Modern Monetary Theory

I’ll try to provide brief, working definitions to everything below. Before I dig in, I just want everyone reading to know that I'm not an economist, I am not an expert on anything pertaining to economics, and for all I know everything I'm about to tell you is dead wrong and I'm an idiot. Now, with that out of the way:

In my recent travels around the internet, I happened across the blogs of Bill Mitchell and Warren Mosler, which discuss Modern Monetary Theory (MMT). MMT is a macroeconomic theory which tries to explain the operation, structure, and behavior of national economies (as all macroeconomic theories do). This puts it in the same league as Keynesianism and Monetarism. Keynesianism is an economic theory that states that private sector organizations will often make decisions that are good for themselves but that may lead to a net bad for the economy/society as a whole. The public sector (government) must step in and, through either direct spending/stimulus or fiscal manipulations, correct these problems and restore balance to the up-and-down business cycle. Essentially, when the economy starts tanking, the government should step in and spend money to stop the decline and prevent or lighten a recession. Monetarism also believes in public sector intervention, though it places a much higher emphasis on regulating the supply of money and managing interest rates via central banks. Monetarists tend to look down on excessive government spending and direct interventions and instead manipulate the money supply. Roughly speaking, US economic policy from the New Deal until the early 1980s was mostly Keynesian, while policy from the early 1980s until today has been roughly Monetarist.

But MMT has fascinated me, because it claims both of these schools of thought are fundamentally in error. If its proponents are correct, then the way that we currently think about the national economy is very wrong, often backwards, and extremely harmful to our own well-being. We have been systematically under-investing in the economy and in our human capital since at least the 1970s. Why do I say the 1970s? Because that’s when we switched from the gold standard to a fiat currency, and that switch subtly changed the nature of our government’s relationship to the economy.

More definitions. A country on the gold standard holds a certain amount of gold in reserve and bases the value of its currency on the weight of this gold. A dollar under the gold standard is directly convertible into some amount of gold. When you acquire more gold, you can print more dollars. If you have printed as many dollars as your gold supply allows you to and then print some more, the worth of an individual dollar decreases (inflation). So basically, the total amount of money that can circulate through the economy and be spent by either the public or private sectors without having inflation is restricted by the amount of gold at hand and the conversion rate of dollars to gold. A similar dynamic is at work for other money systems based on commodities such as silver, salt, etc.

Fiat currency is more interesting. It is not based on any commodity and individual notes (dollars) are actually worthless in and of themselves—you cannot convert them into gold, silver, or anything else. So why does anyone use this worthless money? Because the government exercises its sovereign power to mandate that taxes be collected in its currency. The private sector (companies and individuals) needs this currency to meet its tax obligations to the state. This enforces the use of the fiat currency. I’ve stated above that I find this an interesting currency system—in my mind, its basic operating principle is much more about power dynamics and the state’s monopoly on violence then it is about inherent values of commodities and exchanges. It’s more honest, in a way. A longer and more interesting definition of both of these standards can be found here.

So, I’ve briefly defined Keynesian and Monetarist economics and have also defined gold and fiat currency standards. Where does MMT come in? Proponents of MMT claim that Keynesians and Monetarists and most people who take any interest in the national economy today still reason as though we’re on the gold standard. To understand why, I’m going to move on from the definitions of the gold and fiat standards and discuss their dynamics—how they function and "move."

On the gold standard, the total amount of money in circulation is constrained by the amount of gold the nation possesses and the value of that money in relation to the gold—X dollars is worth Y ounces of gold, and we only have so much gold to go around. Now imagine that the national economy is running at the maximum amount of dollars allowed by this standard. If the government wants to spend money on a new program then it has to either raise taxes to bring in more money from the private sector or it has to issue debt and sell it. The first part of that (taxes) is pretty straightforward, but the second is a little unintuitive to me. Here’s what it means: the government "sells" its debt to private sector or foreign national buyers and these buyers basically provide the money to the government, to be repaid over time and with interest. So under taxation, money is sent from the private sector to the public sector to then be spent by the public sector. With debt issuance, money is provided to the public sector by the private sector and is expected to be repaid. Either way, the government is taking in money from the private sector (or foreign governments) to provide for its expenditures.

