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MMT and Russia

December 18th, 2014

Whenever I post anything about taxation and public expenditure, it’s a good bet that someone will pop up in the comments section to claim that, according to Modern Monetary Theory, states that issue their own currency don’t need taxation to finance public expenditure. That’s a misunderstanding of the theory, but it’s proved hard to explain this. The current crisis in Russia provides a teachable moment.

Russia is facing a lot of difficulties because of the drastic fall in the price of oil (more on this soon I hope), along with sanctions imposed following the war with Ukraine. The government depends on oil for around half its revenue, and it looks as if the drop in the oil price will be sustained for a while. But of course the Russian government can print as many rubles as it wants[^1]

Why, then, is there a problem? Modern Monetary Theory says that governments should not worry about the budget deficit. Rather, they should determine the appropriate level of public expenditure on standard economic grounds, then work out the desired rate of monetary expansion (in effect, a tax on money balances) based on the macroeconomic needs of the economy. Ordinary tax revenue is then determined as a residual, the difference between the desired level of spending and the desired level on monetary growth.

That’s a useful way to look at things, but it doesn’t make the problem of financing public expenditure go away. If oil tax revenue drops, and nothing else changes, some other source of revenue (that is, tax) must be made to keep the rate of monetary growth at its desired level, or else spending must be reduced.

In Russia’s case, the economic downturn implies the desirability of some monetary expansion, but that’s limited by inflation, currently running at 9 per cent and likely to accelerate as the plunge in the value of the ruble feeds into import prices.

To sum up, while MMT provides a different and sometimes useful way of looking at the interaction between monetary and fiscal policy, it doesn’t change the basic equation that, in the long run, public expenditure is paid for by taxes

[^1]: And is suspected of doing so to help some of Putin’s friends, but that’s a side issue.

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  1. Troy Prideaux
    December 18th, 2014 at 07:29 | #1

    I see the Americans didn’t shy away from going straight for the jugular announcing a potential increase in sanctions immediately following the run on the ruble.
    Yes, I’m interested to hear what the MMT advocates say about this situation? (in a genuine curious sense)

  2. Ikonoclast
    December 18th, 2014 at 09:14 | #2

    Topic 1

    MMT uses at least one formal argument that is fallacious. Strangely enough it is a rhetorical argument or device not a real or substantive argument that has a bearing on the substance of MMT. Nevertheless, MMT proponents are wedded to it and cannot be convinced that it is a fallacy.

    MMT argues that expenditure precedes taxation. The corollary, which is explicitly stated, is that money is created via budget expenditure and destroyed by taxation. I argue the fact is you can look at matters in this way if you like and you can look at matters in the opposite way if you like and it makes no difference.

    Money is a notional quantity not a real quantity. This means that the process of creating and destroying money is not like the process of creating and destroying cars (real objects).

    A balanced budget according to MMT looks like this. Let’s assume the budget expends 1 of something, maybe 1 trillion dollars. Expends means spends it into the economy. And yes, the maths is really simple. Let’s further assume that each mathematical operator implies some finite elapse of time so each numeral is in a later time state. I have to state this because I don’t know the notation that would indicate this.

    +1 – 1 = 0

    The above is the MMT conception of expenditure and taxation. I can almost hear Seinfeld saying it. “First you create the money, then you destroy the money.”

    The person in the street does not see it this way. To them money is already existent, so they see the opposite process from their point of view. Their mental Seinfeld says “First you tax the money, then you spend the money.”

    -1 + 1 = 0.

    Taxing money takes it out of the economy and government spending puts it back in the ecoonomy, at least in this view.

    The two processes are not different because they deal with a notional quantity. If it were a real quantity like a car then it would matter.

    +1 – 1 = 0 in this case means make a car, destroy a car and have zero cars at the end of the process.

    -1 + 1 = 0 means this in full. Start with zero cars, destroy one car and then make one car and have zero cars left at the end of the process.

    So I try to tell MMT proponents that it doesn’t matter which way you view it as it is a process involving notional quantities. I also tried to tell them that as this contra common sense view has no more and no less formal justification than the standard view and just confuses and alienates the person in the street then it’s not worth arguing it. Ya can tell ’em that but they don’t believe ya.

    Topic 2.

    “That’s a useful way to look at things, but it doesn’t make the problem of financing public expenditure go away.” – JQ.

    Overall, I think MMT can be a useful way of looking at things but I don’t accept it uncritically. I agree with JQ’s statement in the very literal sense. MMT does not make the problem of financing public expenditure go away but it might change how you approach it at least on some occasions. (It might change it from the standard neoliberal approach but then Keynesianism of almost any variety might change it too from the standard neoliberal approach.)

    The neoliberal approach seems to be that, failing adequate revenue collection, the state HAS to borrow from private funds domestically or abroad to finance the deficit. Here is an orthodox neoliberal pronouncement on the issue.

    “The level of government borrowing is an important part of fiscal policy and management of aggregate demand in any economy. When the government is running a budget deficit, it means that in a given year, total government expenditure exceeds total tax revenue.

    If the government is running a budget deficit, it has to borrow this money through the issue of government debt such as Treasury Bills and long-term government bonds. The issue of debt is done by the central bank and involves selling debt to the bond and bill markets. Most of the government debt is bought up by financial institutions but individuals can buy bonds, premium bonds and buy national savings certificates.”

    Notice the word “has”. A government can borrow in this manner but does it always have to borrow and does it always have to borrow in this manner? The international neoliberal program seeks to capture nations in a net where the near risk-free profits of financing a government’s deficit always go to private financial capital.

    Surely a state bank can issue debt against the deficit? It’s a pure accounting move of course and the government can print the money and pay its bank and thus itself back later. I suspect a large nation with its own currency can do this and defy international financial capital at least to some extent.

    Ultimately economic limits are real not notional but the behaviour and use of finance can and does feed back and greatly affect the real system. A government could print as much money as it likes but if there are not enough real goods and services to buy domestically it will cause undue inflation. Or more precisely, if capacity constraints limit production increases despite the stimulus then inflation will occur.

    I think MMT to some extent is just arguing against neoliberal ideology and the capture of government macroeconomic policy by global finance capital. Some of MMT’s rhetorical devices are not helpful to its cause but you cannot tell its major proponents that; at least I made no headway in the attempt.

  3. December 18th, 2014 at 09:34 | #3

    I think your last sentence should finish “public expenditure is paid for by resources” (i.e. not taxes). Automatic stabilisers arise through greater public ‘borrowing’ (money creation) in downturns.

    My understanding of MMT is that is says exactly what you say. The real limits are not monetary but real. So if foreigners are giving Russia fewer widgets per barrel of oil because of relative price changes on international markets, then local prices will increase in terms of Rubles (inflation), and local idle resources may be engaged in production because of the relative attractiveness of local consumption.

    Since Russian inflation has been pretty stable at around 10% for the past 15 years, I don’t see a blow out to 12-13% being a major disruption to local production.

    Also, I’ve asked Bill Mitchell for a response, because I too am interested about what MMT makes of this, and repeated, currency crises.

  4. Ikonoclast
    December 18th, 2014 at 10:27 | #4

    Clearly sanctions are a concerted, coordinated attack on Russia. That’s a fact on the public record. However, the drop in oil price also looks very suspicious and engineered to me. If the LIBOR could be rigged by world oligarchic capital then it seems clear that the oil price could be rigged by world oligarchic capital and certain governments (specifically USA and Saudi Arabia). There are certainly accusations around that other key commodity prices like the gold price suffer rigging from time to time .

    Sanctions on a significant nation are likely to slow trade and global growth and thus reduce oil demand and oil price. But I suspect what one might call cartel collusion in this case has gone further to rig the oil price low to damage Russia. In this case the “cartel” includes big oil producing nation states like USA and Saudi Arabia (where it is a state operation anyway). It wouldn’t be hard for the USA to use a stick and a carrot to induce Saudi Arabia to keep over-producing relative to demand. There’s the side benefit that Venezuela is also hurt. Two for the price of one!

    I find it very hard to believe oil prices are ever real at all in the sense of being real competitive market prices. They are oligopoly prices, cartel prices, geo-economically and geostrategically set prices controlled by a handful of big players. These are as I said certain TNCs (transnational corporations) and a few governments powerful militarily or in oil or in both.

    Is the rouble’s inflationary trouble entirely domestic or is the currency being attacked? The Russian Minister of the economy has said “We believe that of course the exchange rate does not correspond with the fundamental macroeconomic environment. We see how it has diverged from fluctuations in oil prices.” Of course, he would say that as would any Minister of the economy for any country. But if he is actually right then he is saying one of two things. Global markets are mispricing the rouble or they have been manipulated to attack the rouble.

    The World Socialist Website says;

    “There are several factors behind the enormous devaluation of the ruble. The main causes are the sanctions imposed by the West in connection with the events in Ukraine, the falling price of oil, and speculative attacks on the ruble, which have escalated since the Ukrainian elections. The attacks on the ruble are part of an economic war waged by the US and the European Union (EU) against Russia in order to force the Putin regime to its knees and effect a change of government.

    Evidence suggests that the devaluation of the Russian currency is substantially the result of deliberate attacks on the Russian economy, designed to drive the country into recession.”

    A Zeit Online report on Washington’s financial war against Russia suggests that the collapse of the ruble and declines on Russian equities markets are at least in part attributable to targeted attacks by the US government. The article focuses on Daniel L. Glaser, a representative of the US Treasury’s “anti-terrorist operations” unit. Since 2001, Glaser has played a leading role in developing economic warfare measures against Iran and several other countries. Commenting on the ruble devaluation and decline of stock prices in Russia, he told Zei t Online: “So far, we have never done anything on this scale. But we are learning how to do so with each measure we take.”

    The bottom line is that anyone who believes what happens in international economics IS economics is completely naive. It is geostrategy (where it is not exploitation). It is war by other means. Constructive manipulation is difficult. But destructive manipulation (sabotage) is relatively straightforward. Remember the rubric “motive, means and opportunity”.

    A nation will accept some destruction if it believes it will inflict greater destruction on the enemy. If this were not true no war would ever be fought. The same principle applies to economic war. A nation will accept some economic damage up to the point of serious and effective domestic pushback if it believes it will inflict greater economic damage on its opponent and this will lead to a persisting advantage in relative terms.

    In fact, at this point the USA probably benefits overall from lower oil prices except in some sectors like fracking for oil. And they can pay off Saudia Arabia later with cheap, subsidised, semi-obsolete military hardware.

  5. Troy Prideaux
    December 18th, 2014 at 10:51 | #5

    @Ikonoclast
    Fascinating situation. There are plausible arguments both ways. The flip side arguments:

    “The sharp oil price fall from $100 last summer to below $80 in just three months will bankrupt small US oil producers who need at least $80 per barrel to be profitable”

    “Back in 2005, the US had to import 60 per cent of its supplies from abroad. By 2014, however, the USA only needs to import 30 per cent of its oil consumption. The oil revolution is paying off: too much oil is now on the market, causing prices to drop”

    “In the US, it would be in the general economy’s interests for oil prices to be low, but a low oil price would damage large American corporations that have influence with national politicians through election fund contribution and targeted job creation.”

    all quotes from oil-price.net

  6. Ikonoclast
    December 18th, 2014 at 11:00 | #6

    This is brilliant and thoroughly correct analysis of the Russia question.

    http://www.counterpunch.org/2014/12/09/washingtons-frozen-war-against-russia/

  7. himi
    December 18th, 2014 at 12:48 | #7

    My understanding of the core of MMT (assuming it’s at least substantially correct) is that it’s not a case of the government being required to use taxes to finance expenditure – rather, the (idealised MMT) government finances expenditure by the creation of new money, and then uses taxation as a means of controlling the impact that new money has on the level of prices in the economy, taking into account the balance of other money sources/sinks (the external trade balance and the balance between private saving and spending).

    If I’m understanding Pr. Quiggin here, he doesn’t seem to be acknowledging that the government /can/ simply print more money in order to purchase the goods and services that it needs/wants (i.e. just get the Reserve Bank to change the numbers in the appropriate accounts that the commercial banks have with them, so that people providing services to the government will end up with more money in their savings accounts). He stated that somehow or other some source of revenue external to the government needs to be found:

    If oil tax revenue drops, and nothing else changes, some other source of revenue (that is, tax) must be made to keep the rate of monetary growth at its desired level, or else spending must be reduced.

    But my understanding of MMT is that this is /not/ true. In the case of Russia that would mean that instead of raising taxes or something like that, the government can simply pull rubles out of their arse in order to make up the lost economic activity – with the proviso that a) this may have an impact on the internal value of the ruble (inflation/deflation), and b) the changes in the external value of the ruble and the impact that has on trade balance and the price of imported goods and services (i.e. inflation/deflation) and so forth need also to be considered.

    It’s obviously not a simple matter when you go from the idealised models to a real-world situation, but the core idea (that the government never needs to worry about getting money from elsewhere, just the amount that’s currently sloshing around the economy and the level of economic activity that’s associated with it) doesn’t seem to match what Pr. Quiggin is talking about . . .

    Obviously, all this is modulo any misunderstanding I have of the basics of MMT or the point that Pr. Quiggin is making – I’m happy to be corrected on any of these points.

    himi

  8. Nicholas
    December 18th, 2014 at 13:05 | #8

    I’m a layperson who is currently reading books about modern money theory by L Randall Wray, Warren Mosler, and Frank Newman. Their arguments are mostly about the United States situation, particularly the facts that:

    the market for US Treasury bonds is the largest and deepest government bond market in the world

    the USD is the world’s de facto reserve currency

    the US has a decent tax base (could be improved, certainly, but not too bad)

    the US has the rule of law

    None of those conditions apply to Russia and the rouble.

    The market for Russian government bonds is neither large no deep.

    Russians with money get their hands on as much USD and Euro financial wealth as possible because these assets are outside the Russian monetary system, and therefore beyond the reach of grasping kleptocratic hands. Demand for rouble-denominated assets is low.

    Russia’s tax system is terrible. The base is too narrow; enforcement is arbitrary. This means it is easy for too many roubles to accumulate in the money supply, creating inflation, instead of being taken out of circulation by taxation.

