To Get The Very Basics Of Modern Monetary Theory Wrong

30
904

Modern Monetary Theory is an oddity. In one sense it’s simply a statement of the blindingly obvious – governments create modern money so they can’t run out of it. As long as they can afford the paper and the ink – something Zimbabwe famously proved it is possible for a government to fail at, their last run of hundred trillion $Zim notes wasn’t worth enough to buy the ink for the next – then they can always print more. Shouting that modern money is made on computers doesn’t change this – a government could conceivably run out of computers or, as Venezuela’s having a damn good go at, the electricity to run them.

In another sense MMT is truly weird for there’s a belief that the above simplicity means that the wilder dreams of social democracy can be brought about just by said printing more money. This isn’t remotely true.

It thus rather helps to understand the basics, something that the Senior Lecturer of Practice in International Political Economy at Islington Technical College doesn’t quite manage:

There is something elegantly simple and radical about what is called modern monetary theory, even if nothing it has to say is modern, theoretical or in some ways much to do with money. What MMT says, as far as I am concerned, is as follows. First, in a country with a fiat currency, which means that there is no asset backing to the money in circulation, which money does as a result only get value as a consequence of a government’s promise to pay, there is, at least in theory, no limit to the amount of money that a government can create.

Sigh.

Bitcoin is fiat money. There is no government promise to pay. Bitcoin has value. Therefore fiat currency does not depend upon the government promise to pay.

What does it depend upon then? General acceptance that it is a thing of value. That other people will accept it as having value. Fiat money works because we believe it works.

Which is what gives us our limit on how much can be issued – no more than maintains the belief in its value.

There are, of course, other errors:

Third, to prevent this new money creating excess inflation a government has to tax to withdraw currency from circulation. This is the primary fiscal purpose of taxation, although tax also has other, as significant, purposes as noted below.

That’s not a fiscal purpose, that’s a monetary one.

fiscal
/ˈfɪsk(ə)l/
adjective
1.
relating to government revenue, especially taxes.
“monetary and fiscal policy”

Fiscal means gaining the revenue which can be spent. Monetary would be the description for taxation to maintain the value of money.

Fourth, the government does not need to borrow if it runs a deficit. Firstly that is because it can, at least in theory, simply run an overdraft at its central bank, on which no interest may be charged. This negates the need for borrowing.

This is also known as the monetisation of fiscal policy and has a pretty terrible track record. Zimbabwe and Venezuela only being two examples that come to mind.

Seventh, the realisation that a government that only borrows in its own currency cannot, as a result of this understanding, ever default on its own debt because it can always issue the instruction to its central bank that the payment of that debt be settled, is also of considerable advantage.

And that’s the sort of error which not understanding that first basic point leads to. If money creation destroys belief in the value of money then the country will run out of money. Vide Venezuela and Zimbabwe.

And that’s it. That is modern monetary theory in a nutshell. In essence: the sectoral balances balance. Government debt is private wealth. If you want government created money the government has to run a deficit.

And that’s so barkingly mad that it’s verging upon the insane. For what is it that we’re repeatedly told about money creation? That the banking system creates 97% of it, the central bank only 3%.

We can even show this simply.

source: tradingeconomics.com

The German money supply is increasing.

source: tradingeconomics.com

The German government is running a budget surplus. Therefore it is not necessary to run a budget deficit to increase the money supply, is it?

If you want to claim the euro, then New Zealand:

source: tradingeconomics.com

And:

source: tradingeconomics.com

This particular explanation of Modern Monetary Theory therefore rather fails as a scientific theory, doesn’t it? You know, inconvenient facts doing that to a hypothesis.

Perhaps this expansion of the universities wasn’t a good idea after all?

30
Leave a Reply

avatar
5 Comment threads
25 Thread replies
0 Followers
 
Most reacted comment
Hottest comment thread
5 Comment authors
timworstallMr BillThe Moleedj11Jonathan Harston Recent comment authors
  Subscribe  
newest oldest most voted
Notify of
Jonathan Harston
Guest
Jonathan Harston

I’d recommend that Tuppence read that great economics primer Pratchett’s Making Money, but I worry that he’d fail to understand it even at that level.

Mr Bill
Guest
Mr Bill

Yikes, one of the worst MMT hit pieces I have seen yet. It is bizarre that a journalist would write about something that they are obviously clueless about without engaging any experts on the subject or referencing any of the 25 years of research and academic literature. I would offer corrections, but I am afraid that for this piece it would be best to simply scrap it in whole and start over.

timworstall
Guest
timworstall

Hand waving and shouting “Nyah, Nyah, you’re wrong” is so persuasive I always find.

Now, note what is actually done. A statement is made that only governments can create and give value to fiat money. Both are empirically refuted.

edj11
Guest
edj11

Thanks for actually citing MMT statements. That’s more than many of the MMT critics hve done.

It is important to have this debate ono the merits of the actual statements MMT makes. In that way you are performing an important and necessary service.

It was impossible for me to accept MMT as correct without reviewing the criticisms to see if they made sense. I do find errors throughout the article though. Starting with “as long as they can afford the paper and ink.” Because the currency is now mostly electronic and not relyinig on paper and ink.

edj11
Guest
edj11

Ugh. I stand corrected.
Richard Murphy is not a reliable source for MMT knowledge.
Isn’t there a critic brave enough to actually cite original MMT economist material?

edj11
Guest
edj11

Bitcoin is not fiat. It is backed by a limited supply of numbers with certain mathematical properties.

timworstall
Guest
timworstall

Those numbers not having any objective value. For any useful meaning of the word fiat Bitcoin is.

The Mole
Guest
The Mole

Is the premise of MMT really that a) Governments can print/create new money at a whim b) But this will create inflation, so c) Governments must tax and destroy money at about an equivalent rate (averaged over time) Doesn’t this mean the net money the Government can create is approximately zero (above what none MMT theories allow)? Other than that presumably some of it can effectively be borrowed a bit from the future as there will be some delays in the inflation happening? And as Tim has pointed out if they don’t get that balance right they will print too… Read more »

timworstall
Guest
timworstall

The joy of MMT is to politics. We don’t have to constrain government spending because no one will pay the taxes to fund it. We just go spend. Huzzah!

The two corollaries aren’t explored. First, that no one will pay the higher taxes to kill the inflation – for the same reason as they above – is forgotten. And that the idea doesn’t get us anywhere different anyway is ignored. We still end up in a high govt spending, high tax, world. Which is in itself not something we want.

Mr Bill
Guest
Mr Bill

No, it really isn’t.
Start here for a summary:
http://bilbo.economicoutlook.net/blog/?p=41133