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:
[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] 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. [/perfectpullquote]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:
[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]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.[/perfectpullquote]That’s not a fiscal purpose, that’s a monetary one.
[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]fiscalFiscal means gaining the revenue which can be spent. Monetary would be the description for taxation to maintain the value of money.
[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]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.[/perfectpullquote]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.
[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]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.[/perfectpullquote]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.
[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]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.[/perfectpullquote]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?
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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.
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.
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.
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.
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?
Bitcoin is not fiat. It is backed by a limited supply of numbers with certain mathematical properties.
Those numbers not having any objective value. For any useful meaning of the word fiat Bitcoin is.
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 much money causing hyper-inflation leading to a collapse in confidence in the money supply etc etc.
I think I'm missing why MMT has any benefit over standard monetary theory.
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.
No, it really isn't.
Start here for a summary:
http://bilbo.economicoutlook.net/blog/?p=41133
“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.” – Money is social construct and therefore limitless. Production is finite, resources are finite. Money is just the tool that we use to distribute REAL goods and services. Again the amount is somewhat irrelevant and prices are always relative.
“That the banking system creates 97% of it, the central bank only 3%.” There is a lot of misunderstanding about what this means and is based on a technical definition of “money supply” which does not include bonds or base money. All endogenous money created (bank credit) has on offsetting endogenous liability and thus nets to zero. For any net amount to be added to the economy is must be done exogenously. So, yes, expanding private debt does lead to higher amounts of “money” in the economy, but also an equal amount of additional liability.
“The German money supply is increasing.” – So what? Germany is a net exporter and not a sovereign issuer of currency. What does this have to do with MMT?
“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.” – Your explanation of MMT based on Murphy’s explanation (blind leading the blind?) failed here, yes absolutely. We agree on that point. Another strawman obliterated.
So, back to my original comment. So much wrong there, best to scrap it and start over.
The point of the piece is that Murphy doesn't understand it. Not that I do or don't, nor even that MMT is right or wrong. It's that Murphy doesn't Grok.
"There is a lot of misunderstanding about what this means and is based on a technical definition of “money supply” which does not include bonds or base money"
Err, no, wide money supply measures will obviously include base money.
"“The German money supply is increasing.” – So what? Germany is a net exporter and not a sovereign issuer of currency. What does this have to do with MMT?"
Which is why we also have NZ there. Note again this is about Murphy's interpretation of MMT. He wants to say - does say - that we must run a budget deficit otherwise we'll all run out of money to use. Not because it's true but because he's looking for a reason to run budget deficits.
Strange, the first part was marked as spam. Will try again in multiple parts.
Fair enough. You would rather have the discussion?
"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." You are right that this statement isn't remotely true, but probably not quite in the way you intended. Where is the reference to academic literature that MMT says that it is? That is a pretty poor mischaracterization.
Murphy is not an MMT academic and while he is getting closer in some regards, isn't what I would call a reliable source at this point.
"Bitcoin is fiat money." No, in both regards. Fiat money is typically money declared so by the state, not created in somebody's basement. To even refer to crypto as money is a stretch. At best it is a pseudo e-commodity that in addition to having no redemption value (like a currency), it also has no intrinsic value (like other commodities). It does oddly have value that in my opinion is primarily based on ignorance and speculation with marginal utility. So, proving that something can be created and still has value doesn't really change the fact that the state issuer has a monopoly of it's own currency. Also, fiat value doesn't have anything to do with a government's promise to pay, but rather it's promise to redeem. It "paid" the currency when it was created from spending to start with.
"Fiat money works because we believe it works." - No. Things in general have value because people believe it is so. This applies to non-financial assets in general. People hold gold because they believe it to be valuable. They believe that someone will be willing to take it in exchange for something useful. Currency has value because it has an offsetting liability. The issuer's liability gives in value. With regard to state currency, that liability is a promise to redeem that currency in payment of tax obligations. Therefore it is the tax that ultimately drives the redemption value.
“Which is what gives us our limit on how much can be issued – no more than maintains the belief in its value.”
No, available resources and productive capacity give us the real limit on spending in general at any given time. But, there is no real limit on quantity. Compare the Monopoly Here and Now Edition to the original game for a good example of why this is. Prices are always relative.
“That’s not a fiscal purpose, that’s a monetary one.” No. Inflation is a macroeconomic outcome. Targeting inflation can be done using fiscal or monetary means. When establishing fiscal policy (how much to spend or tax and how), inflationary concerns should be considered.
“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.” – Money creation without the use of bonds to drain reserves (which is not a borrowing operation to start with) is referred to as Overt Monetary Financing. This is a policy choice and has nothing to do with the demise of Zimbabwe or Venezuela. You may as well claim that because those counties eat food and we also eat food, we should be prepared to face the same consequences. Do a little more research on the underlying causes on economic issues in those countries.
"No, available resources and productive capacity give us the real limit on spending in general at any given time."
Sure, a point I've made many a time.
"“That’s not a fiscal purpose, that’s a monetary one.” No. Inflation is a macroeconomic outcome. Targeting inflation can be done using fiscal or monetary means. When establishing fiscal policy (how much to spend or tax and how), inflationary concerns should be considered."
That's rather twisting the logic there. "We should consider the monetary effects of fiscal policy"? Sure. But attempting to maintain the value of money is still monetary policy.