    Russia’s basic financial transactions and ability to sell its goods is severely curtailed by sanctions (thoroughly justified sanctions, but the point is this creates an abnormal situation, making Russia a special case).

    My understanding of MMT is that it conceptualizes taxation as essential for three reasons:

    To make it necessary for everyone to get their hands on some of the local currency so that they can pay their tax liability to the government. This makes the currency valuable and it encourages people to use it in all transactions, not only in discharging tax liabilities.

    To take money out of the economy when the economy is pushing against capacity constraints; to put money into the economy (through tax cuts) when the economy is stagnant or contracting.

    To achieve desired distributive outcomes.

    So MMT’s claim is not that taxation is unimportant – it is essential. It’s just that taxation is not how the government actually finances its spending when you look at the day-to-day accounting realities of how it is done.

    I don’t regard MMT as claiming that any nation, no matter how corrupt, how inept, how bad at collecting revenue, and how stifled by sanctions, can get itself out of economic trouble by issuing more fiat currency. I think the theory applies to countries with sound political and monetary systems, and most particularly it is a refutation of the canard that US Treasury bonds outstanding constitute a form of debt analogous to household or business debt.

  9. Peter T
    December 18th, 2014 at 14:38 | #9

    One would think that the failure of the monetarist experiment in the UK (and elsewhere) in the 80s, with the frank admission that the government or central bank has no real idea how much “money” is out there or how fast it is moving would have prompted some re-examination. This being economics, where zombie ideas lurch on century after century, maybe not.

    “Money” is created all the time, by people running tabs at corner stores, companies issuing paper, credit companies giving out cards, banks making loans and so on. For some thousands of years it has been convenient to use one of a small number of standards of account: mina, denarii, florins, marks, pounds etc. This money is “destroyed” either by completion of the exchange, or by being written off. Part of the game is to trade from soft money up to hard money – ie from less liquid or reliable forms of money to more liquid or reliable ones. Gold or silver were traditionally the hardest forms, but never the only or most common forms (there is always a much larger amount of “money” in circulation of hoard than all forms of cash together could cover: cash is just immediate proof of soundness (Clausewitz: “Battle is to war what cash settlement is to trade”).

    Governments, like anyone else, can make any amount of promises (that is, issue more notes). Can they meet them? Not always. In this case, the Russian government finds itself unable to cover its promises due to the oil price fall, sanctions and its own spending priorities. It could – probably will – make more promises. Will they be believed?

  10. Ikonoclast
    December 18th, 2014 at 15:15 | #10

    My argument is that financially it is meaningless to claim that the following two statements have any real or functional difference in the case of a balanced budget. (By extension of reasoning we could show they have no real or functional difference for unbalanced budgets either.)

    (A) You create money by expenditure and then destroy it by taxation.
    (B) You tax existing money and then you spend existing money.

    Mathematically the above equate to;

    (A) +1 – 1 = 0
    (B) -1 + 1 = 0

    These mathematical statements are equivalent for notional quantities. Of course, they are not equivalent for real quantities, say cars.

    With real quantities, you can do A from scratch:

    Have zero cars, then create a car, then destroy a car and have zero cars remaining.

    But you cannot do B from scratch:

    Have zero cars, destroy a car, have minus one cars and then create a car and have zero cars remaining.

    MMT seems to insist on A as the only real way of looking at the notional system. MMT proponents seem to think this makes some real difference to their case when it is at best a rhetorical device to get people to see that money (a notional quantity) can be created ex nihilo by “printing money”.

    MMT proponents use various examples to attempt to “prove” that the notional processes (A and B) are different. One example is year zero of new country. Let’s call the country New Pacifica which will fiat issue Nepacs as their currency. They say there is no currency to start with and that currency must be created before it is destroyed. In a notes and coin sense this might true for physical legal tender but in an accounting sense it is not true at all. So, they fall for the fallacy of false or misplaced concreteness (reification).

    Let our example be all about ledger, balance sheet or electronic currency not physical notes and coin. Following MMT proponents, the Nepac must be created as budget spending and credited to accounts before people can pay taxes and thus allow the state to notionally destroy the currency again. However, in reality the Nepac only has to be created as a category with financial and legal reality to be “notionally real”.

    People could easily accrue tax obligations as negative values in their account or ledger before positive values are credited. That is to say, taxation could start before government spending. The New Pacifica government might decide (somewhat unwisely perhaps) to have a poll tax or a window tax and levy it up front at the start of each financial year. Thus they could levy this tax first in year zero and negatively credit every potential taxpayer’s account. Now New Pacifica has positive numbers on its government budget balance sheet and can start spending. You could do it either way, it doesn’t matter.

    The other artificial aspect of MMT’s year zero example is that there is never really a neat year zero in empirical reality. Before year zero, money or proto-money exists in some form before the creation of the new fiat currency. So, there is (or should be) for economic, social and equity reasons a conversion process. In New Pacifica, coconuts could have been a barter medium and thus a proto-currency. The government guarantees to change one cococut for 1 Nepac in a transition period. Thus you can eat your coconut, barter it or exchange it for 1 Nepac. But if you want to pay your 1 Nepac poll tax or window tax (to get your account back to zero) you must exchange 1 coconut for 1 Nepac at the State Bank then walk across the road to the New Pacifica Tax Office and pay 1 Nepac. (The government separates these sites for both administative and re-educational reasons. They want to re-educate the populace to use a fiat currency and separate it in their minds from barter.) Thus another part of MMT’s argument holds. You do have to hold the fiat currency to extinguish tax obligations.

    In a way, in the transition process you are extinguishing your tax obligation with a coconut but in a two step process. It’s not so different from any currency transition where two currencies are legal tender for a while. In the long run though you must have Nepacs to extinguish tax obligations in New Pacifica.

    MMT should drop the argument that the budget creates all the budget money and that later taxation destroys it. In the repeated annual circuit of finance such chicken and egg arguments about primacy in a notional system are pointless. They are even pointless in the year zero case as I demonstrated.

    Plus it is a bad rhetorical device. It alienates the person in the street when (a little naively)they see it the other way. They can be left to see it the other way and they can easily enough understand the notion of printing new money as well. But I have given up trying to get MMT proponents to see this.

  11. himi
    December 18th, 2014 at 16:24 | #11

    Ikonoclast :
    My argument is that financially it is meaningless to claim that the following two statements have any real or functional difference in the case of a balanced budget. (By extension of reasoning we could show they have no real or functional difference for unbalanced budgets either.)
    (A) You create money by expenditure and then destroy it by taxation.
    (B) You tax existing money and then you spend existing money.

    It may not make a difference financially and in practise (a point your year dot counter makes pretty well), but in terms of the way people think about government’s role in the economy and society it makes a pretty big difference. If governments raise money via taxes, then the money starts out as /yours/ (i.e. distributed among all the people, and owned by them), and the government takes it away to spend on things collectively. If governments create money from scratch and then use taxes as a way to manage the workings of the economy then the money starts out as theirs, and taxes are simply a way to regulate things. It’s the difference between the government being leeches taking your hard earned money away and the government simply creating and managing a mechanism of economic exchange.

    If the government really is the sole source of money in the economy, capable of creating and destroying it without reference to any external entity, then notions of “government debt”, budget surplus and deficit, budget balance and all the other things politicians like to argue about are completely different beasts than if the government simply takes a cut of the money flowing around the economy and spends it on our behalf. “Government debt” just becomes another way to take money out of the economy, budget surpluses take money out of the economy and deficits put money into the economy without having /any/ relationship to the personal accounting concepts that share the same name.

    It also makes any idea of a “budget balance across the business cycle” meaningless, because a government budget deficit is the only way that the total amount of money in the economy can increase. If MMT holds true, over time governments would /have/ to be in deficit on average, or the economy would be in a state of continuous deflation (assuming economic production was growing).

    My overarching point is that /if/ MMT is an accurate description of the way a fiat-money economy works then that has really significant implications for the way that the economy should be managed, and the way that people (particularly politicians and economists) should talk about the economy. If it’s not, I’d really like to see a solid refutation.

  12. December 18th, 2014 at 17:12 | #12

    @Cameron Murray: “Since Russian inflation has been pretty stable at around 10% for the past 15 years, I don’t see a blow out to 12-13% being a major disruption to local production.” End-year CPI readings suggest an imperfectly declining trend in 2009-13: 13.3% in 2008, 8.8% in 2009 and 2010; 6.1% in 2011; 6.6% in 2012; 6.5% in 2013; and early in 2014 the CBR was targeting 4%-something for 2014. Compared with that, 12-13% is a throwback to the 2008-9 crisis. For some foods, it’s going to be (or has been already) 30-50% because of the double impact of Russia’s retaliatory import bans and the ruble devaluation.

  13. Jordan
    December 18th, 2014 at 17:12 | #13

    Why Asking for help from MMT insights when MMT is only about fiat money and Russia does not posses fiat money, they operate under Gold Standard. More importantly Russia’s monetary set up is GS and institutions operate with many fiat money prevention directives. Just recently, about a month ago, ruble went flexsible. That is only a start on the road to make Russia monetary sovereign. It needs many more steps and really quickly in order for MMT to be useful for them.
    But there are some way around to applying insigts of MMT to non sovereign currencies.Later on, in second comment, about that.
    MMT applys only to about 6 countries in the world that have no debts in foreign currencies which is what makes fiat money posssible and Russia is not one of them. That is concerning state finances.
    Nature of private finances in Russia are even vorse then you can imagine. Private financial system have MULTIPLE fiat money prevention clauses that are hard(almost imposssible) to change. Private borrowing in Russia and most of eastern Europe are limited by
    1) flexible interest rate
    2) tied to foreign currency
    3) foreign currency reserves in the system necessery for companies that deal with foreign supply needed for import oriented country.

    Only with fixed interest rates on loans you can enjoy lessened burden of paying off debts. With flexible (ARM) rate, any increase in wage will be followed by increase in monthly payments and initial burden of monthly payments will stay with debtor untill the end of the loan.
    What a burden that is can be aprehended only by those that took such loans and had to refinance as soon as fixed term expired or default. This is the major reason for large number of defaults in USA, lack of ability to refinance once fixed period (2-5 years) ended.
    If you in Ausstralia still enjoy fixed rate loans then you would not know why so many defaults in rest of the world happened post 2008 and can blame debtors instead of change in the system that happened post 1998 that is the real culprit.

    What is even less comprehendable to the rest of the world is loans denominated in foreign currencies for private debtors. On top of flexible rate for loans you got also possibility of rising principal if domestic currency starts falling. Principal debt is denominated in foreign currency but debtors are paying in domestic currencies which they earn. With the rise of value of foreign currency, as such is the case presently in Russia, amount of principal od debt will rise with it when counted in domestic currency, which is what people use to service such debts.

    So, in Russia today, people and companies are having one two punch in the face as dollar is rising, not only rates are climbing provoked by Central bank, but also the principal amount of debt is skyrising.

    Who can deal with such double ropes pulling to two sides while gravity is pulling third way around the neck of the russian economy?
    To implement MMT in Russia (and rest of the eastern europe) today it would take following steps:
    i) implement flexible exchange rate (only thing done)
    ii) Ban debts denominated in foreign currencies (not even a thought about that, yet)
    iii) order refinancing of loans under fixed rate and lower then earlier issued
    iv) change the work and directives of monetary institutions (change primary goals)
    v) state directing and organizing production of previously imported commodities

    In normal times this requiers at least 1 year even if done expediently (just how much time it takes to organize replacement for SWIFT within Russia is indicator how slow this processs is, to switch from GS system to fiat system) which Russia under finacial attack does not have.

  14. Ikonoclast
    December 18th, 2014 at 17:16 | #14

    @himi

    For a while I was quite taken with MMT, now I am not sure it is really breaking much new ground. MMT seems to posit that nobody else has figured out what the change from a gold standard and the fixed exchange rates system to a set of fiat systems with currency exchange rates means and that nobody else understands national accounts. MMT seems to couch these new arrangements in an ideosyncratic and kind of different starting-point way. As I point out in my previous post, where you start analysis in a circular notional quantity process (the budget cycle) makes no difference.

    MMT thinking can be a good antidote to standard neoliberal propaganda about goverment budgets and expose its chain of falsehoods. But I think Keynesian thinking applied to post-gold standard currencies can do the same thing. MMT advocates kind of take their reasoning a step too far in some respects and turn it into a hardened dogma which must not be questioned anywhere in the slightest detail.

    You say “It (MMT) also makes any idea of a “budget balance across the business cycle” meaningless, because a government budget deficit is the only way that the total amount of money in the economy can increase.”

    The thing is (as I have discovered from debating it) when a modern orthodox economist says “budgets balanced across the business cycles) he or she means “basically balanced but allowing for an increase in money supply proportionate to the growth of the economy over time”. Unfortunately, the naive public or naive “me” interprets that literally.

    It is a shame that some orthodox economists cannot talk more clearly for the lay person. It is almost as if their shorthand is a handy way to entrench simplistic ideas in popular understanding to allow the process of privatisation and shrinking government to continue. At the same time, they and government functionaries understand the shorthand. Any time that oligarchic and monoploy wealth and power is threatened (e.g. GFC) they suddenly deficit spend and do quantitative easing in a big way.

    MMT economists are on far better ground when they argue for a job guarantee via a Buffer Stock Employment Model. That is a great idea. And there are many ways to damp its possible inflationary effects IMO. But that is another debate.

  15. Jordan
    December 18th, 2014 at 17:35 | #15

    One insight from MMT that might help Russia today is that Central bank controls not only interest rates for public debt, but also interest rates for private borrowing and also INFLATION rate and exchange rate. Does The Bank of Russia (BoR) knows that? No, they do not know that, and what is even more problematic, BoR is organised in such a way that one department is not coordinating with another department within Central bank. They are working at crosspurposes against one another hurting the rubble and economy and people with it.
    Since BoR is still set up as under GS system but changed primary means to keep stable conditions is removed (fixed exchange rate) this system will collapse, cet. par. And destroy economy and people with it.
    On one hand, department of fixed exchange rate of BoR is trying to keep reserves of foreign capital needed is killing domestic economy by rising interest rates offered for $US. This lifts up interest rates for private borrowing and provides selfreinforcing feedback for inflation due to debts denominated in foreign currency. Who can survive that in such monetary system with multiple fiat prevention clauses?

