Welcome to heteconomist: MMT and the Crisis

The global economic crisis, and government policy responses to it, have sparked controversy and debate. Many claim that the deficit expenditures undertaken in countries such as the US and Japan will impose higher tax rates and interest rates on future generations, and some fear a collapse in the dollar and runaway inflation. The problems faced by Greece, Ireland, Spain and other vulnerable members of the European Monetary Union are interpreted as omens of the fate about to befall the US and other nations unless fiscal austerity is imposed and public debt dramatically reduced.

The economic problems we face are great, but the true dangers are not budget deficits or public debt but the risk that these non-problems will be used as a pretext for failing to address the real problems: mass underemployment, extreme inequality and poverty, environmental degradation, the corruption of government and a powerful financial elite and the system itself that produces these outcomes. The fact that austerity measures could even be contemplated at a time of high unemployment and excess capacity indicates the effectiveness of the neoliberal propaganda blitz of the past thirty-five years. The mania has led numerous European countries to tie themselves voluntarily to a single-currency arrangement that now impedes their policy response to the crisis, and has enabled the IMF to impose counterproductive policy prescriptions on the governments of many low-income countries. The consequences of austerity measures under current circumstances can only be socially divisive. And with personal freedoms and liberty already under attack in the name of the “war on terror”, state responses to dissent may well be brutal. The policy options available to governments of EMU nations or IMF victims are currently limited, but the governments of other countries have more policy freedom at their disposal if they choose to use it.

Underpinning much of the angst over budget deficits and public debt is a failure to distinguish nations that have tied themselves to a common currency from those who have retained full sovereignty. The governments of the US, Canada, Japan, the UK, Denmark and many other nations are monopoly issuers of their own flexible exchange-rate fiat currencies. These governments have the fiscal capacity to respond to the crisis if there is the political will to do so. Much of the confusion on this point is encouraged by those in powerful positions who have a vested interest in spreading misinformation. The crisis, by bringing mass unemployment and underemployment, provides a small and privileged elite with a big opportunity to attack wages, working conditions, social policies and general living conditions, and continue a massive upward redistribution of income and wealth. Spreading lies to feed an irrational fear of budget deficits and public debt legitimizes savage cutbacks in social expenditures and plays into elite hands.

We can get a sense of the dishonesty in the reaction of the elites to the bank bailouts. If they really thought government solvency was at risk, they would have been aghast at the massive public purchase of toxic assets. But government insolvency is not their real concern. The thought that government policy might partly serve the interests of the wider community is the real source of consternation. And if it were really self-evident that budget deficits and public debt portended disaster, how could the budget deficits and public debt at the end of WWII, which were more than twice the current levels as proportions of GDP, directly precede the “golden period” of low-inflation capitalist growth? Such observations hardly settle the matter, of course, but the post-war experience should at least give pause for thought.

An important purpose of this blog is to draw attention to the work of economists who clearly understand the nature and implications of existing monetary systems and have developed a coherent stock-flow consistent analytical framework in which to analyze macroeconomic issues. The framework, Modern Monetary Theory (MMT), a modern formulation of chartalism, reflects the actual institutional and operational features of modern monetary systems. A ‘modern monetary system’ is taken to mean a system in which the government is the monopoly issuer of its own flexible exchange-rate fiat currency. MMT suggests that flexible exchange-rate fiat money has important advantages over other monetary systems by giving sovereign governments greater policy freedom.

Many posts on this blog, particularly early on, will be concerned with explaining core concepts of MMT. These concepts, in their modern formulation, were initially developed by a handful of people including (in alphabetical order) Bill Mitchell, Warren Mosler and Randall Wray, but there are strong antecedents in the history of economic thought that can be traced back at least as far as Marx (realization crises, monetary circuit and, for some though not others, surplus labor as the source of profit), Alfred Mitchell-Innes and George Friedrich Knapp (chartalism), Keynes and Michal Kalecki (theory of effective demand), the functional finance insights of Abba Lerner, the financial instability hypothesis of Hyman Minsky, the stock-flow consistent framework of Wynne Godley and his circle in Cambridge, UK, and important contributions emerging out of the Post Keynesian school, notably theories of endogenous money and the monetary circuit. The foundational insights on contemporary monetary operations are due to Mosler. Further development of MMT is currently being led by economists centered at the University of Kansas City, Missouri (UMKC). Other prominent Modern Monetary Theorists, around right from the beginning or very nearly so, include (again in alphabetical order) Mathew Forstater, Scott Fullwiler, Stephanie Kelton, Rob Parenteau, Pavlina Tcherneva and Eric Tymoigne.

