# Modern Monetary Theory

Discussion in 'Business & Economics' started by Seattle, Mar 24, 2019.

1. ### SeattleValued Senior Member

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This seems to be getting some traction. Why, I can't quite fathom. Politically, some of its proponents raise some valid points but as an economy theory it's got some fatal flaws.

Are there any proponents here?

3. ### synthesizer-patelSweep the leg Johnny!Valued Senior Member

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I'd be interested to hear what you think the fatal flaws are - I've only just started to dip my toes into the theory, but most of the critiques I've seen of the theory are strawmen - i.e "MMT says we can print infinite amounts of money and it will have no negative effects on the economy" - which is not what MMT says at all.

At it's most basic level MMT is simply a description of how money and sovereign debt work in relation to the issuer of the currency that the debt is denominated in - and every single central banker in the world agrees with that description -including economists/central bankers who unironically reject the theory - so in that sense MMT is 100% empirically solid.

There's also the argument that we are in fact already doing MMT to some degree.
No one, least of all conservatives, really care about debt and deficits (unless they are not in power and they are using it as a stick to beat the opposition with) - MMTers would therefore argue that if we are just going to deficit spend like drunken sailors on a 2 day shore leave anyway (hopefully with less dead hookers than your average republican convention) - and the dire consequences that we are continually told will result of doing so stubbornly fail to materialize - lets use the deficit spending for something more economically productive than simply funding tax cuts for the wealthy.

In general I think that most of the pushback towards MMT comes from political resistance to the ways that some of it's proponents propose to utilise it - like infrastucture investment, universal healthcare, and job guarantee schemes - instead of tax cuts for the wealthy - instead of from a genuine critique of the economic theory itself.

I'll leave with a podcast of one of my favourite economists Mark Blyth discussing MMT with one of it's main proponents Stephanie Kelton which describes the theory and blows away some of the strawmen.

5. ### SeattleValued Senior Member

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I think MMT creates the strawman and then knocks it down. They say the opponents (which is pretty much everyone) claim that all they want to do is print free money forever and that they (MMT) think it will have no negative effect.

MMT says, no that's just misunderstanding our policy, our policy is more nuanced than that. They say that you can spend, more or less, all the money you want as long as it is for productive things. Inflation is when you are spending beyond the productive stage.

If you need free education and healthcare for all, roads, other infrastructure, retirement safety nets, those are all productive things and if you need it you can spend money on it. They say if you spend too much forever of course that will be inflationary but they say we don't propose that.

They do, more or less, propose that though. They also take the current reality, which is a ticking time bomb and instead of fixing that problem, they say it's not a problem. We know that there are structural reasons that the U.S. can get away, for a while, with incurring the debt that we are incurring. A lot of it has to do with the US dollar as the default international currency. Brazil can't follow MMT and get away with it. The U.S. can't either forever.

It's like having your cake and eating it too. It's taking a current bad habit (excessive debt) and just saying it's not a bad habit. Don't direct it toward the rich and the military but instead of just not doing that and making the economy stronger they say to continue the bad habit of incurring debt, just use that money as Bernie Sanders wants and give a free lunch to his constituents.

No matter how you try to disguise it, at the end of the day it's inflationary and won't work. MMT is usually short on examples and instead they just say that everyone misunderstands what they are saying.

Literally they are saying that the government can spend as much money as it "needs" to. There are no examples of this working out anywhere. It's like Marxism, Communism in the sense that whatever the theory is, it never works in reality. Economic "equality" of outcome doesn't work. Everyone isn't the same and unless you shrink the economy to some base amount (thus making everyone poor) you won't have equality of outcome.

7. ### synthesizer-patelSweep the leg Johnny!Valued Senior Member

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OK I get what you're saying and for the most part I think it's kind of a reasonable expectation - although it does seem that you've kind of gone where I predicted in terms of your objection being more of a political one than an economic one.

