What’s Right and not so Right with Modern Monetary Theory

I am finishing up a first draft of a paper on fiat money, bitcoins and cryptocurrencies that will be included in a forthcoming volume on bitcoins and cryptocurrencies. The paper is loosely based on a number of posts that have appeared on this blog since I started blogging almost nine years ago. My first post appeared on July 5, 2011. Here are some of my posts on and fiat money, bitcoins and cryptocurrencies (this, this, this, and this). In writing the paper, it occurred to me that it might be worthwhile to include a comment on Modern Monetary Theory inasmuch as the proposition that the value of fiat money is derived from the acceptability of fiat money for discharging the tax liabilities imposed by the governments issuing those fiat moneys, which is a proposition that Modern Monetary Theorists have adopted from the chartalist school of thought associated with the work of G. F. Knapp. But there were clearly other economists before and since Knapp that have offered roughly the same explanation for the positive value of fiat money that offers no real non-monetary services to those holding such moneys. Here is the section from my draft about Modern Monetary Theory.

Although there’s a long line of prominent economic theorists who have recognized that acceptability of a fiat money for discharging tax liabilities, the proposition is now generally associated with the chartalist views of G. F. Knapp, whose views have been explicitly cited in recent works by economists associated with what is known as Modern Monetary Theory (MMT). While the capacity of fiat money to discharge tax liabilities is surely an important aspect of MMT, not all propositions associated with MMT automatically follow from that premise. Recognizing the role of the capacity of fiat money to discharge tax liabilities, Knapp juxtaposed his “state theory of money” from the metallist theory. The latter holds that the institution of money evolved from barter trade, because certain valuable commodities, especially precious metals became widely used as media of exchange, because, for whatever reason, they were readily accepted in exchange, thereby triggering the self-reinforcing network effects discussed above.[1]

However, the often bitter debates between chartalists and metallists notwithstanding, there is no necessary, or logical, inconsistency between the theories. Both theories about the origin of money could be simultaneously true, each under different historical conditions. Each theory posits an explanation for why a monetary instrument providing no direct service is readily accepted in exchange. That one explanation could be true does not entail the falsity of the other.

Taking chartalism as its theoretical foundation, MMT focuses on a set of accounting identities that are presumed to embody deep structural relationships. Because money is regarded as the creature of the state, the quantity of money is said to reflect the cumulative difference between government tax revenues and expenditures which are financed by issuing fiat money. The role of government bonds is to provide a buffer with which short-term fluctuations in the inflow of taxes (recurrently peaking at particular times of the year when tax payments become due) and government expenditures.

But the problem with MMT, shared with many other sorts of monetary theory, is that it focuses on a particular causal relationship, working through the implications of that relationship conditioned on a ceteris-paribus assumption that all other relationships are held constant and are unaffected by the changes on which the theory is focusing, regardless of whether the assumption can be maintained.

For example, MMT posits that increases in taxes are deflationary and reductions in taxes are inflationary, because an increase in taxes implies a net drain of purchasing power from the private sector to the government sector and a reduction in taxes implies an injection of purchasing power.[2] According to the MMT, the price level reflects the relationship between total spending and total available productive resources, At given current prices, some level of total spending would just suffice to ensure that all available resources are fully employed. If total spending exceeds that amount, the excess spending must cause prices to rise to absorb the extra spending.

This naïve theory of inflation captures a basic intuition about the effect of increasing the rate of spending, but it is not a complete theory of inflation, because the level of spending depends not only on how much the government spends and how much tax revenue it collects; it also depends on, among other things, whether the public is trying to add to, or to reduce, the quantity of cash balances being held. Now it’s true that an efficiently operating banking system tends to adjust the quantity of cash to the demands of the public, but the banking system also has demands for the reserves that the government, via the central bank, makes available to be held, and its demands to hold reserves may match, or fall short of, the amount that banks at any moment wish to hold.

There is an interbank system of reserves, but if the amount of reserves that the government central bank creates is systematically above the amount of reserves that banks wish to hold, the deficiency will have repercussions on total spending. MMT theorists insist that the government central bank is obligated to provide whatever quantity of reserves is demanded, but that’s because the demand of banks to hold reserves is a function of the foregone interest incurred by banks holding reserves. Given the cost of holding reserves implied by the interest-rate target established by the government central bank, the banking system will demand a corresponding quantity of reserves, and, at that interest rate, government central banks will supply all the reserves demanded. But that doesn’t mean that, in setting its target rate, the government central bank isn’t implicitly determining the quantity of reserves for the entire system, thereby exercising an independent influence on the price level or the rate of inflation that must be reconciled with the fiscal stance of the government.

A tendency toward oversimplification is hardly unique to MMT. It’s also characteristic of older schools of thought, like the metallist theory of money, the polar opposite from the MMT and the chartalist theory. The metallist theory asserts that the value of a metallic money must equal the value of the amount of the metal represented by any particular monetary unit defined in terms of that metal. Under a gold standard, for example, all monetary units represent some particular quantity of gold, and the relative values of those units correspond to the ratios of the gold represented by those units. The value of gold standard currency therefore doesn’t deviate more than trivially from the value of the amount of gold represented by the currency.

