MMT will save capitalism not wreck it

Via FTAlphaville:

MMT is a theory that people love to love, and love to hate.

The idea, which stands for Modern Monetary Theory, is frequently cited by academics and politicians on the left as evidence that the state has further capacity to spend without serious consequences to the economy (yet!). On the right, meanwhile, it’s lampooned as a muddle-headed idea that at best, will deter private sector investment and, at worst, takes us back to the cash-carted-in-wheelbarrows era of the Weimar Republic.

(We realise this is a reductive view, and people on both the left and right also disagree with some of the principles of the theory, so don’t get uppity in the comments if you’re one of those types.)

This FTAV writer is no expert in the nuances of the debate, but having followed it for the best part of five years, we know the fundamentals.

Which is why this morning we were interested to see HSBC’s Senior Economic Adviser Richard King come out against the theory in the hallowed pink pages of the FT.

Here are the opening two paragraphs of the piece, but do read it all:

In a world in which government debt is rapidly rising, it’s hardly surprising that there’s growing interest among investors in Modern Monetary Theory. After all, one of its central claims is that budget deficits are, from a financing perspective, an irrelevance. So long as increased government borrowing doesn’t lead to inflation — and, at the moment, there really isn’t much of it around — we can all afford to relax.

As Stephanie Kelton notes in her book The Deficit Myth, governments with access to a printing press are “currency issuers” (exceptions include, most obviously, members of the eurozone). As such, all their spending could, in principle, be financed via the creation of cash. Taxes may serve other purposes — the redistribution of income and wealth, the discouragement of “sinful” behaviour — but, in the world of MMT, they serve no useful macroeconomic role.

To absolutely no-one’s surprise, the great and the good of MMT have kicked off about the article on Twitter. Fellow financial blogger and tax injustice crusader Richard Murphy has been the first to respond in blog form, so here’s part of his take: King starts by suggesting that:

“In a world in which government debt is rapidly rising, it’s hardly surprising that there’s growing interest among investors in Modern Monetary Theory. After all, one of its central claims is that budget deficits are, from a financing perspective, an irrelevance. So long as increased government borrowing doesn’t lead to inflation — and, at the moment, there really isn’t much of it around — we can all afford to relax.”

That’s not what MMT says, of course. What MMT says is not that we can be relaxed about financing, because financing is not its focus. What it actually says is that if there is unemployment that a government wishes to address, then assuming that government spending is appropriately directed to achieve that goal then financing is not a constraint until full employment is achieved. Then it says three further things.

The first is that if spending is continued without any further action when full employment has been achieved then inflation will result.

Alternatively, and somewhat overlooked, more tax at that moment can limit that inflation risk.

But, third and more important still, if the government still thinks its programmes more important than additional private sector growth at that point then a bit more tax reduces private sector demand for labour, so releasing it for publish sector use without inflation arising.

FT Alphaville has to say that we find Murphy’s arguments far more convincing.

Of course they are more convincing. Because they don’t distort the underlying facts, as so many MMT critics do.

The weird thing about it is that MMT is drawn from the same basic understanding of sectoral balances of GDP that underpins monetarism.

One does not have to take MMT principles to the exteme to criticise the usefulness in such underttakings as direct currency transfers to boost demand and promote delevergaing, which can still be contained by central banks with independent inflation-targeting regimes.

I mean, do we want to give captialism back a cost of capital to promote productive investment and advancing living standards for all or not?

Because without MMT, the only other way to do it is a debt jubilee that comes with the joyous accesory of a gallows for the elite.

David Llewellyn-Smith
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Comments

    • ErmingtonPlumbingMEMBER

      “Sploosh” is the gender inclusionary term you should have gone with,…but yes I too splooged at “gallows for the elite.”

      https://youtu.be/RquXLETaciM

      https://youtu.be/HC1NqZvY_lA

      To quote the urban dictionary,

      3
      sploosh

      Synonymous to shwing coined by Wayne’s World, sploosh is an onomatopoeia representing sexual release (male or female), and is therefore a symbol of arousal and attraction to another person.

      Can also be coupled with a hand being extending from one’s pelvic region, to physically represent said release.
      Chick 1: Oh wow did you just see that guy’s 6 pack?? He’s so hot. Sploosh!
      Chick 2: Oh yea for sure! Sploosh.

      or alternatively

      6
      sploosh
      sploosh is another word for jizz
      I like it when you sploosh in my eye.

      I just wanted to clear that up.