Can you clarify something in what you said above in the passage I've quoted though please - what is it about excessive private sector savings that is a bad habit? How would reducing private sector savings by (presumably) putting the private sector into deficit make the economy stronger? that seems counter-intuitive to me

8. ### SeattleValued Senior Member

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I'm hesitant to compare governmental budgeting to an individual's budgeting but it seems helpful in this case. Your argument is similar to saying why should I pay off or keep my credit card balance low because that will mean I will have less cash in my bank account and surely it's better if I have more cash.

In your scenario there is private sector savings only because the government is not being fiscally responsible over some time period.

Sure there is a balance between taxation and government spending and therefore debt but it's just that, a balance, and not all taxation or no taxation. You seem to want to ignore the responsible part. The government can do anything as long as tax payers are willing to pay for it. They will not be willing to pay for programs to infinity.

That's the appeal of MMT. It's just a way to get votes with unlimited spending at no cost to the taxpayers.

If MMT worked there wouldn't be a poor country in the world. That's not the case obviously.

9. ### synthesizer-patelSweep the leg Johnny!Valued Senior Member

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I'll just preface this by saying that I don't consider this to be an argument - just a discussion and an exploration of some ideas that I completely admit to not having anything like a full undertanding of yet - so expect errors and omissions without any indended malice.

Probably the best way to look at that would be to quickly recap how government finances work in a non contraversial way.
We tend to have this concept that governments must collect taxes to fund their spending and any shortfall between taxes collected must be borrowed - but that isn't true - it's just a simplified shorthand for how we THINK it works but not how it actually works.
What goverments do - and MUST do as the sole net issuer of their currency - is to spend first by instructing their central bank to issue currency (this shows as a negative sum on their balance sheet and we call this government debt) - and then collect taxes after the fact to cancel out some or all of the currency they have issued.
So in summary, taxes do not pay for spending, and government debt isn't money that is borrowed from anyone (although government do often sell their debt by issuing bonds - but they are not obliged to do so).
So there's no comparison whatsoever between a household budget and a government budget - as the issuer of a currency, a government can always meet its obligations - whereas a user of a currency must acquire the currency first.

None of the above is contraversial for any economist - with perhaps the exception of the claim that governments are not obliged to sell their debt to the private sector in the form of interest bearing instruments.

The only point of discussion is to what degree can governments continue to issue currency without diminishing the return by causing inflation.

Kind of - if the private sector has a surplus of currency (i.e holds savings), then there must be an accounting identity for issuer of the currency of a debit to an equal amount - and vice versa - these are called sectoral balances and they always match to the penny.
Again - this is not a contraversial claim for any economist.

Where MMT departs from other economic ideas is to take the above points which all economists agree upon - and expand that to say that because government debt isn't money that is physically borrowed from anyone, and because taxes aren't used to pay for services, then there is considerably more fiscal space that a goverment can be fiscally responsible within.

I won't disgree with that - I'm sure there some people who believe that - however that isn't necessarily the position that MMT actually takes.
I think there's also an element of political parties on the left and in the centre getting tired of playing the Charlie Brown and Lucy football game with parties on the right - where when the left are in power they are continually browbeaten by the right over debt and deficits to the point that they feel they can't implement any policies that they want to - only for the the right to completely ignore the issue when they get into power and spend like drunked sailors. The Conservative Party in my country and the Republicans in the US are notorious for this.
The real position is that government spending is constrained by the productivity of the economy, and not by the amount that a government is capable of taxing - some MMT proponents take the next step to say that if government spending can be deployed in such a way as to increase the productivity of the economy, then that additional spending can be made with no inflationary cost.

Good question - my guess would be that in a developing country with a very small government sector, a small tax base, a currency that is weak in comparison to those of the big developed countries, a workforce that is able to subsist outside of a monetary economy, and generally low productivity, you have considerably less fiscal space to implement these kinds of policies.

Here's a bit more background info for you:

Last edited: Nov 27, 2020
10. ### SeattleValued Senior Member

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7,744
I'm aware of the MMT position. It's doesn't make it so to say that it's not controversial and it's semantics to place importance on whether government spending or taxation comes first.