But, here again, we confront a simplification; the value of gold, or of any commodity serving as a monetary standard, isn’t independent of its monetary-standard function. The value of any commodity depends on the total demand for any and all purposes for which it is, or may be, used. If gold serves as money, either as coins actually exchanged or a reserves sitting in bank vaults, that amount of gold is withdrawn from potential non-monetary uses, so that the value of gold relative to other commodities must rise to reflect the diversion of that portion of the total stock from non-monetary uses. If the demand to hold money rises, and the additional money that must be created to meet that demand requires additional gold to be converted into monetary form, either as coins or as reserves held by banks, the additional derived demand for gold tends to increase the value of gold, and, as a result, the value of money.

Moreover, insofar as governments accumulate reserves of gold that are otherwise held idle, the decision about how much gold reserves to continue holding in relation to the monetary claims on those reserves also affects the value of gold. It’s therefore not necessarily correct to say that, under a gold standard, the value of gold determines the value of money. The strictly correct proposition is that, under a gold standard, the value of gold and the value of money must be equal. But the value of money causally affects the value of gold no less than the value of gold causally affects the value of money.

In the context of a fiat money, whose value necessarily reflects expectations of its future purchasing power, it is not only the current policies of the government and the monetary authority, but expectations about future economic conditions and about the future responses of policy-makers to those conditions that determine the value of a fiat money. A useful theory of the value of money and of the effect of monetary policy on the value of money cannot be formulated without taking the expectations of individuals into account. Rational-expectations may be a useful first step to in formulating models that explicitly take expectations into account, but their underlying suppositions of most rational-expectations models are too far-fetched – especially the assumption that all expectations converge on the “correct” probability distributions of all future prices – to provide practical insight, much less useful policy guidance (Glasner 2020).

So, in the end, all simple theories of causation, like MMT, that suggest one particular variable determines the value of another are untenable in any complex system of mutually interrelated phenomena (Hayek 1967). There are few systems in nature as complex as a modern economy; only if it were possible to write out a complete system of equations describing all those interrelationships, could we trace out the effects of increasing the income tax rate or the level of government spending on the overall price level, as MMT claims to do. But for a complex interrelated system, no direct causal relationship between any two variables to the exclusion of all the others is likely to serve as a reliable guide to policy except in special situations when it can plausibly be assumed that a ceteris-paribus assumption is likely to be even approximately true.

[1] The classic exposition of this theory of money was provided by Carl Menger (1892).

 

[2] In an alternate version of the tax theory of inflation, an increase in taxes increases the value of money by increasing the demand of money at the moment when tax liabilities come due. The value of money is determined by its value at those peak periods, and it is the expected value of money at those peak periods that maintains its value during non-peak periods. The problem with this version is that it presumes that the value of money is solely a function of its value in discharging tax liabilities, but money is also demanded to serve as a medium of exchange which implies an increase in value above the value it would have solely from the demand occasioned by its acceptability to discharge tax liabilities.

30 Responses to “What’s Right and not so Right with Modern Monetary Theory”


  1. 1 Egmont Kakarot-Handtke July 2, 2020 at 1:08 pm

    The value of money and the worthlessness of economics

    Comment on David Glasner on ‘What’s Right and not so Right with Modern Monetary Theory’

    David Glasner sets the frame: “In writing the paper, it occurred to me that it might be worthwhile to include a comment on Modern Monetary Theory inasmuch as the proposition that the value of fiat money is derived from the acceptability of fiat money for discharging the tax liabilities imposed by the governments issuing those fiat moneys, which is a proposition that Modern Monetary Theorists have adopted from the chartalist school of thought associated with the work of G. F. Knapp.”

    Of course, other economists have said other things and in the end nobody has any idea what the value of money is. Economic reality is complex, you know, and economics ends always in the swamp where “nothing is clear and everything is possible.” (Keynes)

    Walrasian microfoundations and Keynesian macrofoundations are provably false. Because economics is a failed science it has to be reconstructed from scratch. This has already been done elsewhere#1, #2, #3, so here is the bare-bones version.

    The elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household sector and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

    Under the conditions of market clearing X=O and budget balancing C=Yw in each period, the price is given by P=W/R (1), i.e. the market clearing price is equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand. For the graphical representation see Wikimedia.#4

    The price is determined by the wage rate, which takes the role of the nominal numéraire, and the productivity. The quantity of money is NOT among the price determinants. This puts the commonplace quantity theory to rest.

    The real value of money is ultimately given by the productivity. From (1) follows W/P=R, i.e. real wage = productivity. The value of money has nothing at all to do with the taxing power of the state.