  1. “Taxes…. in the world of MMT…. serve no useful macroeconomic role.”
    Quite right.
    Taxes? Reduce them to 0%. In a non-inflationary World (ie: The one we have right now, and are going to continue to have, if not outright Deflationary) they are redundant under MMT.

    • ErmingtonPlumbingMEMBER

      Yes. I believe new money creation should be democraticly guided and performed through Government expenditure.
      Inflation/deflation can be democratically guided by increases and/or decreases in Government expenditure.
      If Climate change is the great challenge of our time then let’s put trillions into that instead of pumping the share market and asset prices with similar volumes of “money coming out of thin air”.
      A humane and civilised welfare state can easily be maintained while inflation/deflation can be regulated through the expansion and/or contraction of government funds poured into Scientific research, Space programs and other such civilisation perpetuating endeavours.
      For this Democratically guided, Government controlled, new money creation system to function properly, Fierce anti trust, anti Monopoly laws need to be enforced especially in the media (Primary requirement for informed democracy) but across the board esp in mineral exploitation, large scale farming.
      Instead of mobilizing foreign capital, that quite often comes out of thin air itself, to exploit our national endowment the Australian people should be in charge of THEIR LAND.
      A little bit of capitalism is good for the efficient delivery of Goods and services but its tenets should not Govern over us and decide how we organise ourselves as a Nation or as a species. That we should decide all this ourselves IMHO

    • Just out of curiosity, Janet. Are you arguing your point with the assumption that inflation has been consigned to the dustbin of history, forever? Serious question.

      It’s just that it reminds me of one Benjamin Shalom Bernanke, who was quoted as saying many years back that it was his view that central bankers tamed inflation for good some time in the mid-1990s.

    • It may have been tried several times over the last thousand years and failed every time but if you give it a new name and find a few useful idiots to pump it, it’s bound to work this time.

  2. No one hates MMT more than Thomas Palley – mainly for reasons of petty academic rivalry. He has just published his critique of MMT. It’s a good a read and all of his points are valid. But every weakness he points to is, without exception, a problem of execution not principle. MMT is now just an engineering problem and that’s the conversation we should be having.

    https://www.elgaronline.com/view/journals/roke/8-4/roke.2020.04.02.xml

    • The issue for western nations who have accumulated so much debt is that the mechanics of business do not provide enough excess for the punters and those who have borrowed on their behalf, eg govts, to repay what is owed.
      Straws and broken camels come to mind
      On a national scale

      • Your hard money fundamentalist desires is not reflective of the body of work the MMT camp has done to expose the ideological administration of MMT for …. unless your blind … an elitist social agenda.

        MMT is not new, its decades old, reflects operational realities outside ideological or political administration and only attempts to establish a fact based framework by which policy formation can be democratically debated.

        If your contra to that supposition I suggest you look in a mirror for any planks in your eye …

    • PaperRooDogMEMBER

      Exactly, they criticise it with shit like this
      “The first is that if spending is continued without any further action when full employment has been achieved then inflation will result. ”
      As if they haven’t already broken many of the tenets of current system!!! eg negative interest rates!
      “If’s & buts” simply are a laughable criticism

  3. The governments of the world have proven time and again throughout history that they cannot be trusted with their hands on the printing press levers. Does anyone really believe that this will not create massive and unequal inflation, more corruption and a further depletion of any merit based reward system? Why not just hand over all the means of production to the government and be done with it.

    I agree that it’s coming though. TINA.

  4. Alternatively, and somewhat overlooked, more tax at that moment can limit that inflation risk.

    But, third and more important still, if the government still thinks its programmes more important than additional private sector growth at that point then a bit more tax reduces private sector demand for labour, so releasing it for publish sector use without inflation arising.

    There in lies the rub, We want to put an economic system in place that provides the wealthy a justification that no taxes are paid in the hands of an easily manipulated government system that caters to the whims of these wealthy.

    MMT cant work if there is no external lever that can be used to control inflation, the politics wont allow it to be taxes….

  5. And then are those who call for Central Banks to expand their balance sheets by buying up the assets of the wealthy in the misguided belief that filling the private bank deposit accounts of the wealthy will somehow debase the AUD and generate productive economic activity.

    Such lunancy is fighting the dogs and killing the cats.

    End the bank monopoly of deposit accounts at Central Banks and, if deflation beckons, as private banks lose the power to expand money in the form of bank credit out of thin air, distribute the necessary anti-deflation public money creation to each member of the public via their MyRBA account or their now fully reserved account at a private bank.

    A bit of trickle up economics and MyRBA will quickly cure the constipation resulting from the current private bank debt peddler model of public money.