Does it make any difference if we say that you are lending me money to buy a car before I get the car? Without my assurance that you will be repaid, you won't be lending me money for a car. It's not accurate to say that I'll be buying a car anyway, just because I need it, whether you lend me the money or not.

Accounting always results in balance. That's neither here nor there. Sure, within a closed system, if the government spends it means the private sector didn't have to. If you provide my car I don't have to. So what? The cost for my car will be the same (except for the funny money printing/debt issuing that is never paid back world of MMT).

Your last statement is how MMT tries to make the argument that what they are doing is "measured" or "reasonable". They are saying, "yes, this could be inflationary but we will do it in a fiscally responsible way". They believe that as long as it is a productive use, debt can be issued forever mainly because "that is what we are doing now" and because "we are a reserve currency and people will continue to value the dollar no matter how irresponsible we are".

Regarding the last point, they do say that and ...it can't.
Neither party are fiscally responsible anymore. That's the problem that needs to be fixed. The hypocrisy of one party pretending to care about the budget but spending on the military and the other party pointing out that they are breaking the budget and yet arguing that Democratic party would reduce military spending to fund social programs.

The fact is that neither party is fiscally responsible, they just break the budget is different areas. MMT comes along and says "Don't worry about it". None of those three approaches are responsible.

That's because MMT is a pipe dream. It doesn't work for a developing country for the same reason it doesn't work for any other developed country and it's only even a argument for the U.S. because of its status as a reserve currency.

This is just the "too big to fail" argument dressed up differently. If it doesn't work for Germany, the UK, France, Italy, Japan, South Korea, China or India then it doesn't work.

We know the stock market can't go up forever and U.S. debt can't either. Just because we are currently a reserve currency (which is similar to blackmail) doesn't mean MMT is a good policy.

OPEC had the world by the balls in the early 1970's. Now they don't because running a monopoly isn't sustainable. They could break the economic "rules" for a while but nothing fundament changed. It's the same with the MMT arguments.

11. ### synthesizer-patelSweep the leg Johnny!Valued Senior Member

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I mean it's not contraversial in the sense that every trained economist on the planet with a rudimentary understanding of the subject agrees that's how a fiat currency system works - not that it isn't a contraversial idea for politicians or people who haven't been introduced to the mechanics of said system.
It's not merely semantics - it's an important distinction - lets say for example the US govt wants to place an order with Lockheed Martin for $1m worth of stuff - congress authorises the fed to make the payment - the fed make a few keystrokes - their account reads minus$ 1m, Lockheed's reads plus $1m - the government hasn't had to appeal to lenders or check that there are enough tax receipts to pay for it - nor is that money owed to anyone, so there's no one to pay it back to - at that point of the fiscal lifecycle it's an accounting identity, nothing more nothing less. It's similar to the way the US is "in debt" to China. China hasn't somehow come up with a way of making their own US dollars and then loaned them to the US - it can't - only the fed can do that China holds US currency which it has earned through trade with the US, it deposits that currency at the fed, and rather than hold it as cash it exchanges it for interest bearing securities. Like any bank deposit this shows as a debt for the bank, and a positive account balance for the account holder. ( in the banking world, deposits are liabilities for a bank and loans are assets - sounds kind of backwards at first glance but when you think about it it makes sense) Should the Chinese finance minister turn up at the fed one day banging his fists on the table demanding his money back, they'll simply put his bonds in the shredder and run the printing press to print off a trillion dollar bill (why mess around with small change ? Please Register or Log in to view the hidden image! ) - has this "debt" somehow harmed the US economy? quite the opposite - China builds real tangible products and gets paper in return, from a purely transactional point of view, that's the best deal in the world ever (not that there isn't a downside of course) For the first point, that's just a bald assertion that isn't backed up by the facts - the fact is that we have discovered that it's actually pretty difficult to produce inflation, and the old recieved wisdom of "printing money causes inflation" is such a gross oversimplification you might just as well call it a lie. The$30ish trillion that was dumped into the global money supply during the GFC, and the desperate but so far unsuccessful attempts Japan have made to pull themselves out of a 2 decade deflationary slump speak volumes in that regard.

