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.