Quite Remarkable How Badly Modern Monetary Theory Describes The Economy

There is a new initiative to bring the joys of Modern Monetary Theory to the UK. The Gower Initiative. In the interests of journalistic inquiry the first of their explanatory notes opened, the one on inflation. In which we are told the following things:

There could be a variety of reasons for an increasing deficit and it isn’t always correlated with government spending.

For example:

A country that imports more than it exports will usually need continual government deficits to keep its domestic economy growing.

No, that is to misread the GDP equation. Try reading the next page of the standard explanation in the textbooks. This is the claim that a trade deficit makes the economy smaller – it doesn’t. We subtract imports simply because they’re already there, included, in the consumption and investment components of the equation. This is simple stuff.

If the government injects money into the economy and it remains in savings accounts unspent then this cannot be inflationary. In such cases this may require a government to run continual deficits to maintain economic growth.

This is drivel for people trying to explain money. For we do all agree that the banking system creates 95% of the wide money supply (M3, M4 etc) through the creation of credit, don’t we? Also that it’s the wide money supply that matters as a driver of inflation – that’s why we use interest rate changes to curb it. How do banks create that credit? By using deposits to fund the loans they’ve made. Sure, we can model credit creation as banks just creating it but they do have to attract funding deposits by 4.30 pm that day.

Inflationary pressures could be driven by the private sector through, for example, an excessive expansion of bank credit as happened in the years building up to the Global Financial Crash in 2008. This could happen even where a government is cutting its spending.

Err, yes, which is where those unspent but lent out savings accounts come in, isn’t it?

The government itself determines the price it pays for labour and resources so where it identifies a public need it won’t necessarily drive up market prices.

Government doesn’t have to pay market prices? Really? Isn’t that lovely then, we’ve no need, ever, to raise public servant salaries. Because government doesn’t need to attract people away from private sector wages, does it? Or, of course, that assertion is nonsense. Which it is of course.

If government policies bring about more efficiency this might be deflationary. For example, the proposals to renationalise water, energy and rail or restore the NHS to a publicly paid for and managed service could reduce costs and administrative inefficiencies. That could mean a need for less government spending overall.

Efficiency is deflationary? Who knew? Rather than freeing up resources which we can use elsewhere? That also being known as economic growth which is generally, over time, thought to be inflationary as the price of labour rises.

If MMT really is going to conquer the UK they’re going to need better advocates than this. Or perhaps it’s the theory itself which needs improvement.

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The deficit between what government spends and what it takes in is always “correlated with government spending”! Events outside government might reduce intake, but a deficit is the result of not adjusting to live within one’s means. Buying Chinese kitchen widgets while you sell mere diplomas does nothing to the government budget, though it provides the benefits of more trade.

2008 (in the US) was not excessive expansion of bank credit but mandates to make loans to people who could not repay them, then repackage the loans to conceal the risk, then whim-based decisions on whom to bail out.


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For what I think are political reasons, all the Big Three browsers withhold as far as possible the “safe padlock” from sites that do not accord with what Americans fondly call “liberal.” For example the fairly harmless mickhartley.typepad.com or even the rabble-rousing http://www.desertsun.co.uk.

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The above suggestion that because a large majority of money is created by private banks rather than central banks and thus that any inflation caused by excess money creation must be attributable to the former money rather than the latter is false logic. If £20 notes were vastly more popular than £10 notes, that would not alter than fact that printing and distributing an excessive amount of £10 notes would be inflationary.

“The government itself determines…” Yes: I agree the “Gower initiative” got that wrong.


Pedantry: rail is alreasy nationalised, in exactly the same way as roads. It’s trains that are private, in exactly the same way as Eddie Stobart.


A country that imports more than it exports will run out of forex. Importers will bid the price of foreign currencies up and the situation will self-correct as imports become unaffordable. The corollary is that a trade deficit is inflationary. If the country has foreign borrowings it will spend a larger proportion of revenue on servicing that foreign debt. The reduced domestic investment will result in reduced growth. This is all absolutely basic stuff and you don’t have to look very far to find examples.