    This is because under GS system, institutions are set up so that they benefit their balance sheets (numbers on paper) and who cares about suffering populace. Under MMT you can totaly forget about numbers on paper and help people and economy with it, of course with provision of active government. Idea of active government was destroyed with privatisation in 1990s and institutions that were working on it (planing and implementing needs for economy) with it.

    This is the most controversial insight from MMT; Central banks control interest rates and with it rates for borrowing to public and to private and also INFLATION levels. This can be applyed in fiat and also under GS systems.
    To save Russia’s economy, Russia’s Central bank should lower interest rates instead of rising it, because rising rates hurt domestic economy and people much, much more then it helps foreign reserves needed.
    This have to be done slowlly and carefully.
    And yes, again, level of interest rates that Central Banks set is controling borrowing costs for public debt and for private debt and inflation levels. This is extremely hard to comprehend to people that ideologise free market.
    The CBs controll this, not markets. Do people in CBs know this? No, but it was done in Italy under help from Warren Mosler, initiator of MMT.

  16. Ikonoclast
    December 18th, 2014 at 19:39 | #16

    Getting back to the OP, it’s kind of interesting that Russia has an economic downturn and 9% inflation. One expects a downturn to be deflationary or at least less inflationary. I mean simplistically and naively one might expect that. So what is Russia’s story?

    Egypt appears to have about 3.7% GDP growth, an unemployment rate of 13.1%, inflation rate of 9.1 %, a budget deficit of 9.1 % of GDP and government debt to GDP ratio of 87.1%. Their balance of trade is -3,898 USD Million. Food inflation is 11.52%. What would MMT prescribe for Egypt? I asked this question on an MMT website a while ago and got no answer. Is the answer too hard?

    I think recent history in MENA (Middle East and North Africa) shows that food inflation is a good indice for social unrest and even revolution and civil war. So I am not sure that pushing food inflation further by a bigger deficit is a playable card. What other cards are playable? There are some but you don’t especially need MMT to tell you. Cutting that part of military spending which goes offshore and internally shifting part of the army’s personnel from military duties to infrastructure work might help but I doubt that would fly poltically (or even take) off while the military run the country.

  17. plaasmatron
    December 18th, 2014 at 19:49 | #17

    I have no background in economics. I am a physicist.

    All the arguments here on MMT by JQ and Ikonoclast seem to me sound if the system is closed. However, in an international setting the system is open. The disadvantages that small states with a fiat currency have, are transferred as advantages to large states with a fiat currency, primarily the US. The only way that +1 -1 = 0, is if there is no interaction with an outside system, i.e. trade.

    Please correct my naivety.

  18. nom de plume
    December 18th, 2014 at 19:55 | #18

    Not really MMT-related, but germane to this discussion nonetheless:

    https://www.youtube.com/watch?v=VT085isnyB0

    ‘Economic hardship is being created by the foreign-controlled Bank of Russia’s monetary policies, to spread mass discontent and facilitate a Maidan in 2015 to remove Putin. So claims Evgeny Fedorov, citing the colonialist Central Bank law, established after Washington’s victory in the Cold War’

  19. Ikonoclast
    December 18th, 2014 at 20:30 | #19

    @plaasmatron

    “The only way that +1 -1 = 0, is if there is no interaction with an outside system, i.e. trade.” plaasmatron.

    Your statement is correct about national accounts in total. I was making an argument from a simplified government budget case (bit like a closed PVT experiment without gas leakage) to deal with the strange (to me) insistence by MMT that government budgets create ALL the expenditure fiat money and that taxes destroy all the taxed money. Equally, one could say for example that taxes conserve money and push it back into the next budget.* It doesn’t matter which way you look at it as money is notional not real. Physical conservation laws don’t apply to notional quantities.

    Let me state I am not an economist nor a physicist just an interested layperson in these matters so I make no claim to expertise. I am just reasoning from basic logic as best as I can.

    I make a big deal about questioning MMT on this point (how to look at the creation and destruction of fiat money) only because;

    (a) Its proponents are so dogmatic about this point about fiat money (government expenditure creates it, taxation destroys it); and
    (b) I have demonstrated (I believe) that it is irrelevant for notional quantities which way you look at the matter; and
    (c) I don’t think it is actually material to their theories and only serves to make them sound silly and dogmatic when they don’t need to be silly and dogmatic defending an irrelevant point.

    * Note: The view that taxes conserve money and push it back into the next budget is actually the view of the person in the street. It’s also closer in a sense to the reality that taxes take the ability to spend and consume from the person taxed and give that ability to the government without affecting total spending or inflationary pressures in the economy. So if anything, the common and orthodox view on this particular formalism has more going for it. It matches up closer with the parallel material reality. A rich man before tax has enough money spare, say $100,000, to buy a luxury car. After paying his tax he cannot buy that car this year. But the government buys the very same same new car for its fleet for the PM. Car sales remain the same all else being equal. Inflation remains the same all else being equal. The car went the way the taxed dollars went basically. It’s easier to mentally match real and nominal flows with this model.

  20. Ikonoclast
    December 18th, 2014 at 21:12 | #20

    @nom de plume

    That interview contains absolutely incendiary material if the interviewee is correct. I believe he is correct though I would like confirmation on issue of the control of the Russian Central bank by the Troika (European Commission, International Monetary Fund and European Central Bank) and the USA. “Troika” being a Russian word this situation is redolent with terrible black irony.

    The summary of the video says;

    “Economic hardship is being created by the foreign-controlled Bank of Russia’s monetary policies, to spread mass discontent and facilitate a Maidan in 2015 to remove Putin. So claims Evgeny Fedorov, citing the colonialist Central Bank law, established after Washington’s victory in the Cold War, and the system of fifth-column levers, methodically operated to steer the revolution.”

    “Evgeny Fedorov (the interviewee) is a Deputy of the State Duma and the coordinator of the National Liberation Movement for restoring sovereignty of Russia.”

    IMO, and also seen from a Russian perspective, the West’s behaviour is completely arrogant, morally insupportable and totally insane. The USA has gone insane and they are risking the whole world in their drive to control the whole world. The whole situation is terrifying. Let’s hope the Chinese maybe can broker something to defuse this. They are a whole lot wiser and more realistic than the Americans.

  21. Jordan
    December 18th, 2014 at 22:34 | #21

    @plaasmatron
    You are right about MMT working in a closed economy only, which is called currency sovereign and practically means that there is no public nor private debts in foreign currencies.
    To minimise debts in foreign currencies, smaller economies have to have flexible exchenge rate and capital controls. That is when activist governments can initiate production of previously imported goods and achieve full employment with help of unlimited deficits. Under fixed exchange rates that becomes almost imposssible or it requiers much higher spending levels and longer time to achieve sustainable full employment.

    But, closed economy does not mean that there is no international trade, you are wrong there. Closed economy means that there is flexible exchange rate and capital control (prevention of free flow of capital across the borders). Capital control means that there is some cost attached to exchanging currencies in order to employ them into economy or to flee the country. Those costs should be above profit rate to be really effective.
    Another important condition is that Central bank of a closed economy does not care about levels of exchange rates but about it’s economy needs to reach full employment. CB should prevent only huge jumps in exchange rates in order to prevent speculators attacking a currency.
    That is what closed economy means.

  22. Jordan
    December 18th, 2014 at 22:48 | #22

    @Ikonoclast

    As I point out in my previous post, where you start analysis in a circular notional quantity process (the budget cycle) makes no difference

    It matters a great deal where you start your analysis about money road. That is the only way to reach a logical conclusion with all the implications that follow it.
    Budget cycle becomes visible only when you start at the begining of money. And new currencies are adopted all the time, following a creation of new countries. How is novorussian east Ukraine preventing inflow of newlly printed money from western Ukraine? By implementing new currency. There is a chance to see how the money circles. Or you can look at fairly recent examples of Britain importing British pound into new colonies. Or by looking at Greenback. Those stories tell you when the circle of money starts and how it matters to start at the start.

  23. plaasmatron
    December 19th, 2014 at 01:06 | #23

    @Ikonoclast

    you sure know a lot for “just an interested layperson”.

    If money is not real, then it cannot be equated with other variables that are real (apples with oranges?). In that case, one needs to move to either complex numbers, or a matrix formalism. Is this done in economics?

  24. plaasmatron
    December 19th, 2014 at 07:52 | #24

    Sometimes asking the question, you realise the answer.

    Money is just like a universal constant, not a measurable variable. It simply relates the value of two measurable variables. But a fiat currency is not a constant. Then it is as if every month, a bunch of guys in suits, sits down and decides the value of Planck’s constant or the fine structure constant. Then every other universal constant has to be adjusted accordingly. No wonder economists have a tough time predicting stuff.

  25. Ivor
    December 19th, 2014 at 09:02 | #25

    @plaasmatron

    Please correct my naivety.

    The world is closed. Any flows from one subpart of a closed system are matched by an equal and opposite flow in another part.

    All that the rich countries do, is corrupt this equity, using money, and then wonder why they end up with global crisis and growing inequality.

    Money is just a social relationship, within and between nations, within a closed system.

    Naturally capitalist equations only balance if you have an open system, so they corrupt their money by introducing fictitious money and pretend that it all balances out in the future.

    The amount of credit then increases into unsustainable mountains of debt.

    At least it gives capitalist academics and excuse to collect data and write big books on inequality.

  26. Ikonoclast
    December 19th, 2014 at 09:39 | #26

    @plaasmatron

    In your last post I think you have already gone beyond my thinking and come up with a very interesting idea. Mathematical economists like John Quiggin or Ernestine Gross would be better placed to assess that idea I think.

    At the risk of repeating myself, when I say money is nominal and apples are real, I am saying that apples have a physical reality and money has only a notional (ideational) reality. Things that are real and things that are notional have different characteristics. To state the obvious, the physically real obeys the Law of Conservation of Mass-Energy. Money does not. As MMT (and many other economic theories) state explicitly money can be created out of nothing and destroyed into nothing.

    Certainly money is real or becomes real at another level. It develops a social reality and then an economic reality. (And the things used to keep count of it are real like notes, coin, ledgers, computers and human brains). The finance-legal system comes to have a controlling reality where the notional controls the real. It is when we allow this controlling reality of the notional, including false and less useful notions, to operate automatically and dictate to us that we become economic and social “zombies” to use John Quiggin’s parlance.

    Abbott and Hockey are clearly economic zombies in this sense.

    Note 1:- “Reification (also known as concretism, hypostatization, or the fallacy of misplaced concreteness) is a fallacy of ambiguity, when an abstraction (abstract belief or hypothetical construct) is treated as if it were a concrete, real event, or physical entity.” – Wikipedia.

    Note 2:- In a way, there are many levels to reification. Phenomena or notions can perhaps become more reified or tenuous just as atmosphere can be become more rareified and tenuous with altitude. Capital (as opposed to mere money) can exhibit these tendencies. I have block quoted from Wikipedia below and I think it is very much worth reading and turning over in your mind following our discussion above.

    “Fictitious capital is a concept used by Karl Marx in his critique of political economy. It is introduced in chapter 29 of the third volume of Capital. Fictitious capital contrasts with what Marx calls “real capital”, which is capital actually invested in physical means of production and workers, and “money capital”, which is actual funds being held. The market value of fictitious capital assets (such as stocks and securities) varies according to the expected return or yield of those assets in the future, which is at best only indirectly related to the growth of real production. Effectively, fictitious capital represents “accumulated claims, legal titles, to future production” and more specifically claims to the income generated by that production.

    Fictitious capital could be defined as a capitalisation on property ownership. Such ownership is (legally) real and legally enforced, as are the profits made from it, but the capital involved is fictitious; it is “money that is thrown into circulation as capital without any material basis in commodities or productive activity”.

    Fictitious capital could also be defined as “tradeable paper claims to wealth”, although tangible assets may themselves under certain conditions also be vastly inflated in price. In terms of mainstream financial economics, fictitious capital is the net present value of future cash flows.”

  27. Charles Hayden
    December 19th, 2014 at 16:49 | #27

    MMT is very helpful on Russia.

    We see that Russia allows the ruble to float, is losing national incomes from the fall of in revenues from oil, losing willing and able foreign buyers of rubles due to sanctions, targeting quantity limits in the banking system, and raising interest rates.

    So in a span of a months, they make less stuff, the world wants less of their currency, and they want more of the world’s stuff relative to what they would have sold to get that stuff before. Further, they have all kinds of import restrictions that deny the world the ability to sell the stuff it wants to sell to Russia.

    MMT shows how higher interest rates are, by definition, inflationary. Higher rates raise the cost of lending and borrowing and increase the returns on savings. Overnight debts and savings grow. To the extent that higher rates deter new private borrowing, the gov’t deficit gets larger than otherwise from the fall of in tax revenues from the spending and incomes said lending would have instigated (as well as from increases in social spending due to the fall of in lending).

    In any event, b/c of the interest rate increases, Russia could end up with a bigger gov’t deficit, less output, more unemployment, and higher prices.

    Raising rates to catastrophic levels has never worked.

  28. December 19th, 2014 at 18:54 | #28

    @Charles Hayden

    There’s a simpler explanation for Russia’s inflation. The Russian consumer depends heavily on imports, which get more expensive as the ruble weakens. Goods produced in Russia also become more expensive in rubles because domestic producers peg their sale prices to those of imported goods (at a discount, of course).

    To the extent that higher rates deter new private borrowing, the gov’t deficit gets larger than otherwise from the fall of in tax revenues from the spending and incomes said lending would have instigated (as well as from increases in social spending due to the fall of in lending).

    Russia’s central bank must choose between letting the ruble depreciate and, therefore, push inflation further up almost at once, and raising rates, which will discourage investment and lead to lower domestic output several months (the earliest) later.

  29. GrkStav
    December 19th, 2014 at 19:03 | #29

    So, how exactly did colonialists and their governments monetize (with THEIR money) the economies of the colonies, if not by declaring/imposing direct obligations that could be met ONLY in that money (not at once, as that would be impossible before that money had first gotten in the hands of at least some of the population on whom the direct obligations were imposed) and then offering that money in exchange for services (labor) and goods. Historically and logically, spending money into the economy precedes taxing it away or ‘borrowing’ it.