Understanding the basics of Modern Monetary Theory makes it possible to explore the implications of fiat money. It will be argued that the implications are far-reaching, not just in coming to terms with crises and policy issues, but for understanding the alternative paths that are open to us.

My basic position can be briefly indicated from the outset. In a commodity-backed money system or common currency arrangement, external undemocratic constraints are imposed on the government which limit its freedom to use fiscal policy for public purpose. A consequence of this is that government – and society as a whole – becomes subservient to the logic of capital. In these systems, the logic of capital not only dictates private-sector activity, but continually and increasingly encroaches on non-market social spheres. In contrast, fiat money, if put to effective use, can free government policy from the dictates of capital to the extent that society – through democratic means – deems this appropriate. The implication is that capital, which is determining under alternative monetary systems, can be restricted and made subject to societal demands in a fiat-money system, if in fact society wants capital to exist at all.

The implications of fiat money appear to be liberating for people of all political persuasions. For right-libertarians or conservatives who want small government and an economy dominated by private-sector activity, MMT indicates how this can be achieved within a fiat-money system, and the policy considerations that are likely to arise. For social democrats, liberals and moderates who, in varying degrees, want the government and public sector to play a larger role in the economy, MMT provides a sound basis for policies conducive to a mixed economy. For left-libertarians and socialists, I will argue that fiat money offers freedom from the dictates of capital, and offers a possible path not only to socialism but eventually to its higher forms; a path that is non-utopian yet makes conceivable the gradual withering away of the wage labor relation and an eventual separation of income from labor time. Such a path could only be pursued through struggle, but fiat money provides the possibility.

At this stage, these claims will appear to be mere assertions. The arguments behind them require fleshing out in posts to come. Hopefully the effect will be stimulating. Irrespective of ideological differences, it is empowering to come to grips with how the system actually works and to perceive clearly the options available to us.


14 thoughts on “Welcome to heteconomist: MMT and the Crisis

  1. Thank you for this Blog. I’ve read Mosler’s “Seven Deadly Innocent Frauds of Economic Policy.” until the pages are tattered and worn. Your Blog presents the same basic material in a broader context particularly the comparative analysis of gold v fiat and fixed v flexible.

    All I need now is a workable link to Prof Steve Keens’ interactive models and I’m a very happy MMT camper.

    By-the-by what are copywrite rules for reposting your Blog with attribution. Pls respond if you can using my email address. Thank you.

  2. Potomac, email sent. Glad you find the blog worthwhile.

    I will mention here also that people should feel free to re-post with attribution materials from the blog. Anything that helps disseminate the understanding made possible by MMT and related approaches is appreciated. Thanks.

  3. And so begins my heteconomist journey through ‘Posts to Read First’. See you on the other side…

  4. Peter: Found your site after browsing material from Cullen Roche (while doing a study on currency regimes and monetary policy). Great material, and your writing is so non-abrasive and thoughtout. Please keep up the great work!

  5. One thing I have not see in what MMT literature I have read is a recognition that in the US fiat money system, there is no national debt, ever. As I understand it the basis for common thought on the national debt is that the Treasury has to borrow money to fund deficit spending. It does this by issuing Treasury securities (T-bills), which are sold at public auction to banks and other large financial institutions. The securities are IOU’s of the government of the United States to the banks that end up purchasing the securities. Treasury gets its money for deficit spending from the sale. So, at this point the government owes the banks for the money it got. But that is not the end of it. And I think from this point on is where there is a lot of murkey and erroneous understanding of what happens next as the Fed acquires these same securities from the banks.