    Transaction money is zero at the beginning and the end of the period under consideration.#5 All transactions are handled by the central bank which continuously creates and destroys fiat money (= deposits and overdrafts) on its balance sheet. There is NO such thing as a fixed quantity of money. The central bank plays an ACCOMMODATIVE role and simply supports the AUTONOMOUS market transactions between the household and the business sector. The economy never runs out of money. Money comes into the economy at the supply side.

    Monetary profit for the economy as a whole is defined as Qm≡C−Yw and monetary saving as Sm≡Yw−C. It always holds Qm≡−Sm, in other words, the business sector’s surplus = profit (deficit = loss) equals the household sector’s deficit = dissaving (surplus = saving). This is the most elementary form of the macroeconomic Profit Law.

    The problem with MMT is that it is bad theory#6 and bad policy#7, more specifically: MMT is plain political fraud.#8

    The Profit Law for the three-sector case (household, business, state sector) reads Qm≡(G−T)−Sm which says that the business sector’s profit/loss is given by the state sector’s budget deficit/surplus and the household sector’s dissaving/saving. For Sm=0 this boils down to (G−T)=Qm, i.e. public deficit equals private profit. The profit of the monetary economy is in this analytical limiting case produced entirely by the state sector. In other words, deficit spending/money creation is a free lunch for the Oligarchy. Financial wealth grows in lockstep with public debt.

    MMT is not a scientifically valid monetary theory but brain-dead propaganda for the benefit of Wall Street. The question is whether David Glasner does not understand how the monetary economy works or whether he is complicit in the fraud.

    Egmont Kakarot-Handtke

    #1 The creation and value of money and near-monies
    https://axecorg.blogspot.com/2017/12/the-creation-and-value-of-money-and.html

    #2 The objective value of money
    https://axecorg.blogspot.com/2018/03/the-objective-value-of-money.html

    #3 Sovereign economics, Sec. 1.3, 4.6
    https://axecorg.blogspot.com/2020/06/sovereign-economics-international.html

    #4 Wikimedia, Elementary production-consumption economy

    #5 Wikimedia, Idealized transaction pattern, household sector, balanced budget

    #6 Wikipedia, economics, scientific knowledge, or political agenda pushing?
    https://axecorg.blogspot.com/2020/06/wikipedia-economics-scientific.html

    #7 MMT, money printing, stealth taxation, and redistribution
    https://axecorg.blogspot.de/2017/11/mmt-money-printing-stealth-taxation-and.html

    #8 MMT is ALWAYS a bad deal for the 99-percenters
    https://axecorg.blogspot.de/2017/12/mmt-is-always-bad-deal-for-ninety-nine.html

  2. 2 LAL July 2, 2020 at 10:02 pm

    You have said rational expectations could be a useful first step, and coincidentally I am reading John H Cochrane’s book manuscript Fiscal Theory of The Price Level (https://static1.squarespace.com/static/5e6033a4ea02d801f37e15bb/t/5efbd658be87e018f0122a40/1593562722548/fiscal_theory_posted_7_2020.pdf). I was at least able to get to the same conclusions as you In this blog post regarding MMT as far as value of money being determined by the public’s demand for cash and expectations of future economic states from the models developed by the end of chapter two of the book. Wondering whether you would find it an interesting read.

  3. 3 Frank Restly July 3, 2020 at 10:18 am

    David,

    “Taking chartalism as its theoretical foundation, MMT focuses on a set of accounting identities that are presumed to embody deep structural relationships. Because money is regarded as the creature of the state, the quantity of money is said to reflect the cumulative difference between government tax revenues and expenditures which are financed by issuing fiat money. The role of government bonds is to provide a buffer with which short-term fluctuations in the inflow of taxes (recurrently peaking at particular times of the year when tax payments become due) and government expenditures.”

    I don’t believe that Chartalism and / or MMT expound on the role of government bonds in that way when governments can in fact create (print or coin) any amount of money that they like to cover revenue short falls without resorting to the sale of bonds (borrowing). Why borrow to cover a revenue shortfall when it is easier to create the money directly?

    The argument could be made that the sale of bonds (and payback of those bonds) to a central bank creates a “temporary” state of monetary expansion. But that argument has a lot of holes:
    1. “Temporary” can be a really long time – up to and including 100 years for fixed term bonds.
    2. “Temporary” can be a really, really long time – governments have the ability to “roll over their debt” meaning they use the proceeds from the sale of one 100 year bond to pay back another 100 year bond or they sell perpetual bonds with an indeterminate maturity.
    3. The argument assumes that the central bank is the only purchaser for those bonds. No monetary expansion at all may occur if the bonds are sold outside the banking system.

    My own conclusion – ultimately government bonds serve to function as an entitlement system (or insurance program if you prefer) when they are sold to the private sector. They are in fact the first entitlement system (before Social Security, before Medicare and Medicaid, etc.). That is not to suggest this is a bad thing (as the perjorative “entitlement” may suggest). Government debt forms the backbone of any credit structure. Banks use government debt to reduce credit risk across their portfolio of holdings.