    Less economic constipation means more jobs and you will not need the government to invent them.

    https://theglass-pyramid.com/2020/09/09/covid-19-the-perfect-time-for-trickle-up-economics-and-myrba/

      • pfh007.comMEMBER

        The jobs will be the jobs required by the consumption and investment decisions of millions of Australians.

        They could hardly do worse than the grand capital misallocation decisions by the bank lending departments, future dreaming planners (light rail, snowy 2, big Australia ) and other assorted clowns, that we have witnessed over the last 30 years.

          • pfh007.comMEMBER

            WW,

            “… And such jobs would be??????? see the CPI post just now..”

            Doing what I can with the rough material on offer. What do you mean? What does a weak CPI result have to do with your demand for detail on what jobs would be greated by millions of Australians receiving a slice of new public money creation.

            Is Skippy ghost writing for you?

          • Note Services through the floor
            there are no jobs
            and when WFH is exposed, there will be less.
            the AI and robot revolution is here.

          • pfh007.comMEMBER

            WW,

            Robots and AI are important issues but I think people are needlessly jumping at shadows. There are plenty of dud jobs that can happily go the way of bank tellers, milk men, garbos and all the other jobs that computers and machines have already taken as their own.

            Even with the dud jobs gone there are loads and loads of things that people can do that we have not even thought about doing because they were considered luxuries of the idle upper classes and we lacked the time to do them. Without the debt peddler mouse wheel lifestyles sucking years out of our lives the potential for quality idleness is great.

            WFH is my personal favorite black duckling but even that will not kill the desire to hang out and be amused, fed and entertained.

            What you are talking about is essentially a monetary circulation problem or economic constipation. How will money circulate if people don’t need to work much?

            MyRBA offers a simple solution to the economic constipation that a dependence on debt peddling as public money produces.

            Push money in at the bottom and remove some of it as it congeals at the top in fatty lumps.

            Good circulation is the key to good health in both blood and money.

    • Jumping jack flash

      Don’t worry. If my predictions of how a bankers’ utopia would look are correct, then pretty soon you will have your MyRBA bank accounts.

      In fact the RBA will run the entire show, and collect taxes as interest payments for all the debt that everyone has and needs, and that they needed to take off the failed banks’ hands.

      After that, Government turns into a glorified HR department, and in all honesty they’re not too that far away from that either. All they really have left now is just the whole taxes thing and the tax-related stuff like the budget. Itd be easy to push that onto the RBA – to give our hardworking pollies so much more time to focus on the “important issues”, rather than the tedious nuances of the budget. Booooorrrrriiinggg!!

      You can’t tell me that Joshy-boy spent more than a couple of days skimming over the budget before announcing it, and someone else did all the work.

      • pfh007.comMEMBER

        “.. If my predictions of how a bankers’ utopia would look are correct, then pretty soon you will have your MyRBA bank accounts…”

        I am curious how you connect a bankers utopia with MyRBA.

        Surely by now the howling of Sweeper and Skippy have demonstrated that MyRBA is a bankers nightmare.

        MyRBA ends the bankers privileges.

        They will become just another investment manager pleading for funds from sceptical investors.

        https://theglass-pyramid.com/2020/08/20/investment-manager-special-edition-myrba-superior-for-productive-capital-allocation/

        • Jumping jack flash

          At the end of the day if the private banks are crushed by all their debt, then someone will have to pick up the pieces.
          The demise of the private banks is pretty much inevitable.

          Once the RBA is forced to step in and become the lender of last resort and buy the failed banks, then you get your MyRBA bank accounts. But not before then. RBA isn’t interested. They are not the people’s bank, they are the banks’ bank.

          And once the RBA is in charge, then they implement their bankers’ utopia. It has to be done. There isn’t any other way and maintain the status quo.

          • pfh007.comMEMBER

            Ahhh,

            Yes, I understand what you mean. That dystopian outcome is a real possibility.

            I have zero faith in our RBA to do anything beyond curry favour with their banker clientele. They made that clear a few weeks ago.

            https://theglass-pyramid.com/2020/10/08/rba-watch-central-bank-digital-currency-on-the-way/

            But I am reasonably confident that some other country with less craven hucksters will take the plunge and launch a genuine attempt at breaking the banker dominance of central banks by giving their public access to central bank accounts or central bank digital currencies that will amount to something similar.

            China is already conducting live experiments and others are seriously thinking about it.

            I am confident that those experiments will be very successful and they will expose our RBA as a hopeless bunch of banker medicants.

