be exogenous. It can’t be both.
MMT PROVIDES ITS OWN THEORY OF MONEY – BASED ON ITS VALUE IN EXCHANGRE CREATED BY THE REQUIREMENT TO PAY TAX USING IT, REQUIRING THAT IT BE USED AS THE MEDIUM OF EXCHANGE. IT NEVER CLAIMS MONEY HAS INTRINISIC VALUE OF ITS OWN. YOUR CLAIM IS JUST WRONG.
MMT assumes that everyone wants the currency they print and are forced to own and accept it. The reality is though that if people expect the government to keep printing that money then they will either want more of it to supply their goods and services or not hold their balances in that currency.
IF YOU DON’T WANT YOUR STERLING SEND IT MY WAY. I WILL FIND A USE FOR IT. I KNOW YOU WON’T BE SENDING IT. YOUR C,AINM IS FALSE. AS IS THE CLAIM THAT ANY MMT GOVERNMENT WOULD JUST KEEP PROINTING MONEY AND NOT TAX IT OUT OF EXISTENCE. IN OTHER WORDS, YOU ARE TALKING NONSENSE
Fiat currency has no intrinsic value but MMT essentially claims that printing more of it makes you richer.
IT DOES NOT. NEVER HAS. NEVER WILL. WHY TALK NONSENSE?
MMT claims that taxation provides the anchor for the value of the currency as people are required to pay their taxes in that currency, but this again is too simplistic. Taxpayers don’t have to hold their money in that currency until they pay their taxes, and a net importing country would still have to find sources of foreign currency. That, or if you were to totally sterilize any MMT money printing through taxation you would need to tax essentially the same amount printed. At which point it becomes the same as regular old tax/deficit financing.
NO ONE IN MMT EVER DENIES THERE IS A RELATIONSHIP BETWEN SPENDING AND TAX. THERE IS. BUT IT IS THE REVERSE OF WHAT YOU CLAIM. AND THAT CHANGES EVERYTHING, JUST AS ITS UNDERSTANDING OF GOVERNMENT BORROWING CHANGES EVERYTHING. AND AS A MATTER OF FACT, IT IS INCREDIBNLY HARD TO HOLD MUCH FOREIGN CRRENCY AND PEOPLE DON’T DO IT. AND OF COURSE DEBTS HAVE TO BE SETTLED IN OTHER CURRENCIES SOMETIMES. MMT HAS A COMPLETE THEORY ON EXCHANGE RATES.
MMT also thinks that the natural rate of interest should always be zero or near so. Regardless of inflation, totally ignoring real rates. Which in itself is quite insane. What do you think people will do if inflation is high and rising – thanks to the government printing ever more money? Sensible people would use the opportunity of negative real rates to borrow as much as they can and either buy real assets or simply move the money offshore where they can get positive real rates. The finance industry would do this in such unimaginable size the currency would be crushed. Just look at the Yen as an example of what happens when real rates are too low.
THE NATURAL RATE OF INTEREST IS NOT IMAPCTED BY INFALTION, YOU DO KNOW THAT, DON’T YOU? THIS CLAIM IS BASED ON SUCH ABSURD ASSUMPTIONS THAT I SEE NO REASON TO ADDRESS IT. IT IS BASED ON RIDICULOUS CLAIMS ABOUT BEHAVIOIR IN A DEMOCRACY THAT WPULD NOT HAPPEN
I could go on pointing out the many flaws in MMT but as others have said it’s like playing Calvinball. I doubt Richard Murphy will answer (or be able to) any of the points i’ve raised. I’m expecting bluster and invective, put it that way.
It’s proponents will always claim that people don’t understand it (they do) or it has never been tried (most of it’s policies have been tried. Turkey most recently. Unsurprisingly it was an abject failure).
TURKEY ‘As of end of February, the currency breakdown of short-term external debt stock composed of 51.0 percent US dollars, 22.2 percent euro, 10.8 percent Turkish lira and 16.0 percent other currencies.’ THAT IS EXACTLY WHY MMT WOULD SAY IT IS IN SUCH TROUBLE. IT IS DOING THE EXACT OPPOSITE OF MMT.
