MMT is Politically Open

I find it surprising that some commentators on the MMT-related blogs and elsewhere in cyberspace fear that MMT is designed to suit the political left. I disagree with this perception. The only sense in which I think MMT is helpful to the left is in the same way it is helpful to all alternative perspectives. It indicates that social possibilities are open and that there is more than one alternative. In this respect, it is more truthful than orthodox economics. This may be a negative for defenders of the status quo, but it does not mean that MMT is of any particular assistance to the left other than to make clear that its preferred social choices are in the mix along with all other social possibilities.

For example, in MMT – as with most other heterodox approaches – there is no presumption in favor of laissez-faire capitalism. This is different from orthodox economics, which presumes – on no legitimate basis whatsoever – that laissez-faire capitalism is best except in specific instances in which it can be shown otherwise. Leaving out this baseless presumption is no doubt inconvenient for those who benefit from it in the current orthodoxy, but its omission does not favor the left over any other perspective.

Not only does the MMT framework not privilege the left, but from my experience, the left is probably at least as wary of MMT as the right. The socialist left tends to resist MMT because it suggests managed capitalism can be made to work. It is not expedient for socialists to argue that capitalism could be viable but should nonetheless be overturned for reasons of social justice. It is stronger to say capitalism is unviable. End of story. This is a much simpler and – given recent economic history – readily accessible message. Most journals and newspapers of the socialist and communist left spout voodoo on fiscal and monetary matters. Their analyses of budget deficits and public debt usually accept the orthodox propaganda uncritically, because it suits them politically to do so. It suggests capitalism is “broke”. Of course they oppose austerity, but they conveniently accept that the austerity is “necessary” under capitalism and take this as evidence that capitalism must be overturned.

Often those on the liberal left don’t seem to like MMT either, because it suggests that there is no financial reason to tax the wealthy more or cut back on military expenditure. Most liberals do not seem keen to admit that their reasons for wanting these policies are other than financial. It makes it a more difficult political sell. Given the neo-liberal propaganda offensive of the past thirty-five years, it is much easier to say “the country can’t afford tax cuts for the wealthy” than to say, for instance, “tax cuts for the wealthy are inequitable”.

If anything, I think the only people with any power who have embraced elements of MMT are in the establishment, and largely on the right. In the U.S., politicians use knowledge of the implications of currency sovereignty to expand the military and cut taxes for the wealthy, then pretend not to comprehend when it comes to social expenditures. They understand the realities of currency sovereignty when it suits them. In Europe, this schizophrenic understanding is even more pronounced. The ECB kicks the can down the road by providing financial assistance to member governments (and hence the banks) on the proviso that austerity is unleashed on general communities to “pay” for the assistance. The ECB understands that such assistance can be provided indefinitely, but pretends not to understand the options available when it comes to job creation, public-sector wages, the welfare state, education, etc.

My own view is that capitalism could be managed in such a way as to deliver full employment and price stability under a renewed class compromise that distributed the benefits of economic growth more evenly, even though I am not in favor of such a preservation of capitalism. However, I do not believe capitalism will be run in this manner. My assessment of the positive possibilities under capitalism draws on my understanding of MMT, but my belief on where things are probably heading does not, since MMT is silent on such questions. Short of ending capitalism, I suspect things are only going to get worse. It seems to me that, right now, political leaders are knowingly trashing the global economy. Part of the motive is presumably to dismantle what remains of the welfare state and organized labor, particularly in Europe, which is really the last stand of anything vaguely resembling social democracy. There are presumably also other geopolitical goals behind the austerity and extreme concentration of wealth, although the motivations do not seem entirely clear. Imperialist rivalries, control of natural resources through military means, and the further curtailment of individual liberties and an encroaching surveillance state all seem to be part of the story.

In short, I think political leaders, policymakers and financial capital all understand perfectly well that austerity is based on a class-interested lie. They might not understand it as MMT, but they know the supposed need for austerity is their own concoction. The fiction is enabling a corrupt and extraordinary upward transfer of wealth along with the introduction of more draconian surveillance and police-state measures. It is general communities who do not appear to understand the true nature of the deception. They do recognize that their interests are being run roughshod over, but they buy into the lie that suggests there is no alternative to austerity. Many are also likely to go along with further infringements of liberty that occur in response to civil unrest. All this is a god-send for authoritarians on the center and right. It is not a good situation for the left, or for libertarians of the left and right.