This is the "household" model of government spending, which functions in a somewhat similar manner to how you and I balance our checkbooks or take out and repay loans. All the government officials, economists, and people-in-the-street that are worried about the federal deficit and about the crushing burden we’re placing on our kids are worried about repaying the debt-generated loans outlined above. They worry that if the government’s repayment fees are too high it won’t be able to pay for things like Social Security, Medicare, infrastructure, education, etc. And under a gold standard they would be correct to worry.

Proponents of MMT claim that under a fiat currency regime it’s wrong (and damaging) to worry about federal debt. Under a fiat regime:

1) The total amount of money is not constrained by some fixed amount of gold. Instead, it is constrained by the total output of the national economy. There should be enough money in circulation to run the economy at full steam and buy up every product and service available. A fiat currency moves the theoretical boundary of economic activity beyond some arbitrary threshold dictated by lumps of precious metal and pushes it out to “what the system can bear” based on actual, physical capacity.

2) Spending beyond the economy’s total productive capacity is what leads to inflation. This additional money cannot buy any new products or services (there’s no way to make them since we’re at full capacity), so it goes toward bidding on existing products and services and therefore raises their prices.

3) Your taxes do not pay for any federal government expenditures. Taxes are instead a form of private sector demand reduction. Remember, the economy can only hold a certain amount of money dictated by its maximum productive capacity. If the government wants to spend more money to purchase goods and services, it should tax more to reduce the amount of money in the private sector. If it doesn’t tax more then it risks inflation from having too much money in circulation. Likewise, if it wants to spend less, it should tax less and let the private sector do more spending. If it doesn’t tax less, then the amount of money in circulation is too low and productive capacity sits unused. The idea here is to keep the total amount of money chasing goods and services near an optimum, maximum level. Again, taxes reduce demand in the private sector to make room for government spending.

Note that this turns our normal reasoning on its head. The federal government does not tax you so that it can then spend your money on buying or providing goods and services. It taxes you so that you cannot spend as much of your money on goods and services, which then makes room for it to spend money on them instead.

4) Sovereign governments that issue their own currency are never insolvent. Put another way, there is no such thing as debt to be repaid at the federal level. Why does the government have to issue debt (as under the gold currency regime) when it doesn’t need the money in the first place? It generates money, so neither taxes nor loans made via debt contribute to government funds.

There are other implications of a fiat currency regime, but these are the most interesting and unconventional in my mind. This is what Modern Monetary Theory is all about—the actual implications of a sovereign government issuing its own fiat currency. Note that I’ve been trying to explicitly reference the federal government here, since it issues currency. State, city, and other local governments do not issue currency and must therefore balance their budgets—they rely on tax income for their expenditures.

Some of you may be thinking that what I just outlined has little to do with economic reality in the US at this time. If we’re on a fiat currency system, why are we so worried about federal debt? Why is Obama calling for a freeze in (some) government spending? Why are we talking about entitlement reform? Well, we are on a fiat currency system. The reason that we’re so worried about these things is that we think we’re still on a gold currency system and have been behaving accordingly. The US government still issues debt commensurate with its expenditures, but it doesn’t have to. What is outlined above is the potential of a fiat system. We and every other fiat nation on Earth are operating under voluntary restrictions that keep us acting like we’re on the gold standard when it comes to government debt and money supply.

These voluntary restrictions are only voluntary in that we’re not fully aware of them and do not have to operate with them. And they have led to prolonged, systematic underinvestment in our economies—both their physical capital and human labor. I’ll have more on this and other topics in a later post (for example, running the economy at full steam will bid up the price for oil, so some of the assumptions above have big caveats). For now, I’ll leave you with this thought: Under a fiat regime, running a federal budget surplus is usually a bad thing and will often lead to recession.

Folks,

Somtime times you have to get into the mind of liberals to understand what they are thinking. Another posting here had a reference to Modern Monetary Theory so I chased the rabbit. Did not find reference to this in search. A general search shows activity in academics and bloggers.

If you do some research and thinking on this you will see that this is the theory our govt is operating under. It is the new fashionable economic theory adopted by the elites.

