I’ve been asked quite a few times about chartalism and its recent rebadging as modern monetary theory (MMT). My answer has been that I really should get around to looking into this. However, the issue came up again at Crooked Timber following my post on hard Keynesianism. Looking around, I drew the conclusion that an attempt to define and assess the various versions of MMT would take more time than I had available. So, instead, I thought I would draw up a set of propositions bearing on the claims I made about hard Keynesianism and invite comment from MMT advocates and others as to whether they disagree. Here they are
1. Except during the period since the GFC, money creation has not been an important source of finance for developed countries
2. Except under extreme conditions like those of the GFC, money creation cannot be used as a significant source of finance for public expenditure without giving rise to inflation and (if persisted with) hyperinflation
3. Government deficits must be financed primarily by the issue of public debt
4. The ratio of public debt to GDP cannot rise indefinitely, since governments will ultimately find it impossible to borrow
5. The larger the deficits governments want to run during deficits, the larger the surpluses they must run in booms
Now some justification for these claims:
On point 1, the US monetary base has expanded from $800 billion to $2400 billion since the beginning of the crisis. Prior to that, growth was roughly in line with nominal GDP, that is, around 5-6 per cent per year or additions of $50-60 billion.
My take on this: Quantitative easing and similar operations since 2008 have created money equal to around 15 per cent of GDP or around 5 per cent per year, without obvious inflationary consequences. We can conclude (assuming the inflation doesn’t materialise) that, in a liquidity trap, there is substantial capacity to use direct money creation as a source of finance.
Pre-GFC, seignorage/base money creation was a minor source of finance for the US government (about 0.5 per cent of GDP, consistent with money base being about 10 per cent of GDP). And, I’m confident the same is true for all developed countries except maybe Japan, which has been in a liquidity trap for a long time.
On point 2, there are plenty of examples of governments trying to finance their operations through the printing press, and the outcome is always the same: inflation at first, then hyperinflation, then the end of the currency. Zimbabwe, which now has no currency of its own, is just the latest example. There are various possible mechanisms by which this outcome occurs, but the central point is that the monetary base is typically around 10 per cent of GDP, which presumably reflects people’s desire to hold money. Any substantial increase in the monetary base can be sustained only if interest rates are pushed down to low levels, ultimately to zero. And, except in crisis conditions like those of the present, zero interest rates will lead fairly rapidly to inflation in asset prices and ultimately in consumer prices.
Point 3 follows from point 2.
Point 4 like point 2 has been verified by sad experience many times.And its obvious that, the higher the debt ratio, the stronger the incentive for the government to default or inflate their way out of trouble, and therefore the higher the interest rates they will face. At some point the capacity to borrow runs out.
Point 5 follows from Point 4.
So, there are my propositions. Feel free to comment.
127 thoughts on “Some propositions for chartalists (wonkish)”
Let me clarify some basic MMT positions:
Monetarily sovereign governments do not borrow. They are currency issuers, and spend by crediting bank accounts. Because they do not borrow, it logically follows that they have no debt either.
But they perform operations that closely resemble borrowing. They issue these saving instruments, government bonds, whose purpose is not to fund anything but to offer non-government sector some safe place to invest their money.
This process, government creating money trough deficit spending, resembles borrowing because it used to be, under gold standard, that the governments had to borrow in order to finance spending. All ties to gold were severed when bretton woods system collapsed in 1971, but bond issuance, and some other legislative restrictions are relics from that era.
This may sound rude, and I don’t mean to sound rude, because I have been babied a lot by some really nice MMT people. But the WORST aspect of MMT is that its missionaries often convey a religious zeal.
I struggle to keep my own economic thought free from politics. So much the worse, if people throw not only politics but religious ferver into the mix.
I think that the intensity arises over the policy options that MMT offers rather than a quasi-religious excitement over MMT. Many people see the current policy prescriptions taking us over a cliff and are would like to see that direction change. MMT provides a substantive rationale for such change. I can only speak for myself, and that is my motivation for being involved in this. I see it in terms of political action rather than economics per se. All the talk now is about possible inflation in the future and no one is talking about depression level unemployment and a significant portion of the the developed work challenged on their balance sheets, if not underwater.
Hi Tom… and thanks for the kid-glove approach 🙂
I don’t know how people take my crits of MMT, but often they are offered as a crit of style-of-presentation. If I may: certain phrases are repeated over and over (“loans create deposits” and “net financial assets” for example). I know they are key concepts, but seldom do I find someone who can put these concepts in his own words. It makes me think there is too much adoration of the high priests of the cult. That’s just an impression; but I tend not to trust ideas that are presented that way.
I was as hard on John Quiggin as I dared to be in my first comment on this post. But I challenged him with a graph, and he challenged me back by interpreting the graph.
Come to think of it, I don’t think I’ve ever seen a graph from an MMT guy.
