A new sandpit for long side discussions, idees fixes and so on. I’m going to add MMT to nuclear power as a topic that should be confined to sandpits from now on. I’ve had my say on the subject, and the argument in the comment thread doesn’t seem to make anything any clearer.

64 thoughts on “Sandpit

  1. As you know, pandemics are a global catastrophic threat, with magnitude proportional to economic size, so US would be the biggest loser. According to a new OECD report, pandemics (and financial crises) are top global risks. Below are some references also to the Contagion film , which may make a more lasting impression than reports. There should be a more sensible approach to pandemic prevention and to pandemic preparedness. It’s unfortunately very complicated.

    Prevention (of a pandemic) is always urged, but is actually in nobody’s interest as a priority. So it does not get done, by households, communities or countries or international organizations, absent enlightened public intervention. Domestically we mandate insurance for many risks but internationally there is a huge void for disease risk. The risk of zoonotic (animal-borne) diseases becoming pandemic is increasing because there is more contact among wildlife, livestock and people, encroachment on wildlife habitats, fast growth in livestock populations, and rapidly growing trade and international travel. Some 70% of emerging infectious diseases are zoonotic. Some will cause pandemics. As they say, it’s not a matter of if, but when. Fortunately, the problem is man-made and a solution is possible.

    The main problem is that veterinary services in developing countries are far too weak. They are not considered relevant to human public health. As a result, people in these countries often come into contact with animal diseases. Most of these diseases are “neglected”, the ill are the poor, and diagnoses may be incorrect (apparently a substantial part of malaria diagnoses in Africa may be leptospirosis and other zoonoses). In the absence of disease surveillance in livestock, humans become sentinels for animal disease. With avian flu, every time the sick/dead humans are diagnosed, it’s discovered only later that nearby chickens had the disease. The reverse should be the case, to protect the humans and to control the disease at the animal source (at far lower cost than control in humans). People should not have to die in order that sick animals are found.

    The lack of veterinary capacity is thus a risk to the health and welfare of the poor in developing countries. In poverty surveys, livestock disease is a major source of income shocks for the poor. There is also a governance failure as the public health establishment only looks at humans and won’t give money to the veterinarians to look for and control zoonotic disease in animals. (There are likely parallels in the defense budget?) So these animal-human diseases fall between the cracks as the vets and the doctors each assume that the other is taking care of the problem — and naturally they rarely talk to each other, since they are in different professions and departments. This happens in the US as well but the lack of coordination is worse in countries with weak capacity, which is particularly severe in animal health. US CDC (and the military) have people providing TA in many developing countries, but these tend to be doctors working with the health ministries, not veterinarians. So there is practically no capacity to detect early and control at the animal source. Inefficient and ineffective.

    Once a pandemic disease reaches humans, it is probably impossible to stop it from spreading everywhere. A novel pathogen can be on all continents within 36 hours. It’s impossible for the US to shut down airports and close borders when someone coughs. In the Contagion film hundreds of people were infected by the time the first patient was diagnosed — which was fortunately in the US, with competent diagnostic capacities. If you recall the H1N1 flu in 2009, it was a couple of weeks from first reported outbreak to diagnosis, by which time the disease (fortunately a very, very benign one, on average) was on several continents. So what looks like a “slow-onset” disaster is in fact “rapid-onset” because of the limitations of surveillance. Another reason to focus on prevention and not allow the pathogen to reach human populations.

    Estimates of global pandemic flu impact range from $650 billion in a mild scenario to $3 trillion (4.8% of GDP) for a severe case.

    It is feasible to control these diseases in animals, to arrest their spread, and even to eliminate these diseases completely from livestock. This has been done in the past and can be done again. But to prevent pandemics, we would have to invest much more, and in a sustained way, in veterinary capacity in developing countries. These investments in surveillance and disease control will have a huge payoff, by making people and economies everywhere much safer. The rate of return is on the order of 120% per annum if the assumed probability of a pandemic is 1% in any year (once-in-a century event). Such investments will also have substantial collateral health and economic benefits for poor farmers and their communities. (In the current Somalia crisis, apparently most cattle died from diseases, not from the drought as such.) From a poor country perspective, investment in veterinary systems is not a priority since the vast majority of the benefits would accrue to the rest of the world. Poor countries have an overwhelming comparative advantage in producing the global public good of pandemic prevention. (One could also compare to them having WMDs.)

    The last scene of the Contagion film shows the reason for the pandemic: “the wrong bat meets the wrong pig”. The Quandong piggery is clearly out of compliance with biosecurity standards, which would have prevented the bats from settling in the building. There is either no standard locally or it’s not enforced because there are no veterinarians. A veterinary inspection could have detected the diseased pig. For all we know, the diseased pig had a seizure, temporarily recovered and was quickly sold to the restaurant where Gwenyth Paltrow (patient zero) partied. Poor countries have little incentive to enforce standards. Rich countries have high standards associated with livestock and meat production. These coexist with no or low standards elsewhere, though pathogens know no borders, so the global defense system is flawed. Only as strong as the weakest link.

    Wildlife is a source of many pathogens, which tend to infect, first, livestock and then people who live or work close to livestock. The Contagion film shows that controlling disease at its animal source in developing countries is clearly in the overwhelming interest of all of us. The costs of these investments are very modest. The cost of bringing developing countries’ veterinary surveillance and disease control systems to a workable standard is $1.9 billion – $3.3 billion per year, including for the associated strengthening of their human public health systems.

    A pandemic is a low-probability, high-impact disaster. According to a paper from John Mueller (of Ohio State University) and Mark Stewart (of the University of Newcastle in Australia) discussed here, since 9/11 the US government spent $1 trillion to prevent terrorism ($100 billion per year, not including the wars), which would have been cost effective if it had prevented 1,667 otherwise successful Times-Square type attacks per year, or more than four per day.

    The expected value of the cost to the US of a moderate pandemic is, conservatively, $9 billion annually (3.1% of GDP, probability of occurrence in any year of 2%). For the world, with only 1% probability, the annual expected value of a severe pandemic’s costs is $30 billion. Pandemic flu has occurred every 30-40 years in the past. It would “pay” for the US to finance the full cost of security from infectious disease, and it is a fraction of what was spent on other catastrophic risks (terrorism). Per OECD country inhabitant, the cost of upgrading developing countries’ veterinary and public health systems is about $1.73 -3.00 per year (less than a cup of coffee – how much security do we want to buy?).

    This is a global problem of tragedy of the commons, in search of a global solution. Investment is needed in the locations where the risks of disease emergence are greatest (crowded livestock-human-environment interfaces). OIE (the World Organisation for Animal Health) has evaluated many veterinary systems around the world, so it’s known what needs to be done. Countries that do not have resources for these investments should receive support from those that do. It’s like when a neighbor’s house is on fire and the wind is blowing toward my house — it’s very much in my interest to help put out the fire, especially if I know that the neighbor cannot do it and that the wind is going to get stronger.

    Because of the avian flu response in 2005-2011, about $600 million per year was spent on zoonotic disease control and prevention in developing countries (half of it externally financed, often by loans, not grants). External financing has been rapidly declining with ‘flu fatigue’, though the risks are likely growing. The $600 m/ year appears to reflect the collective belief that a pandemic is a once-in-5,000 years event. There is an international regime of notification of animal and human diseases (to OIE and WHO, respectively) and International Health Regulations signed on by all countries, but largely not implemented by poor countries, because there is no appetite to fund their capacity to implement the IHR on a long-term basis. Having dedicated funding for international regulatory/surveillance systems would make sense but there is no sign of any such arrangement.

    What’s the chance of getting this problem properly (comprehensively) addressed as a national economic security issue?

  2. It was suggested at that I take my urgings to drop the renewables vs nuclear debate for one about climate science denial, the politics of support for fossil fuels and the emptiness of any assurance from the Right for support for nuclear over fossil fuels elsewhere. It looks like the debate will be stopped over there – too inflammatory I think. Anyone care to comment?

  3. Ikonoclast, you asked:

    1. “Do absolutely all budget deficits have to be funded and if so why?”

    a) Budget deficit ex ante versus budget deficit ex post. The former refers to a plan with a specified future date. The latter refers to the actual outcome at a specified date.

    b) Of course one may have unfunded budget deficits ex ante. But an ex post deficit is always funded.