"Money creation without the use of bonds to drain reserves (which is not a borrowing operation to start with) is referred to as Overt Monetary Financing. This is a policy choice and has nothing to do with the demise of Zimbabwe or Venezuela"
The two countries both printed lots of their own sovereign money and went and spent it. This had bad effects. The MMT response, but you've got to tax it back is fine, it works. But V and Z did indeed do that first part of the plan, he printing and spending.
"Where is the reference to academic literature that MMT says that it is?"
I'm not talking about the academic literature. I'm talking about what Richard Murphy says.
"Murphy is not an MMT academic and while he is getting closer in some regards, isn't what I would call a reliable source at this point."
Other that wrong I've not found Murphy reliable on anything.
""Bitcoin is fiat money." No, in both regards."
Well, yes, it is. I see the points you're driving at and simply don't take them to be important differences. Your definition also becomes markedly tautological. States issue fiat there fore fiat is state issued. Not markedly useful.
"Things in general have value because people believe it is so."
Correct. Money not being a special exemption to this.
Please note again - I've no objection at all to the basic statements of MMT. Govts issue money, they can issue more, we can monetise fiscal policy, we can tax back the excess inflation - sure, all of these are simple and true statements.
I do argue with the implications of all of this. And I especially argue with whatever blather Murphy comes up with this week. I've been doing that last for nigh on 15 years now and am not going to stop soon.
Will you please try to at least begin to understand. I'm making fun of Murphy, not MMT?
Look up "Ragging on Ritchie" on my personal blog. I think the man's dangerous. Because people in power sometimes do believe his nonsense. He was, quite seriously, once considered for a peerage as a quid pro quo for his being a Labour Party economic adviser.
M4 in the UK and M1,2,3 in the US do not include reserves or bonds. So unless, you are making a new definition for "money supply" (which is fine, just state what it is) then base money is not included directly. Only the bank deposits are counted which are part of the 97% that you mentioned regardless of whether they were created from reserve adds or lending. So, the 97% figure is very much definition dependent. Form a NET money supply standpoint in a more generic sense, only the money added to the economy by the government increases the net position as money created endogenously by bank lending is offset by an equal liability within the economy.
Regarding what Murphy wrote: "If you want government created money the government has to run a deficit."
This is basically true. There doesn't have to be persistent deficits necessarily. But to have government money in the economy, there has to be a deficit at some point. It doesn't came from anywhere else. Your refutations are about "money supply" which again has a specific definition and includes bank credit. Bank credit is not "government created money."
Can a country that already has "government created money" in the economy run a budget surplus and leave some of that previously GCM in the economy? Sure, but it had to come from a government deficit at least in the beginning.
Whether or not a nation should run a deficit at any given point in time depends on the desired macro outcome, not ideology. To have positive net GCM added to the domestic sector and have imports from the foreign sector, a deficit is required. This is a simple accounting identity. You can argue whether or not you prefer to have positive savings and net imports. That is a policy discussion though.
I would agree that Murphy isn't the best source to discuss MMT, but based on what I have seen from both of you, he knows it better than you do. If you have a beef with Murphy, this isn't your best place to attack. He has the high ground.
You what? Notes and coins are narrow or base money. M0 includes notes and coins. M4 is M0 plus etc. Thus the idea that base money isn't included in M4 is odd.
Err:
" by the government increases the net position as money created endogenously by bank lending is offset by an equal liability within the economy."
But the creation of base or narrow money also creates and asset and liability. The central bank promises to repay, recall? Therefore they're creating a liability as they create the asset.
Good, we agree on resource constraints.
Inflation - Price stability is a goal of monetary policy, but it is still an outcome that is affected by both fiscal and monetary (to a lesser extent) policy.
"Bad effects" - sure, trying to create additional money to buy something that is not for sale has bad effects. The problem is ultimately that there isn't enough to buy. It really doesn't matter how much or how little money is in circulation if there isn't enough food. This goes back to understanding the difference between causation and correlation. You may as well be saying that marriage causes divorce. So, the MMT response is that you have to have resources and production, you need a free floating currency (unlike Venezuela), you should not have foreign denominated debts, the gov should not spend beyond the country's productive capacity. Taxes are a only a piece of that. Your version of the MMT response is simply another straw man.
Money is basically an IOU. It is the liability part that gives it value. Of course there are different levels of trust, so sure you have to believe that the issuer is going to do what they say, but the underlying value is the liability.
Again, bitcoin and commodities have no liability attached. You are completely dependent on finding a counter party that wants the item you have as much or more than you do.
Nobody needs bitcoin (or gold or tulips or beanie babies). Everyone that pays taxes though needs currency that is redeemable for that purpose.
"Please note again - I've no objection at all to the basic statements of MMT." That's great, but it would be better if you took the time to understand to body of work first before agreeing or objecting to MMT. Based on your statements, your understanding seems extremely limited at best.
Exogenous vs endogenous.
Reserves are not included, only the bank deposit. Otherwise the same money would be counted twice. The bank deposit adds to your 97% number vs the 3% number. Notes and coin are included, that is correct. That is a very small portion, hence the 3%.
I completely get that. Maybe there are better ways to do it though. Have you tried calling him names?
The problem is that some people that read this will think you understand MMT because you say that Murphy doesn't. So, why not get that part right and then have a go at Murphy all you want.
Just out of curiosity, what is your beef with Murphy? Did he have an affair with your wife or something? It seems personal.