    “The role of government bonds is to provide a buffer with which short-term fluctuations in the inflow of taxes (recurrently peaking at particular times of the year when tax payments become due) and government expenditures.”

    Either you are making this up, or MMT / Chartalism has a significant flaw in its foundations.

  4. 4 Henry Rech July 3, 2020 at 1:34 pm

    If things like Bitcoin might be considered money what does it say about money?

    And it seems to me that Modern Monetary Theory should really be named Modern Fiscal Theory given its aim is to neuter monetary policy.

  5. 5 Frank Restly July 3, 2020 at 4:03 pm

    Henry,

    “And it seems to me that Modern Monetary Theory should really be named Modern Fiscal Theory given it’s aim is to neuter monetary policy.”

    Modern Monetary Theory is a tautology (as excellently described by Brad DeLong), not an economic policy framework.

    MMT answers the question – Given the ability for a government to create (print / coin) money at will, why does a government tax (not how much, on who, or in what matter a government should tax)?

    The reason that a government collects taxes (under MMT) is to create a demand for the money that it either directly creates (via coining / printing) or indirectly sponsors (through central bank credit based money). A government does not tax explicitly to pay for expenditures (it can always print money to do that).

    In laymen’s terms taxation creates a networking effect. Since everyone that resides within the operating boundaries of a government and it’s legal duties must pay taxes in the same money, they will use that very same money for commerce (buying / selling goods). Carrying around two currencies (one to pay taxes, and the other to buy goods with) is inefficient.

    MMT recognizes that governments can (are legally permitted to) print money. You interpret that as governments should (policy recommendation) print money. MMT is NOT a policy guideline.

  6. 6 Henry Rech July 4, 2020 at 2:19 am

    Frank,

    “You interpret that as governments should (policy recommendation) print money.”

    I am not sure how you came to that conclusion – I am not saying that at all.

    MMTers state they prefer to see the policy rate set at 0% or thereabouts. So effectively, there is no stabilization role for monetary policy.

    Stabilization is effected by increasing or lowering taxes.

    The Job Guarantee Scheme is also a stabilization mechanism and pretty much the only component of MMT that has theoretical content. The rest of MMT is mostly descriptive.

    MMT mostly works to dispel the mainstream mythologies around government spending, deficits and debt.

  7. 7 Frank Restly July 4, 2020 at 4:18 am

    Henry,

    “MMTers state they prefer to see the policy rate set at 0% or thereabouts.”

    Okay, again this is a policy recommendation that does not come out of what MMT actually says. MMTers could prefer Coke to Pepsi or Burger King to McDonalds and recommend their preferences to the general public. That doesn’t mean that the recommendation to drink Coke or eat at Burger King comes from a policy framework built on MMT.

    Also, I believe what MMTers actually say is that the government should not pay interest on it’s liabilities.

    The “policy rate” affects both government and private borrowing, and I don’t think that MMTers are saying that private banks should either borrow or lend at 0%.

    The 0% interest on government liabilities can be achieved in a number of ways:

    1. Government runs perpetual balanced budgets / surpluses
    2. Government covers any shortfalls by printing money directly
    3. Government sells equity to cover shortfalls

    “MMT mostly works to dispel the mainstream mythologies around government spending, deficits, and debt.”

    Agreed 100%. Though I believe that there is still some confusion (even in the MMT world) about why governments borrow / issue debt / sell bonds. See above from David:

    “The role of government bonds is to provide a buffer with which short-term fluctuations in the inflow of taxes (recurrently peaking at particular times of the year when tax payments become due) and government expenditures.”

    That is incorrect. Government bonds serve as an entitlement (insurance) program.

  8. 8 Henry Rech July 4, 2020 at 4:24 am

    Frank,

    “Also, I believe what MMTers actually say is that the government should not pay interest on it’s liabilities.”

    Can you provide a reference for this?

    “…I don’t think that MMTers are saying that private banks should either borrow or lend at 0%.

    Are saying I said this?

  9. 9 Frank Restly July 4, 2020 at 5:04 am

    Henry,

    “Can you provide a reference for this?”

    See:

    https://en.wikipedia.org/wiki/Modern_Monetary_Theory

    From the table on the web page:
    Comparison of MMT with mainstream Keynesian economics

    Setting interest rates (Keynesian)
    “Managed by Fed to achieve dual mandate of maximum employment and stable prices.”

    Setting interest rates (MMT)
    “Emphasizes that an interest rate target is not a potent policy. The government may choose to maintain a zero interest-rate policy by not issuing public debt at all.”

    See:

    http://bilbo.economicoutlook.net/blog/?p=31715

    “At the London event last week, I indicated that governments should not issue any public debt as the benefits of doing so are small relative to the large opportunity costs.”

    “I don’t think that MMTers are saying that private banks should either borrow or lend at 0%.”