    The term ‘funding’ is an old accounting term. In the case of an ‘accounting entity’ (non-bank)it includes the following items
    i) cash obtained from the sale of interest bearing securities (bonds and bills; longer and shorter term to maturity)
    ii) cash obtained from the sale of non-interest bearing securities (equity)
    iii) bank loans (another type of sale of an interest bearing security)
    iv) cash obtained from the sale of hybrid securities (eg preference shares, stapled securities)
    vi) cash obtained from the sale of derivative securities (eg warrents)
    vii) interest on securities bought in the past
    viii cash obtained from the sale of securities on hand on the secondary market
    viii) cash obtained from the sale of physical assets
    ix) cash obtained from the sale of patents
    x) unpaid bills (accounts payables)

    For a government the ‘funding’ options are:

    i) cash obtained from the sale of interest bearing securities (bonds and bills; longer and shorter term to maturity)
    ii) taxes
    iii) interest on securities bought in the past
    iv) cash obtained from the sale of physical assets or enterprises (NSW Inc)
    v) printing money (‘quantitative easing’)
    vi) unpaid bills (wages of public sector employees, goods and services provided by private enterprises)

    c) Printing money is equivalent to selling zero interest debt securities

    d) An ex-ante budget is a financial planning tool.

    2. “Why cannot moderate unfunded deficits (with a moderate net unfunded nature over many business cycles) be used in parallel with other supporting measures (higher training and education for example) to stimulate the economy when there is significant unemployment and thus significant un-utilised capacity in the economy and why can this not occur (as you apparently imply with Hard Keynesianism advocacy) without creating accelerating inflation?”

    I believe I have answered the ‘moderte unfunded deficit’ bit of your question.

  4. @Ernestine Gross

    The statement about ex-post funding leads to a kind of tautology since everything has to be financed ex-post because of the double-entry accounting rules.

    The key statement made by MMT theorists is not about the need of funding government spending or lack of it in the accounting sense. It is about the causality in the current system. Funding in the accounting sense has also that meaning – acquiring funds in order to spend.

    Let’s clarify the terminology first. I know that the term “government” has been redefined by MMTers and it means the government sector consisting of the central bank and government institutions. I would prefer to use the term “state sector” to avoid any confusion.

    Does the state sector have to borrow or acquire by levying taxes pre-existing money in order to spend? Or is it true that the state sector is capable of initiating and terminating a flow of money on its own?

    What is the best description of the modern monetary system? As an IT specialist I would say that it is mainly a distributed system of linked databases where certain elementary functions have been defined to conform with the accounting rules. Of course some transactions occur in cash outside of the banking system but this is not so relevant in the modern digital era and these can still be included on aggregate balance sheets.

    In this sense money is what can be spend – either deposits recorded in bank databases or physical tokens.

    Non-state-sector entities require the presence of a positive balance on their deposit account if they want to spend. They obviously can replenish that balance by either earning money or borrowing it but this requires an interaction with another entity (usually requiring consent of that entity). However the state sector is capable of spending without having a positive balance on their accounts because that balance can be replenished at its will if the central bank performs certain operations. The government has to finance itself in the narrow sense outlined above but if a budget is approved nothing can stop the government from spending – the amount of money raised by levying taxes may be higher or lower than estimated but the government will still spend. In that sense selling securities is an offsetting operation related to interest rates maintenance and required to satisfy certain arbitrary legal constraints not an operation enabling spending.

    That statement does not mean that spending is not constrained it only means that on a graph linking inflows and outflows of money the Kirchoff’s current law may not be satisfied for the node depicting the state sector as a whole. What is also interesting using that notation is that the banking sector is capable of initiating a flow as loans create deposits but that flow is terminated because newly created loans must balance newly created deposits.

    We are not talking about some naive ideology parroted by half-educated blog commentators. The state of the economic system may be described by a vector of several variables, including exogenous settings like interest rate, various taxation parameters and the volume of government spending – and endogenous like GDP growth, inflation and unemployment. What I have seen so far are attempts to convince people that there is only one set of endogenous parameters in the vector space which will lead to low inflation and the optimal growth of the GDP – one that is based on explicit semi-balancing the budget over the budget cycle. I am not sure whether we can say that “There Is No Alternative”. MMT proposes an alternative set of parameters – an alternative bias point of the same system. This proposal defines different parameters as an error signal for the regulator circuit. Nobody said that the state sector debt (deflated by the CPI factor negative position of the sector) will not saturate in the long run while inflation is not excessive. Do we really know how to solve the optimisation problem? Has it ever been proven that budget position needs to be taken as the error signal to the control loop? To me the current mainstream solution does not look optimal at all looking at the unemployment rate and the environmental costs. I am not a follower of anything but I would at least make an attempt to understand why an alternative proposal seems to be getting traction among not necessarily stupid people.

    Anyway I hope that I did not introduce too much IT / Electronic Engineering jargon but not only economists may pretend to understand complex systems.

  5. jrbarch post @51, Thread “Expansionary Austerity”
    “John, I gave you an answer this morning but am still sitting in moderation (?) – probably doesn’t matter anyways judging from your comments and others responding to Ikonoclast … it always amazes me how difficult it is for one mind to communicate with another!
    I think that is all to do with the ability to focus and isolate an Idea without memory and ego interfering. In my view MMT ‘knows’ something that everybody else thinks is mis-information or upside-down silly. Time, I guess will tell. Just like tribal, slave, and feudal economies – capitalism cannot last forever (OWS cracks in the super-structure)?
    I think a huge part of the real problem is conceptual baggage – force fed at uni’s with no discussion allowed; there is absolutely no logical reason that I have seen to date (that stands up to MMT scrutiny) why Govt. should fund itself through the bond market; and taxation is definitely not understood. But I do not believe people with the orthodox view should be ‘sand-pitted’. Nor do I believe it is intellectually honest to dispense with 20 years of work of your peers in so cavalier a fashion. What if someone treated your work in the same way – publication dependent upon some lay reader somewhere answering an ill-conceived question that reveals straight away the core material has not been read.”
    Jrbarch, I am one of the others who responded to Ikonoclast. I don’t know whether your assumptions about motivation and ignorance, as reproduced above, are intended to be directed at anybody who does not say “Wow” in response to reading “MMT”. Let me now tell you why I don’t say “wow” – how come I was so ignorant:
    MMT proposes that the value of fiat money derives from legislative power of governments to demand taxes to be paid in the same fiat money.
    May I note that this is not a new idea. For example, Knapp, G. F (1905) Staatliche Theorie des Geldes, Dunker and Humbold, Munich. Engl. Translation, “The State Theory of Money, Macmillan, London, 1924.
    This is what Bill Mitchell says
    “In a fiat currency system, the currency has legitimacy because of legislative fiat: the government tells us that’s the currency and then legislates it as such. The currency has no intrinsic value. What gives it value, what motivates us to use the currency that the government suggests, is the fact that all tax obligations are denominated in and have to be extinguished with that currency. We have no choice. If you live in America, for example, you have to pay American taxes to the IRS with American dollars. So demand for the currency, otherwise worthless bits of paper, is driven by the fact that all tax obligations have to be extinguished with that currency. Once you consider that, then you immediately realize that the national government is the monopoly issuer of that currency. That means that the national government in such a system can never be short of that currency; it can never run out of money. It doesn’t need you or I to lend it money or you and I to pay taxes to get more money. It can never run out of money. That’s the first basic insight of MMT: governments are not constrained in their spending by a need to raise revenue.” Source:

    I have a problem with Bill Mitchell’s theory when he writes: “That means that the national government in such a system can never be short of that currency; it can never run out of money. It doesn’t need you or I to lend it money or you and I to pay taxes to get more money. It can never run out of money. That’s the first basic insight of MMT:”

    My problem is that, in contrast to Knapp, Mitchell negates his own theoretical reason for fiat money to have value.

    Isn’t this enough to stop talking about MMT? It is for me.

  6. The problem that I have with the MMT thing (as I understand it) is that they are saying that the government can borrow money to spend, but not necessarily need pay it back. They can also print extra money.

    Now with my little bit of knowledge I saw the US money printing QEx as being less of a problem as they have just been through an expensive set of wars courtesy of George Bush Jnr. In that case the US has been exporting huge quantities of goods (bombs and bullets) for which they will never be paid by the importing countries (Iraq and Afghanistan). ie the books are hugely out of balance. So I saw that as being Quantitative Balancing rather than Easing. On the other hand the US has just ripped off the rest of the world with their bogus Derivatives, so the US is probably nationally in monetary balance. The unfortunate thing is that the ripoff money went into the hands of the 1%, not the 99%, or the government which is carrying all of the problem debt.