I think that a large part of getting something is getting the terminology. Contemporary philosophers pay a lot of attention to meaning because this is where mistakes creep in. For example, MMT economists seek to avoid the ambiguity of “money” by being specific. “Net financial assets” adds to that specificity because to understand the terms as MMT economists use it requires understanding their distinction between vertical money and horizontal money, a key MMT distinction. Similarly, “loans create deposits” underlies horizontal money creation, which necessarily nets to zero.
I am one of the people that practically memorizes what the MMT economists say because I am not an economist and I don’t have the background to know when I an making a mistake. I am quite aware of this from my own field, where writing for non-professionals requires careful consideration of accessibility, on one hand, and precision, on the other. It’s a balancing act.
I have seen some graphs in MMT papers but MMT economists are not big fans of graphs for a good reason. Most issues are multi-variable, so graphs don’t lend themselves well to describing the functional relationships. Oversimplification of complex issues is one of the criticisms that MMT economists and other Post Keynesians — most Minskyians actually — level at some other economists.
You are misreading my remarks, I think. My central point is that i don’t want to get into the kind of debate where I offer a summary and critique of what I think MMT says, then someone comes along and says that I’ve misunderstood or misrepresented MMT and we spend a lot of time arguing about definitions of money and so on, without ever getting down to the economic issues.
I thought it better to present my own views on propositions that should be of interest to MMT advocates, and let them respond.
Not rude at all, but a little mistaken – just for the record I am not a missionary of any description; however I am an enthusiast of life. Am trying to be honest and forthright with JohnQ, not political or religious.
To my mind too many commentators, even dare I say ‘analysts and XPerts’ pick up one or two of the pieces of the jigsaw puzzle that is MMT, comment immediately on how odd and unlikely they are, then take them over to their favourite jigsaw puzzle and try and fit the pieces into it. Then their response is: ‘this is crazy, these pieces don’t fit, this is nonsensical’. Well of course it is nonsensical!
You have to take the pieces and fit it into the MMT puzzle. And when you have completed that puzzle and understand thoroughly what you are looking at, then maybe you can make an honest appraisal and comparison with other jigsaw puzzles. Hence the recommendation to read the core literature.
Only then can you make up your own mind with some modicum of intellectual integrity. There is too much conceptual noise and waffle in this world already (brain farting), and the intelligentsia are supposed to be the ones that clarify things, not act as catalysts to even more confusion.
I think that is direct and fair enough.
Oh, by the way: politics and statemanship, religion and philosophy, education and communication, art and crafts, science and knowledge, enthusiasm and organisation are all aspects of a human being, only separable conceptually – you can’t fragment being! To me there is no harm in allowing each aspect to interact with the other.
OK, makes sense – thanks John. But the point I am making above makes sense too. Shall take you on your word, but do hope you can find some time to read something for yourself on MMT.
Wouldn’t be the first time…
jr, I try to understand by finding one piece that makes sense, and then building on that. I cannot trust a concept if I have to accept it all first, and understand it all later. This is a big problem for me, with trying to ‘get’ MMT… Note that I object most often to the style-of-presentation, not to the concepts.
And then, everything is backwards. Deposits are lent? Nope: loans create deposits. I can see it, but I still have to work out how everything fits together. And I’m not at all sure that the MMT conclusions follow from all that accounting.
Wow, there is a lot of editing to quote-and-reply. I hope I got it right!
I try to understand by finding one piece that makes sense, and then building on that.
Me too – I pick an area like ‘reserve accounting’ or ‘job guarantee’ or ‘trade’ etc. and gather up all of the available pieces from the MMT source material (Fullwiler, Mitchell, Mosler, Wray) and some from knowledgeable commentators like Auerbach, Roche, Hickey, Hudson, Black, Kelton and lay them all out as a whole and review them – then I keep what makes sense to me. Idea is to focus concentration rather than disperse it over a wide seemingly disparate field. Putting these focal areas together and establishing their links is ‘doing the jigsaw puzzle’.
everything is backwards</em
Look, it is 'logical' that human beings practice kindness and compassion with each other – but something gets in the way. Don't be surprised to find mainstream thinking about just about everything, is logic stood on its head. The world in 2011, is not a logical place – otherwise we would (logically) be living peacefully and securely together, appreciating the beauty and diversity of life on this planet and in each other. It takes more than logic – always!
Good luck with your mental gardening! Cheers …
I have a queston for the MMT and the Hard-Keynesians.
Who agrees with the following statement?
“The economy is a complex dynamical system with irrational participants”
As long as we’re talking on the macro-level I’d say we all do.
This seems to be a rejection of equilibrium modeling and REH in aggregate, i.e., at the macro level. In that case, I would venture to say that all MMT proponents agree and probably most Post Keynesians, too.