    Nope, just trying to clarify that I don’t believe that a 0% “policy rate” per se is what is being advocated by MMTers, but rather 0% interest on government liabilities.

  10. 10 Frank Restly July 4, 2020 at 4:55 pm

    Henry,

    “Also, I believe what MMTers actually say is that the government should not pay interest on it’s liabilities.”

    “Can you provide a reference for this?”

    http://bilbo.economicoutlook.net/blog/?p=31715

    “…I don’t think that MMTers are saying that private banks should either borrow or lend at 0%.”

    “Are you saying I said this?”

    No, you did say this:

    “MMTers state they prefer to see the policy rate set at 0% or thereabouts. So effectively, there is no stabilization role for monetary policy.”

    MMTers do not say they prefer to see no stabilization role for monetary policy. What they say is is that they see no stabilization role for interest paying government securities (bonds).

  11. 11 ralph47 July 5, 2020 at 12:25 am

    Contrary to David Glasner’s claim that MMTers are unaware of the importance of “…whether the public is trying to add to, or to reduce, the quantity of cash balances being held”, MMTers are well aware of that point.

    Had David Glasner been better acquainted wiht MMT literature, he would have noticed MMTers referring time and again to “savings desires”.

  12. 12 David Glasner July 5, 2020 at 8:37 am

    Ralph, Thanks for your comment. It is true that I am not well-versed in the MMT literature, so I may have been speaking out of turn. Can you have provide specific references for me to look at? But the intuition behind my point is that the fiscal theory of the price level only explains part of what determines the price level, just as the analysis of the real value of gold explains part of what determines the price level under the gold standard.

  13. 13 Egmont Kakarot-Handtke July 5, 2020 at 8:42 am

    LAL, Frank Restly, Henry Rech, ralph47

    You constantly argue: MMTers say this and MMTers say that. It is a matter of indifference what MMTers say because MMT is provably false. MMTers are too stupid for the elementary algebra that underlies macroeconomics. For the proof see section Scientific blunder from Keynes to MMT in #1

    So, there is no need at all to listen to what MMTers say, except for the political fact that MMTers betray the general populace.

    Because of the macroeconomic Profit Law, it holds Public Deficit = Private Profit. Therefore, public deficit spending is a free lunch for the ten-percenters and amounts in real terms to stealth taxation of the ninety-percenters.

    This, though, is only the beginning. The business sector distributes profit to the ten-percenters. The ten-percenters, in turn, buy the bonds that are issued in order to consolidate the short-term liabilities of the government sector.

    Then, the ninety-percenters are taxed, in order to pay the interest on government bonds which are in the possession of the ten-percenters. This goes as long as the public debt is rolled over. This is fine for the ten-percenters as long as the central bank keeps the interest rate above zero.

    All in all, public deficit spending/money creation amounts to a four-fold fraud for the benefit of the ten-percenters and the detriment of the ninety-percenters.

    MMT is the biggest redistribution program in the history of humankind. Private financial wealth is roughly equal to public debt. MMTers are currently the worst disgrace of academic economics which runs for 200+ years now on a very high level of scientific incompetence, stupidity, and corruption.

    Your comments are beside the point and absolutely irrelevant.

    Egmont Kakarot-Handtke

    #1 Profit
    https://axecorg.blogspot.com/2020/06/profit-axiomatic-economics.html

  14. 14 Henry Rech July 5, 2020 at 9:37 am

    Frank,

    “What they say is is that they see no stabilization role for interest paying government securities (bonds).”

    Same thing, bond issuance is a monetary operation.

    Bill Mitchell, in your linked reference, says:

    “So you start to understand that the “borrowing” (that is, bond issuance) is a monetary operation not a funding necessity.” (My interjection in parenthesis).

  15. 15 Frank Restly July 5, 2020 at 2:39 pm

    Henry,

    The whole thing from Bill Mitchell:

    “In his 1943 article Lerner says (page 355) that the government would only issue debt if otherwise the rate of interest would be too low. So you start to understand that the borrowing is a monetary operation not a funding necessity.”

    “He went further on this theme in his 1951 book when he says (pages 10-11) that the:

    “… spending of money … out of deficits keeps on increasing the stock of money (and bank reserves) and this keeps on pushing down the rate of interest. Somehow the government must prevent the rate of interest from being pushed down by the additions to the stock of money coming from its own expenditures … There is an obvious way of doing this. The government can borrow back the money it is spending (emphasis in original).”

    “This is one of the fundamental insights of MMT – that debt issuance can assist the central bank to drain excess bank reserves that were generated by the net spending (deficits) in the first place.”

    Your original statement:

    “So effectively, there is no stabilization role for monetary policy.”

    How does “assisting the central bank to drain excess bank reserves” (as described by Bill Mitchell) become “no stabilization role for monetary policy”?