    Now they have a new idea, MMT. I don’t think that it will fly.

  7. @Ernestine Gross

    It is not difficult to see that Mitchell does not negate anything. BTW I don’t particularly like the part of MMT which is deductive (“derived from the first principles” that money has value because of whatever, unemployment arises because of taxation etc). It smells to me like the rest of economics, a bit detached from the reality, sorry about that.

    We have 2 separate issues here:

    Issue #1. Bill Mitchell described why taxation is the crucial element of making worthless tokens the legal tender. Further discussion about anchoring the value of money in relation to other goods and services exchanged in the economy can be found in “Understanding Modern Money” written by Randall Wray.

    Issue #2. In the second statement Bill Mitchell wants to say that the national government does not need to obtain money for spending in the sense of causality. This does not mean that excessive spending especially in the context of defunct taxation and diminishing productive capacities won’t lead to inflation. I remember perfectly well hyperinflation in Poland during the transition from the command economy to the market system. We had hyperinflation and diminishing value of currency units but the government could spend anyway and buy these goods and services it needed (or even more). I am not advocating this approach. I am sure Bill Mitchell doesn’t either.

    NB I don’t like the term MMT but I think that the majority of the ideas and memes “sold” under the MMT brand that is Chartalism, Functional Finance and the economics of Michal Kalecki are worth a bit more serious attention than just dismissal as a blog-quality pseudo-science for uneducated masses.

  8. @Adam (ak)

    o.k., Bill Mitchell does “not negate anything”. He contradicts himself. My conclusion remains unchanged.

    I am quite confident Bill Mitchell is quite capable of saying what he wants to say without your assistance.

    May I suggest you read (not smell) BilB carefully.

  9. @Adam (ak)

    “The statement about ex-post funding leads to a kind of tautology since everything has to be financed ex-post because of the double-entry accounting rules. ”

    No, Adam (ak), it is not because of ‘the double-entry accounting rules’.

  10. @Ernestine Gross

    1. “No, Adam (ak), it is not because of ‘the double-entry accounting rules’.”

    So please show me the causal link between borrowing or taxation and spending in a general case. Will the government be unable to spend if the bond market refuses to buy the offered volume of treasuries at a given price under the tap system and taxation income is not sufficient?

    Specifically did it constrain the American government during WWII? Did it lead to hyperinflation?

    If there is another reason why the ex-post funding identity is not an accounting tautology I would be very happy to learn about it.

    2. Somebody who reads these comments may reach a slightly different conclusion whether Bill Mitchell contradicts himself or merely explains 2 separate issues.

  11. I had started preparing a long (for a blog) exposition of my views about MMT. These views clearly show I am a long way from “buying” all MMT tenets. At the same time, they do show that I also do not buy some of the claims of current orthodox economics about the limits on government action.

    Given the turn the debate has taken above I feel my attempt would be now be somewhat behind the stage the debate has reached. Hence, I have abandoned my efforts.

    What I do note however, is that when I read Adam Smith, Marx, Keynes, Mitchell and Keen I do understand all of their English lanuage explanations even if I do not understand all of the sometimes complex accompanying mathematics which some (not all) of these writers employ.
    When I read Quiggin and Gross, on most general issues, I also understand their explanations. Yet when I read their explanations and reasons for what seems a total blanket rejection of anything to do with MMT I cannot understand the jargon, rather than plain English, which they resort too. To me it seems passing strange. I feel very minded not to blog on Prog JQ’s blog anymore. There seems no more point to me. I strongly suspect JQ won’t mind a bit. So it’s a win-win folks! 🙂

  12. @John Quiggin

    “Money creation IS inflationary under conditions other than those of a liquidity trap, if the amount of money created exceeds the demand for cash balances . Since this demand is around 0.5 per cent of GDP, MMT theory correctly applied requires that money creation should be held to a level consistent with the growth in demand for cash balances, and the rest of public expenditure (that is, nearly all of it) must be financed either by net debt or by taxation.”

    @John Quiggin

    “Under current Australian conditions, is anyone willing to claim that the government could quadruple the money supply without inflation? That’s about what would be needed to eliminate the very modest budget deficit we now have without issuing debt.”

    I understand that the term “money supply” in the sentence above refers to base money. If it refers to M1 or M3 then yes, quadrupling the supply (the stock) during one year period would have a significant (if not dramatic) impact on the prices.

    So what would happen in Australia if money creation financing the deficit changed from 0.5% GDP to 1.5% – 2% of GDP and issuing treasury bonds to offset deficit spending was abandoned? Would it lead to inflation due to the consequences of interest cash rate falling to zero due to the excessive quantity of Exchange Settlement balances?

    Actually a similar experiment was already performed in 2008/2009 and nothing happened. The explanation is that “because the Bank establishes a ‘corridor’ around the target cash rate, that ensures the incentives for banks to hold ES balances are unaffected by the stance of policy. The lower bound of the corridor is the rate of interest paid on ES balances, set at 25 basis points below the target cash rate, while the upper bound, 25 basis points above the target cash rate, is the rate at which institutions can access the Reserve Bank’s standing facility and obtain funds on a secured overnight basis. ”

    So this means that the cash interest rate would remain pretty much the same. Unless we believe that excessive bank reserves would be lent out, there should be practically no difference between the situation when RBA pays interests on excess reserves and RBA mops up the excess liquidity by open market operations involving CGS. This means that selling Treasury bonds is not an essential operation required to finance or rather offset the deficit in such a way that deficit spending does not create inflation by inducing an expansion of the private credit. Cash interest rate is defended by paying interests on excess reserves.

    I haven’t said that CGS do not play any role in the financial system but this is a separate issue.

    Anyway, this is probably enough for a while…

  13. Adam, thanks for this – we finally have some sort of reference to actual numbers. Now, if you look at the scale of the graphs in the RBA report, you’ll see that the value of ES balances is around $10 billion. Total currency issue is $50 billion

    1 per cent of GDP is a little under $150 billion.

    To spell this out for the last time – the amount of money the government can print under normal circumstances is trivially small in relation to GDP and total government expenditure. For anyone actually concerned with financing public expenditure, the error involved in assuming that all expenditure must be financed, sooner or later, by taxation, is negligible.

    Even large scale quantitative easing like that undertaken in the US (about 10 per cent of GDP over nearly four years, or about 2.5 per cent of GDP per year) is of marginal significance relative to total government expenditure.

  14. @John Quiggin
    Thank you for the response.

    The point I was making was not about the absolute quantity of the reserves in 2008/2009 (that period was hardly normal) but about the existence of the mechanism allowing for a replacement of the bonds by ES balances. If the Reserve Bank pays interests on excess bank reserves then issuing bonds can be abolished (with some side effects on the finance sector and some effects on the balance sheet of the Reserve Bank). This is an argument against the thesis that bond issuance is required to cover the gap in funding of the government spending.

    I can provide more links to articles from RBA stating that the quantity of ES reserves and as a consequence the quantity of money (MB) is rather irrelevant – the only parameter they target (which influences bank lending and credit repayment) is the cash rate. It is not a matter of a scale but rather the way the system operates.

    The main difference between the bonds and reserves at RBA is that the value of existing bonds changes when the cash rate, inflationary expectations and funding conditions of the private sector firms change. If a bank has 1bln of ES reserves and the cash interest rate changes then that $1bln is still worth $1bln (but the revenue stream changes). If a bank had $1bln in CGS then after the adjustment of the cash interest rate that 1bln may be worth $1.02bln or $0.98bln. This means that securities can be used for speculation or hedging.

    Now we can go one step further and ask whether the current architecture of the feedback loops used to control the economy has no alternative. Currently the main monetary policy control loop defines the error signal as mostly the CPI inflation rate minus 2.5% That signal is then applied to the interest rates setting through a kind of simple filter. At the same time another fiscal policy feedback loop exists. It mainly operates as the so-called “automatic stabilisers” but there is a discretionary element there as well. If the ratio of deficit spending divided by GDP or the stock of public debt divided by the GDP flow (what is dimensioned as a time constant) is considered to be too high then austerity policy kicks in. I agree with the critique of this approach presented in the main blog post. If there is a severe drop in the GDP then the government may consider a so-called stimulus.

    What I understand MMT is mainly about (I may be obviously wrong) is presenting a different set of settings. The current set of arrangements has been identified as the root cause of the instability manifesting itself in rising private debt, asset bubbles and severe financial crises caused by the systemic insolvency of the banking sector in some countries leading to the current dire situation observed in Europe.