Following up my previous response to your query about how the Greek economic crisis should be best handled, the solution for Greece – from a MMT perspective – is discussed at length within Bill Mitchell’s billyblog today:
I would agree that an economy is a complex time dependent system. I would say participants who want to model a monetary system without taking the biopysical constraints on the material welfare of humans into account are irrational, particularly if they want a monetary system to be useful for human existence rather than a mere number game..
I am not sure whether I understand your note – Barro type GE models or Radner type? Are you taking bounded rationality and the difference between individually optimal but collectively sub-optimal outcomes (eg Prisoners’ Dilema type) into account? I am pretty confident in saying that the math-econ members of Hard-Keynesians would.
Extend it from material welfare to general welfare and I can concur. However, I met it more the way Tom Hickey explained it except I was not thinking as in technical terms.
By material welfare I mean essential things like food, clothing, housing, ‘clean air’ (as determined by natural scientists), ‘clean water’, sustainable eco-systems, … , hospitals, schools, public places, transport, consumer goods such as washing machines, …., theatres, down to gadgets if they are affordable more or less by everybody. If people want to spend wealth on churches, that is is their business. While there is a rough ordering in the list, it isn’t a strict ordering – taking preferences as given is not a bad idea in economics if one wishes to talk about non-dictatorial resource allocation systems. So ‘general welfare would depend on private and public physical things and a ‘sustainable’ eco-system.
Would you agree that talking about a monetary system without the biophysical constraints is irrational if one is concerned with the ‘general welfare’ of people?
The best way to understand any economic theory is to read it and then read it’s critique and try to find answers for it. I think. But then, i’m no economist, so i might be wrong.
To answer your statements:
“1. Except during the period since the GFC, money creation has not been an important source of finance for developed countries”
– If you by “money creation” mean addition to aggregate demand, that’s exactly the problem. Most developed countries have had a high average unemployment rate, which isn’t just direct loss, but also incurs future losses.
“2. Except under extreme conditions like those of the GFC, money creation cannot be used as a significant source of finance for public expenditure without giving rise to inflation and (if persisted with) hyperinflation”
– Bull. There is no inherent link between government spending and inflation. “Money creation” becomes a problem only if the government starts competing for resources with the private sector, so it all depends on the overall picture of the economy. However, any addition to demand by the gov’t should be aimed at increasing supply also (putting people to work). To put this statement in perspective, the private sector buildup of debt is also “money creation”. About Zimbabwe: http://bilbo.economicoutlook.net/blog/?p=3773
“3. Government deficits must be financed primarily by the issue of public debt”
– Only if the economy is at full capacity, but then there most likely will not be a need for deficits, as the automatic stabilisers will not be used as much and more taxes will be paid. Also, i think the best understanding of public debt is that public debt to the private sector is the same as the banks debt to me as their customer.
“4. The ratio of public debt to GDP cannot rise indefinitely, since governments will ultimately find it impossible to borrow”
– It can. There is no real -financial- restriction on the government. The government doesn’t need to “borrow” from the private sector, if it doesn’t feel like it, as it can rely on “money creation”. That said, obviously the government -should- not aggressively “create money” if there isn’t a realistic case of that helping the economy as a whole.
“5. The larger the deficits governments want to run during deficits, the larger the surpluses they must run in booms”
– Not necessarily. The MMT understanding of taxes is that they provide a reduction in private sector demand (destroying money), which, in turn, allows the government to act in the economy while avoiding inflation. Thus surpluses are only a systematic reduction in aggregate demand and as such should only be used if/when there’s a risk of the economy overheating.
I think one of the important points of MMT is the separation of “can” and “should”. MMT argues the government has all these capicities, but they’re obviously not arguing the economy should be run as in Zimbabwe. I really think you should try taking a completely neutral look at MMT and see the points it has.
Like i mentioned before, i am no economist. I’m just arguing according to my understanding of MMT, which might very well be weak.
I went wrong here. That public debt might actually be inflationary through interest rates and it most likely would be invested in similar low-risk assets anyway.
Well, like i said, my understanding of MMT is still weak. You really should check out the experts. I think Bill Mitchell would be the one to go to (his blog).
Have a look at work coming out of Canada: Fictional Reserve Barking:
I think you’d enjoy the humdinger.
In that case we concur on the definition.
I think we should talk about the operational realities of the economic system currently in use and get the fundamentals of that correct before applying it to ‘biophysical constraints’. We should not build a rebellion or revolution over that system and force wholesale changes that would be rejected by the masses with such a carte blanche change.
I take your phrase ‘biophysical constraints’ to mean ‘environmental sustainability’ and I must say MMT economist Bill Mitchell does focus on this in his work. This is one of the reasons rents are recommended by many economists, rents on resources. It slows the degradation of biophysical constraints and I can foresee work opportunities in rehabilitating such areas as well (but that brings me into policy recommendations) rather than an explanation of the fundamentals of the system we all ready have.