From my perspective, the reason to disseminate MMT is not to privilege one political perspective over another. It is to empower general communities. Once we understand the possibilities (and limitations) inherent in a flexible exchange-rate fiat-currency system, we will be in a position to determine our preferred course and attempt, through collective action, to overcome the daunting political obstacles in our way. Whether that is a leftward, centrist or rightward course, it will at least be a self-determined one, and one that is actively chosen rather than passively accepted as the inevitable consequence of impersonal forces permitting no alternative.

169 thoughts on “MMT is Politically Open

  1. R.,

    Holy smokes. Still going on there.

    From the comments there, an ECB document quote:

    “A daily net balance vis-à-vis the ECB is derived from the TARGET2 settlement balances between the central banks of the ESCB. This balance is generally remunerated at the respective interest rate for the main refinancing operations.”

    Seems straight forward enough.

    Looks like a terribly convoluted discussion continuing there though.

    RE says:

    “As you say, Germany might lose its TARGET2 claim if the eurosystem vanished, but note that it would also lose according to its capital key if just Greece defaulted on its debt to the eurosystem. If Germany left the eurosystem, then presumably the eurosystem’s other members would have to either pay Germany off, or negotiate gradual repayment of its TARGET2 claim.”

    Something along the lines of what I said. The credit risk outcome depends on the particular scenario – e.g. Greek default versus full Euro system collapse.

    This guy Karl Whelan is unbelievable. It’s not atypical or even unreasonable for bloggers to repel commenters who disagree with them, but his style is very poor. I think both you and RE were quite courteous in your initial engagement. If he’s going to post on technical issues, he should be prepared for people who’ve done their technical homework. Quite insecure on his part, I’d say, and perhaps with good reason.

  2. BTW, his hangup with whether TARGET balances are classified as loans or not is quite immaterial; they’re credit and debit balances with similar money characteristics to revolving lines of credit for an indefinite duration – and they definitely take on the risk characteristics of loans if you start analyzing credit risk contingencies under various Euro default or break up scenarios

  3. JKH,

    I think the TARGET balances are paid at the main refinancing rate and opposite for negative balances. So Bundesbank is earning on them. However, there is a pooling of income and then this is distributed to all the NCBs. So Bundesbank is not really making all the interest, because some of it is given back .. or most – questions along those lines.

    Of course, this is of minor concern to me (more of a digression) because the asset itself is lost even if it making low returns in the scenarios in my thoughts.

  4. “BTW, his hangup with whether TARGET balances are classified as loans or not is quite immaterial; they’re credit and debit balances with similar money characteristics to revolving lines of credit for an indefinite duration – and they definitely take on the risk characteristics of loans if you start analyzing credit risk contingencies under various Euro default or break up scenarios”

    Exactly.

    Yes, we were all making technical arguments and he simply couldn’t handle the arguments.

    He called me an “an arrogant anonymous poster” privately!

  5. R–It seemed to me that Whelan was saying that those flows do not correspond to any underlying resources (e.g. his comment on CB assets not being a good way to think about national wealth).

    But if they in fact represent (some part of) an EZ current account deficit with respect to Germany, then that statement is surely unambiguously wrong (although I’m very rusty on this sort of stuff).

    I was going to say that it’s a pity that Whelan never addressed this argument explicitly, but then Nick Rowe appeared in the comments and asked him.

  6. Scott,

    Yes, one of those cases where manners are so bad, it almost obscures the more terrifying possibility that he really doesn’t know what he’s talking about, at least to the degree the manner strongly implies about self-regard for total mastery of the subject matter.

  7. Ramanan,

    Good report by Goldman.

    Although I think the way they’ve said this at the end is actually wrong:

    “By increasing its liquidity provision to Euro-zone banks, the European System of Central Banks (ECB plus national central banks) also inevitably increased the credit risk it faces, despite the various haircuts the ESCB applies to the collateral that is pledged. As the ECB has increased its funding to peripheral banks in particular, the risks the ESCB faces is also more concentrated in that region.The losses the ESCB might face, however, are distributed among the national central banks regardless of where they materialise. This is the case whether there are significant TARGET2 imbalances or not. The rise in TARGET2 imbalances has increased the risk for core central banks only to the extent that without these imbalances the liquidity provision of peripheral banks would have been smaller. But it is not clear to what extent the liquidity provision to peripheral banks would have been any smaller without the TARGET2 imbalances. After all, it is the repo operations (whether full allotment or not) and the collateral regime that decide on the size of the liquidity provision.Put differently, it was the decision to replace private funding through central bank liquidity that increased the risk the ESCB faces and not the fact that TARGET2 facilitated transfers from peripheral countries to the core. As long as peripheral central banks are able to replace private funding—and the limiting factor here is the amount of collateral that can be pledged—there is no additional risk due to TARGET2 imbalances.However, central banks in the core countries face one specific risk that can be traced back to the TARGET2 imbalances, and this refers to the possibility that a country might decide to leave the Euro area. In such a scenario, the net claims the remaining central banks have acquired vis-à-vis that country reflect a genuine risk that would not exist without these imbalances. This could in the extreme case of a total break-up of the Euro area, and assuming that the peripheral central banks could not repay their liabilities, mean that the losses would materialise on the Bundesbank’s balance sheet.Overall, barring any collapse of the Euro-zone, TARGET2 imbalances do not reflect an additional risk for core central banks. It is only if one or several countries were to decide to leave the Euro area that the imbalances would lead to potentially significant losses beyond the risk already reflected in the current generous liquidity provision through the ECB.”

    They seem to be saying there’s a counterfactual whereby peripheral banks could have relieved their liquidity pressures by other forms of central bank borrowng. But that’s incorrect. Given net capital flows, the central banks themselves must also adjust their relative reserve positions, and that requires a mechanism to resolve inter-CB reserve imbalances. And that requires a specific clearing system to do that. And that system is TARGET. It can’t be done without such a system if there is a net capital flow imbalance. If what he’s saying is that the same credit risk could have built up without net capital flow dislocation, that’s OK. But I’m not sure that’s what he’s saying. TARGET is required for the reserve dislocation that results from net private capital flows.

    Also, there’s a general false meme about TARGET that is common to both Goldman here as well as critics of Sinn. The false idea is that “there’s no risk unless there is risk”. That’s a redundant expression of risk logic, of course. Its the incipient privately unfunded net capital flows that reflect emerging pressures in credit risk maldistribution. I.e. net capital flows that can’t be financed privately are a sign of creeping risk even in the first instance. That’s in the nature of continous risk measurement. As it builds from the outset, the risk increases, based on EZ default and break up scenarios that are associated with that risk. There is no binary break point where risk “suddenly” appears due to TARGET imbalances. It’s a continous function. That’s possibly nit picky on my part, but its an important principle of risk measurement.

    (A minor point is that these reports tend to attribute TARGET imbalances to the failure of core commercial banks to finance their peripheral counterparts in the interbank market. That’s true to a degree, but the net position also reflects the failure of significant non-bank private sector players to continue to fund the periphery – e.g. core pension funds who pull back. The net reserve effect etc. is the same. For some reason, people tend to attribute reserve affecting activity to banks only – we’ve seen that in standard MMT descriptions, quite apart from the TARGET issue, as well.)

  8. JKH,

    I liked it and in fact wrote to the author to get the original and he was generous.

    Having said that, I fully agree with your point about non-private banking unable to fund themselves causing banks themselves to be in the position they are in now.

    The governments themselves saw losing foreign creditors losing interest. Recently I saw a graph on holding of government bonds by foreigners (which would comprise mostly foreigners inside the Euro Area, my judgement) and how it has shifted downward during the crisis. And of course private sector securities would also have suffered similar fate. Will try to find the graph. (But shouldn’t be surprising to you, given what you wrote)

    Before the crisis, home bias in portfolio preference went down as financial markets started investing outside their homes and when crisis hit, they moved funds back home.

    And I would read your comment from down to up and say that this caused the central banks to accommodate the needs of banks because in “good times” banks wouldn’t need to borrow much from other banks outside the country but since crisis hit coupled with the fact that banks have counterparty limits (which would have tightened during the crisis), the Eurosystem necessarily had to step in.

    However I think GS does go into that a bit not in the ending part, though

    GS: “Another possible scenario leading to funding strains for
    bank periphery is if deposits are withdrawn and
    transferred to bank core as depositors question the
    solvency of bank periphery. The underlying flows in this
    ‘capital flight’ scenario are identical to what is displayed
    in Table 3, and central bank core again acquires in that
    scenario a claim on central bank periphery, i.e., a
    TARGET2 imbalance opens up.”

    Overall, I would say that this one was better than other Sinn bashers and the author correctly avoids referring to anyone and simply states his views.