    First of all the finance sector has to be downsized and heavily regulated. It is pretty obvious that in Australia setting interest rates to zero under the current arrangements would lead to another housing or mining bubble. But who said that banks should be allowed to lend money to everyone pretending to have an income to cover 95% of the value of the property?

    If the cash interest rate is held at 4 or 5% then rising public debt would lead to an increasing redistribution of income towards the class of rentiers. It is not a question of solvency – it is a question of the long-term stability of the system. As I understand MMT theorist proposed allowing for the cash interest rate to drop to zero, severe restrict bank lending to providing funds for productive activities only (this may mean low credit availability and as a consequence high spread), tax speculation and at the same time switch to active fiscal policy as the tool to stabilise the economy. They don’t want to alter one parameter only because this would lead to an instantaneous instability. They want to adjust all the parameters at once so that a stable point (close to the settings used in the 1950ies) is reached. They want to provide the means to shrink the balance sheets of the banks by allowing for private debt repayment. This can be enabled by running high enough budget deficits. If the current savers don’t want to dis-save and spend (invest), private debt would be replaced by the public debt. Saving propensity of the private sector would obviously change and one can imagine that the level of public debt / GDP may stabilise over time (if people know that they won’t earn money by merely holding deposits or bonds) – but this is not a relevant error parameter in the feedback loop. Productive capacities utilisation and the unemployment rate is that parameter. NB I personally think that the transition process from one set of settings to another may lead to a short-term instability of prices but I would prefer this to 22% unemployment rate (as in Spain).

    The real reason why I think MMT is interesting is that it offers the tools not only to solve the current crisis but also to reshape our economy in a more sustainable way by wrestling away the steering wheel from the hands of the “market” plutocracy to the democratically elected representatives of the people. I am not a naive person and I am very sceptical whether this project will succeed. I think that instead of market socialism / democratically controlled state capitalism we will end up with a kind of corporate fascism. But scepticism should not prevent us from making thought experiments.

    2 hidden assumptions or rather observations have been made:

    1. Money multiplier theory does not describe the reality therefore the quantity of base money does not impact the stock of M1/M3

    2. The loanable funds market model is invalid because of endogenous money creation/destruction in the banking sector. Increasing saving (in the sense of hoarding money) does not stimulate investment. Loans create deposits.

    I am perfectly happy to debate these 2 points at a latter date if needed.

    If we throw away these 2 elements from the Neo-Keynesian models pretty much all what is left is Kalecki and we have arrived in Beijing, China. Anyway I have to finish now.

  15. @Ernestine Gross
    Dear EG,

    My comment was not directed at any one person – just observing the “(in)-ability to focus and isolate an Idea without memory and ego interfering” and the effects of “conceptual baggage”. I don’t see any ‘wow’ factor in MMT – just blue sky and green grass; the chance to evolve out of the conceptual morass, miasa and fiasco that drives economics at the moment, affecting the lives of real people and a beautiful planet.

    Your willingness to at least read some of the core literature – obviously Mitchell (and the Kelton paper I referenced I hope), think about it, ask questions and engage in a discussion is all that could be sought. Shutting down a discussion is just a form of mental bullying and unnecessary exercise of control. Take one look at the world and it is obvious that economists don’t have a monopoly on reality. Am obviously a bit ticked off with JohnQ about that – I promise to get over it.

    I still see nothing but Zilch in John’s comment and fascination with numbers below: Govt. NFA’s $-for-$ = nongovt NFA’s. What else do you need to know??

    If I understand you correctly EG there are two statements in which you see conflict:

    1) Taxation drives money;
    2) Govt. can never become insolvent.

    To me this means: gasoline drives the motor (economy) and the Govt. can never ever run out of gasoline.

    Anybody who wants to understand MMT should read the core literature and think it through for themselves. In line with the notion of “conceptual baggage” – it is my very general observation that most minds are like vacuum cleaners, even those with a few uni acronyms attached – university does not train the mind how to think for itself; and ego gets involved. Therein lies the confusion in the world in my humble view. The function of the intellect in my view is to be able to discriminate between what is real and what is not – that should be the focus of any teaching; not stuffing toothpaste into a tube and squeezing it back out again.

    And the fact that economics is only one aspect of human existence: looking at life through only one (economic) lens blinds people.

    I just wanted to give an answer to the question you addressed under @jrbarch. I respectfully bow out of this discussion as I believe people’s time would be better spent in referencing the core literature than reading me. Spend just a few hours/week on the dismal science if you really have to, and enjoy the rest!


  16. @jrbarch

    Thank you for your lecture and advice, although I did not ask for it. I am in the habit of making up my own mind.

    You say: “If I understand you correctly EG there are two statements in which you see conflict:

    1) Taxation drives money;
    2) Govt. can never become insolvent”

    I say: No, you don’t understand correctly and you haven’t copied it correctly either. Please read the original a view posts up.

  17. @jrbarch

    I’m sure your heart is in the right place and you firmly believe what you say but you have come across as a little didactic lately (eg. wishing me good luck in learning to make up my own mind).

    I’m fairly sure that I’m reasonably good at critically analysing arguments – this ability has served me well thus far in my life – so as such your advice/bidding of goodwill is redundant and made me feel talked down to. More significantly, it may weaken the persuasiveness of your argument (people view exclusive claims to the truth leerily, except if they are already converted).


  18. @Adam (ak)


    I am writing after reading your post addressed to JQ @14. In the light of the content of your post to JQ, it seems to me there are 2 distinct sets of problems which overlap at a point such that talking at cross purposes is facilitated.

    The first set of problems concerns monetary systems. The second concerns the operation of a given monetary system at a particular period of time in a set of countries under particular circumstances.

    My critique of Bill Mitchell’s exposition of MMT concerns the first set of problems. In this set of problems it is the theoretical plausibility of a proposition that matters. By theoretical plausibility I mean logical consistency. I have shown the contradiction (logical inconsistency) @5.

    Irrespective of your opinion of people whom you call “uneducated masses” (Adam (ak) @7), I do not believe people are as silly as you seem to assume. Moreover, I maintain, in contrast to the design problems in IT where the designing agent has complete control, in economics concerned with non-dictatorial resource allocation systems (eg those that are compatible with the notion of democracy), it is silly for a theoretician to assume there are ‘uneducated masses’. By assuming ‘the masses’ are as intelligent as the theoretician, theoretical plausibility is an obvious criteria for assessing a theory.

    With reference to the content of your post to JQ @14, you seem to be concerned with 2 issues; a technical issue (the ‘architecture’ of the management of a given monetary system) and a policy objective issue (unemployment rate in Spain). These issues are separate from my critique of Bill Mitchell’s exposition of MMT.

    For what its worth, I agree with you on the inadequacy of the money multiplier model but this is the common reference point at present.

    I also agree that a 22% unemployment rate is a major problem (some parts of the former East Germany still have similarly high unemployment rates). I don’t believe it is possible to reduce these problems by means of sprouting generalities. Detailed empirical knowledge, including cultural knowledge, seems to me to be required.

    You mention ‘optimisation’ within a context of what seems to me to be a decision making tool problem. Assuming I am not totally wrong, this is a ‘management problem’. In this context, have you come across Reinhardt Selten’s recent work on ‘bounded rationality’ in a management decision context, as presented at the 2011 Lindau meeting?


  19. @Ikonoclast

    Please don’t sulk, Ikonoclast. Please consider that economics is so fascinating because everybody is part of ‘the economy’ and therefore nobody’s opinion can be excluded under all possible circumstances (but under some it can). Can we go back to normal communications, please?

  20. In a very undeveloped economy taxation could ‘drive’ money because an economy could be so undeveloped and poor that most trade would normally be barter and the reason for obtaining money could be simply to be able to pay taxes assuming something like a poll tax which had to be paid to government in money. But that taxation drives money in a modern economy is simply untrue. There have been banks completely independent of government and with no power to tax that have issued their own money for one thing.

    The main reason people use money is because it is a convenient way of purchasing things and if you obtain money in exchange for selling goods or services including working then you can use that money to purchase things. That convenience can be eroded if the money you obtain loses value with any rapidity which is why high rates of inflation are so corrosive.

  21. And of course, government can become insolvent. I doubt very much that the Zimbabwean government would have had goods or services willingly supplied to it toward the end of their currency problems.

  22. @Dan
    @Ernestine Gross
    Hi Dan,
    It’s mind that really interests me – how it functions; how it becomes confused. However, you are right – I hold in far higher esteem the nobility and power of clarity of the human heart!