    The national debt is supposed to be the accumulated debt of all the securities the Fed has acquired over the years that has not been redeemed. Somehow for those thinking there is now a debt at the Fed, they have not paid attention to how the Fed acquires the securities in the first place. And they don’t pay attention to what the Fed is with respect to the government. These are not basically economical matters, but institutional and legal matters. So, economists don’t always know these details either. As far as I’ve been able to discern, and I hope someone will correct me or give a more accurate account, the Fed acquires these securities by purchasing them at the public auction from the banks with fiat money the Fed makes up out of thin air. Or the Fed abhors the drop in reserves of the banks that bought the securities (large amounts) and augments their reserves in return for the securities. In any case the Fed has acquired the securities with fiat money made up out of thin air. Now we know that the banks could have sold these securities to other banks, and the government would have to pay them the principal plus interest to get the securities back. So, the debt obligation goes to the new owners. It may be that many think this is the case with the Federal Reserve Bank. And that may be the basis for a sustained belief in the existence of the national debt. But I think what is overlooked in that case is that the Federal Reserve is an agency of the government, “independent but within the government”. And the making of fiat money out of thin air is in the United States a power given only to Congress or whomever it delegates this power to. Once we realize this, the usual laws of debts comes into play.

    The government has redeemed its debt in the very act that the Fed as an agency of government using government powers to create money used to acquire the securities. The result is that there is no government debt at the Fed.

    It would be the same if the Treasury redeemed the debt by buying back the securities with Treasury notes, which are also fiat money created out of thin air.

    The fiat dollars introduced into the economy by the Fed through the banks is debt-free. Nothing is owed to the Fed for the dollars. Nor does it make any sense to think the Fed would need back the dollars it creates out of nothing. (This is not true under a gold-based dollar, in which the Fed would need to be reimbursed with gold-based dollars already in existence that it had created earlier). So, there is no national debt. Deficits in a fiat money system are debt-free.

    Now, I admit a lot of important people seem not to recognize these facts. At this writing I’m not sure that President Obama fully appreciates them. I wonder if the Fed itself, especially some of its Governing Board, fully appreciate this.

    I’ve even had speculations of a conspiratorial nature that the Fed is concealing these facts because it has a cash cow in the accumulated interest on the growing number of accumulated securities that are being rolled over year after year. If I am correct some of those interest payments may technically be illegal. My analysis would only permit a one-time payment to the Fed of 6% of the interest of the security, which is a transaction fee. That has to be given the Fed separately from the securities redeemed, since all of the interest would have to go to the bank.

    Now it would be unseemly if the Fed created its own fiat money to pay itself its transaction fees. Where would autonomous behavior end? It is better to prevent it. And as I see it, the Treasury could issue additional securities to acquire money in existence from the banks to cover these transaction fees on securities acquired by the Fed. Banks would provide the Treasury with money, the Fed would acquire the securities and redeem the debt the Treasury created for the government. But the Treasury gets its money from the bank and pays the Fed. This is designed to keep Fed and Treasury “independent”. The Fed is prohibited by law from buying securities directly from the Treasury. The current system gets around this by using private intermediary banks as middlemen to allow the Treasury to have new debt-free fiat money created by the Fed and introduced into the economy matching the money Treasury gets from the banks.

  6. MMTdebtkiller, thanks for your comment. I’ve been hoping somebody more knowledgeable on the finer points of U.S. law and monetary operations might jump in. I’m not sure if this is concerned quite with the point you are discussing, but if you haven’t seen it previously, the following paper by Scott Fullwiler may be of assistance:

    Treasury Debt Operations: An Analysis Integrating Social Fabric Matrix and Social Accounting Matrix Methodologies

    In general, anything by Fullwiler is well worth reading, but I am not sure if your particular concern is addressed.

  7. Hey Peter,

    I think with your “Crappy Jobs” post you may have attracted the wrath of the Catallaxy Files crowd…

    Is that, or the Apple Inc fans believe you are badmouthing the late Steve J.