          • pfh007.comMEMBER

            Yes, that is what bankers think they are if they spend their time reading old-stuff like this.

            http://cowles.yale.edu/sites/default/files/files/pub/d01/d0159.pdf

            And we all know how much they hate the “burden” of operating a deposit account at the RBA.

            That monopoly over central bank deposit accounts is no privilege …it is nothing but hard work and ………risk free returns.

            What is really puzzling is how you simultaneously claim that banks are just like any other investment manager but you only want to nationalise the banks.

            Or did I misunderstand you and you actually want to nationalise all investment managers as well?

            Why nationalise a musty old branch network when you can nationalise money?

          • Please desist with the libertarian apologia for the philosophical legal foundations that enabled banks and credit lenders to get out of control again, not too mention monopolies, or corruption of public institutions to drive the privatize society … its vulgar to the extreme.

          • because they can’t be trusted with ordinary peoples savings.

            that’s a great paper btw. thanks for posting. I had forgotten how brilliant it was.

          • pfh007.comMEMBER

            Sweeper,

            “.. that’s a great paper btw. thanks for posting. I had forgotten how brilliant it was….”

            My pleasure !

            It is quite clever but quite dated.

            You should give this a listen. McFarlane’s comments on MMT and the ‘old ways’ are very interesting but it is not entirely clear what he is referring to. I have a view on that but I will keep you in suspense.

            As a big fan of the ‘old ways’ and also a critical of Skippys MMT I thought you might have some insights.

            https://josephnoelwalker.com/101-the-rise-and-fall-of-monetary-policy-ian-macfarlane/

          • McFarlane is a true believer in inflation targeting and I don’t really see eye to eye with him a lot of the time. But he is largely right about MMT.
            “It wouldn’t work where you have normal interest rates”
            imo this is the number one point MMTers don’t get.
            Meaning, that lowering interest rates and allowing money qty to increase to meet qty demanded at that interest rate is exactly the same policy as increasing base money and letting the interest rate fall to allow an increase in qty demanded to absorb the increase in money stock.

            You cannot discuss monetary theory without a theory of the interest rate. And this is where MMT falls over.
            What is the model of the interest rate?
            I’ve had this discussion with Skippy many times.

            McFarlane makes the point that spending before taxing will lead to an increase in bank reserves (absent fine tuning which he would know about).
            Yes. But then what? Say the target rate is 3.5% like 90% of the time under inflation targeting.
            MMTers say it doesn’t matter because the commercial banks can’t get rid of their reserves so they lend them out or buy securities bid down the overnight rate.
            So now the overnight rate is below target.
            But by setting the target rate at 3.5% the CB was also setting a qty of base money at that interest rate in order to meet their inflation target. .
            An MMTer would say, ok they can pay interest on reserves to hit the 3.5% target rate.
            But then, exactly as McFarlane says the consolidated Treasury/CB has merely transferred it liabilities to the banks at exactly the same cost as if they had issued notes.

            Another way to make McFarlane’s point that base money or reserves is still a liability of the State is the real bills doctrine.
            eg. whenever the CB creates reserves it buys something real.
            Even if the reserve creation is caused by the Treasury going into overdraft. What is really happening in an accounting sense?
            The CB takes up an asset “IOU to Treasury” and credits the commercial banks accounts. The “IOU to Treasury” is now backing these liabilities, which under the real bills doctrine can only have value if the Treasury can credibly tax the private sector in order to redeem its IOU with the CB. Phil Lowe made a similar point.

            ie. McFarlane is spot on that deficits financed by base money absolutely are a liability of the state. Even if it were currency.
            What he also didn’t mention is there is a way for banks to rid themselves of excess reserves; that is to buy securities, bid down returns which then lowers the opportunity cost of holding currency and encourages the public to withdraw deposits for currency and commercial banks to exchange their reserves for currency.

            Mervyn King’s podcast was also very good.

          • pfh007.comMEMBER

            McFarlane’s comments about paying interest on bank reserve (deposit) accounts at the RBA were interesting especially how he connected not paying interest on those balances to MMT and described it as the ‘old way’.

            I dug up this. (removed link as moderation did not like it)

            The graph in this link is the ratio of broad money to total reserves between 1960 to 2018.

            As you can see it has increased from about 10 to over 30 with a large increase around to 2004 where it shot up from about 10 to 30. That indicates massive growth in the components of broad money outside of the central bank deposits (reserves) of banks.

            Given that broad money is currently about 2.4 trillion this would suggest that if the ratio remained at about 10 the banks would be currently required to hold reserves of approximately 720 billion rather than the 60 billion they currently hold.