  16. 16 Henry Rech July 5, 2020 at 4:49 pm

    Frank,

    “How does “assisting the central bank to drain excess bank reserves” (as described by Bill Mitchell) become “no stabilization role for monetary policy”?”

    You’ll have to ask Bill Mitchell.

    I believe the reasoning is excess reserves are managed to maintain a low policy rate at a fixed level (c. 0%).

  17. 17 Frank Restly July 6, 2020 at 6:02 am

    Henry,

    “You’ll have to ask Bill Mitchell. I believe the reasoning is excess reserves are managed to maintain a low policy rate at a fixed level (c. 0%).”

    I am asking you. You have indicated in several posts above that:

    “And it seems to me that Modern Monetary Theory should really be named Modern Fiscal Theory given its aim is to neuter monetary policy.”

    “MMTers state they prefer to see the policy rate set at 0% or thereabouts. So effectively, there is no stabilization role for monetary policy.”

    Bill himself (in his opening paragraph) advocates that the federal government should not sell bonds at all.

    Bill (in quoting from Abba Lerner) indicates that the federal government should sell bonds to drain excess reserves and maintain a positive (non-zero) interest rate. Supply and demand. When the government sells bonds in excess of available reserves this puts upward pressure on interest rates and drains available reserves.

    Neither proposal (Bill’s, Lerner’s) neuters monetary policy or provides no stabilization role for monetary policy (as you seem to believe). In fact Lerner’s proposal seeks to assist the central bank with maintaining a positive non-zero interest rate (not a 0% rate as you contend).

  18. 18 Henry Rech July 6, 2020 at 10:54 am

    Frank,

    “I am asking you. ”

    Ask all you like. I am not a proponent of MMT and am merely reporting what I understand to be MMT’s way of looking at things. And I suggest you take these matters up with Bill Mitchell or the others if you are not satisified with my reporting.

    Bill Mitchell has made a range of statements in the blog post you referenced which it seems you find contradictory. Again I suggest you take these up with the proponents of MMT.

    “In fact Lerner’s proposal seeks to assist the central bank with maintaining a positive non-zero interest rate (not a 0% rate as you contend).”

    MMT does not take everything that Lerner proposed as gospel. Bill Mitchell has at various times argued the case for zero interest rates. Other proponents have written papers on the matter.

  19. 19 Egmont Kakarot-Handtke July 8, 2020 at 4:04 am

    Frank Restly, Henry Rech

    You still do not get the crucial point of monetary policy. Roughly speaking, when fiat money is brought into the economy in order to pay a growing wage bill it is a good thing, when fiat money is brought into the economy for deficit spending it is a criminal thing because it amounts to counterfeiting. This puts the MMT talking points into a new perspective.

    • The counterfeiter never runs out of money.

    • The counterfeiter never stops stealing stuff from the rest of society.

    • The counterfeiter increases the profit of the business sector with his additional demand.

    • The counterfeiter says that he is good for the economy and employment.

    • When the economy breaks down the counterfeiter increases deficit spending/money creation.

    • The counterfeiter solves any problem from unemployment to pandemics to global warming with deficit spending/money creation.

    • The counterfeiter continuously increases the public debt but says that it does not matter.

    • The counterfeiter is a criminal but never gets caught because he games the fiat money system from within.

    • The counterfeiter gets effective PR support from academia, in particular from the MMT fake science trolls.

    With your ignorance and scientific incompetence, you are practically – intentionally or unintentionally does not matter – part of a gigantic political fraud.

    Egmont Kakarot-Handtke

  20. 20 Frank Restly July 8, 2020 at 3:22 pm

    Egmont,

    Enough already.

    “With your ignorance and scientific incompetence, you are practically – intentionally or unintentionally does not matter – part of a gigantic political fraud.”

    See the U. S. Constitution, Article I, Section 8

    The Congress shall have power

    “To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.”

    “To borrow Money on the credit of the United States.”

    “To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.”

    “To establish a uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States.”

    “To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.”

    You can argue all you want about whether Congress SHOULD print or coin money, whether Congress SHOULD levy taxes, and whether Congress SHOULD borrow. And I apologize if you live in a country that does not grant the same powers to it’s legislature – I can only argue from what I am accustomed to. But your blind ignorance of what the Congress is permitted to do and why it does these things is in short pathetic.

    You stick to your theories, maybe someday one of them may promote some useful understanding. I will stick with my facts.

  21. 21 Frank Restly July 8, 2020 at 3:40 pm

    Henry,

    I was able to find the Blog post you reference on Bill Mitchell recommending a 0% policy rate located here:

    http://bilbo.economicoutlook.net/blog/?p=1961

    I can’t say that I agree with his position (either from a political / economy perspective or a productivity perspective).

  22. 22 Henry Rech July 8, 2020 at 4:29 pm

    Thanks for the link, Frank.

  23. 23 Frank Restly July 9, 2020 at 2:54 am

    Henry,

    You are welcome. Here are my own thoughts on 0% interest rate, the natural rate of interest, and what interest actually is.