  30. GrkStav
    December 19th, 2014 at 19:08 | #30

    How “heavily” does the “Russian consumer” depend on “imports”? Whence the pricing power of domestic producers and sellers to peg their sale prices to those of imported goods (at a discount of course)? When/if Putin acts as the ‘dictator’ or ‘autocrat’ the West describes him as, then you’ll see how much of this inflation due to increased ruble prices of imported goods, and alleged associated increased ruble prices of domestic goods will stick.
    If the Russian Federation’s Repressive State Apparatus has been infiltrated and ‘colonized’ (directly or just ideologically) by the ‘oligarchs’ then the RF will go the way of Ukraine. If not, it will not.

  31. December 19th, 2014 at 19:44 | #31

    @GrkStav

    40-45% of goods sold via retail were imported before the 2014 ban on food imports. Out of total demand, 60% of meat and milk, 50% of cheese, 90% of footwear. As for the pricing power of domestic producers, these are my observations over years, not a theory. I should add that this time around, Russia’s ban on food imports from the EU, US, and Australia must have boosted Russian producers’ market power. Early in 2014, a kilogram of decent Polish cheese cost 350 rubles or $10 in Moscow. In November 2014, a kilogram of Russian cheese, often of inferior quality, cost 500 rubles, the same $10, but up more than 40% in rubles.

  32. Jordan
    December 19th, 2014 at 20:14 | #32

    @Alex K.
    There is embargo on exports to Russia, but not from the whole world. Did not Russia sign trade agreements with China? Yes its mostly oil and gas but Russia still has option to import as much as it needs from the rest of the world. So the lack of supply will not be the reason for increased inflation, maybe just a small part of it untill new trade orders are delivered.
    Major reason for inflation is demand for dollars and euro, i believe that most of the loans inside Russia and for russian’ companies are in dollars or denominated in dollars. This is the reason for exchange rate jumps, initially. but now CBR is pushing value of the dollar up by offering higher and higher interest rates. Pushing inflation with it ever higher.

    This higher rate will not prevent lack of dollars even tough they hope it will. Asian crisis of 1989 which experienced the same problem with foreign currency swaps based on loans in foreign currencies shows that not even 70% interest for dollar loans did not prevent collapse of currencies against dollar.
    This high interest that Central banks offered and with it raised inflation pushed economies into deep recessions. Only help came from capital controls. Capital control is the only thing that prevents capital flight.

    This is how institutions based on Gold Standard work, it is more important for them to save foreign reserves which were kept exactly for the purpose of such crisis to fill demand and defend currencies, then to protect their economies. Even tough CBs are acumulating foreign reserves to protect against currency attacks, they do not use them when most needed, they still want to accumulate more ‘just in any case’ even at the time when reserves were ment to be used/ spent. This is GS ideology at work when you need fiat money the most.

    Only help can come from MMT insight that high interest rates are inflationary and governement activate forming new production of previously imported goods. This is an excellent chance for Russia to develop, will they use it or will GS minded institutions of Central Banks destroy domestic economy.

  33. Jordan
    December 19th, 2014 at 20:27 | #33

    Asian crisis was in 1997-98 not 1989.

  34. Jordan
    December 19th, 2014 at 20:36 | #34

    Krugman also writes about importance of private debt not public debt. Russia is a clear example of surplus country in deep crisis due to private debts in foreign currencies while state has wast amounts of public foreign reserves. Levels of public debt or surplus does not play any role in an economy.

    for aficionados of emerging-market currency crises this is all quite familiar. (Side note: I invented currency crises — not the thing itself, obviously, but the modern literature — in 1979. Really. And business has been good ever since.) When you have big balance-sheet problems involving foreign-currency debt, an interest-rate hike that tries to discourage capital flight damages the economy, and hence those same balance sheets, from another direction, and it’s common, even standard, for the effort to fail.

    That is the point of his writing today and from previous post The Ruble and the Textbooks:

    Most notably, tight-money policies were really really unsuccessful during the Asian financial crisis of 1997-8, on which you can read my take here.

  35. Jordan
    December 19th, 2014 at 22:39 | #35

    @JQ

    it doesn’t change the basic equation that, in the long run, public expenditure is paid for by taxes

    Only if a state does not have any negative balance outstanding, it can claim that public expenditure has been paid by taxes. Can you find a country that does not have outstanding balance?
    Since WWII there is no country without public debt or that it at least lowered it at any point, so no country ever pays its spending by taxes nor will ever pay it. Nominal debt always have to grow and it will keep growing, only its relation to GDP can shrink from time to time, but no country, even surplus countries like Norway, or Germany can not nor will ever get rid of debts which was incured by spending.
    JQ, how can you claim that taxes will pay for spending, eventually, when countries keep their debts indefinetly, which can only mean that spending was not covered?

    And here is the response to JQ’s sentence by Bill Mitchell, much longer response then my.

  36. Ikonoclast
    December 19th, 2014 at 23:30 | #36

    Re J.Q.’s statement.

    “… it doesn’t change the basic equation that, in the long run, public expenditure is paid for by taxes.”

    I think both this statement and MMT statements to the contrary are too dogmatic and simplistic. The reality is more complex. What do we mean by “pay for”? Do we mean pay for by money which is after all a nominal or notional thing? Or do we mean pay for by effort, in kind or disutility?

    Even if we use money as a proxy for paying by effort, in-kind or through disutility it can become a definitional question. What’s a “tax”? A small oil-rich country could have zero taxes of any kind and a national state-owned oil industry. The oil revenue could fund the state. Does this country have taxes? Where’s the disutility to any national of this country?

    I will rule out of court any claim of disutility to potential private oil barons in the country. My court simply has no sympathy for that argument. Citizens of states with no oil could claim the disutility of paying for their oil imports I guess. So is the disutility exported? Is the “tax” levied overseas?

    OMG! I sound like J-D!

  37. Auburn Parks
    December 19th, 2014 at 23:52 | #37

    I dont really understand all the confusion about MMT. Its simply a way of doing economics that acknowledges reality in these 4 ways:

    Govt is the monopoly issuer of the currency
    Govt is in control of its interest spending
    Accounting
    Endogenous money creation

    None of these are theories. They simply describe reality. The only thing controversial about these 4 observations is that MMT is the only school of economic thought that recognizes them. Thats not an indictment on “MMT”, it amounts to an example of just how ridiculous and out of touch economics has become.

    Discussions of inflation and exchange rates must be consistent with the 4 facts above, just like building a house must be consistent with the laws of physics or it falls down.

  38. Jordan
    December 20th, 2014 at 00:35 | #38

    Very well said @ Auburn Parks

    @Iconoklast
    Now you are introducing the word revenue instead of taxes when JQ used it. And even with placing word government revenue instead of taxes (most of the revenue to government is in taxing way to economy or people, not only by taxes) this JQ’s statement still does not hold since there is so much spending not covered nor will ever be covered with revenue, instead it will go on the government’s credit card. A credit card with no limit. History shows that.

    If JQ somehow implys that inflation is how eventually this get taxed from economy then that would be different topic but still incorrect.

  39. December 20th, 2014 at 01:15 | #39

    @Ikonoclast

    What would MMT prescribe for Egypyt? “MMT”, or the advocates of it, wouldn’t be worried about the deficit. But, they would be concerned about the high levels of both unemployment and inflation.

    Of course, western economies too have suffered from simultaneous high levels of unemployment and inflation, though not quite so bad as in Egypt. That started to happen in the 70’s and paved the way for the introduction of neoliberal policies. To address that issue the idea Job Guarantee was introduced.

    Could a job guarantee work in Egypt? Well, yes it could. The idea has worked in the few cases where it has been tried. Notably in Argentina and India in recent times.

    In addition, the taxation system would need to be improved to ensure taxes were collected as required and, equally importantly, on time and before the receipts weren’t eroded in value by inflation.

    The government should also think in resource terms rather than solely in monetary terms. Incidentally, and to that extent MMT is badly named. Its not really about money per se. It’s not even that modern! Is it a theory? Maybe. But then so is gravitation. So, if we do think in resource terms we can see that if food production, for whatever reason, doesn’t keep up with food demand then it will rise in price. Neither MMT nor any other economic theory can change the reality of that.

  40. John O’Connell
    December 20th, 2014 at 01:15 | #40

    “If oil tax revenue drops, and nothing else changes, some other source of revenue (that is, tax) must be made to keep the rate of monetary growth at its desired level, or else spending must be reduced.”

    Before oil tax revenue dropped, oil exports dropped, removing money from the economy. Removing LOTS MORE money than the drop in oil taxes added. Seems to me they need to reduce, not increase, government revenue in order to maintain the desired rate of monetary growth.

  41. John O’Connell
    December 20th, 2014 at 01:32 | #41

    @Ikonoclast
    I am sympathetic. It’s true, in the beginning of a currency spending must precede taxing or borrowing. Today, with a large amount of currency outstanding, and millions of dollars of spending and taxing occurring every day, does that matter any more? The point is that spending occurs regardless of the LEVEL of taxing or borrowing. Taxing and borrowing does not fund spending. Only laws based on the archaic gold standard, and accounting rules that do not recognize monetary sovereignty, require this.

    “The issue of debt is done by the central bank and involves selling debt to the bond and bill markets.”

    No, that’s done by the Treasury.

  42. December 20th, 2014 at 02:04 | #42

    @Jordan

    “So the lack of supply will not be the reason for increased inflation, maybe just a small part of it untill new trade orders are delivered.”

    The disruption in trading patterns is costly and Russia being a major importer, some suppliers will demand premiums. (Of course Russia could simply cancel the import bans it introduced in response to US and EU sanctions). For example, there is no obvious way to replace cheap, high-quality dairy imports from Europe.

    “Major reason for inflation is demand for dollars and euro, i believe that most of the loans inside Russia and for russian’ companies are in dollars or denominated in dollars.”

    As I have tried to explain, the key reason for inflation is Russia’s dependence on imports. The weaker the ruble, the higher the prices. It’s the way it’s been since ca. 1995. The reasons why less dollars are being exchanged for rubles are, first, cheap oil; second, the need to pay back dollar loans (without the Western sanctions, most would be refinanced). Until recently, there was a third reason: exporters betting against the ruble, borrowing cheap rubles to pay their domestic costs (including taxes) and keeping their dollars “for later”.

    The higher interest rate discourages that behavior and tightens the supply of rubles, boosting the ruble vs. the dollar and actually limiting inflation.

  43. December 20th, 2014 at 02:16 | #43

    @John O’Connell

    “Before oil tax revenue dropped, oil exports dropped, removing money from the economy. Removing LOTS MORE money than the drop in oil taxes added.”

    It’s not the volume of oil exported that has dropped but its value in dollars. That does not remove rubles from the economy. It only leads to less dollars offered by Russian exporters in the Russian forex market.

  44. December 20th, 2014 at 02:59 | #44

    @Ikonoclast

    In my humble opinion the most relevant point with regard to the MMT assertion that spending precedes taxation is with regard to the effect of this notion on the morality of our politics.

    If Robert Nozick and John Rawls both agree that the sovereign must “take” something and redistribute it from one private citizen to another to create what Rawls might thing is a socially just distribution of income and wealth; we are going to have a problem because Nozick argues that this is the moral equivalent of chattel slavery. And, this is why we never get anywhere in our politics in my humble opinion; we have deep moral and philosophical differences and we mask over them with appeals to economics.

    Now consider the opposite…the State itself; the sovereign; the commonwealth…it is the progenitor of this currency that is “taken” from individual private citizens. It can distribute any amount of dollars it wants to the Paul’s of the world without first taking from Peter. In fact, Peter’s dollars must have logically come from the sovereign first. Instead, when the sovereign takes from Peter after the fact…the sovereign is doing so to manage the value of its own currency that it alone has the fiduciary duty to preserve and sustain.

    To me, what is really important is that this subtly different point of view could have a tremendous effect on our politics. With monetary sovereignty we are able to use the Power of the Purse to pursue something like Rawls’ Difference Principle without actually violating something like Nozick’s Principles of Justice in Acquisition, etc.

  45. December 20th, 2014 at 03:07 | #45

    In other words, under a veil of ignorance trying to design the social contract, we do not need to choose to “take” previously, justly acquired wealth as Nozick might suggest; if we desire some preferential distribution in line with Rawls’ difference principle. No, we simply need to grant the popular sovereign monetary sovereignty. And, there is no reason for the minarchist to really oppose that because it does not acquire taking some power that the individual has in the state of nature.

  46. Jordan
    December 20th, 2014 at 03:45 | #46

    @Alex K.

    The higher interest rate discourages that behavior and tightens the supply of rubles, boosting the ruble vs. the dollar and actually limiting inflation

    Inflation comes from other side which is much stronger then from side where interest rate provide for more dollars. CBR thinking is that higher offer for dollars will attract more dollars to Russia. This raises the value of dollar, but just as you noted at #31 comment, producers in Russia offer products in dollar value. That is my experience from living in eastern Europe. Sellers always keep prices in dollar value no matter demand/supply equilibrium. Prices allways follow dollar value, because they can.

    By CBR killing the ruble, when it offers more for dollars, prices follow the jump. This is inflation. Acelerating inflation push two ways: by rising dollar and rising inflation. Rising inflation forces people to quickly spend (providing demand for goods) or exchange for foreign currency(raising demand for dollars), which makes even more demand for dollar. Higher inflation makes higher demand for foreign currency. It is a vicious circle that CB is supporting by raisin interest rates hoping that it would bring more dollars. Truth is that it only produces higher demand for dollar while killing economy through inabillity to get loans for corporations and people.

    If CBR would lower interest rate for dollar, interest rates for ruble debt would follow such rate and help switch private debt from foreign currency to domestic currency debt. Sure, exchange rate would jump initially but would go steady in short time since there would be no demand for dollar (imports would come from China and they just made agreeements to trade outside dollar and euro), economy would be forced to switch to ruble all the way and ruble would become sovereign. MMT could be applied just as it is in the USA.
    Only problem is that CBR is set up as GS system and they work against their own economy, rising interest rates will not work to steady exchange rate and would kill borrowing in ruble.