            Does anybody know when the RBA started paying interest on ES balances?

            Requiring banks to hold large levels of reserves on which no interest was paid appears to be a feature of pre-deregulation banking in Australia. Worth noting that during that period the Commonwealth Bank had a large market share and was publicly owned.

            McFarlane draws a connection between that pre-deregulation approach and MMT in this podcast. He seems to be suggesting that large reserve ratios on which no interest is paid is similar to what some MMT folk are proposing.

            It is an interesting listen as reserve ratios are often argued to have been a device for controlling bank credit creation rather than a method of forcing banks to finance government deficits. Some might say it boils down to the same thing but the emphasis is quite different.

  6. Stewie GriffinMEMBER

    Because without MMT, the only other way to do it is a debt jubilee that comes with the joyous accesory of a gallows for the elite.

    …and there in is the issue – all MMT will do is preserve the status quo.

    Without first carrying out debt repudiations all MMT will do is ensure that the existing flows in the economy are preserved, the economy continues to function and serve the commands of those directing it, and most importantly enslaving debts continue to be served. The opportunity to over throw the existing corrupt system and profiteers who who’ve been accreting to the corridors of power will pass, ‘order’ will be preserved and we will instead continue to sink into a collective funk as we are bleed dry by our uncontrolled tax farming industries.

    Does anyone really think that the MMT spent on capital works will actually make our lives better, or simply be used to expand the existing infrastructure and housing stock solely to accommodate continued immigration fueled and focused economic growth… the simplest means of guestimating what the economic policy of the future will be under a system designed to preserve the status quo, is to expect more of the same policies that brought us here.

    • see that Tesla FBB, that is infrastructure
      nil, jobs,but returns 2 to 5x on cost.
      All this promised high labour input infrastructure will not eventuate
      it has no public benefit.
      Technology is here,

    • ErmingtonPlumbingMEMBER

      It all depends on who’s in charge of the decision making process Stewie

      Democratic majority rule is the only escape from our domination by corporate plutocracy and it’s desire to impose techno feudalisation on the world

    • See all my responses above … you clearly have no understanding of what MMT describes or how that enables the breaking of many a rice bowl for the elites and all the political advantages it removes.

      • Stewie GriffinMEMBER

        I can see the appeal of MMT from the floor of the uncanny DunningKruger valley you inhabit – an easy answer to all of our problems! Why has no one thought of this before?

        • Im not going to engage with your adversaries Stewie but I want you to know that at least I (and I’m sure many others) think you’re doing a great job of upholding reason and logic. The far left leaning ideologues on this site mean well I’m sure but so did many that only led to death and despair for the those that didn’t agree with them. Being a right wing cu*t mostly means we just want to leave others alone and want to be left alone. voluntary cooperation is not antithesis to our beliefs But beyond that it starts to look a like fascism. Call it out when you see it, and know the rest of us appreciate it because we can’t find the endless energy it requires for infinite rebuttal against the inane.

          • Stewie GriffinMEMBER

            Thanks for the feedback BG – I grew up in the country, swatting away flies is something I’m use to.

          • Stewie GriffinMEMBER

            See all my responses above … you clearly have no understanding of what MMT describes or how that enables the breaking of many a rice bowl for the elites and all the political advantages it removes.

            …and what where your devastating critical observations above?

            A couple soft talking points with grandiose claims that it can ‘establish a fact based framework by which policy formation can be democratically debated” – how exactly? Next you’ll be saying MMT can also bring world peace through a shared sense of brotherhood.

            Seriously Skip you’ve said nothing above but a couple motherhood statements and some supercilious comments like ‘Please desist with the libertarian apologia for the philosophical legal foundations that enabled banks and credit lenders to get out of control again, not too mention monopolies, or corruption of public institutions to drive the privatize society’ word salads aren’t an arguement.

          • I can attribute to all the claims where your responses are only rhetorical in construct and have the gravitas of an opinion.

            Authoritarian projections unwarranted or supported aside.

          • I’ll make it simple for you stewie … you and your thoughts over the years and the sources that you use to buttress your world views remind me of the pick up truck gun rack back wind screen decal proudly presented which is represented with a rifle scope cross hairs and in bold around it coon hunter.

          • Stewie GriffinMEMBER

            Three comments where one would do; an after thought of an after thought of a mediocre thought….and spread over 45 minutes – my, you must have been cross. Good.

          • Did someone just play the racist card? I thought only the woke could do that in order to derail a debate? Has a wokester been exposed among us?

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