This is only one of many sourced, but do some research and reading because the idea is GROWING.

In this case, wikipedia has some good background information.

http://en.wikipedia.org/wiki/Chartalism

Folks, this is going to require thinking, get out your thinking caps.

see also chartalism: link It's fascinating to see a theory which makes Keynesians look sane and sober-minded. There have some correct ways of looking at fiat money, but in real world terms, I think MMT is beyond dangerous.

Again, taxes reduce demand in the private sector to make room for government spending.

Did you get that? We are in the govt’s way. This is about as open and honest of a statement as you can get from our govt and elitists.

Liberals think it's all ‘funny money’ - that contruct works as long as ‘funny money’ will buy the world's labor and production. The flaw is it only works when a country has earned reserve currency status. A status our grandparents eared for us... If a liberal doubts this they can look at Haiti and try to explain why Haiti can't do the same with their 'money'...

Liberals think it's all ‘funny money’ - that construct works as long as ‘funny money’ will buy the world's labor and production. Two groups have to accept the illusion - the producers and consumers.

The flaw is it only works when a country has earned reserve currency status. A status our grandparents eared for us... If a liberal doubts this they can look at Haiti and try to explain why Haiti can't do the same... buy it all with ‘funny money’...

Why does the government have to issue debt (as under the gold currency regime) when it doesn’t need the money in the first place? It generates money, so neither taxes nor loans made via debt contribute to government funds.

This is such sophistry. The guy who wrote this should simply note that when the government issues debt, the amount of currency in its Treasury increases. So therefore debt does contribute to government funds.

Spending beyond the economy’s total productive capacity is what leads to inflation. This additional money cannot buy any new products or services (there’s no way to make them since we’re at full capacity), so it goes toward bidding on existing products and services and therefore raises their prices.

The author claims this new theory is distinct from Keynesianism, and then posits one of the central tenets of Keynesianism. If this statement is true, stagflation cannot happen and the 1970's are just a figment of our imaginations.

Basically MMT is a very fancy way for the guv to skim wealth from the producers in the country. In Haiti of course there are no producers, so the theory sort of breaks down, and does not escape the laws of the copybook headings. (If you don’t work you will starve).

Full employment

For Chartalists, a preferred method of achieving full employment and price stability is the Job guarantee. Under the notion of Job Guarantee, the pool of unemployed workers is guaranteed a job by the government – typically at minimum wage – and this would act as a buffer stock and automatic stabilizer to the wider economy. By decreasing in size it would lower deficits and deflate booming economies, and by increasing in size, enlarge deficits and stimulate depressed economies.

So Workman's comp is now a job guarantee, a reserve pool.

MMT, Keynesian, and Monetarist theories are all fatally flawed. For one thing, none of them take into account private credit availability even though all of the world’s major economies are credit-based.

The problem with the government simply printing money...or with the government borrowing money...is that either action destroys more private credit than whatever new money was either borrowed or printed.

Thus, government over-spending leads to deflation...a slower speed of money...because that over-spending (above tax revenues) destroys access to private credit.

Jobs are people doing favors for each other. “Money” is the accounting of those favors. Government stepping in to give validity to "a money" by issuing debt is also their way of taking a cut of the action. And yeah, if they take too much it devalues the currency.Paper isn't that different than gold - both represent 'wealth of favors' - one is ever so slightly 'more real' - the major difference being one can be manipulated unethically easier...

“Spending beyond the economy’s total productive capacity is what leads to inflation. “

This is moronic thinking. What is important about money is it’s information carrying capacity, period. Arbitrary fluctuations, whether for pump priming or whatever are devastating to information content. Any fixed rule will work, whether it is inflationary or deflationary, as long as it is fixed. But politicians like to steal, so they can’t keep with a constant fiat currency but debase it in an accelerating way. That’s where gold comes in, because it is stable, but it is also subject to fractional banking.

So in short, that’s why you have revolutions, to purge the kings/bankers when they steal too much. The idea that central bankers can know how much money to pump in to keep the economy at full roar is absurd Keynesianism which we are now experiencing in full fail mode.

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