    Higher interest rates are inflationary for countries that do not enjoy sovereign currencies or have debt in foreign currencies. It is private debt that matters, not public debt which Russia has reserves sufficient to cover foreign debt.

  47. braddv
    December 20th, 2014 at 04:07 | #47

    @Ikonoclast

    -1 + 1 = 0 means this in full. Start with zero cars, destroy one car and then make one car and have zero cars left at the end of the process.

    How can you destroy a car you never had?

  48. GrkStav
    December 20th, 2014 at 04:27 | #48

    Yes, destroy/extinguish a not-already existing car then make one car and you have zero cars left at the end of the process. Because “notional” #shakingmyhead

  49. December 20th, 2014 at 04:30 | #49

    First, the real wealth of a nation is all it produces domestically + all it imports – all it exports. So the trick is to support domestic full employment to maximize domestic real output, and then work to optimize real terms of trade. That is, get the most you can in exchange for your exports.

    Russia can sustain domestic full employment with rubles with the ‘right’ fiscal adjustments and a gov funded ‘transition job’ to assist the transition from unemployment to private sector employment.

    As for the ‘need’ to import it’s mainly the private sector that imports and markets work that out.
    For example, there are not countries that ‘can’t import’ and note that ‘the problem’ is always ‘too many imports’ and what to do about that, etc.

    As to why the CB did what it did, history tells us not rule out insider special interests/corruption/etc. and/or the fact that the monetary officials are often western educated where they learned all that nonsense…

  50. GrkStav
    December 20th, 2014 at 05:09 | #50

    In anticipation of the Eurozone and the Euro (and being “allowed” to join) the Greek government and Greek CB behaved as if already a currency user for about 3-4 years. Never underestimate the self-destructive power of delusions and false hopes. When some of the “chickens” are digging underground tunnels for access to the hen-house, the ‘wolves’ have a much easier time. 🙁

  51. December 20th, 2014 at 06:27 | #51

    “To sum up, while MMT provides a different and sometimes useful way of looking at the interaction between monetary and fiscal policy, it doesn’t change the basic equation that, in the long run, public expenditure is paid for by taxes.”

    What’s the long run? As Keynes famously remarked we are all dead in the “long run”.

    According to the principle of sectoral balances its is easy to show that:

    Govt Deficit = Private Saving + Net Imports.

    In other words, all money spent by the Government will be returned in taxation, as that money is spent and respent in the economy. Where else can it go? That is unless someone saves it. Either in a piggy bank or in a bank account. Or if it is spent on net imports. That means that money gets saved in the central bank of the big exporters. Then, and only then, it becomes unavailable to the taxman.

    We see that countries like the UK, the USA can happily go on running deficit after deficit for year after year. The governments aren’t just funded by taxation. They are funded by these deficits too.

    So can it continue? Will they have to repay it in the “long run”? Are these deficits a burden to British children and grandchildren?

  52. December 20th, 2014 at 06:48 | #52

    @Troy Prideaux
    The quickest way to answer your question is refer you to Bill Mitchell’s recent article:
    http://bilbo.economicoutlook.net/blog/?p=29761

    But I’d just add that its exactly the same for Russia as every other country. Firstly make the most of all available resources. Don’t have a high percentage of the workforce hanging around doing nothing. If workers can’t find a job on the “free market” then Governments should find some way they can make a contribution to total production.

    In times of crisis ie war then extraordinary measures like rationing and price controls may be necessary to prevent unnecessary inflation. Its almost the case that Russia is at war. That’s for them to decide.

  53. Ivor
    December 20th, 2014 at 08:40 | #53

    @Auburn Parks

    Govt is the monopoly issuer of the currency
    Govt is in control of its interest spending
    Accounting
    Endogenous money creation

    Maybe the problem is that these isolated points do not represent political economy.

    You can have production and trading and exploitation without any of these.

  54. Ikonoclast
    December 20th, 2014 at 09:29 | #54

    @John O’Connell

    Thanks for your sympathetic consideration. You said;

    “No, that’s done by the Treasury.”

    Technically that is true for Australia and maybe many other countries now. Thanks for the correction. But who it is done by under the aegis of government fiat depends on adminsitrative arrangements and where the chinese wall is placed. The Central Bank could be administratively set up as a branch of Treasury. It could still have an intra-departmental chinese wall between it and straight treasury functions if deemed necessary. I mean a chinese wall that might be not only an information barrier but also a functions barrier.

  55. Auburn Parks
    December 20th, 2014 at 09:38 | #55

    @Ivor

    Sorry but that is simply false. A central organizing body (Govt) is essential to the maintenance of society and markets you cant just assume it away. Our public institutions (Govt) form the foundation for all transactions….monetary system, protection of property & rights, enforcement of contracts, education of the public, mediating differences among various groups, balancing social darwinism, providing public goods that the private sector cannot produce on its own, etc etc.

    The problem is that mainstream economics cant even get these most basic facts right, which is why no school of economic thought that is not consistent with these facts cant be taken seriously.

  56. Ikonoclast
    December 20th, 2014 at 09:39 | #56

    @braddv

    You haven’t understood my point. Perhaps I expressed it badly. My point is precisely that that process is impossible. I thought it was so obviously impossible that I didn’t have to highlight its impossibility.

    “Start with zero cars, destroy one car and then make one car and have zero cars left at the end of the process.” is impossible because it is a real process.

    “Start with zero fiat dollars, destroy one fiat dollar and then make fiat one dollar and have zero net dollars left at the end of the process.” is a possible process for the currency sovereign precisely because the dollars are notional not real.

  57. Ikonoclast
    December 20th, 2014 at 09:57 | #57

    @warren mosler

    In post number 18, nom de plume links to youtube claims by Evgeny Fedorov, Deputy of the State Duma and the coordinator of the National Liberation Movement for restoring sovereignty of Russia. Fedorov’s claims are incendiary and just might be true.

    “Economic hardship is being created by the foreign-controlled Bank of Russia’s monetary policies, to spread mass discontent and facilitate a Maidan in 2015 to remove Putin. So claims Evgeny Fedorov, citing the colonialist Central Bank law, established after Washington’s victory in the Cold War, and the system of fifth-column levers, methodically operated to steer the revolution.

    2:59 Foreign banks own the production in Russia.
    8:23 Putin has no authority over the Central Bank.
    13:56 Bank of Russia is legally a foreign-controlled Central Bank.
    15:21 (It’s a) Road map to Maidan 2015 (in Moscow).”

    It’s clear and a matter of news and public record that the USA and the West are waging economic war on Russia. Sanctions are war by other means. I just wonder if all his specific claims about monetary operations in Russia are true. Especially is it true that Central Banks in Russia and other nations designated “developing nations” do not have the same independence that Central Banks in developed nations have. Are they “controlled by the West”?

    Further, are Russian banks not permitted to loan (roubles) for Russian capital investment in Russia. Federov seems to claim that only foreign banks can lend for capital investment in Russia and then only in US dollars. He further seems to imply that the Russian economy is effectively a two-currency economy with dollars as well as roubles circulating domestically and that as I said capital investment must be denominated in dollars and come from outside Russia. If all this is true, Russia has partial currency sovereignty at best.

    Be interested in your thoughts on this.

  58. Ivor
    December 20th, 2014 at 10:26 | #58

    @Auburn Parks

    This is very typical of MMT bloggers.

    My point was specific to:

    Govt is the monopoly issuer of the currency
    Govt is in control of its interest spending

    Then we get a weird diversion:

    (Govt) is essential to the maintenance of society and markets you cant just assume it away.

    Huh?

    Addressing the cited issues of Government role in “issuing currency” and “interest spending” is not assuming the Government away.

    We then get a huge swamp of platitudes and truisms

    Our public institutions (Govt) form the foundation for all transactions….monetary system, protection of property & rights, enforcement of contracts, education of the public, mediating differences among various groups, balancing social darwinism, providing public goods that the private sector cannot produce on its own, etc etc.

    Whoopee, so what?

    Finally we get the Freudian slip:

    The problem is that mainstream economics cant even get these most basic facts right, which is why no school of economic thought that is not consistent with these facts cant be taken seriously.

    In fact this applies just as much to MMT religion.

  59. Sheila Newman
    December 20th, 2014 at 10:48 | #59

    Did you mean to imply that Russia is at war with Ukraine? I think that NATO has been trying to provoke war with Russia, but so far, Russia has most pointedly refused to cooperate.

    I apologise for my non-technical jargon economics argument below, but would appreciate a response.

    With regard to monetary policy. Russia is huge and could be self-sufficient. I would have thought that the low price of the ruble would not affect internal trade, which would benefit people in Russia and that it would reduce the cost of exports which could be fueled with local resources. I reckon that Malthus was right in his essay on corn prices. It is sensible to avoid reliance on international trade for important things because that leaves you vulnerable in times of war or where your currency loses value. Especially important is the ability to adapt within the constraints of global oil prices by maintaining an economy within the lowest oil values.

    America is trying a desperate ploy of tearing up its own landscape, society, democracy and economy to extract embedded petroleum resources that it would previously have left there because of these costs which are economic and run counter to EROEI. It is doing this in a last ditch attempt to starve out the remaining traditional oil and gas producers, notably the Arab states like Qatar and Saudi Arabia, which then submit to it. I suspect that t is now trying to enter South American oil via Havanna, using Fidel’s brother, who seems to be a weak link. It will attempt thus to break the BRICS countries alliance and undermine Russian oil economics that way. Countries not wishing to submit to US-NATO could slow growth by reducing and sharing work, production, consumption and population growth (which is what the US did briefly at the time of the first oil shock and which the EEC/EU did long-term) until America implodes. America will resist this. The worst other countries could do is to imitate America, rip up their democracies and their landscapes, and beggar their taxpayers to feed the banks, which are a negative hole, dug by gutting resources and public assets all over the world.

    There is a theory that democracy gained currency post WW2 because of its need to combat the attraction of communism, socialism and dirigism. When the USSR collapsed, it became easier to do away with real democracy and global capitalism has been niggling away at dirigist-style national economies in Europe and the civil rights of Roman law. The EU seems to be increasingly influenced by US style policy pushes and I note that Sarkosi in France began the erosion of a basic premise of Napoleonic law in permitting spouses to inherit part of the family inheritance before children. Note that compulsory equal inheritance preferencing children and then related family makes this unnecessary.

  60. John Quiggin
    December 20th, 2014 at 11:05 | #60

    @Ikonoclast

    On matters of this kind, Wikipedia is your friend

  61. Sheila Newman
    December 20th, 2014 at 11:18 | #61

    I wanted to add to my last post by saying that another reason to turn away from globalism to dirigism and national self-sufficiency for basic needs is the US debt. My understanding (initiated by Hans-Peter Martin and Harald Schumann’s theory in The Global Trap) is that the United States, as the world’s largest customer, debtor, and banker, is able to hold the world to ransom. See http://candobetter.net/node/2544

  62. craig
    December 20th, 2014 at 13:00 | #62

    Why all the focus on the currency. The money supply is mainly deposits created by banks.

  63. Ikonoclast
    December 20th, 2014 at 13:16 | #63

    @John Quiggin

    From reading this entry (which I had already read) and then from going on and reading the BIS entry and Article 75 of the Russian Constitution I can only find the vaguest of generalities. Certainly, there is nothing to confirm Fedorov’s allegations. Nor is there anything to specifically refute them that I can find. Next I will have to check “the special Federal Law” that the Wikipedia Article about the Central Bank of Russia refers to.

    I assume J.Q. you are saying all his claims are baseless. Is this correct? It’s strange because some of his allegations were quite specific. There was a reference to developing nations being treated differently from developed nations in the international money system and/or by the “Troika” (IMF, European Central Bank, and European Commission), by USA, by the West and so on.

    Russian nationalists or patriots like Fedorov (and Putin for that matter) are interesting cases and unusual mixes of ideology from our point of view. They can be and are all of reactionary (gay bashing, Western culture bashing), militaristic, authoritarian, Chekist, oligarchist and yet still State-Marxian or maybe even a tad MMT-ist in economic outlook. Fedorov could be foaming at the mouth from a different end of the ideological spectrum yet making about as much sense as Sarah Palin or the TEA party in the USA.

    At the same time, Realpolitik tells me Putin and Fedorov are justified in at least a few senses. They are right to be totally suspicious of the USA and to regard them as an enemy. They are right to regard the USA and its lapdogs like Australia as lying hypocrites. They are right that the USA continually attempts regime change and has been interferring in Ukraine recently. They are right to be highly suspicious of and rejecting of Western neoliberalism. After all, most of us who blog here are equally suspicous and rejecting of it. Fedorov implied that neoliberalism has a strong imperialist element and bias built into its monetary/banking/financial system. I happen to agree with that 100%. It’s a legitimator and facilitator of capital’s assualt on the worker. We can see that even in the rollback of our soc**l-democratic state.

    From the Russian point of view, they do have legitimate interests in the Crimea and even in Ukraine if only East Ukraine. If Russia started fomenting regime change in Mexico or Quebec how would the USA take it? That question is very easy to answer. If Russia started trying to organise the world into economic sanctions against the USA how would the USA take it? Again, that is easy to answer.

    The West and the USA are all of sanctimonius, “sanctionmonius”, hypocritical, scheming, exploitative, rapacious, militaristic, imperial and provoking. Of course, Russia historically and contemporaneously is just as bad. But we need to get realistic and stop pretending to ourselves that we are better. “Angelising” ourselves and demonising others only leads irrational and dangerous thinking (the Freudian process of projection basically).

    The West and the USA need to get wise to Realpolitik, get off Russia’s case and let it have “a legitimate sphere of interest” as all great powers demand by virtue of power; power being an accepted and indeed unavoidable reality in Realpolitiks (if I may use the plural). The world economy would be better off for such realism just as it would be better of if neoliberalism’s or monopoloy-finance capital’s crisis of over-accumulation of capital was addressed.