Moving on I find your use of the term "fiscally responsible" kind of vague - I don't want us to end up talking past each other, each of us using the same term to mean something different and end up completely misunderstanding one another even though we are discussing in good faith.
What I mean by the term is that the government should employ fiscal policies which both avoid and are capable of correcting, negative outcomes for the economy such as inflation, deflation, excessive unemploment, recession, financial instability.
Are you happy with that definition or do you have a different one which you prefer?

Personally I find it rather refreshing that an economic theory doesn't claim to provide one size fits all answers - I'm of the opinion that the unwillingness of most western democracies to explore any other ideas outside of the neoliberal bubble we've been living in for the last 40ish years has a lot to do with the sluggish growth, decaying infrastructure, and stagnant wages we seem to be irrevocable stuck in right now - if less government, less regulation, less taxation and more privatization was really the pancea we were told it was, you would have thought it would have worked by now.
MMT makes no secret of the fact that it wouldnt really work in a country with a major export based economy like Germany for example - ignoring for a moment that they couldn't do it anyway because they don't issue their own currency, Germany relies upon keeping domestic labour costs as low as possible, strict competition regulations, and liberal trade agreements to keep the cost of their goods as low as possible - something like a job guarantee program would just bid up wages and make their exports uncompetitive

12. ### SeattleValued Senior Member

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It's not "contraversial". It's "controversial" I'm sure all politicians and most people understand how a fiat currency works. Everyone understands that the currency is based on the "full faith and credit" of the U.S. government and not by gold or some other commodity.

Debt is still being created. It's not a matter of the U.S. defaulting on that debt since it's denominated in U.S. dollars that it could always credit more of. It's a matter of those dollars having any value.

Inflation wasn't hard to create in the early 80's when I was getting an MBA in International Business. You do have to do something extraordinary such as creating an oil cartel or issuing excessive debt.

Politics can slow down, mess up an economy. The U.S. is still doing well compared to most countries so it's hard to say it isn't working. The economic system isn't what "isn't working". If spending and taxes came into line the system would be working just fine.

The solution isn't to just create more debt. You think the best way to improve the infrastructure is to just "print" more money or to raise taxes and lower spending in other areas? We spend more than \$600 billion a year on our military. Should we just issue more debt and continue down that road or maybe reduce the size of our military?

13. ### synthesizer-patelSweep the leg Johnny!Valued Senior Member

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And yet we are constantly beset with questions like "how are we going to pay for X?" - the answer is always the same: parliament / congress instructs the central bank to issue the funds
Or "My taxes pay for Y" - they don't, taxes only serve a single purpose which is to cancel out the negative sum on the central bank's balance sheet which we call the national debt
If everyone knew that those were the correct answers, the same old questions wouldn't keep getting asked.

Agreed

Difficult to argue that excessive debt was the cause of the stagflation of the 70s and early 80s when the national debt was lower as a proportion of GDP during that period, and rose as inflation fell.

But agree that it takes extraordinary circumstances to create that situation
The 1970s-80s Stagflation was literally a once in history event, never happened before, never happened again - caused by a perfect storm of extraordinary economic issues during that period - oil price shock, constrained financial markets, national as opposed to international economies, very tight labour markets particularly for the most skilled, highest paid workers, slowdown on productivity etc
This strengthens the arguments that MMT proponents make, it doesn't weaken them.

I can agree that there is considerable fiscal space within the US economy to do more/better with what it already has.
Funding tax cuts for the wealthy with deficits seems to be pretty pointless and doesn't do much if anything to stimulate the real economy.
Likewise healthcare spending is spiralling wildly out of control - it'll be 20% of GDP within a couple of years compared to 7%-9% in most other developed economies - and that's simply unaffordable and unsustainable - put that 10% of GDP back into the pockets of consumers and you'd go a long way to stimulating stagnant aggregate demand.
Might be difficult to do as political partisanship seems to trump good economic sense at the moment.

14. ### SeattleValued Senior Member

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Why are tax cuts pointless in the first case but putting 10% of GDP back in the pockets of consumers a good idea in the second case? They both do the same thing.

