There is a stock criticism of Modern Monetary Theory (MMT), or modern money as I would rather call it, that goes something like this:
MMT says a country can print money and everything will be fine — even with trade.
This is wrong. And it is wrong because it misunderstands what MMT is for. MMT does not say that trade doesn't matter. What MMT says is that money isn't where the trade problem lives.
First, let's be clear what money is. It is:
- A measure of value, or representation of claims owing within a monetarily denominated economy,
- A means to facilitate exchange, and
- A supposed store of value, although I have good reason to question that, because this seems to me to be nothing more than a special case of the measurement of value.
To attribute significance beyond these characteristics to money is inappropriate, and since MMT is about money, to look within it for answers it cannot supply is always going to lead to disappointment.
That said, there are real issues around trade where MMT can help point to answers required if problems inherent within that issue are to be addressed.
First, it is essential to realise that trade is real, and that money is a means of valuing and recording it. These are not the same thing.
Imports are real resources coming in. Exports are real resources going out. What we call “the trade balance” is simply the record of those flows.
But, and this is the critical insight, MMT insists that we do not stop at the record of those flows. What it says we must ask is, why do those flows look like this? In other words:
- Why do we have a trade surplus or a deficit?
- Why do we have movements in the exchange rate as a result?
- And why do we not have that movement if we might otherwise expect it?
These are the real questions. They ask about the real issues that underlie trade that need to be examined. MMT, in other words, is not just a scoring system. It is a way of interpreting the data the scoring system gives us, and of then deciding what matters.
So, what does MMT see when it looks at trade? Four things stand out:
- First, real constraints matter: production, skills, energy, technology. A country that cannot supply what its people need will face trade stresses, whatever the exchange rate.
- Second, a floating currency is a pressure valve. It reveals economic weaknesses rather than hiding them behind a fixed exchange rate that ultimately collapses. It is much better to have a safety valve than an economic explosion or meltdown.
- Third, power dynamics matter. Access to essentials like food and fuel is determined by international relationships, and not by how much sterling is available for trade in financial markets. MMT insists we look at the real issues
- Fourth, markets need discipline. Speculation against a currency is politics by other means. MMT demands that finance serve trade and not the other way round by highlighting this fact, for example, by requiring that issues like hot money flows be looked at as well as trade.
So what does this MMT perspective change? I suggest that it changes the story entirely. Mainstream economists start with money, saying things like:
If the exchange rate falls, the country is failing.
MMT begins with an analysis of production and power, saying, for example:
If the exchange rate falls, what is failing in the real economy that has made this happen?
MMT doesn't solve the trade problem, but it does demand that we diagnose it, and it tells us where to look by asking, for example:
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Why do we import so much energy?
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Why have we abandoned industrial strategy?
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Why do we let speculative financial markets dictate our exchange rate and national priorities?
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Who benefits when we hollow out our productive base?
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Who loses?
My suggestion is that the interpretations that follow lead to better choices than anything that conventional economics offers, at least in the hands of most commentators who ever get to be heard in the media, in politics or anywhere else.
MMT does, in fact, refuse to let panic in the money markets drive policy. Instead, it asks whether the nation can marshal real resources to meet real needs. And if it can't, what it then makes clear is that the problem that must be addressed is not to be found with money. Instead, the problem has been created by:
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Political choices about what we produce.
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Failures to invest in capability within the economy, in all its forms.
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Structural power imbalances in global trade, and
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The capture of markets by speculators, not producers
In short, MMT does not tell us what to think about trade. It tells us how to think about trade. It says:
- Look beyond the movement of money.
- Look at what the data is trying to tell you.
- Trade balances are the symptoms.
- Issues in the real economy are the causes.
MMT then directs us to the causes, and it is that shift, from blaming the currency to understanding the economy, that is why MMT's contribution to the understanding of trade is powerful, necessary, and long overdue.
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What you have written, along with basically all of MMT, is nonsense.
The only thing true about MMT is that governments CAN print money. Not that they should or what the effects would be.
What do you think the effect on inflation and the pound, let alone thing like trade and fiscal balances would be if you started printing money?
Not only would you have to fund the £120bn odd budget deficit, but refinancing would also become essentially impossible. No-one is going to buy bonds with rates set to zero and inflation likely to spike. So you can add another £180bn a year immediately, before you get to spending any more on anything else.
International investors would flee, dumping the value of the pound even further, probably forcing even more money printing to purchase the Gilts the sell, which is currently around 35% of all Gilts.
No-one would hold any Sterling, as the government would be printing huge volumes of of it. Despite what you say, taxes would never be able to go up high and fast enough to counter any inflation as you claim. There isn’t the political will, let alone the idea that even the tax rises in the last two budgets have seen the governments polling crash. Yet you would need to raise taxes multiple times more.
Wealth, investment and people would flood out of the country.
MMT is simply a recipe for economic crisis. Which is exactly what has happened every time countries have tried to print money.
I think you know this, which is why you are desperately trying to defend this with more pieces about MMT trying to gloss over the many problems, but are so wedded to this completely lunatic “theory” that you are now stuck.
Two things. First, it’s not that government can print money – as a matter of fact as central banks confirm – the only way it ever pays for anything is by printing money. So you have written nonsense from beginning to end.
And you ignore the role of tax.
And you are writing drivel about the quantity theory of moeny, which I have dismissed this afternoon. Why did you waste your time?
It is extraordinary that people who clearly don’t have even the slightest understanding of MMT spend so much effort trying to debunk it.
