Democratized Money and MMT

In the last day or so, several economists and commentators have emphasized the significance for democracy of the way in which society constructs its money. I have stressed previously that Modern Monetary Theory (MMT) makes clear the democratic potential of societies in which the government is the monopoly issuer of its own flexible exchange-rate fiat currency. This possibility of a more democratized money stands in stark contrast to the preferred course of neo-liberal policymakers who, if they get their way, as they did for example with the design of the European Monetary Union, deny governments an exchange-rate policy, a monetary policy, and effectively a fiscal policy in that it is put in a straitjacket, legitimated by dodgy economic theory such as ricardian equivalence. When their monstrous neo-liberal design goes wrong, they then seek to reinforce these antidemocratic measures by replacing elected politicians with technocrats, as we are now beginning to see in the case of some European countries.

This point is brought out very clearly by Post Keynesian economist Steve Keen in an interview on the finance show, Capital Account:

From Zombie Banking to Zombie Democracy

A similar point, from the perspective of MMT, is made by Bill Black in his latest post at New Economic Perspectives:

Addressing the Dominant Critique of MMT

John Carney, though primarily addressing another aspect of the debate over MMT, also touches on the implications of currency sovereignty for democracy in a post at CNBC:

MMT, Deficits and Savings: The Babysitting Model

With MMT gaining greater exposure, new readers are being attracted to the various blogs involved in discussing the approach. With this in mind, I thought it would also be worth drawing attention to a post on the topic by Dan Kervick that was made available earlier this year. It was originally presented as a six-part series, but has been combined into one long post:

Public Money for Public Purpose: Toward the End of Plutocracy and the Triumph of Democracy

The topic has also been one of my preoccupations here at heteconomist. For example:

Fiat Money is Logically Prior to Capital

Money and Paths to a Post-Capitalist Society

Hat tips to Tom Hickey and Clonal Antibody for the links to the Steve Keen interview and Bill Black post.


10 thoughts on “Democratized Money and MMT

  1. Thanks for the call-out Peter.

    As people can probably tell by now, I take every opportunity I can to use the word “public” where it is appropriate, and to avoid using words like “government” and “state” when the word “public” will do.

    I can’t speak to cultural conditions on other countries, but I believe that the constant, mostly negative references to “the government” and “the state” here in the US – on both the right and the left – are part of a dis-empowering rhetoric that works to alienate the America people from their own democracy, and leads them to treat the institutions of their government as representatives of some kind of alien overlord from Mars, rather than the tools of which they are supposed to strive to become the sovereign masters.

    When citizens in a democracy stop using that kind of distancing rhetoric to talk about their governing institutions, and instead use integrative rhetoric that steps up and takes ownership of that over which they are the rightful owners, they stop asking, “What should the government do?” and re-phrase the question as “What should we do?”

  2. It’s nice that Carney has brought MMT to CNBC’s audience, but he appears to be completely nuts. He questions whether we should allow the aggregate private sector to net save (accommodated by a federal deficit). What in heck does he think the alternative is? Would he like the IRS to enforce quotas on personal savings? Or just have massively pro-cyclical, deflationary federal fiscal policy and send half the population into bankruptcy court?

    He throws in the babysitting coop, but doesn’t bother to fully explain it or say where he heard of it (it obviously comes from Krugman/Sweeney).

    Then when you think he’s finished he mentions that “most government spending is destructive.” Just thought he’d mention that in passing, to clear up any misconceptions we might have had. I guess we’d better shut down the schools!


    Dan Kervick, I also like “our government”.

  3. It’s no use complaining about the loss of fiscal and monetary powers that a country endures when it joins a common currency: that’s an inevitable part of joining a common currency. In fact simply joining the European Union, even if a country does NOT adopt the Euro, involves a loss of sovereignty. California is part of the U.S. dollar common currency area. California cannot set its own interest rate, plus its freedom to do fiscal policy is restricted.

    Indeed I’d go further. Euro periphery problems derive precisely from ALLOWING those countries a degree of freedom on fiscal and monetary matters. But that is just “have your cake and eat it” day dreaming: a country cannot join a common currency AND retain the advantages of an independent monetary and fiscal policy. This “have your cake and eat it” delusion has resulted in Greece etc running up unsustainable debts.

    In contrast, if they’d had no freedom to borrow, deflation would have kicked in as soon as they began running balance of payments deficits, and the re-adjustment process would have been slower and more manageable.