Really, at it’s core, MMT isn’t anything new. It’s a re-mix of chartalism and functional finance with a simplistic claim that governments can spend without limits and no potential downside. It’s a fantasy world political dogma, not a serious theory. Unsurprisingly the world has treated it as such, only to be labelled as “neoliberals” by MMTers.
YOU ARE RIGHT – MMT IS NOT NEW. IT JUST EXPLAINS HOW THE ECONOMY ACTUALLY WORKS. YOU CAN’T.
I’d almost kind of like a country to employ Kelton et al as the advisors to their finance ministry and to try MMT “properly” (when people have tried it and it has failed it’s never “real” MMT, much it’s never “real” socialism that fails….) just so we could finally put this to bed and have the MMT crowd shut up and stop lying to people about how their government could provide everything they want almost without limit, at no cost to them.
MMT HAS NEVER SAID IT EXPLAINS HOW A GOVERNMENT CAN DO ANYTHING COSTLESSLY. THE STUPIDITY IN SHOW HERE IS ALL YOURS. DO YOU ALWAYS MAKE THI8S MUCH OF A FOOL OF YOURSELF?
APOLOGIES FOR TYPOS – I CAN’T BE BOTHERED TO CORECT THEM
Fine response. If I may, I’ll pick up on one of the points made by “David”.
“Do you think politicians will always be wise, or do you think they’ll keep spending more money to buy votes for the next election? ”
This is a discussion I have in Euroland. The 2007/2008 crash exposed the insanity of politicos (Spain, airports built but never used etc). Talked with a guy (economist) involved with eastern Europe. We agreed that at least for the Euro-zone a project-based approach to spending could be used – with orgs such as European Investment Bank being the funding and filter (sort the good from the mad) for gov projects. Money from the ECB (money for bonds). Does not happen (of course). I question the capacity of many (most?) politicos to even have a basic understanding of the political economy/macro-economics. I’ve even spoken to some – depressing. So, I’m not convinced about their wisdom cos many don’t have even basic knowledge to be wise about. But. MMT is, currently, the best description we have on government, money & taxes. I sense from “David’s” responses that if MMT (with all the caveats you mention) were adopted he would – lose. Dommage
@ David. Two items to educate yourself about MMT and stop you creating irrelevant straw men:-
https://www.levyinstitute.org/pubs/wp_996.pdf
https://www.youtube.com/watch?v=LGlqnHTBP3I
I responded to Richard Murphy but he hasn’t replied yet. I await his response.
ED NOTE:
One of the moderation rules of this blog, which I do publish, is that no one can return and repeat their false arguments for a second time. You did, David, and clearly intend to do so again, as a result of which you are now blocked, simply because you make false claim, after false claim, after fasle claim, all of which I have refuted, none of which you recognise, and as a consequence, I will treat you as a straightforward troll.
I completely agree.
In current circumstances the question is whether there is capacity in the economy to do what is needed.
Does anyone really (really) think that, to take a minor example, our country, the fifth or sixth biggest economy in the world, can’t fix the pot holes in the roads (and much else besides)?
Of course we can!
The country has a lot of capacity to do much more. It can be done!
We do have spare human resources. There is a lot of underemployment. But, as per a previous reply, there have also been vast numbers of false economies over the past 14 years (and longer). Unwinding these pernicious false economies can provide a great deal of real resources to do what is needed.
We gave the resources.
We also need a government willing to reallocate resources to meet needs.
Some interesting comments on some of these short videos on YouTube, often suggesting that politicians cannot be trusted to spend money wisely, so that the essence of what you are saying is dismissed.
In some cases it’s just a lazy way of disagreeing with you on principle, as there is a liberal sprinkling of trolls.
But it’s not easy to rebut that sort of cynicism, when we know how politicians have spent their / our money lately.
I admit I simply do not ahve time to deal with these comments
But then, I am not much interested in engaging with people who think that way
Can politicians be trusted?
In the UK, the idea that politicians cannot be trusted regularly arises whenever there is an indefensibly incompetent and corrupt Tory government. At that point the Tory media decides that their best bet is to start pushing the idea that all politicians are the same,
The Tories may be rotten but so are Labour/Lib Dems/Greens/SNP/Plaid Cymru/etc, therefore the rottenness of the Tories is no reason to vote for anybody else.