I actually spent the afternoon delving into criticism of MMT from all sorts of critics, and I have to say I was surprised at how bad most of these critiques were. I would be embarrassed to publish anything trying to “debunk” a theory if I understood that little about it.
I have wondered whether I am missing something about MMT given the orthodox criticisms, perusing the critiques makes me much more confident I have not. They really don’t seem to understand.
There is much more coming on this issue. I have not really had the quiet day I promised myself.
MMT describes how the system works now. Even the Bank of England has explained how commercial banks ‘create’ the money they lend. Or perhaps to be more precise, create credit. Are you suggesting that the BofE itself does not understand how it works? Maybe go and read what they have published.
Money in the form of credit and debt is overwhelmingly digital so even the reference to ‘printing money’ betrays a very outdated understanding of how the monetary system works. It’s a sad reflection on most economists and denizens of the City that they cling to the view that the sun goes round the earth. Partly due to ignorance and partly due to their own agendas. Cui bono.
As Richard has frequently explained, the ability to create money as per MMT is not an excuse for infinite expenditure from a bottomless well, leading to a Zimbabwe or a Weimar republic. As some of Corbyn’s more naive followers tried to argue. It asks tough questions about how a country’s resources are being used and how best to use tax.
And Keynes worked it out a century ago.
Thanks
Oh dear, EK.
As any government bond trader will tell you – MMT is just a statement about the way money works. It is correct and politically neutral.
What MMT does NOT opine on is the wisdom or otherwise of “printing money”…. and Richard is at great pains to point out that MMT does not solve anything – hard choices are still required.
What MMT DOES do is broaden the range of choices available to policy makers.
The key is to get policymakers to choose wisely.
Thanks
@EK
You are right that MMT only says that governments can print money, not that they should do so.
However, the ONLY way (sovereign) governments pay for anything is by printing money. That’s what several major central banks say. If the government doesn’t print money it can’t pay for anything – not a great scenario.
Let me assume that you simply expressed that poorly, that you really meant that governments should not print money in excess of their tax receipts and deposits they receive through bond sales. Well that’s not true either. Firstly governments can, and do, create large sums of money, £100’s of billions, from time to time and the economy doesn’t collapse. For example, a lot of money was, necessarily, created during great financial crash (2008) and during the pandemic. Secondly, governments need to create money to offset the effects of inflation; if they didn’t the total value of money in the economy would eventually decrease leading to deflation.
You are mistaken when you say that “economic crisis […] is exactly what has happened every time countries have tried to print money”. The above comments clearly show that does not necessarily happen. More to the point, it is spending money, beyond the real capacity of the economy, that can cause problems. It is not creating money itself. You can spend more money, if the economy is below capacity, without causing inflation.
But why, you might say, would a government create money if it wasn’t going to spend it? Which is my third point about money creation. The government needs to create money to offset savings. Saved money is, generally, “dead money”, i.e. does not circulate in the real economy. So if it is not offset again it would, again, eventually lead to deflation.
Finally, government bonds might reasonably be thought of as a form of money since they are easily converted to cash. The only substantive difference between bond sales and direct money creation is, then, that bonds pay interest. So, by selling bonds, governments are, in effect, creating money. The usual problem with bond sales is that the government sells too many and is obliged to pay too much interest, it’s not that bond sales, creating money, itself causes inflation.
Money creation is necessary, occurs every day in a modern economy, and does not necessarily cause inflation.
But isn’t Trade the key element that Steve Keen says MMT has got completely wrong…? Or is it that it still has something useful to say on the subject, despite having got the fundamentals back to front…?
Steve says Warren Mosler got trade wrong – and he did – absolutely wrong.
So I have explained what it could get right.
That is how ideas develop.
Steve Keen and Stephanie Kelton were involved in a panel discussion at the YourParty conference today called “Economy for The Many”.
A recording is online here: https://www.youtube.com/live/-755kRtHWdw?si=i6C7eqq-9HLSoo63&t=9339
The session lasts about an hour.
Thanks
It would be ironic if Your Party ended up being more open-minded and receptive to MMT than the Green Party.
Your Party would have at least two positions on MMT right now.
Seems to start around 2.40, to save a lot of scrolling
Might it be that, at most, money is only a tertiary resource and so profoundly different in its essence from primary resources such as food and fuel and from secondary resources such as services?
Might the domination of money in socio-economic discussions and pronouncements be connected with its apparent simplicity, the emphasis put on it by some economists, much of the main stream media, the majority of the citizenry and so many politicians?
Might the minimalisation/avoidance of deeper socio-economic education be another factor in the distorting domination of money?
Might it also be the case that many dislike the necessary emotional discomfort of changing a “deep belief” and some do “very nicely thank you” from the (currently) dominant, attributed role of money?
I think you undertand my argument.
Yes, I get this, the key terms being about the tangibility of what we get from trade versus the less tangible means we use to pay for it.
So, economic orthodoxy has the power relationships all wrong which is basically nothing more than the financialisation of complex and nimble trade agreements.
This invites all sorts of crimes against money creation and allocation that can cause untold harm to the domestic economy. There is this term isn’t there about your money ‘working hard for you’. Well sometimes there are places where it should not be working at all.
Because the real hard work is about negotiating, agreeing, compromising, creating proper industrial policies, dare I say cooperating even, about trade.
I am struck by the fact that for all the hero worship we have over wealth, just how lazy and narrow minded the emphasis on money and making money out of money makes people?
This post is a real eye opener.
Thanx.
Thanks