Typically these biophysical constraints can lead to supply side inflation, assuming it is or will be part of a product. The economy is such a dynamic beast, often you need specifics. Even this supply side inflation depends on whether it is a natural scarcity or whether being held hostage by groups that have monopoly or oligopoly control over the resource (e.g. OPEC 1970s)
The short answer is yes.
I must be clear so I offer this as a disclaimer I’m just an informal student of Neo-Chartalism/MMT and not familiar with a lot of technical terms but I have not found a need for the use of such jargon so far. I just find this school of thought makes intuitive sense (even though it is claimed it is counter-intuitive I don’t find it to be so) & I have looked at other schools of thought.
Macro – Environment, People (Govt view or it should be)
Micro – Me, Environment (Most Individuals view until they’re content with their own personal welfare)
To paraphrase someone in the field about debt and to put it in an Australian context:
The government going into debt is the shifting of dollars from exchange settlement accounts at the RBA to securities accounts at the RBA.
Paying off government debt is the shifting of dollars from securities accounts at the RBA to exchange settlement accounts at the RBA.
It does not need to be a big deal.
Senexx, but then jargon is often created by people who do not want to bother with technical terms that have a well defined meaning.
Last word ?
I’ve just finished trawling through the comments on CT that spawned this thread.
Before the CT thread was closed one commenter, Sebastian, repeatedly claimed that the employment boom that followed Clinton’s surpluses disproved a fundamental tenet of MMT (and presumably Keynesianism).
Joseph Stiglitz who was there at the time explained in his book “The Roaring Nineties” that the unusual outcome was due to an unusual event (a “lucky mistake”), the relaxing of accounting rules that allowed banks to hold long term government bonds as risk free securities (that is, no reserve back-up).
When interest rates subsequently fell the S&L’s were left with huge windfall profits from their holdings of high coupon long term bonds and that fueled a lending boom.
So AD was maintained in the face of budget surpluses by private deficits. The sectoral balance identity holds.
Prof. Quiggin – First, let me commend you for your work on Zombie Economics. I found the book extremely informative and helpful for understanding the mess we’re facing right now. In my opinion, the book should be mandatory reading for all economics undergraduates, as well as regulatory analysts working on financial regulation. I’ve recommended it to several people, some of whom are currently in the field of public policy.
That being said, I wish to simply bring to you attention the following point relating to this discussion on chartalism: the endogenous nature of money. To get a good grasp of circuitist/chartalist monetary economics, it’s important to keep in mind that the money supply is determined by the demand for bank credit (loans). A bank will create a loan when the borrower is creditworthy and has adequate collateral. Even economists at the Bank for International Settlement have concluded that is the case. Here’s an excerpt of a paper by P. Disyatat: http://www.bis.org/publ/work297.pdf
“…since banks are able to create deposits that are the means by which the non-bank private sector achieves final settlement of transactions, the system as a whole can never be short of funds to finance additional loans. When a loan is granted, banks in the first instance create a new liability that is issued to the borrower. This can be in the form of deposits or a cheque drawn on the bank, which when redeemed, becomes deposits at another bank. A well functioning interbank market overcomes the asynchronous nature of loan and deposit creation across banks. Thus loans drive deposits rather than the other way around.” (p.7)
Post-Keynesian economists Randy Wray and Basil Moore are mentioned in the BIS paper. Although post-Keynesians have been saying this for years, it is only recently that mainstream monetary economists and central bankers have realized this fact.
Why is this important? Briefly, I will give you three reasons.
First, it means that, contrary to what we’ve all been taught, it is investment undertaken by firms that creates savings. Investment doesn’t require prior deposits or prior savings to come about. This is a significant point to remember in this discussion on modern money.
Second, it also means that the money multiplier does not exist. The size of the monetary base does not impact the supply of money. Actually, it is the other way around: banks seek reserves to comply with reserve requirements after they have created the loans and deposits.
Third, it means that inflation is not the result of an expanded monetary base. In fact, it is the increase in prices that drive the bank to seek additional reserves (as a result of demand-pull or cost-push inflation). The implications for economic policymaking are significant.
For those who are interested, here are some good, short quotes from Basil Moore’s classic work “Horizontalists and Verticalists”:
“Banks do not wait for excess reserves before providing new loans to the public. Nor are new loans made at the initiative of the banks themselves. Banks are essentially in the business of selling credit . As with all firms the amount of goods and services they can sell depends ultimately on the demand for their product.” (p.46)
“In a world of credit money and central banks, interest rates can never be endogenously determined solely by market forces. The authorities cannot choose not to affect interest rates.” (p.254)
In other words, the exogenous nature of money taught in macro textbooks is another zombie idea…
Thanks for the opportunity to comment.