  64. Ikonoclast
    December 20th, 2014 at 13:45 | #64

    Footnote:

    This might help us all.

    http://www.cbr.ru/eng/today/?Prtid=bankstatus

    Now, I am off to study it… or at least read it once through. I have neither money nor course marks riding on my understanding so my motivation aint all that high. I really wanted someone to hand me the answer(s) on a plate. 🙂

  65. Ivor
    December 20th, 2014 at 14:02 | #65

    craig :
    Why all the focus on the currency. The money supply is mainly deposits created by banks.

    Plus credit, or more specifically, the per capita increase in credit pa.

    When you express demand for an item, and purchase it, some of the purchase consists of increased credit per capita.

  66. Ikonoclast
    December 20th, 2014 at 14:57 | #66

    I see Paul Keating agrees with me on geostrategics with respect to Russia. That means he’s right of course! I’ll give him this, he puts it more eloquently than I could and with more aplomb.

    http://russia-insider.com/en/military_tv_ukraine/2014/11/18/04-48-21pm/former_australian_pm_paul_keating_extending_nato_was

  67. nom de plume
    December 20th, 2014 at 15:36 | #67

    @Ikonoclast

    I seem to recall Malcolm Fraser saying much the same thing some months ago, when the Ukraine was on the boil.

    Paul Craig Roberts has been saying it for years. His latest is germane to this discussion too:

    http://www.paulcraigroberts.org/2014/12/17/financial-market-manipulation-new-trend-can-continue/

    The guts:

    ‘The US government, perhaps surprised at the ease at which all financial markets can be rigged, is now rigging, or permitting large hedge funds and perhaps George Soros, to drive down the exchange value of the Russian ruble by massive short-selling in the currency market. On December 15 the ruble was driven down 19%.

    Just as there is no economic reason for the price of gold to decline in the futures market when the demand for physical gold is rising, there is no economic reason for the ruble to suddenly lose much of its exchange value. Unlike the US, which has a massive trade deficit, Russia has a trade surplus. Unlike the US economy, the Russian economy has not been offshored. Russia has just completed large energy and trade deals with China, Turkey, and India. If economic forces were determining outcomes, it would be the dollar that is losing exchange value, not the ruble.

    The illegal economic sanctions that Washington has decreed on Russia appear to be doing more harm to Europe and US energy companies than to Russia. The impact on Russia of the American attack on the ruble is unclear, as the suppression of the ruble’s value is artificial.

    There is a difference between economic factors causing foreign investors to withdraw their capital from a country, thereby causing the currency to lose value, and manipulation of a currency’s value by heavy short-selling in the currency market. The latter can cause the former also to occur. But the outcome for Russia can be positive.

    No country dependent on foreign capital is sovereign. A country dependent on foreign capital, especially from enemies seeking to subvert the economy, is subject to destabilizing currency and economic swings. Russia should self-finance. If Russia needs foreign capital, Russia should turn to its ally China. China has a stake in Russia’s strength as part of China’s protection from US aggression, whether economic or military.

    The American attack on the ruble is also teaching sovereign governments that are not US vassals the extreme cost of allowing their currencies to trade in currency markets dominated by the US. China should think twice before it allows full convertibility of its currency. Of course, the Chinese have a lot of dollar assets with which to defend their currency from attack, and the sale of the assets and use of the dollar proceeds to support the yuan could knock down the dollar’s exchange value and US bond prices and cause US interest rates and inflation to rise. Still, considering the gangster nature of financial markets in which the US is the heavy player, a country that permits free trading of its currency sets itself up for trouble.

    The greatest harm that is being done to the Russian economy is not due to sanctions and the US attack on the ruble. The greatest harm is being done by Russia’s neoliberal economists. Neoliberal economics is not merely incorrect. It is an ideology that fosters US economic imperialism. By following neoliberal prescriptions, Russian economists are helping Washington’s attack on the Russian economy.

    Apparently, Putin has been sold, along with his internal enemies, the Atlanticist integrationists, on “free trade globalism.” Globalism destroys the sovereignty of every country except the world reserve currency country that controls the system. As Michael Hudson has shown, neoliberal economics is “junk economics.” But it is also a tool of American financial imperialism, and this makes neoliberal Russian economists tools of American imperialism.

    The remaining sovereign countries, which excludes all of Europe, are slowly learning that Western economic institutions are deceptive and that placing trust in them is a threat to national sovereignty. Washington intends to subvert Russia and to turn Russia into a vassal state like Germany, France, Japan, Canada, Australia, the UK and Ukraine. If Russia is to survive, Putin must protect Russia from Western economic institutions and Western trained economists.

    It is too risky for the US to take on Russia militarily. Instead, Washington is using its unique symbiotic relationship with Western financial institutions to attack an incautious Russia that foolishly opened herself to Western financial predation.’

    Roberts doesn’t mention MMT per se, but the phrase ‘Russia should self-finance’ along with the emphasis on its real resources is rather redolent. And the conclusion is uncomfortably redolent of Mr Federov’s analysis.

  68. John Hobgood
    December 20th, 2014 at 17:08 | #68

    Roberts is a political economist. Politics comes first, then economics. Currency operations are right out.

  69. MRW
    December 20th, 2014 at 17:44 | #69

    @Ikonoclast #2

    Topic 1
    MMT uses at least one formal argument that is fallacious…
    MMT argues that expenditure precedes taxation. The corollary, which is explicitly stated, is that money is created via budget expenditure and destroyed by taxation. I argue the fact is you can look at matters in this way if you like and you can look at matters in the opposite way if you like and it makes no difference.

    Actually, no, in practice. Please read Frank Newman’s Freedom From National Debt. He is the former Deputy Secretary of the US Treasury, and explain US Treasury processes.

    1. The government spends first, according to Congressional appropriation, which is absolutely not notional. The money is authorized for expenditure, the only legal trigger that can create it. [If this were the first day of the government’s existence, there would be no dollar bills to tax.] Spending come first.

    2. The US Treasury authorizes its banker, the Federal Reserve, to mark up its General Account at the Federal Reserve in the amount of the appropriation. This increases the General Account balance in the amount of the Congressional appropriation.

    3. The US Treasury then authorizes its banker, the Federal Reserve, to mark up the accounts of the vendors that the federal government is buying from. This depletes the General Account balance…AND…it increases the money supply in the economy by the amount of the appropriation.

    4. By law, from the gold standard days, the US Treasury is not allowed to have zip or an overdraft in its General Account.

    5. The US Treasury, then, prints up (well, it did until April 2013, now it’s electronic) treasury securities in the exact amount of the congressional appropriation.

    6. The US Treasury, then, sells these treasury securities at auction on the open market to pension funds, banks, university trusts, wealthy individuals, businesses, households, foreign banks, and foreign governments. The Federal Reserve, the central bank, cannot purchase them, by law.

    7. This restores the money supply to balance.

    8. The interest on these treasury securities is calculated at the end of August every year, and the US Treasury issues treasury securities in the exact amount of the interest owed for the year. No children or grandchildren involved.

    9. Taxation is a completely different issue, and is not involved in this process at all. It is a fiscal operation to stimulate or de-stimulate sectors of the economy, and to either heat up or cool down the economy.

    You write:

    The person in the street does not see it this way. To them money is already existent, so they see the opposite process from their point of view. Their mental Seinfeld says “First you tax the money, then you spend the money.”

    You cannot tax the person on the street if he or she has not earned it yet. Government expenditure must come first, unless you expect the person on the street to counterfeit it. Your claim that “To them money is already existent,” means the person on the street is ignorant.

  70. MRW
    December 20th, 2014 at 17:52 | #70

    To sum up, while MMT provides a different and sometimes useful way of looking at the interaction between monetary and fiscal policy, it doesn’t change the basic equation that, in the long run, public expenditure is paid for by taxes

    No, it’s not.

    See my reply on page 2: December 20th, 2014 at 17:44 | #19

  71. John Hobgood
    December 20th, 2014 at 18:22 | #71

    @MRW

    Indeed yes. Taxes are paid via public expenditure. Indeed, you can tax prior to spending, but you can’t COLLECT those taxes in your own currency before you spend at least that amount.

    Well, you could if you were ok with counterfeiting. I can’t recommend it.

  72. December 20th, 2014 at 19:43 | #72

    @Jordan

    I’m afraid your argument has become circular. You are assuming that a high interest rate is inflationary and describe a vicious inflationary circle triggered by it.

  73. sdfc
    December 20th, 2014 at 21:23 | #73

    @Ikonoclast

    That’s kind of the point Ivor. The money supply is essentially backed by bank credit.

  74. sdfc
    December 20th, 2014 at 21:24 | #74

    Not you Ikon, scroll up one.

  75. sdfc
    December 20th, 2014 at 21:58 | #75

    You are assuming that a high interest rate is inflationary and describe a vicious inflationary circle triggered by it.

    The high interest rates are inflationary argument has been taken up by some people who should know better, based on a spurious interpretation of the fisher equation.

  76. Ikonoclast
    December 20th, 2014 at 22:01 | #76

    @MRW

    I still get the feeling that there might be a formal fallacy at the heart of this part of MMT. Stay with me as I am re-attempt my “real versus notional” refutation of this part of MMT. But honestly, I now run into a real problem and might have to attempt a refutation another way if I can.

    By “this part of MMT”, I mean the apparent formal insistance that runs;

    (A) Money creation MUST come before money destruction.
    (B) Therefore Government spending MUST come before taxation.
    (C) Therefore taxation does not fund government spending.

    I argue that because money is a notional category not a real category;

    (A) Money creation could come before or after money destruction.
    (B) Government spending could come before or after taxation.
    (C) Therefore “taxation does not fund government spending” is a meaningless statement in this formal system.

    Remember, you ought not conflate an accurate description of a formal nominal process (your description of fiat money creation in the United States) with an insistence that it MUST be this way and can be no other way.

    Fiat money is not a real category. It is a notional category. It does not belong to the category of real objects.

    Let us look at the impossible and possible processes for real quantities. These follow from the Law of Conservation for Matter-Energy.

    (A) Start with -1 cars. Build a car. Finish with zero cars. (Impossible process).
    (B) Start with 0 cars. Build a car. Destroy a car. Finish with zero cars. (Possible process).

    Let us look at these processes for notional quantities. I maintain both are possible processes.

    (A) Start with -1 fiat dollar. Fiat 1 dollar. Finish with zero dollars. (Possible process).
    (B) Start with 0 dollars. Fiat a dollar. Destroy a dollar. Finish with zero dollars. (Possible process).

    The argument now hinges on how the state-citizen system could start up without the state fiating a positive quantity of dollars. The year zero start-up of a fiat system is often invoked by MMT advocates for illustrative purposes. In year zero MMT says the first budget must fiat positive dollars to kick-start the system. I argue this is not quite technically correct. A step has been forgotten. I argue that the state must first fiat the CATEGORY of dollars as legal tender by a sovereign act; by law or legislation. The NOMINAL CATEGORY of dollars must exist legally before any quantity of dollars legal tender can exist.

    Once the category exists by fiat then quantities of dollars can be fiated. Taxation (negative money creation or destruction) could occur before positive money creation. The government could (rather unwisely) decree a poll tax or window tax before bringing the first budget down. It could debit each citizen’s account or ledger by $1.00. It’s a rather primitive economy obviously. The government could then credit its accounts with this money to use for its first budget. If one can imagine a transition process from a barter economy with coconuts as a proto-currency and a 1 for 1 coconut for dollar conversion for a tranition period one can see how this would work.

    However, here I run into a real problem which appears to sink me. The problem is money supply. The money supply must be positive and it will be zero after x coconuts are traded for the x dollars created by the poll tax or pre-tax. The government will have to fiat more dollars to have a positive money supply. So it now appears that the simple fact that a positive money supply is required in circulation demonstrates that positive fiat money creation must precede taxation.

    Whether this applies in the circular case where budgets follow year on year is another issue. Taxed money could be hypothesised as destroyed by taxation or hypothesised as passed through to the spending side of the ledger. Either way could be institutionalised in accounting but this does not save me from the year zero money supply problem.

    In the real resources sense citizens do of course pay for their goverment’s consumption. But then again after all distribution of social income is not the total disutility of taxes, requisition and labour drafting equal to the utility of social income to the population. (Distributions may be uneven and inequitable of course.

    I think we need J.Q. to demonstrate formally how in the long run, public expenditure is paid for by taxes. All I have done in my bizarre attempts is refute myself and look silly. I thought I could belt up the tarbaby and ended up stuck and defeated. LOL.

  77. Jordan
    December 21st, 2014 at 02:29 | #77

    @Alex K.
    I am not saying that interest rates trigger inflation, i am saying that rising interest rates will only support alrerady existing inflation. Inflation is already there due to demand for dollar and fact that sellers keep prices in dollar values of ruble. This fact you also demonstrated in comment #31 with cheese prices, they are $10 yestrday and today even tough in rubles is much higher.

    It is not circular logic if rising interest rates only support and increase allready existing inflation. If i said that interest rates trigger and cause inflation then you would be right. If interest rates were kept at the level of time zero, then such inflation would fizzle out and would not rise anymore. Reduce interest rates and it might even go lower.

  78. John Hobgood
    December 21st, 2014 at 03:27 | #78

    Iconoklast –

    It depends on what you mean by taxation. If we take it to mean the levying and collection of the unit of account, then spending must precede taxation. If you get more granular about the process, the fiscal authority can indeed levy the tax before it spends, it just can’t collect it.

    BTW, by levying the tax, the fiscal authority has created unemployment. The taxpayer is now forced to offer his goods/services in exchange for the unit of account and the fiscal authority becomes the price setter.

    So much for the “Free Market” economy. Kind of difficult to get that one going when the currency itself is coercive.

    As the currency is fiat, you could say the fiscal authority has none of it or you could say it has an infinite amount of it. If it really wants to spend, taxing would be the most difficult, costly (in real terms) and convoluted way of going about it. But a fiat currency with no velocity is a pretty useless thing.

  79. Ikonoclast
    December 21st, 2014 at 06:43 | #79

    @John Hobgood

    Yep, I now have a lot of egg on my face. In getting between two economists and an economic theory I have been arguing well above my intellectual weight division. However, in for a penny, in for a pound. (A currency joke seems appropriate at this point.)