    For the record I was wishing you good luck with building up your own understanding – not questioning your deductive or analytical powers which I am sure are good. Nor did I have any feeling or sense of ‘talking down’ to you. For me there is no up or down when it comes to human beings.

    EG also felt that I was ‘lecturing’.

    EG I agree I have misunderstood what was going on in your mind, because you say so; I didn’t ‘copy’ verbatim because I thought that I had said exactly the same thing. I re-read the original and now cannot say with any certainty what is going on in your mind for you to say “Mitchell negates his own”.

    Sorry about that.

    Cheers …

  23. @Ernestine Gross

    Since several issues have been raised I cannot address all of them. I am severely time-constrained and I will have to scale down my activity on this forum. I work full-time as a software engineer and I have family duties so I only have very little time left for my study. But I still feel obliged to address some of the points.

    1. Let me comment on the supposed “logical inconsistency” of the statement made by Bill Mitchell.

    “Isn’t this enough to stop talking about MMT? It is for me.”

    I agree that what he wrote could be confusing but what did he really mean? There are other scholars (R.L.Wray) who wrote something similar in a less confused way – that fiat money is enforced as legal tender by the action of the state especially by taxation and therefore as long as the enforcement stays in place the government is not constrained in spending by the exact need to match injecting the currency with removing the currency. There is an interesting example of the government buying only aircraft carriers and setting the value of the currency in that way in “Understanding Modern Money” written by R.L.Wray. Of course this is just a theoretic example and everyone knows that it won’t work because the markets are not perfect.

    I understand that the first part of this proposition (coming from chartalists) is not controversial. It is the second part (the government is not constrained in spending) what is rejected.

    The government can spend as much as it decides to but there will be consequences of spending too little (a recession), too much (inflation) or in a wrong way (wasting of real resources, environmental damage, stunned economic growth, stagflation). This is exactly what MMT scholars talk about – they haven’t forgotten about the real constraints in spending. However raising matching funds from the non-government sector by taxation or borrowing is not a precondition of spending. There are 2 semi-exogenous (at least in the short time frame) variables – the level of government spending and the level of desired money hoarding in the private and foreign sectors. This actually comes from Michal Kalecki.
    and “Theory of Economic Dynamics” (1954)

    Let me explain why I mostly agree with L.R. Wray and B. Mitchell. I was born in a communist country and I simply remember that the monetary system could be organised in such a way. When I was a kid there were coins and red bank notes around printed by the National Bank of Poland but government bonds were practically not existent and hardly used to finance the deficit. This was a pure fiat monetary system where money were tokens and my intuitive understanding of money is based on my early experience. Of course I know that the most of money we use is created by the banking system when loans are extended (“horizontal”) so we live in a kind of credit system fused with the fiat system but the state can always override the markets.

    Did the communist monetary system work? Not necessarily well because of the forced saving and the inflationary overhang. In fact that system was mostly a failure. The markets did not set the prices but the government was afraid of raising prices due to the risk of mass rioting. However there are examples of communist countries where there was no inflation (Czechoslovakia) maybe because people were terrorised more thoroughly. One may say that a “pure” fiat monetary system could work like that only because prices were not set by the market mechanism. I disagree because if we look the real boundary between the state sector and the private sector in modern China we will discover that behind a facade of the market economy lurks the good old communist property ownership system with state ownership of the banks and major enterprises. Of course the top-down command “component” was replaced by the market mechanism (while some central planning was left intact and private custody of some means of production is encouraged). If the central bank sells bonds to the state owned commercial bank or such a bank lends money to a local government never expecting it to be paid back we have a functional equivalent of “financing spending by currency emission” how this phenomenon was called in the old good communist times. For further discussion of these issues I can only point to “From Marx to the Market” by W. Brus and K. Laski and “The Party: The Secret World of China’s Communist Rulers” by Richard McGregor. NB I spent a significant amount of time trying to understand what’s really going on in China and I have a pretty clear idea how it works. It is not far away from MMT with one very important exception in regards to the export-led growth policy. NB I strongly disagree with W. Mosler in regards to the real long-term benefits and costs of the export surplus. He simply did not read enough of Kalecki!

    Time will tell who is right. I don’t think that MMT should be discarded.

    Disclaimer: I am staunchly anti-communist and I was involved in low-profile political activism in 1988/1989 in Poland. I am simply not happy with what has replaced the command system.

    2. Thank you for mentioning the work of Reinhard Selten – I was not familiar with it. I watched his lecture yesterday. His research certainly goes in the right direction (it is closely related to artificial intelligence and multi agent systems in the computer science) however there are many more patterns of human behaviour and patterns of interaction between humans which cannot be modelled as just a decision-making process driven by applying a heuristic search algorithm and comparing the aspiration levels to the perceived level of goal realisation. I refer to what Dan Ariely described in his books as “predicable irrationality”. In the end heuristics can be implemented in Turing automata. But we are not Turing automata. We are neural networks living in a big social network.

  24. @Ernestine Gross

    Actually after re-reading my post I discovered that it is not clear enough.

    What I understand from reading the R. Wray’s book and B.Mitchell’s blog is that they think that the functions of taxation are:

    1. creating demand for the currency in the private sector by requesting using that currency in settling tax liabilities

    2. removing excessive aggregate demand and ensuring that a fiscal space for government spending not exceeding productive capacity of the economy exists. This function is related to buttressing the value of the fiat currency against the good and services available for purchase.

    Government spending may further stabilise the value of the currency by offering constant prices for some buffer goods like gold or excessive labour (Job Guarantee) where the quantity is left to adjust. The system is supposed to have one degree of freedom.

    If the government bids against the private entities for certain goods and services to achieve a constant volume of supplies then this kind of spending may be inflationary as the price may adjust upwards and start dragging up other prices and wages.

    It is possible for the government to force the non-government sector to accept the fiat currency without levying taxes as described in L. Wray’s book in the example related to Civil War in the US. This will inevitably lead to hyperinflation but the government can still print and pay the soldiers, Levying taxes is not therefore a strict precondition of spending.

    BTW this is exactly what happened in early 1920s in Poland. In 1921 (right after the war with Russia, won by Poland) the budget deficit was 155% of the GDP and in 1922 it was merely 94%, So levying taxes is not a precondition of spending. In 1923/24 the hyperinflation was suppressed by extraordinary levying taxes (land tax) and reducing the government spending (what caused a mild recession). Only after applying correct fiscal brakes the government could denominate the currency and peg it to gold (indirectly) via other hard European currencies.

    This explanation is entirely consistent with MMT.

    The main point of critique probably not addressed adequately by MMT theorists is the possibility of the refusal of the private agents to use the currency for all the domestic transactions – the process called dolarisation. Again I remember it very well as it occurred in the late 1980ies in Poland. But as long as the inflation rate is in single digits and there are means of saving in the domestic currency (such as TIPS) there is absolutely no reason for the currency flight to occur.

    However if the inflation is low and this is the key point one of the implicit points of critique of MMT (“money for nothing”) the government purchases goods and services like anyone else rather than forces the private sector agents to do anything involuntarily for example by sequestrating some goods or drafting people to the army. Only people obsessed with the concept of absolute private rights may consider such behaviour (running deficits) a violation of anyone’s freedom. I understand that levying higher taxes can be considered an impediment to people’s freedom but what’s wrong with spending to fill the pre-existing gap in the aggregate demand?

    Now I have a single question.

    What is the reason that governments persist on issuing bonds (supposed to increase the saving propensity of the private sector) if that sector is hell bent on saving more than it invests? I understand that during WWII the Western governments wanted to create more fiscal space for spending on war-related expenses and therefore offset their budget deficit by issuing bonds (re-borrowing money). But currently the situation especially in the US is exactly the opposite. There is a a gap in the private sector demand caused by debt deleveraging (often incorrectly described as a “liquidity trap”). So what is the purpose of issuing bonds which will often end up on the balance sheet of the Fed doing QE anyway?

    (I know the mainstream explanation that is the IS-LM model where outside of the liquidity trap the level of prices depends on the quantity of money but does this model actually describe the reality?)

  25. @Adam (ak)

    1. Yes, Adam (ak), you have raised a lot of ‘issues’ and you raise more ‘issues’ in your last post. Good to see soft ware engineers have an interest in ‘issues’.