    As to the part of periphery national debt that is attributable to politicians’ failing to collect enough tax (with a view to winning votes), periphery countries would be better off if they’d never had the freedom to run up those debts.

  4. The difference between the European situation and the US situation is that the fiscal constraints on US states is offset by the fact that the national government can carry out an aggressive fiscal policy to supply the income and demand that the individual states cannot supply. The US states are not just part of a currency union. They are part of a federal system with a fiscally powerful central government.

    The Europeans lost the flexibility and nimbleness of multiple floating currencies, and in exchange the got some benefits from lower trade barriers and transaction costs. But they never went all in on a fiscal union that could now be at work saving the continent from another recession. It looks to like they made a bad trade.

    We had inadequate fiscal action here in the US too – but at least we had some, which is why the US is now in much better shape than the Europeans who are wasting themselves away with fiscal anorexia.

    Greece didn’t run up unsustainable debts. Their debt to GDP ratio was lower than most of its Eurozone neighbors, as was the relative size of its government. But they did hold onto an unsustainably bad tax system.

  5. @ Ralph Musgrave

    I believe that the Federal government spends around $2200 per capita more in states like Mississippi and West Virginia than it collects in taxes. Decades of continuous government fiscal transfers. Imagine cutting that money off. Do those states internally deflate to competitiveness with California, Connecticut etc. or do they end up in a deflationary spiral? Greece differs in having had to borrow the money to fund its deficits. So now it has an intolerable debt burden as well as a balance of payments problem, but even if it hadn’t borrowed I think the idea that it could have deflated its way to a balanced current account back when it joined the Euro is pretty doubtful.

  6. “periphery countries would be better off if they’d never had the freedom to run up those debts.”

    Correct. The question then is why did the ‘magic market’ supply so much credit to these states when in the US they never go higher than 15% of the state GDP?

    There is no statute stopping the US states running up debt. They just can’t sell the bonds.

    Is that because there is a clear bankruptcy mechanism for the US states, but no such system for Greece?

  7. Dan

    I don’t know if you’ve seen Steve Keen’s latest appearance on Capital Account.

    It’s surprisingly MMT like, in that it talks about neo-classicals finding democracy ‘inconvenient’ and hence why we have an ‘independent’ central bank.

    Now we’re onto the next step where the government is increasingly boxed in and downgraded in its power to do anything. Before to long the only thing it allows itself to do is decide the colour of the wallpaper in the offices.

    He also talks about how government currency can get us out of the problem.

    Very interesting to see how the thinking is evolving.

  8. Can’t wait for Keen to incorporate vertical transaction in his work. I think he eventually will. Hopefully we can have a complete workable macro model by the next decade.

    Now, getting the establishment with its anti-democratic policies to accept it will be a different matter, too much interests at stake.

    “Is that because there is a clear bankruptcy mechanism for the US states, but no such system for Greece?”

    The capacity/appetite to absorb public debt by the private sector is huge, this is so when the banking system is deeply related to public debt & central banking system. it’s very easy to leverage States (I mean ‘sovereign’ states, which in the case of the EMU is a travesty, but still there a grade of apparent sovereignty and that’s how the market perceives it) using banking system during the good times.

    When there was growth (inflated by credit) the debt sustainability looked fine and a lot of public debt was assimilated by the system because it was needed as collateral and to expand even more credit. In the hierarchy of paper, government debt comes second best to money always, even if these governments are not monetary sovereign, and as such the capacity to absorb government paper by the private sector is huge as long as the economy is growing.

  9. Neil asks in relation to Euro periphery countries, “why did the ‘magic market’ supply so much credit to these states?”. I’d guess because lenders suspected that the Euro elite would be extremely reluctant to allow an EZ country to default: a suspicion bolstered by the fact that there just isn’t any formal mechanism set out by the EZ under which member countries can leave the EZ. Such was the ignorance and arrogance of those setting up the EZ, that they thought their scheme could never fail.

    This suspicion is further supported by the fact that ECB is printing billions, and far from allocating the money to Europe’s equivalent of Main St, the money goes to private banks, who in turn lend even more to periphery debtor countries.

    Another factor is that as in the U.S., senior politicians, private bank executives, and the elite in general etc move in the same social circles. Those with an influence on the printing press don’t want their next cocktail party turning ugly because they’ve bankrupted others at such events. So they channel the peoples’ money into the pockets of the latter. It’s Europe’s equivalent to the Geithner – AIG – Goldman Sachs affair.

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