    I am clearly veering around a lot on what I believe re MMT. I am lost in the woods, no doubt about it. The paradox of money in general and the paradox of fiat money in particular has me flummoxed, at least in relation to MMT. I’ve also perhaps created a minor sh**storm on two blogs, this and Bill Mitchell’s blog, by my incompetent arguments. However, there is no malice in my flounderings. There is intellectual pretension, a wish to be right and a wish to find the truth. One out of three is not good, but it’s a start.

    On Bill Mitchell’s Blog, Prof. J.Q. has written this, starting with a quote from an MMT proponent on that site.

    ” “A common misconception seen in the derivative literature on MMT (which is dominated these days by blogs, social media pages and tweets) seems to think that MMT says that currency-issuing governments are omnipotent and can solve any crisis just by spending. None of the main proponents of MMT over the last 2 decades has ever made statements to justify such a view.”

    Agreed, and this was the main point I made in my post.” – J.Q.

    This is good as it demonstrates an area of agreement between MMT economists and J.Q. No controversy on this point, move along folks. Incidently,I don’t know what kind of an economist J.Q. self-identifies as:- Orthodox? Keynesian? Post-Keynesian?

    However, J.Q. also wrote at the end of his blog.

    “To sum up, while MMT provides a different and sometimes useful way of looking at the interaction between monetary and fiscal policy, it doesn’t change the basic equation that, in the long run, public expenditure is paid for by taxes.”

    Therefore, there is still an area of disagreement between J.Q. and MMT economists on that point. I have attempted to refute the MMT camp on this point using a bizarre and incompetent argument (self-judged in retrospect) and have failed. J.Q.’s mission, should he accept it, is to provide to the proof for his own contention.

    My own thoughts on this matter amount to random waffle at this point or maybe “notes towards”… something.

    The citizen is a person. The state is an institution. This is obvious enough but certain observations flow from it. The citizen can pay a cost in a way that the state cannot and does not. The citizen pays a disutility cost for obtaining needs and desires. This is not some abstract disutility cost but a concrete one which can involve personal pain, discomfort, boredom or deprivation (in a couple of senses of the word). Compared to this organic, personal reality, the state as an impersonal inanimate institution can pay no disutility costs. Its agents (ministers and bureaucrats) can have the state make trade-offs to achieve certain goals at the expense of other goals but that is about it.

    The position of the fiat-money state and the position of the citizen with respect to fiat currency is clearly different. If a citizen prints money, he/she is counterfeiter. In common parlance, they get something for nothing. (Though there are still disutilty costs for counterfeiting.) The state can legally print money. In a sense, the state is the “legal counterfeiter”. The state “gets something for nothing”. It gets the chits called fiat dollars for nothing other than the costs of “printing money” or now the electronic process crediting accounts.

    Where does this leave the statement “public expenditure is paid for by taxes”? In one sense it seems true. Public expenditure is paid for by taxes paid by the citizen. The citizen is “taxed” for effort in earning money. Money is a representation for the value of this effort. The citizen is then taxed the money and it represents a real loss for the citizen. The citizen now cannot buy something or “appropriate something with money”.

    If we assume the 1 for 1 equivalence of a balanced budget, the state can appropriate this very item for state uses via the “fiat-fiction” (which might be to give it to the PM for his use or to give it to a poor person for his use.) But how is the state “taxed” for this action? How does it pay a disutility price? It does not and cannot pay a disutility price in the sense that a citizen does. It uses the “fiat fiction” to pay the price in the process of pumping money supply into the economic system: a process required anyway if the economy is growing and if money supply is “leaking” in any way.

    The creation of fiat money backed by taxation (as either real backing in some form or as symbolic backing with inflation tamping) is not the only way a state can appropriate resources. It’s just the current legal process it uses in orderly peacetime. A modern state can also confiscate or requisition materials and products and it can use impressment, drafts or conscription on its citizens. It will often do this in times of existential stress like total war. Everything from fiat currency (“legal counterfeiting” without any pejorative judegement) to confiscation and impressment comes with legal backing and/or the state use of its monopoly of of force also called monopoly on violence.

    For the proposition “public expenditure is paid for by taxes” to be shown to be formally true in the financial system (as opposed to being “disutility-true” in the real economy of real citizens) it has to be shown that a fiat-curency-issuing government can never spend or almost never spend enough without taxes. What the mechanism of this demonstration is I cannot figure out.

    The seeming paradoxes appear to arise with the melding of a notional system with a real system and presumably have been arising in ever more baffling form with the evolution of money from barter to proto-currency, to precious metal backed currency to fiat currency. In the later stages of this evolution, modern capital has also arisen (actually or as new notional categories of finance and analysis?) in forms such as fixed capital, money capital and fictitious capital (if we follow Marx). But orthodox finance also recognises these categories albeit using diffrent terms and without as many pejorative connotations.

    So either the question is genuinely baffling or I am trying to reason beyond my competence.

  80. Ikonoclast
    December 21st, 2014 at 07:08 | #80

    Footnote to my last post.

    Rather than saying “public expenditure is paid for by taxes” it might be better to say “public consumption is paid for by the foregoing of private consumption.” But some if not all public consumption becomes private consumption again, like welfare or contracts to the private sector. But of course some potential consumption can also become investment (public or private) via a government action.

    Heck, in a mixed economy we might as well just say “The state transfers some consumption and alters some investment destinations.”

  81. MRW
    December 21st, 2014 at 07:58 | #81

    John Hobgood :
    BTW, by levying the tax, the fiscal authority has created unemployment. The taxpayer is now forced to offer his goods/services in exchange for the unit of account and the fiscal authority becomes the price setter.

    I agree. Essentially, how a fiat currency become the coercive entity that it is. You have to have a reason to work for the Unit of Account. And what do we get for this coercion? In the hands of competent men (and women) who are working for the benefit of all Americans: prosperity and provisioning of the general welfare of the people as the preamble to the Constitution so orders.

    However as Warren has said many times in his talks, repeating the inside-baseball Federal Reserve term: “Reserve add before reserve drain.” Spending before the issue and sale of treasury securities.

  82. MRW
    December 21st, 2014 at 09:04 | #82

    Ikonoclast :
    So either the question is genuinely baffling or I am trying to reason beyond my competence.

    There’s nothing wrong with your reason or competence, you’re just over-noodling it. You’re over-thinking. I suspect you’re like I was for a couple of years: “Could it really be this simple? . . . . And if it’s this simple, why hasn’t anyone said it this simply before now?”

    The federal government is not revenue-constrained. It does not need taxes to pay for public expenditures. (State and local govts do, however.)

    So let me lay this corkscrew on you, which contains statements that will appear to you as mutually exclusive, except this is how it really works, all laid one on top of each other because they didn’t bother to change the laws back then because a war intervened:

    because we have a fiat currency that requires its use as taxes to establish and maintain the country’s legal tender or legal ‘unit of account’

    because the law from the gold-standard days requires the US Treasury to maintain a positive General Account at its bank, the Federal Reserve (because they were really “printing money” against the gold then, not so after 1933)

    because treasury securities under the gold-standard, which were convertible to gold just like physical dollars, could not be cashed in for gold until after the treasury securities matured, which the government used to reduce the risk to the whole gold supply (reduce hoarding)

    because the law since 1947 says that the Federal Reserve system must return all profits to the US Treasury annually after operating expenses for the 12 districts, and the ~1.56% dividends paid to the (non-voting) member bank shareholders in each district

    because the act of returning the ‘unit of account’ to the US Treasury—as taxes, or as interest payments from Quantitative Easing— extinguishes that money from the economy, as in “poof, all gone”

    because the amount paid in taxes is used to reduce the amount of treasury securities that the US Treasury must issue to match the Congressional appropriation (for the purposes of rebalancing the money supply that the spending adds to the economy)

    Because of all this, there is the perception that federal taxes pay for federal public expenditures. They don’t. Only your state and local taxes pay for public expenditures in any real sense. Only your state and local governments need real revenue–hard cash, if you will–from the public in order to operate.

    Federal taxes are used, when properly understood, to manage the economy of the USA. To increase or decrease the velocity of different sectors in the economy/country. To increase or decrease the wealth of different sections of the country (e.g, tax breaks, say, for car manufacturers to build factories in poor or blighted areas). To heat up a cold economy when no one is spending, and the government wants people to have more money to spend. To cool down a hot economy when everyone has a job but there aren’t enough goods and services available for everyone (leading to higher prices) just like they did as WWII ended to offset the huge savings American workers had in their bank accounts from full employment (1.2%, I think). They taxed the rich up to 90%, and gave the little guy a break after using the country’s resources for the war effort, and created the middle-class, and let them buy all the refrigerators and TVs and cars they wanted.

    I strongly recommend you buy Frank N. Newman’s April 2013 87-page book that explains this. Incidentally, he says to read Warren Mosler, Randy Wray, and Scott Fullwiler–and someone else–to learn how the system works.

  83. MRW
    December 21st, 2014 at 09:31 | #83

    Here, read Beardley Ruml. He was the Chairman of the NY Federal Reserve in 1946. He gave this speech in 1946 to a bunch of bankers.

    TAXES FOR REVENUE ARE OBSOLETE

  84. MRW
    December 21st, 2014 at 10:08 | #84

    nom de plume :
    @Ikonoclast
    The American attack on the ruble is also teaching sovereign governments that are not US vassals the extreme cost of allowing their currencies to trade in currency markets dominated by the US. China should think twice before it allows full convertibility of its currency. Of course, the Chinese have a lot of dollar assets with which to defend their currency from attack, and the sale of the assets and use of the dollar proceeds to support the yuan could knock down the dollar’s exchange value and US bond prices and cause US interest rates and inflation to rise. Still, considering the gangster nature of financial markets in which the US is the heavy player, a country that permits free trading of its currency sets itself up for trouble.

    While I agree that someone is trying to destroy Russia and force the Ukraine to dump their currency and use the Euro, Paul Craig Roberts is not clear about how the US currency works. In fact, he doesn’t have a clue, although his heart is in the right place.

    China hasn’t accumulated treasury securities to defend its currency from attack. And this statement is just bizarre: “Of course, the Chinese have a lot of dollar assets with which to defend their currency from attack, and the sale of the assets and use of the dollar proceeds to support the yuan could knock down the dollar’s exchange value and US bond prices and cause US interest rates and inflation to rise.” Just off the effing wall.

    Here’s how it works, in real life.

    The Federal Reserve has two kinds of bank accounts: checking and savings. (They have fancier names, but this is what they are)

    The only entities that can bank at the Federal Reserve are:
    1. US Government
    2. US banks
    3. Foreign governments
    4. Foreign banks

    1, 2, 3, 4 have checking and savings accounts at the Fed. China has a checking and savings account at the Fed.

    When Walmart buys $100,000,000 of tires and skidoos rom China, it wires the money to China’s checking account at the NY Fed. That’s how the payment system works.

    China has 4 choices. [USD cannot leave the US banking system by law. It cannot leave the US Federal banking system.]

    1. Exchange the USD on the open market for Yuan and wire it home.
    2. Buy something American with the money: farm equipment, planes, oil.
    3. Leave it in checking and earn 0.25% interest.
    4. Earn more interest.

    Let’s say it chooses #4.

    China tells the Federal Reserve it wants to buy $100 million of treasury securities (treasury bonds).

    The Federal Reserve moves China’s $100 million to China’s savings account.

    China buys treasury securities on the open market.

    When China wants to cash them in, it tells the Fed the sell them.

    The Federal Reserve moves the $100 million in principal and interest from China’s savings account to its checking account.

    This is called Paying Off the National Debt. The act of going from China’s savings account to its checking account is called paying off the national debt.

    Nothing more complicated than that.

    It has nothing to do with the dollar’s exchange value, US bond prices, US interest rates, or inflation..

    Zero.

    All it is is what Walmart paid China for imported goods.

  85. Ikonoclast
    December 21st, 2014 at 11:57 | #85

    @MRW

    The farthest point I can get my mind to in these matters is;

    (1) The federal government is not technically revenue-constrained. It can create any amount of fiat currency it wishes or believes it needs to do. However, this technical or nominal non-constraint is really neither here nor there. The fact is real constraints exist. Are the real goods and services available for the government to purchase? Will excess inflation be created? What happens to unemployment and indeed social equity and cohesion in all this? The real contsraints are what counts.

    I accept that the change in emphasis by MMT and the rebuttal of certain everyday myths (“the government is like a household”) is useful but I don’t hold this reasoning, perception and advocacy to be the sole preserve of MMT. And sure, the neoliberals might chant differently openly to the public but privately they bail out business with deficit trillions and/or QE trillions. So even they (the most Machiavellian of them anyway) know the real facts too.

    2. Does taxation fund spending for a fiat currency issuing Fed Govt.? This is a second order question compared to 1. above in my opinion. It may or it may not. It depends on your viewpoint, how you do the accounting and whether you are going to focus on the notional (accounting) processes or the real processes. The latter tend to show taxation as a redistribution tool, a pigovian tool and maybe a fiscal space making tool because it is a way, not the only, way to damp inflationary pressure.

    3. Finally, all of these controversies are based in both current conventions of public-private finance and in the assumptions of and presumptions for capitalism as a system. Capitalism has now evolved to late stage or monopoly-finance capitalism for reasons inherent to capitalism itself and its control by an oligarchic set-up. This set-up is now propped up by private wealth and power and government wealth power de-democratised, bought and suborned to the purposes of the oligarchs.

    4. Capitalism is very likely to collapse in my opinion. This collapse might be due to internal contradictions (revolution by the poor against the long-run stagnation induced by oligopolisation and over-accumulation of capital). Alternatively, the collapse might be caused by external contradiction namely the conflict of capitalist over-production with the environment causing irreparable environmental damage. Either way, the system will go through a disjuncture in an abrupt change to a new system (or chaos and anarchy) such the “laws” of bourgeois or capitalist economics will be completely or largely obsolete. That’s my best guess at this stage even though it might not happen in my lifetime.

  86. December 21st, 2014 at 12:09 | #86

    Not sure whom Cameron was addressing but this is certainly the crux of Quiggin’s continual misunderstanding of MMT:

    “public expenditure is paid for by resources” (i.e. not taxes)

    verse

    according to Modern Monetary Theory, states that issue their own currency don’t need taxation to finance public expenditure

  87. MRW
    December 21st, 2014 at 13:46 | #87

    @Ikonoclast

    I poured coffee on my laptop about 90 minutes ago and it’s fried. So I was answering you on my iPad and I just lost everything I wrote because I accidentally hit the wrong part of the screen.