    2. ‘Multi agent systems’ are not confined to computer science. For example, general equilibrium models are multi agent (economic) systems, so are ‘agent models’ in economics. These approaches evolved into computational approaches via ‘automata models’. I assume ‘predictable irrationality’ refers to a property of the system rather than to individual agents.

    3. Yes, neural networks are more recent representations of complex systems.

    4. If I were you, I wouldn’t start with MMT. Obviously, if you put a contradiction in line 1 of a model, you’ll get a state of the system which can be labelled ‘predictable irrationality’.

    Alternatively put, I am not prepared to participate in a monetary system where, after a period of time, I am being asked to switch from the belief that ‘in principle a fiat monetary system could work’ (because of taxation) to the belief that ‘the government’ is another name for Santa Claus (or the Tooth Fairy) that can print money under any condition to fulfill all my material wants while ensuring that the environment remains ‘sustainable’.

    5. But then I am curious. Please let me know when and under which conditions a simulated social system with MMT has an ‘irrational’ state. (You know my prediction.)

    Best of luck with your endeavours.

  26. @Ernestine Gross

    The empirical verification of the majority of the claims laid by MMT theorists comes when we go shopping and discover that only products “Made in China” are available and other have disappeared.

    “State media reported that China’s local governments borrowed 3.8 trillion yuan ($556 billion) from banks last year, to keep the economy humming. They also raised 450 billion yuan ($65.9 billion) indirectly via the bond market. Add those debts to Beijing’s own, and the real 2009 fiscal deficit could be 15 percent of 2009?s GDP.”

    “Four trillion yuan ($586 billion) will be spent on upgrading infrastructure, particularly roads, railways, airports and the power grid; on raising rural incomes via land reform; and on social welfare projects such as affordable housing and environmental protection….The sums involved are substantial. By comparison, the U.S. pumped $100 billion into its economy in the summer via tax rebate checks. Germany has just announced a $65 billion stimulus package. Both economies are larger than China’s. China’s stimulus package amounts to nearly 15% of annual economic output spread over barely two years. ”

    So do they fret how they will finance that stimulus? People who dare to babble about the absolute property rights, sound money and implementing Western parliamentary plutocracy model are re-educated not promoted in that country. Maybe a bit harsh but it is working…

    They as a nation want to be rich by having useful things made for themselves not rich by having virtual claims on someone else’s wealth. These are only a tool.

    We can ignore these fact and stick to the empirically discredited by the emergence of GFC theories about the absolute benefits of the system based on sound money, absolutely free “free market” efficiently allocating resources by blowing asset bubbles and absolute property rights. (or the lightweight version of these called Neo-Keynesianism). We can also believe that we have true democracy and consumer choice that is we can choose between Coles and Woolworths, Clive Palmer and Andrew Forrest or Senator Conroy and Tony Abbott. We can stick to overconsumption as the only means of avoiding the collapse of the Australian property Ponzi schema based on the creation of the credit money and mortgage debt in equal quantities.

    As long as we can “borrow” our “sound” money from the structures run by the Communist Party of China the show in Australia can go on. This is the logic we choose to believe in, not the only existing logic. This is the greatest scam 99% of the people believe in. I will not cry when someone pulls the plug. People like me who are free from mainstream beliefs can easily adjust because I do not expect anything rosy to happen in the future and I have quite limited material needs.

    What looks really encouraging and what was the true purpose of this exchange of arguments is something entirely different. I did a quick background check and I know that you have a PhD in economics from a leading Australian university – something what I truly respect. I have no formal qualifications in economics except for one semester of Marxist macroeconomics in 1988 (I have never been a communist but I could be close to the ideas of democratic market socialism not necessarily with the Chinese characteristics).

    I am sure that if I have written something really ignorant you (or professor Quiggin who hosts this blog) would have blown a hole in my arguments. It is absolutely irrelevant who I am – a totally random person doing random things, speaking with a thick accent and looking a bit dodgy, not aspiring to promote myself in any way. It is the value of the ideas and survival of the fittest memes what matters in this game.

  27. @Ernestine Gross

    “I am being asked to switch…. to the belief that ‘the government’ is another name for Santa Claus (or the Tooth Fairy) that can print money under any condition to fulfill all my material wants while ensuring that the environment remains ‘sustainable’. ”

    That is ridciculous EG if you mean it seriously. You are not being asked to believe that and MMT is not saying that. Certain people on this forum persist in claiming that MMT is saying what it is not saying.

  28. A problem with the Communist countries was that as they controlled everything they could set ‘reasonable’ prices for things and give pay increases that would produce excess demand for the goods and services. Because prices didn’t go up in response, the result was shortages so everyone had to queue for things and found themselves with money left over (forced saving). But Ernestine would know all this. The rejection of letting prices adjust to ‘clear’ markets and play an allocative role was one (of several) big mistakes they made. Apparently there was some sort of ideological aversion to using the price system. I suppose it is great if you can give everyone higher pay and ‘reasonable’ prices, just unfortunate that they can’t use that higher pay with the goods running out and them being left with money they want to spend but nothing to buy. Of course, the quantity of money in those economies would have been greater than the price level could sustain and if the prices had been allowed to adjust they would have moved to a higher price level which is what happens if governments print more money.

  29. @Ernestine Gross

    “So, you are interested in how ‘the mind functions’. I am interested in you telling me how you ended up in the sandpit”.

    Oh, not talking about MMT – that is for sure E.! Just wanted to encourage Dan to look beyond the pale, that’s all. I mean, other people end up in sandpits too you know: The Politics and the Sociology of the Economics Profession – James Galbraith I wonder if that has anything to do with ‘mind’ ….?? Oh Yes – I forgot: we are all scholars now!!

    Ernestine seriously: your mind, my mind (just like a parachute) are of little use unless they are open. The central Idea and Beauty of MMT for me (drat, couldn’t help myself) – is that it provides a way for human beings to look after each other a lot better than Capitalism does, which is simply a system and ideology based on greed! For me, it is that simple.

    Like a lightning bolt zigzagging its way through a burning atmosphere, the central tenet of MMT of Govt. monetary sovereignty independent of nongovt will I hope one day burn its way through all of the academic twaddle. It is OBVIOUS – Govt. monetary sovereignty is OBVIOUS – how to use that power in a humane way to benefit people is also OBVIOUS – back to mind again to explain why it is not so! Human beings explain away everything – even that universal energy from which they have been created! They always seem to miss the Obvious (or turn it into a religion like economics).

    Nice playing with you (in the sand pit I mean that). As I said, we have to learn to look at human affairs afresh – without memory interfering and all of the rest of it!!!


  30. I am dead serious, Ikonoclast. For your convenience, I reprocduce the relevant part from my post @5:

    ‘MMT proposes that the value of fiat money derives from legislative power of governments to demand taxes to be paid in the same fiat money.

    May I note that this is not a new idea. For example, Knapp, G. F (1905) Staatliche Theorie des Geldes, Dunker and Humbold, Munich. Engl. Translation, “The State Theory of Money, Macmillan, London, 1924.

    This is what Bill Mitchell says
    “In a fiat currency system, the currency has legitimacy because of legislative fiat: the government tells us that’s the currency and then legislates it as such. The currency has no intrinsic value. What gives it value, what motivates us to use the currency that the government suggests, is the fact that all tax obligations are denominated in and have to be extinguished with that currency. We have no choice. If you live in America, for example, you have to pay American taxes to the IRS with American dollars. So demand for the currency, otherwise worthless bits of paper, is driven by the fact that all tax obligations have to be extinguished with that currency. Once you consider that, then you immediately realize that the national government is the monopoly issuer of that currency. That means that the national government in such a system can never be short of that currency; it can never run out of money. It doesn’t need you or I to lend it money or you and I to pay taxes to get more money. It can never run out of money. That’s the first basic insight of MMT: governments are not constrained in their spending by a need to raise revenue.” Source:

    I have a problem with Bill Mitchell’s theory when he writes: “That means that the national government in such a system can never be short of that currency; it can never run out of money. It doesn’t need you or I to lend it money or you and I to pay taxes to get more money. It can never run out of money. That’s the first basic insight of MMT:”

    My problem is that, in contrast to Knapp, Mitchell negates his own theoretical reason for fiat money to have value.

    Isn’t this enough to stop talking about MMT? It is for me.’ [E.G.]

    Of course ‘the government’ can ‘print some numbers on pieces of paper’ (or make equivalent computer entries) and say ‘now we have more money’. Who is going to give goods and services in exchange for these numbers? Voluntarily that is and for how long before the last proverbial man realises that he is being robbed.