    FACT: Interest is the cost of time (not the cost of money as some economists like to stipulate).

    This can be seen by looking at a barter economy where a generally accepted form of money does not exist. Do “loans” happen in a barter economy? Absolutely.

    Example: I produce airplanes and it takes me three years to produce each airplane. My neighbor produces apples and he harvests apples every year. I want to trade one of my airplanes for some of his apples. There will be a spot exchange rate for apples delivered today for an airplane delivered today (for instance 1000 apples for one airplane). However, I don’t have an airplane ready right now to deliver to my neighbor, and so I am willing to accept fewer apples today (800 apples) for a plane that I will deliver to my neighbor 3 years from now. In effect, my neighbor is charging me interest because he is lending me apples now until I am able to deliver a plane to him 3 years from now.

    FACT: The U. S. central bank defines the “natural rate of interest” as the rate of interest that would be charged if the central bank did not exist at all.

    This definition has issues in that in an n good economy with individuals that will have different life spans, there is not a single rate of interest that reflects every possible exchange of goods. Nonetheless, if we accept the what the central bank is saying, then we must accept the possibility that the central bank is matching it’s policy rate of interest to it’s interpretation of what the “natural rate of interest” is.

    Given this, what are the variables that affect the “natural rate of interest”?
    Without going through all the variables, one that I will focus on is frictionless intergenerational transfers. What do I mean by that? One example is inheritance taxes. Inheritance taxes create a friction in the transfer of goods / assets from one generation to the next. Another example is that I demand that my children perform chores to earn an allowance. Those chores create a friction in the transfer of money between myself and my children.

    I hope where you see I am going with this. When all intergenerational transfers are frictionless, the natural rate of interest will have a tendency to fall. The reason is that while the time that any one individual lives may be unchanged (average lifespan 70-80 years), the time available to an extended family that spans many individual lifetimes is much longer (200 years, 500 years, 3,000 years, etc.). When those extended families are able to conduct frictionless transfers of property, this will put downward pressure on the natural rate of interest. An extended family has more time available to build savings (versus an individual) and so is willing to accept a lesser rate of return on those savings.

    Now obviously other things come into play. Inflation rates in excess of the return on savings will tend to dissuade saving even in extended families.

    And so, while Bill Mitchell may recommend that the central bank set it’s policy rate to zero, and neither you or I may agree with it, he is not entirely wrong IF intergenerational transfers of assets are frictionless. In that case, the central bank may be simply doing it’s job – matching it’s policy rate to the natural rate of interest.

    The ridiculous people are the ones who support the elimination of inheritance taxes (aka death taxes), who dote on their kids and grandkids, and then complain as interest rates (like the natural rate of interest) fall to zero – what did they expect would happen?

  24. 24 Egmont Kakarot-Handtke July 9, 2020 at 6:20 am

    Frank Restly

    You are in the wrong reference frame. Economics is about how the monetary economy works and NOT what the Constitution says. Economics is, according to its explicit self-definition#1, a science and the Constitution is politics. It is the foundational principle of science that both spheres must be kept apart. It is a well-known fact that politics corrupts everything it touches. It is the story of Midas, but instead of turning everything to gold politics turns everything to shit. So, the principle of the strict separation of science and politics is constitutional for science.

    The macroeconomic profit law implies Public Deficit = Private Profit. So, the MMT policy of deficit spending/money creation is clearly a free lunch for the one-percenters.#2 MMT claims that MMT policy benefits the ninety-nine percenters, while the exact opposite is true. So MMT is a political fraud. It is academics like Stephanie Kelton who promote the greatest redistribution of income and financial wealth in history.#3 The current distribution is in the main the result of the growth of public debt over the last 200+ years. Make no mistake, it is WeThePeople who owes the public debt. And it is the one-percenters who owns the financial assets.

    By blowing smoke about the Constitution you are covering the political fraud of MMT. This may be okay according to the Constitution, it is not okay according to the principles of science.

    The scientific fact of the matter is that MMT goes down the scientific toilet and you with it.

    Egmont Kakarot-Handtke

    #1 “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”.

    #2 Keynes, Lerner, MMT, Trump and exploding profit
    https://axecorg.blogspot.com/2017/12/keynes-lerner-mmt-trump-and-exploding.html

    #3 MMT: For the record
    https://axecorg.blogspot.com/2017/09/mmt-for-record.html

  25. 25 Frank Restly July 9, 2020 at 7:28 am

    Egmont,

    “You are in the wrong reference frame. Economics is about how the monetary economy works and NOT what the Constitution says.”

    Any scientific endeavor (like economics) is first and foremost about the irrefutable observable facts, not how you or I or anyone else thinks the world should operate.

    FACTS: The U. S. Constitution gives the Congress the power to borrow, the power to tax, and the power coin money.

    End of story.