The most extreme example of the success of this kind of propaganda is the execrable Donald Trump whose obvious corruption is seen by his Evangelical Christian supporters as a sign of his authenticity.
Agreed
https://youtu.be/3iKtKhyFahQ?si=G5Y6RdV-9ldTl3qS
2 minute Clip at 1.04.48 – head USA money honcho tries to explain how the government prints and borrows money
Its a pity that people like ‘David’ ( Michelangelo’s?) above can’t discuss without indulging in immoderate and vituperative language.
Im sure I havent fully thought through and/or understood all the issues around money creation, currency exchange rates, international comparative interest rates, trade deficits/surpluses and imported inflation etc.
But a reasoned discussion, further explanation, and querying are whats required .
You would have thought that after the disaster of the last 14 years of neoclassical orthodox austerity – there would be at least a hint of humility from those asked to consider whether there may be a better way.
You would have thought that….
MMT is nothing new, it’s simply Government creating more money to spend. As we have seen in numerous countries, too much Government money creation ends in tears and hardship for the general population.
And you are right MMT, does affect the rate of inflation, a country’s credit rating and exchange rate of sterling.
Yet more utter gibberish, because none of this is what MMT does, as I have explained
Excessive spending (as MMT seeks to encourage) will certainly impact inflation, a Country’s credit rating and the value of the currency I.e. exchange rate.
To suggest otherwise is just a blatant lie.
But that is not what MMT ever suggests
If you gave to resort to lying why bother to post here?
MMT says the government can spend without limits (because it issues the currency), but it shouldn’t.
The constraints on spending are resources: e.g. materials, labour, energy
If resources are scarce then inflation goes up.
If resources are not fully utilised then the economy is failing.
So the rate of spending has to be controlled in order to keep the supply of resources optimum.
At the moment, spending is way too small, even though the money is available. The economy is stagnating, people can not afford to spend.
Resource are not being managed appropriately.
Probably the best book on the subject is Stephanie Kelton’s The Deficit Myth (£6 paperback, £5 Kindle) https://amzn.eu/d/gWlkEaQ
Correct
Those who argue otherwise are literally making up their claims
The fundamental objection to MMT is that governments won’t be able to resist spending more is prudent in order to gain short-term political advantage. According to Hayek in ‘The Road to Serfdom’, excessive government spending will inevitably lead to totalitarianism, which is also complete horse****. Starting with Adam Smith et al (who were all basically just lobbying on behalf of the capitalists), we therefore concocted a fairy story about a revenue-constrained government which has led to a set of conventions, which try to force the government to behave like one.
Because of this distrust, they also try to de-politicise the economy and put banking technocrats in control. And that’s ended well, hasn’t it?
I’m not an economist. I am a scientist. A proportion of the science I deal with benefits from mathematical models of often quite complex systems. You can make lots of what-if enquiries of such a model and thereby gain insight into the system (subject, of course, to the assumptions of the model).
I read an article by one economist who says X prevails. I read an article by a second economist who says Y prevails – quite different from X. I have the view that if there was an economic model in general, public use (or perhaps a very small number of models), we could test out the contentions of economists and move discussions forward a bit. Of course there would still be arguments, but there would be something available for public view that we could poke a stick at.
(Like your blogs a lot.)
I have no problem with maths. For many reasons, it can be a fundamentally useful tool. It most certainly is in science, and engineering. It can also have a role in accounting and economics. So I am not criticising maths, as such.
What I am criticising is maths that is used to achieve the particular purpose that neoclassical/neoliberal economists use it for. Instead of using maths to try to explain the observed phenomenon of the world, which is what I think science does, for example, they create mathematical models from which they derive prescriptions seek to change the world to conform with their assumptions.
It is this distorted use of a faux mathematical methodology to them with which I have problems. That is why I am not sure that your suggestion would work, unless we constrain the modelling so that it cannot be used in this way.
Everyone forgets that, MMT or not, government deficit spending is equal dollar for dollar to non-government surplus. That’s the way money is created in a fiat monetary system. Our assets come from accumulated government deficits.
A lot of dense people in the UK who can’t work out where the money came from to bail out the banks and the economy from the effects of Covid. Furthermore they then go on to argue if the UK government could create its own money it wouldn’t spend it wisely. I don’t really think you can call the country a democracy when so few bother to make the effort to think!