    Also better than Buiter who wasted a lot of ink with painful notations/unnecessary formulae.

  9. More thoughts:

    I guess what you are saying is that most of the analysis indirectly blame the banks for the TARGET imbalances rather than blaming the cross-border flow of funds which actually led to the imbalances.

    So

    “GS: “Another possible scenario leading to funding strains for …”

    is still weak because it included capital flight only for “deposit flows”, not for transactions involving pension funds selling assets (non-bank marketable securities) and shifting them back home.

  10. Sergei,

    Yeah GS chief economist Jan Hatzius is well aware of sectoral balances and imbalances. He had an article titled “The Un-Godley Private Sector deficit” once (early-2000s) and very well forecasted the coming recession around 2007, when the private sector expenditure was falling relative to income as the private sector debt started becoming unsustainable.

  11. Ramanan,

    Goldman does note net private capital flight on gross capital account as a distinct contributor to the problem, separate from current account imbalances. No problem there.

    From Goldman:

    “The losses the ESCB might face, however, are distributed among the national central banks regardless of where they materialise. This is the case whether there are significant TARGET2 imbalances or not.”

    That is correct insofar as the Eurosystem is designed such that the distribution of loss absorption in the normal course is independent of the distribution of loss origination. E.g. it’s designed such that losses on the books of the Greek NCB get allocated out pro rata regardless of the fact that they originated in Greece.

    But the fact of increasing net private capital flight is symptomatic of increasing risk in the very structural sustainability of the zone itself, specifically reflecting increasing risk origination in those parts from which capital is fleeing – e.g. Greece. TARGET imbalances are a direct manifestation of that net capital flight from more risky to less risky parts of the zone. As that risk distribution becomes increasingly skewed, it is indicative of the condition that the sustainability of the Eurozone itself has become more at risk – the pronounced risk skew is increasingly incompatible with the idea of intended risk sharing across the zone and the survival of that core idea of a currency union.

    And because of that increased existential risk, the normal formulaic distribution of losses itself becomes at risk. And to the degree that TARGET imbalances indicate all of that risk, including the risk to the normal loss sharing formula, there is an accompanying risk to Germany that the normal formula distribution of losses will collapse, and Germany will be on the hook for the huge build up of risk in its own TARGET balance – something that isn’t an issue in the normal course, but is an issue when capital flight and TARGET imblances reflect structural pressures on the very existence of the Eurozone.

    What Goldman is saying is true if your compare two cases – each with the same credit risk on the balance sheets of the peripheral commercial banks – but one with zero TARGET imbalances and the other with TARGET imbalances as they now exist. It is true that in the first case the system can fund the risk without resort to TARGET funding, by construction as a case of inter-NCB balance.

    But such a comparison itself is extremely unlikely in the first place. TARGET imbalances reflect capital flight that results from increasing concern about total risk build-up in the periphery.

    So TARGET imbalances are a meaningful indicator of risk in and of themselves, because of the heightened risk scenario they naturally imply, compared to a system that is still in balance from a TARGET perspective. It is reasonable to infer that the resulting maldistribution of risk indicates heightened perception of total risk. Goldman sort of recognizes this point but not in a way that acknowledges TARGET imbalances as part of the natural incremental development of overall risk in a system that might eventually collapse.

  12. JKH,

    “From Goldman:

    “The losses the ESCB might face, however, are distributed among the national central banks regardless of where they materialise. This is the case whether there are significant TARGET2 imbalances or not.””

    Yes, it is misleading to state it like the way GS did. The same was also done by the Bundesbank report on this.

    “Goldman sort of recognizes this point but not in a way that acknowledges TARGET imbalances as part of the natural incremental development of overall risk in a system that might eventually collapse.”

    Yes true. And the title of the ending you quoted originally “A genuine TARGET2 risk only in the event of a Euro area break-up” itself is kind of incorrect because the TARGET2 imbalance itself indicates a possibility of a breakup build up due to risk inherent in the whole system.

    “the pronounced risk skew is increasingly incompatible with the idea of intended risk sharing across the zone and the survival of that core idea of a currency union.

    And because of that increased existential risk, the normal formulaic distribution of losses itself becomes at risk.”

    Yes understand now better thanks to your point. When I saw Bundesbank’s analysis of the risk sharing and underplaying it by saying that it is shared etc, it confused me a bit. And almost everyone seems to be using this.

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