Why are taxes an issue if productive spending doesn't even require taxes to pay for them (MMT view)?

By the way MMT proponents argue that you get inflation when there is no "slack" in the system. When there is still unemployment there will be no inflation. The 80's showed that you can have unemployment and inflation. The 70's/80's doesn't strengthen the MMT argument. It does the opposite.

Last edited: Nov 28, 2020
15. ### iceauraValued Senior Member

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The US from 1933 or so until 1980. The US even managed to pay off WWII without serious inflation - about as definitive an example of an economy "working out" as one can imagine.
Your idea of "doing well" and most observers's varies considerably.
No, they don't.
Tax cuts generally - unless specifically designed not to - disproportionately put money in the pockets of the already wealthy. Putting 10% of the GDP back in the pockets of the lower 2/3 would have much different effects on an economy.
You are? Seems an unlikely assumption.
I've never heard a Republican politician make an accurate claim that depended on how a fiat currency works. Of course one assumes that some of them are deceptively pandering, but by all appearances it's a minority - the general run seem to be true believers in Supply Side Reaganomics - and it presumes an ignorant public of "most people" anyway.

16. ### SeattleValued Senior Member

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Are you arguing for MMT (the title of this thread) or are you just arguing?

17. ### Dennis TateValued Senior Member

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I took my first class in Economics at St. Francis Xaver back in 1979 and I actually did a paper that year on the Weimar Republic but one critical aspect of MMT was explained brilliantly over on another forum:

http://www.politicalforum.com/index...s-a-good-thing.499686/page-11#post-1067298520

Basically....... everything before MMT used scare tactics to prevent students from noticing that there are two necessary ingredients for a time of hyper inflation.
1. print lots and lots and lots of money
2. DECREASE productivity.......

The 2020 response to CoVID 19 was exactly what a tiny percentage of the wealthiest of the wealthiest would want if they were attempting to set in motion another economic collapse, perhaps to gobble up assets at a fraction of the present relative cost.

This reminds me of something that occurred at the time of President Lincoln, (technically in the decade after his death).

If the money supply is increased in a way that sets in motion an increase in productivity... .you will not necessarily have serious inflation.......... and if you really increase productivity you could even have a decrease in prices in terms of many types of products by setting in motion a better economy of scale ratio.

18. ### SeattleValued Senior Member

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19. ### Dennis TateValued Senior Member

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This was the one sentence that I felt cut through the myths surrounding the Weimar Republic Inflation, the hyper- inflationary period in Zimbabwe and also Argentina.

The same principle of loss of productivity applies not only in Weimar but also in Zimbabwe and in Argentina.

20. ### SeattleValued Senior Member

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I don't see that it's "brilliant" to quibble about the semantics of "precipitating causes" and "resulting causes". Argentina's hyperinflation was due to unionism and corruption and nothing much has changed over the years.

Venezuela messed with state socialism and it's paid the price. It gave more to it's citizens than it's economy could justify.

The problem in the U.S. isn't just that one day we will have to pay the price of spending more than we take in. When most weaker countries do that they get inflation immediately. The dollar is the de facto world reserve currency and therefore there is more demand for it ...until there isn't. Until our debt gets so out of hand that we have to start raising interest rates drastically to get anyone's interest in holding dollars.

That will become more of a problem at some point but we are also paying the price now. We hold the same amount of dollars but they are just worth less in buying power. We're paying for all this spending every day as that buying power goes down.

I bought my house for 120,000. Now it's worth about 700,000. To buy a house today costs 700k that used to cost 120k.

The only thing Modern Monetary Theory has going for it (and as a theory it isn't really taken seriously) is that it's describing our current pathology (over spending) and saying that it isn't a problem. Go ahead and do more of it, it's OK... is their motto.

The only difference between our economy today and hyperinflation is just the rate. If you want hyperinflation then follow Modern Monetary Theory and that's what you will get.

If you are the U.S. it will take a while longer to find out. If you are Argentina, you find out much more quickly that it doesn't work.

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