    Of course there are situations where ‘printing numbers on pieces of paper’ and call it money makes sense. For example in the case a ‘currency reform’ (eg Germany after WWII, Argentina not that long ago) when a new currency and new rules of the game are introduced, some notes, denominated in the new currency’ have to be printed and some coins minted.

    The question of who gets the new or additional ‘money’ cannot be ignored even if it goes via ‘government expenditure’ in the national accounts. Surely there is a difference whether the additional ‘money’ is spent on say public works or to buy ‘bad debt’ generated by the private banking system.

    In the absence of anything more substantial regarding ‘MMT’, it seems to me as soon as one considers conditions under which ‘government spending’ can be ‘financed’ by issuing ‘more money’ one ends up in mainstream economics (or in the Tooth Fairy land).

    It may or may not be of interest to you that ‘Keynesian economics’ – a version of Keynes’ writings’ – entered mainstream economic policy during the time of the Bretton Wood system. What made sense under these rules of the game may not make sense under a pure fiat money system because there are no natural or institutional bounds on the system. So, the version of mainstream Keynesian economics which talks about ‘balancing the budget over a reasonable period of time’ is, IMHO, an updated version which takes the fiat money system into account.

  31. @Ernestine Gross

    Ernestine, I’d have to read up on macro-economics from all angles. I could even go back to Uni as a mature age student in economics. I guess that would be my next 5 years mapped out. An interesting set of existential questions attaches though. Why should I bother? Will I or the world be any better off for me pursuing a private or Uni study course in all schools of macro-economics? Would you or JQ or any established economist, public offical or political representive ever pay the slightest attention to a line I wrote even I became a little adept (though still for certain mediocre and deriviative) in the subject? No, of course not.

    So frankly, I dont care.

  32. @Ernestine Gross

    I strongly disagree with the following statement and I think that it contains the core myth perpetuated by the monetarists and the Austrians:

    “Of course ‘the government’ can ‘print some numbers on pieces of paper’ (or make equivalent computer entries) and say ‘now we have more money’. Who is going to give goods and services in exchange for these numbers? Voluntarily that is and for how long before the last proverbial man realises that he is being robbed.”

    The answer is – do I really care who made that money? No I don’t. I am perfectly happy to accept the money printed by the government as long as can buy the goods and services for that money at pretty much stable prices. As long as there are spare productive capacities in the economy everyone will be perfectly happy if there is more demand for the goods and services. So who is being robbed?

    Who does actually care about these numbers? Only the journos, economists and politicians. Do normal people actually know how much savings exists in the economy? If deposits sit in the banking system somewhere and reserves sit in the central bank – how does that quantity affect anything? Interest payments do affect the economy. Liquidating these savings does. Yes there is a spending out of wealth effect but it is not very significant. As long as this money merely sits there it really doesn’t matter. Suppose I have 100kg of gold. It is deeply hidden so that nobody knows about it. How does it affect the economy? How does it differ from the gold deposited in the rock at the depth of 1000m – until I dig it out and sell to someone and spend the money?

    MV=PQ. I don’t want to provide a link because of the moderation latency but it is pretty obvious that this is phlogiston, pure phlogiston.

    So we do care about the supposed dilution of our savings when the government creates money (MB) but we don’t care at all when the banking sector creates several times more deposits (counting towards M1 and M3) – also out of thin air but backed by private debt? We had this massive property bubble here in Australia financed by the mountain of private debt and nobody (except for Steve Keen and to some extent MMTers and Austrians) said anything. Where were the monetarists then? Where were the Neo-Keynesians? A vehicle to exploit young Australians and migrants like me by the means of USURY to satisfy GREED has been created and almost everyone has been perfectly happy.

    Do you know why virtually nobody spotted anything? Because the mainstream models do not include the banking sector and endogenous money creation. Because it is assumed that “patient” agents lend money to “impatient” agents. This is all equilibrated on the loanable funds market. Who said that? Our hyper-progressive Paul Krugman. What a … So we will talk about bounded rationality and all the fancy stuff but the basic topology of the model is absolutely incorrect. We will add an epicycle or two to our geocentric model to match the data. No wonder nobody saw the GFC coming if the models do not include the sector seizing about 40% of the profits (source: The Atlantic May 2009) which is an active source of investment and consumption spending contributing to aggregate demand – and then creates a black hole in the aggregate demand when debt deleveraging takes place and credit money is destroyed. Yes it is as simple as that, dL/dt is a monetary flow. For an electronic engineer this is trivial as this is the equation describing a capacitor (i=dq/dt). But professor Paul Krugman doesn’t know that.

    BTW in the previous instalment I claimed that the Chinese can run budget deficits reaching 15% of the GDP financed mainly by local governments taking loans in state-owned banks (will they have to repay them? will the state seize the property of the state?) Isn’t it printing money? And so what? Did it blow out? Yes, the inflation reached 6% (mainly due to the private property bubble) What did the wise people living in China do? Did they repeat the “cooling down” strategy implemented by prof Leszek Balcerowicz in Poland ? (very successful, 20% unemployment in 2003, the year I left because I had had enough living in a dislocated society brainwashed by the Catholic Church and the neoliberals)

    No. The Chinese did not raise the interest rates much nor throttled the budget deficits. They simply told state owned banks not to lend money to property investors. The result? The economy is humming and nobody cries that is being robbed (except for the speculators – good on them). So this is exactly the opposite to the prediction that once the governments discover that they can get away with printing, they will print money to death. MMT will not lead to hyperinflation. This is a grave misinterpretation of the political cycle theory created by Kalecki.

    So answering the old question – what would happen if the budget deficit was financed by money emission and interest rates were allowed to fall close to zero – the answer is: nothing bad in the longer run (there can be some transitionally jitters), provided that bank lending is throttled and budget position adjusted as required (no new wars Mr Obama, sorry about that). Bank lending has to be dynamically throttled – not like in communist USSR. Like in the capitalist West before the deregulation, like in Australia when major banks were state-owned.

    (Yes the loanable funds market model would yield a different result. But that model is wrong. I can properly illustrate that but it would require putting links. Basically we need to plot the bank spread as a function of the volume of new bank lending in Australia in the “normal” (non-liquidity trap) period. This shows the cost of sourcing deposits determined by the dynamic equilibrium between the flow of deposits and loans. The same can be done for the net volume of lending (lending – repayment). The result is that the spread was pretty much constant despite the significant gyrations in the rate of new lending or d(M1-MB)/dt. The mainstream theory would predict increasing the spread when the demand for the loans was higher. The result suggests just one thing spotted by Michal Kalecki more than sixty years ago: loans create deposits and banks do not lend reserves. We can add that currently the reserves are supplied by the Reserve Bank so that the cash rate is hit. But who reads Kalecki these days – except for the Chinese? If this doesn’t look convincing, “Monetary Economics” written by W. Godley and M.Lavoie contains more formal stock-flow consistent models. Increasing the amount of reserves when the interest rate is constant will not lead to excessive lending)

    NB the Chinese keep interest rates close to the inflation rate what means that the real interest rate is close to zero. I would do exactly the same. No monetary reward for hoarding money but also no unfair penalty for being frugal.

    We, the so-called Westerners have robbed ourselves from the common sense and have chosen (or were pushed into by the plutocrats) living in a parallel universe, a kind of virtual reality. I simply cannot stomach that – for the second or third time in my life. This time I have nowhere to migrate, I will stay here.

    The Chinese are laughing at us and taunting us to commit an economic suicide by applying austerity so that our money they “lent” us is “sound”. And nobody still wants to see anything.

  33. People care about many things they are unaware of. I might work in an environment where radioactive waste has been dumped and I might be unaware of that. However, I certainly will care about my failing health.

    Even if they don’t care about who gets the money printed, who prints the money, or how much, people certainly do care about the consequences.

  34. Ikonoclast :Wasting your time m8, JQ and EG know it all.

    I am surprised about your comment, Ikonoclast.

    I can’t speak for JQ. But I can assure you I don’t know “it” all. In particular, despite the lengthy posts adressed to me by several commenters, I haven’t learned anything new about “MMT”.

    Who or what is “m8”?

  35. @Adam (ak)

    A few posts further up you told me you have little time (work, family commitments). Now you write a lengthy post. Assuming your time constraint is sincere, I shall be brief.