  26. 26 Egmont Kakarot-Handtke July 10, 2020 at 4:36 am

    What Is MMT? (Short Version)

    MMT is the issuance of counterfeit currency in the form of deficit spending/money creation for the benefit of the one-percenters.

    Genuine currency and counterfeit currency are indistinguishable because they originate from the same source: the FED. It all depends on whether additional fiat money is injected on the supply or the demand side.

    MMTers are not scientists but political agenda pushers. MMT policy is to the disadvantage of the ninety-nine-percenters. The counterfeiter steals from the rest of society via the price anonymous mechanism.

    It is the ninety-nine-percenters who owes the public debt. And it is the one-percenters who owns the financial assets. Interest on public debt works like a regressive tax as long as the debt is rolled over.

    Because #PublicDeficitIsPrivateProfit, MMT is the biggest redistribution program ever.

    MMT is a political fraud.

    Egmont Kakarot-Handtke

  27. 27 Egmont Kakarothandtke July 10, 2020 at 4:45 am

    Correction
    via the anonymous price mechanism

  28. 28 Egmont Kakarot-Handtke July 12, 2020 at 4:31 am

    Cross-reference

    MMT – a Wall Street myth
    Comment on Chris Dillow on ‘The Deficit Myth: A Review’

    Chris Dillow’s main point of critique is “For me, Kelton is – albeit very lucidly – reinventing the wheel.”

    This is, in fact, a compliment because MMT is proto-scientific garbage and Kelton is an academic fraud.#1

    MMT’s macroeconomics is provably false since Keynes, Kalecki, Lerner, etc. So, MMT policy guidance has no sound scientific foundations.

    The macroeconomic Profit Law implies Public Deficit = Private Profit. This means that the greater part of profit in the United States is actually produced by the state. The US economy hangs for a long time already on the state ventilator for its survival.

    Among all that academic crap, MMT has the right message for Wall Street. Who is MMT’s first apostle? Right, Warren Mossler, ex-Wall Street. But Stephanie Kelton is, without doubt, the more attractive sales-person. Economics has become part of the entertainment industry long ago and the casting is done in Hollywood where they know best what sells.

    The rest is marketing/PR routine. Interviews, book, media hype, No 1 on the best-seller list, and then, of course, trolling in the social media. This is where Chris Dillow comes in “Dr Kelton explain these ideas wonderfully clearly, so I recommend this book to all non-economists interested in government finances.”

    MMT is itself a myth. MMT policy is NOT for the benefit of WeThePeople. MMT is the issuance of counterfeit currency in the form of deficit spending/money creation for the benefit of the one-percenters. Because PublicDeficit = PrivateProfit, MMT is the biggest redistribution program ever. MMT is a political fraud.

    “Chris Dillow is a Marxian economist,” says Tom Hickey at Mike Norman Economics. There are historians who claim that already Marx was on the payroll of the financial Oligarchy.

    Egmont Kakarot-Handtke

    #1 More details
    https://axecorg.blogspot.com/2017/07/mmt-cross-references.html

  29. 29 Egmont Kakarot-Handtke July 15, 2020 at 1:45 am

    David Glasner, Frank Restly, Henry Rech

    It is pretty obvious that you have NO idea how the monetary works. Because of this, you cannot properly assess MMT.

    The underlying problem is that the monetary economy (capitalism or communism does not matter) is NOT a self-optimizing equilibrium system but eventually breaks down.#1

    The Profit Law#3 Qm≡I−Sm tells one that macroeconomic profit is positive in a growing economy as long as the business sector’s investment is greater than the household sector’s saving. If this fails, macroeconomic profit turns into loss and the economy breaks down. This must eventually happen, what is unknown is the exact date.#2

    However, there is a way to postpone the breakdown. The Profit Law including the state sector reads Qm≡(I−Sm)+(G−T), that is, the second component of macroeconomic profit is the state sector’s deficit. It holds Public Deficit = Private Profit.

    The MMT policy of deficit spending/money creation is ultimately a means of postponing the breakdown of the US economy. From a political standpoint, the COVID pandemic provides a good rationale to mute the budget-balancers and to blow the deficit up to hitherto unknown proportions.

    The volume of the deficit and the popularity of MMT#4 is a good metric for the acceleration of the breakdown.

    If you intend to learn economics I recommend the new textbook Sovereign Economics.#5

    Egmont Kakarot-Handtke

    #1 Major Defects of the Market Economy
    https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2624350

    #2 Mathematical Proof of the Breakdown of Capitalism
    https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2375578

    #3 Wikimedia

    #4 Keynes, Lerner, MMT, Trump and exploding profit
    https://axecorg.blogspot.com/2017/12/keynes-lerner-mmt-trump-and-exploding.html

    #5 Amazon or BoD
    https://www.bod.de/buchshop/sovereign-economics-egmont-kakarot-handtke-9783751946490


  1. 1 What’s Proper and never so Proper with Fashionable Financial Concept - Trader Sensation Trackback on August 4, 2020 at 9:55 pm

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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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