    So now it’s bar time.

  88. John Hobgood
    December 21st, 2014 at 14:38 | #88

    @MRW
    MRW –

    You can remove the Hard Disk Drive and save your stuff (except for your answer to Ikonoclast). You just need to remove it from the laptop and put it in an external enclosure (they aren’t expensive). The sooner you get it out of the laptop the better. Let me know if you need help with that.

  89. Ikonoclast
    December 21st, 2014 at 19:16 | #89

    I found an interesting paper and read it pretty much right through. I even re-read key paragraphs several times. This is the paper.

    “Understanding the Modern Monetary System” – Cullen O. Roche, August 5, 2011.

    Here is one place to find it.

    http://fernandonogueiracosta.files.wordpress.com/2011/08/cullen-roche-mmt-understanding-the-modern-monetary-system.pdf

    The author introduces the paper as being about Monetary Realism. He discusses MR more than MMT as such. The paper is intended to be a description of the contemporary US monetary system. It is largely this description. I am not a scholar with independent research behind me so I cannot comment on its accuracy and comprehensiveness. My guess is it is basically right.

    However, the paper does wander off a couple of times into the author’s philsophical musings about the US economy and what underpins it. Private enterprise innovation is one factor he represents as important. A few other such comments indicate the author, although not buying into myths about the monetary system, might be buying into a few other US and capitalist myths, as I might call them, that are conservative or even slightly neoliberal. It’s an unexpected mix and he should have stuck to his self-set brief.

    In the conclusion he says;

    “In sum, most of what we have been taught in school is based on a now defunct monetary system (the gold standard). MMT is not a theory, but merely a description of a modern fiat currency system. While its description of the modern monetary system is accurate, it is by no means a holy grail. And those who apply policy prescriptions are merely utilizing the realities of the system to apply what they believe are sound uses of the system. It does not mean the
    government can just credit accounts and create real wealth. No, real wealth is only created through real productivity. And while government can’t create this wealth it can be used as a tool to help the private sector to achieve prosperity. I think it’s important to understand that government is not always bad or that government spending is always evil. In fact, government serves a vital purpose within our society. How involved that government is in the day to day lives of its citizens is to be decided by the citizens themselves.

    I believe MMT and Functional Finance provide a more accurate portrayal of the monetary system
    in which we reside in the USA and in many other autonomous states throughout the world. It is
    my hope that a greater understanding of our monetary system will result in a less dogmatic, more pragmatic and more rational perspective of our economy so as to help us all in achieving the prosperity we desire.”

    Okay, this conclusion is well and good and certainly not neoliberal in spirit. It’s motherhood and apple-pie. The implied belief that US citizens (the masses other than the 30% or so who vote and even other than the “1%” wealthy) have a say in how the US economy is run is quaint and completely inaccurate IMO.

    Does this paper really reflect MMT accurately? I don’t know.

    MMT has a bit of a split personality IMO and suffers from both grandiosity and dogmatism. Now that’s a bit rich coming from me but I hold it to be somewhat true nonetheless. MMT is very strong on saying it’s just an accurate description of how the modern monetary system works. It then makes the assumptions or claims that;

    (a) that nobody else knows this or has figured it out (presumably even those who made it and exploit it); and/or
    (b) nobody else knows or has discovered how it might be used for good instead of evil.

    That’s a bit of a caricature but you get my drift.

    It’s as if simply describing the system accurately has initiated MMT-ers into a profound secret nobody else knows. Converts, even temporary ones like me who approach it and then pull away again, seem to be encouraged into this same belief. They now know a profound set of powerful truths that nobody else knows. If only life was that easy. I am not sure how you get from a very accurate desciption (without theory) to a profound secret nobody else knows.

    Now, I might be doing MMT a disservice here. If that is the case, well MMT-ers are prolific proselytisers and can easily out-preach me any day of the week. They are well capable of looking after themselves.

    At the same time, I do not want to do Bill Mitchell a disservice. I agree with many of his policy prescriptions and his analysis of the disaster that is the EU. This is possibly because he seems to me almost Marxian in some of his political economy. He has done and is doing an enormous amount of work. Finding out and detailing how things work empirically is painstaking, voluminous work. Bill Mitchell also works with and publishes a LOT of data as a macroeconomist and econometrician. I hope I have got his specialities right. He respects empirical data and I respect that highly.

    With regard to my criticism that I am “not sure how you get from a very accurate desciption (without theory) to a profound secret nobody else knows,” it may well be I haven’t encountered the theory part properly yet. Bill Mitchell’s textbook when it comes out next year (IIRC) might address this area.

  90. December 21st, 2014 at 19:54 | #90

    @Jordan

    “I am not saying that interest rates trigger inflation, i am saying that rising interest rates will only support alrerady existing inflation.”

    So we agree that an external shock (a drop in commodity prices) leads to ruble inflation. However you’re saying that a low ruble rate would slow down that inflation – by encouraging investment in domestic production, if I understand correctly? Assuming it can work, it will still take months. To get there, Russia has to survive the short-term panic, which is a matter of days, not even weeks. A higher interest rate sends a reassuring signal to the public and helps dry up ruble liquidity in the banking system, easing pressure on the ruble. These are very short-term effects but the alternative is general panic, banks runs, and social unrest. Russian authorities prefer slow-boiling the frog.

  91. nom de plume
    December 21st, 2014 at 21:31 | #91

    @Ikonoclast

    Ikonoclast

    I just came across a podcast you might be interested in; From Alpha to Omega’s Tom O’Brien interviewing anti-NATO activist Rick Rozoff, who sure knows his political onions, providing both context and counterpoint to Mr Federov’s econ/finance perspective and chiming with Roberts, Fraser and Keating… quite a mixed bag to be nodding in agreement. The danger of American madness makes for strange bedfellows.

    http://fromalpha2omega.podomatic.com/entry/2014-11-01T01_52_13-07_00

  92. Jordan
    December 22nd, 2014 at 04:04 | #92

    @Alex K.
    We agree that something else then interest rate is causing rising inflation. That else is capital flight caused by sanctions and economic attack on Russia. It is political reason for inflation inside colonialy (import based) set up system. Due to sanctions, many foreign companies are closing up shops in russia and exchanging rubles for dollars in order to leave. This is lowering the ruble which is triggering even more capital flight due to fear more then from sanctions. It is the demand for dollar that is devaluing ruble and as you noted prices will be kept in dollar value. Prices will rise due to exchange rate, not because of cost of production.
    The reason is not drop in comodity prices but increased demand for dollars due to capital flight.

    “However you’re saying that a low ruble rate would slow down that inflation”
    No, im saying that low ruble rate would help decouple prices from dollar value in rubles. First, the domestic loans have to switch to rubles by baning dollar denominated loans and then refinance into debt with fixed and lower interest rates. This will help start ups that fill the demand for imported goods.
    Yes, all that takes years, not days. Present aproach only delays this needed change that is inevitable while giving impression that it can be avoided. High interest rates do not help, they only destroy demand for loans needed for new production and to upgrade tehnology.
    High interest rates destroy production because most companies operate under debt. This destruction is much much worse thing then loosing foreign investments which will leave anyway.

    “To get there, Russia has to survive the short-term panic, which is a matter of days, not even weeks.” I do not think that interest rate helps exchange rate any, i think that even keeps it fall faster because it feeds fear and speculations. Higher rates help a bit and short time and coupled with selling of currencies,but only under normal conditions, not under sanctions. Economic sanctions turn things upside down. Political decisions trump economic rules.

    “and helps dry up ruble liquidity in the banking system, easing pressure on the ruble.” are you advocating even more economy be based on dollar? All that just to keep nice looking exchange rate? What is that good for?
    In normal conditions that is how it would play out and force even more economy into foreign debt to keep equilibrium, but under sanctions that is not an option.

  93. Min
    December 22nd, 2014 at 06:30 | #93

    Ikonoclast :
    @braddv
    “Start with zero fiat dollars, destroy one fiat dollar and then make fiat one dollar and have zero net dollars left at the end of the process.” is a possible process for the currency sovereign precisely because the dollars are notional not real.

    How so? By destroy a fiat dollar you mean collect it in taxes, right? How can you collect it in taxes if it does not exist? Even “notionally”?

  94. Min
    December 22nd, 2014 at 06:53 | #94

    Ikonoclast :
    Once the category exists by fiat then quantities of dollars can be fiated. Taxation (negative money creation or destruction) could occur before positive money creation. The government could (rather unwisely) decree a poll tax or window tax before bringing the first budget down. It could debit each citizen’s account or ledger by $1.00.

    IIUC, something like that was done by some colonial gov’ts to introduce their currency into the colonial economy. A poll tax or hut tax was decreed, to be paid in the ruling country’s currency, the only local source of that currency being the colonial gov’t or colonists from the ruling country. But though the tax was decreed, it was not collected until the currency had been introduced into the colony.

    In other contexts, British tally sticks started out as gov’t payments, with the promise that they would be accepted in payment of taxes. In America, colonies issued their own money as IOUs to get around the requirement that only the British crown enjoyed seignorage rights. In both cases the money and the debt were created together, at the same time. 🙂

  95. Min
    December 22nd, 2014 at 07:06 | #95

    John Quiggin: “it doesn’t change the basic equation that, in the long run, public expenditure is paid for by taxes”

    Why is that anything other than an article of faith? Reasoning backwards from a mythical day of reckoning is problematic, to say the least.

    Consider the American Continental Dollar. It paid for a lot of the expense of the American Revolution, yet the Continental Congress, which issued it, did not have the power to tax, nor did any state accept it in payment for its taxes. As a result, it crashed. The payment was not it taxes, but in real resources and efforts, and in ruined lives. Thomas Paine unsympathetically asked if people had wanted a war for free.

  96. MRW
    December 22nd, 2014 at 08:50 | #96

    John Hobgood :
    @MRW
    MRW –
    You can remove the Hard Disk Drive and save your stuff (except for your answer to Ikonoclast). You just need to remove it from the laptop and put it in an external enclosure (they aren’t expensive). The sooner you get it out of the laptop the better. Let me know if you need help with that.

    Thanks, John. That’s exactly what I did. And it was dripping wet. A SSD. Hope it’s OK. I’ll find out tomorrow.

  97. nom de plume
    December 22nd, 2014 at 09:05 | #97

    This piece by Mike Whitney is even scarier than Federov. He provides a road map for the so far strangely compliant Putin, one which involves a return to Cold War era proxies and capital controls, ramping up the danger of war and European depression considerably. If Putin can’t or won’t move, if he won’t utilise his greatest asset – his massive approval ratings (based as they are more on nationalism than the man himself) – then eventually some other Strong Man else will.

    http://www.counterpunch.org/2014/12/19/ruble-takedown-exposes-cracks-in-putins-defense/

  98. MRW
    December 22nd, 2014 at 12:30 | #98

    @nom de plume

    I give Putin more credit than most. I have found few Americans who understand what went on with Crimea and why it is so important to Russians. The rah-rah against Putin for backing Crimea is as idiotic as expecting the U.S. federal government not to defend and aid Puerto Rico or Guam. Anyone who has been to Crimea, and I have, knows that it is a Russian area. It was the summer seat of the Russian government for two centuries that I know of. Putin didn’t have to blink twice when they asked him for help. This is in addition to the Russian naval base at Sebastopol.

    In addition to his masters degree in international law, Putin has a PhD. His doctoral thesis was How to bring a totalitarian state into the 21st C by using natural resources judiciously. He has a very clear idea of what’s underneath the ground, and Russian resources are vast.

    Mike gives an accurate reading of the geopolitics, IMO. He doesn’t get the dollar reserve structure right, however. His comment that it’s like having a credit card you never have to pay off tell me that. Obama has given a great big wet kiss to China in his mishandling of this. BECAUSE OF the currency wars, which Obama initiated, I believe China will be setting up payment schemes in their own currency which could produce the kind of market in yuan that they will need to become the reserve currency in 15 years. The other side will push back hard. The TPP, and whatever the European one is called, is the global legal system being set up for the global governance movement operating as a side issue to all of this. Lots of players on this chessboard.

  99. David
    December 22nd, 2014 at 13:09 | #99

    @MRW
    You listed who can bank with the Federal Reserve (US Treasury, US Banks, Foreign Governments and Foreign Banks). You also say that the Fed cannot buy (original issue) US bonds (I understand they can only buy old, ‘used’ bonds 🙂 via the recently completed Primary Open Market Operations (POMOs). So someone (the US Banks, ie, Primary Dealers) has to by the treasury bonds when they are first issued.

    I want to clear up something for my understanding.

    I’m assuming the funds in these Fed (cash) accounts are what is meant by the term ‘Reserves’. (‘Securities’ accounts hold Treasury bonds and are analogous to savings accounts.)

    Mr. Mosler has written that The Fed’s bond sales are carefully coordinated between it and the Primary Dealers (ie, the major US banks) so as to never fail.

    To me this implies several possibilities: the PDs have enough cash to always purchase what is coming down the pike and just buy the new bonds, or the Fed can loan the funds available to the PDs to allow the PDs to purchase the new bonds. Either approach allows the PDs to fulfill their obligations to enable them to ‘make the market’.

    By implication, the interest from the treasury bonds will exceed the cost to borrow from
    the Fed, so the PD (US bank) is not out of pocket.

    Is this how it works? And/or, are there other mechanisms used for this?

    Thanks very much for your excellent summaries earlier.

  100. Troy Prideaux
    December 22nd, 2014 at 13:57 | #100

    MRW :
    Obama has given a great big wet kiss to China in his mishandling of this. BECAUSE OF the currency wars, which Obama initiated, I believe China will be setting up payment schemes in their own currency which could produce the kind of market in yuan that they will need to become the reserve currency in 15 years.

    I generally agree with most of what you’ve said, although I’m of the opinion that the ‘currency wars’ had a more peripheral effect with China’s intentions of introducing a competing reserve currency. That’s been their aspiration before the ‘currency wars’ or at least the era of QE.

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