    1. I have no idea why you refer to ‘the monetarists’ and ‘the austrians’ in relation to what I wrote.

    2. You say:
    a) “The answer is – do I really care who made that money? No I don’t”
    b) “Do you know why virtually nobody spotted anything? [about the GFC] Because the mainstream models do not include the banking sector and endogenous money creation. ”

    A) The content in a), strictly speaking, makes no sense. But I believe I understand what you mean.
    B) I have added the term in square brackets in b) to convey the context, assuming I understood what you intended to convey.

    The foregoing comments are not important for present purposes.

    The important point is that your b) contradicts your a) in the sense that if people (including you) would ‘care about’ who ‘made the money’ then we might not have the GFC mess. By ‘caring about’ I mean if we would have a financial record keeping system which would allow people (including governments) to distinguish ‘monetary objects’ according to ‘currency denomination’, ‘issuer’, ‘redemption functions’, dates, other conditions attached to financial contracts, then the GFC mess could be disentangled such that ‘the tax payer’ would not have to carry the costs of those who enriched themselves via ‘financial innovations’. I am saying the financial accounting framework is insufficient. For an alternative record keeping system, as a tool for theoretical and empirical research, see A. Furche (2001), The Model of Token Money, PhD thesis available at Macquarie University. This work builds upon the concept of a basic financial contract as found in a general equilibrium model by R. Radner (neither monetarist nor Austrian).

    I understand you are frustrated. However, like in other academic disciplines, research in economics is a tedious process, involving many people and building upon earlier work.

    I am getting a little tired of the mantra of ‘nobody’ except a few ‘predicted’ the GFC. The whole mantra rests on a particular meaning of ‘prediction’. Using the most stringent meaning of this word I can think of then those who are said to have ‘predicted’ the GFC haven’t done so either.

    How about we use the word ‘anticipate’. Then I can tell you there are many people who for a long time did not believe in what some call ‘the great moderation’ and the associated financial innovations and the proverbial Wall Street bankers. (I say proverbial because they don’t all have their headquater in N.Y.) For example, the previous Treasurer, Peter Costello, authors in the 1990 Handbook of Monetary Economics (what is money?), Professor Tobin, to name only a few. Surely if someone publishes a PhD thesis in 2001 that anticipates the need for a rigorous concept of monetary objects, their creation and distraction, it would indicate not everybody has been sound asleep. Similarly, why is it that Germany, France, the Netherlands, Australia and some South American countries have managed debt creation better than the USA or the UK?

    All this has essentially nothing to do with “MMT” about which I have learned nothing new.

    I should stress here that I consider it extremely impolite toward Professor Mitchell to frustrate normal debate aimed at refining arguments by means of raving on about everything and anything.

  36. @Ernestine Gross
    In contrast I consider our brief exchange of views very interesting. It let me make valuable observations and its outcome confirms my suspicion that the fate of the Western civilisation (in the current form) might be sealed. Thank you.

  37. OK – let’s all get down off our high horses for a moment and appreciate that each mind is trying to communicate with another; taking the time to do so.

    Ernestine: could you work with the concept of a brand new country for awhile? Everything is all set up ready to go – the banks, the corporations, the people, the central bank and Treasury etc. All the Govt. has to do now is ‘spend’ the ‘money’ into existence. Everybody is willing to use the Govt.’s money for whatever reason you come up with. Govt. can set the price of it’s money anywhere it wants initially. The tax system is ready to go.

    Would it be reasonable to ask Ernestine, that you set out the logical steps that Govt. might take from this initial state to ‘funding’ itself through taxation and debt issue.??

    Am not challenging you – simply making a request (I hope you understand that)! Am accepting of ‘THE END’ if that is your preference – no worries! Also, I cannot promise that I will be able to pull apart your logical steps – although others may?


  38. I’m going to use all my willpower to go on “blog furlough” at least from JQ’s blog. I think I need to as I got too hot under the collar. M8 was Adam (ak) as when I hit the button his was the last post.

  39. @jrbarch

    I am done with this thread, sorry about that. To add any value, someone would need to read and properly understand the conceptual framework used by Ernestine in her academic work
    and starting from that point, translate the fundamental claims made by MMT theorist into that lingo. Only then a valid platform for exchanging ideas would be established. This is certainly doable however I still doubt about the end result because we differ in fundamental intuitive understanding of the relationships between the individuals, society and the state.

    I am going to fire up my Suzuki GS500 instead.

  40. Adam (ak)

    I agree with you on the usefulness of having a common point of reference for any discussion, although I would prefer one that is independent of the work of the discussants.

    I’ve tried to figure out what is conceptually and theoretically new in the MMT but without success and notwithstanding your carefully worded post @25.

    Your post @25 appeared either a short time before I posted @26 and I didn’t see it or it was inserted after I had posted. I suspect an alternative sequence of message receipts might have changed the tone but not the content of my post. Anyway, I learned something useful about Poland, about which I knew nothing.

  41. @Adam (ak)
    Yes – I had a read of Ernestine’s paper: can understand why you prefer to fire up the Suzuki (but please be super-conscious riding that thing, I lost a mate recently).

    For me, the paper (not Ernestine) is a really good example of ‘mind’: a conceptual framework built on a cloud. I find Randy Wray’s thoughts on money much more interesting in that regard. Have placed some links below to MMT papers that I think are relevant in case anybody wants to read the MMT view.

    I think mainly in human terms so my ‘accounting’ is even more simple: when kids play and one kid owes the other – that’s money; when one kid credits another – that’s money; when all ‘accounts’ are settled – money disappears. It makes no difference if the kid grows up to be Govt. People forget that at the root of all transactions are human beings – ‘forgetfulness – read unconsciousness’ is courtesy of mind.

    The bottom line is interesting? At the end of each life, when the last breath is drawn – all of your hours on this earth, everything you have ever done, everything that you thought you were, sum to zero – that’s accounting. Anybody over 60 who is humble knows that – and mind comes back to bite you in the (rear) end.

    Riches? The only thing you can take with you of any ‘value’ is whatever is written in your heart: – if you think that I’m kidding sit beside someone passing from this planet – you will see it in their eyes, every time. So, maybe we need to redefine ‘intelligence’ and ‘store of value’. Intellect should be wedded to simplicity if it is to function at all. Intellect is meant to disciminate between what is real and what is not – not build edifices in the sky.

    Beyond Ernestine’s paper: when the ‘logic’ of a monetary system arises from human compassion rather than human greed and miasma, maybe then we might get somewhere. That’s what I would call ‘Progress’. One step (amongst many) is to understand the simple basics of our own monetary system:

    Bell (Kelton): Can taxes and bonds finance Govt. spending?

    JKH September 30, 2009 at 5:28 am | #

    Mosler: A General Analytical Framework for the Analysis of Currencies and Other Commodities

    MMT – an accounting-consistent, operationally-sound theoretical approach

    Modern Central Bank Operations – The General Principles

    Wray: The Credit Money and State Money Approaches

  42. @jrbarch

    What is going on here?

    You are addressing a list of references (third or fourth level) to Adam (ak). But Adam (ak) has written a reasonably careful summary of ‘points’ from this literature on this thread!

    Incidentally, in an earlier post on this thread you made up a quote and assigned to me.

    You don’t understand the difference between the description of ‘monetary objects, their creation, their circulation and their distruction’, which is valid for all monetary economies versus a theory for a particular monetary economy. There you have your cloud.

    You want a ‘logic of a monetary system’ that arises from human compassion rather than one that arises from greed. I understand you still can contribute to the fund raising on JQ’s blog site. You can voluteer to pay for the newly introduced property tax in Greece and you can get Goldman Sachs to make up for any shortfall in your monetary wealth, if necessary. You can also lobby Moodys to pay for the consequences of their ratings of junk bonds (risky equity) as investment grade debt. If this is not enough, please let me know and I’ll provide a longer list to practice your logic.


  43. JRBarch

    “I think mainly in human terms so my ‘accounting’ is even more simple: when kids play and one kid owes the other – that’s money; when one kid credits another – that’s money; when all ‘accounts’ are settled – money disappears. It makes no difference if the kid grows up to be Govt. People forget that at the root of all transactions are human beings – ‘forgetfulness – read unconsciousness’ is courtesy of mind”

    This is simplistic nonsense. You over look the consequences of the first transaction. If a service is provided then this can only be neutralised with the provision of an equal service. If that equal service is impossible to be provided then there is an unpaid debt which can only be resolved with an on-tradable token, an item of equal agreed value, or a noterised transfer. Money.


  44. Hi jrb

    Money has the value of “intention”, so “remains unpaid” dishonours that intention. Now, for kids that is usually quickly forgotten. For adults, it is not.

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