    Either way, lucky you! 😉

  8. If I’d known that that post would get some attention, I probably would have written a serious version. (No, not really. I’m not that self-disciplined.)

    I stand by the argument as far as it goes, but it is not meant to be the theory of everything. It is, at most, a “theory of an implication or two of on-the-job learning for the capitalist tendency toward deskilling and/or competition between individual workers for good jobs”.

    Incidentally, your alternative interpretation got me thinking about a Marxian version of the learning curve, but now it seems like overkill to post on the topic again. I was going to blend in ‘simple’ versus ‘complex’ labor with learning, inverting the curve to make it in terms of surplus value. Maybe I still will, after a discreet interval, veiled in a low-key — boring, if possible — and believe me, it is possible — form.

    PS: I don’t know if it was accidental, but your comment is well placed here. Future generations of “Heteconomistas” may stumble upon the post and share in the “mirth”, “bemusement” or “outrage”.

  9. U.S. job satisfaction hits 22-year low (2010)


    New Survey: Majority of Employees Dissatisfied (2012)


    “Right Management ran the online survey between April 16 and May 15, and culled responses from 411 workers in the U.S. and Canada. Only 19% said they were satisfied with their jobs. Another 16% said they were “somewhat satisfied.” But the rest, nearly two-thirds of respondents, said they were not happy at work. Twenty-one percent said they were “somewhat unsatisfied” and 44% said they were “unsatisfied.”

    Employee Loyalty Dropping Worldwide

    Susan Adams
    Forbes Staff

    The Unhappiest Jobs In America

    Jacquelyn Smith
    Forbes Staff

    “Staffing firms and consultants release employee engagement and loyalty surveys periodically. The news on this front has not been good for some time. In November, I reported on a more in-depth study, a Mercer survey of 30,000 workers worldwide, which showed that between 28% and 56% of employees in 17 spots around the globe wanted to leave their jobs. In the U.S., 32% said they wanted to find new work. That’s about half of the 65% of respondents to the Right Management survey, who said they were either somewhat or totally unsatisfied.

    “What’s the message to employers? A lot of unhappy workers are staying put. But if  employers want an upbeat, engaged workforce, they need to find ways to help employees feel challenged and rewarded by work.”

  10. The first thing with which this blog caught my attention was with its head banner with the beautifully pixelated eyes. DON’T EVER CHANGE IT! As for the rest of the content, it’s simply MMT inside. 😉

  11. The claim that by controlling the amount of money in circulation a government can reduce unemployment and avert similar evils of the social system, namely MMT is false!

    In particular the reason for unemployment is not due to the amount of money that is circulating or is available for investment, but it is due to the lack of opportunity to work. This opportunity is monopolized by those who have rights to our natural resources, mainly land, that is one of the three necessary factors for production to occur (Adam Smith — 3 factors of production, Land, Labor and Capital).

    The theory of how economics works has become a political matter and since the time when John Bates Clark (about 1900) introduced the idea that the land value is a part of the capitalistic system and it can be controlled as if it were an aspect of cooperate management, has the emphasis on limitations been deliberately and wrongly placed on money. By this deceit and by the way that land laws permit land to be withheld from use and its value allowed to grow and to be speculated in, there is a serious limitation on how much money people can earn at their jobs.

    The management of access to land means that the competition for suitable jobs stops the less able parts of the community from finding work and it means that there will be a deliberate amount of unemployment. Worse, it also means that without having the means for a steady income of sufficient size, many families will become poor and need to depend on the community for support. All of this is because a relatively few greedy monopolists will not share the rights for access to natural resources. Since the availability of these resources should be regarded as a human right, the withholding of land is immoral and damaging to the progress of the community.

    The deliberate neglect of these issues has brought us to believe that the control of the national progress is due to money and not land access. Thus MMT is in fact being used by land monopolists to convince us that they are not to blame and that the regular business cycles are due to poor government of money and not due to the way that land speculation causes our social system to become naturally unstable.

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