MMT and Russia

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

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

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

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

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

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

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

196 thoughts on “MMT and Russia

  1. @John Hobgood
    Imports are cheap only to users of truly fiat currency, to those 5-6 countries that got to force others to trade in and accept only their currencies.
    Those currencies are used for international trade and as such can prevent inflation from domestic supply drop. Russia is not one of them.
    As long as other countries accept your currency for their goods, you will feel no lack of supply domesticaly. And that is cheap.
    Other countries can import up to one point and then due to debt in foreign currencies, have to start exporting. They have to return the favor of previously receiving goods for cheap. That is thanks to not using fiat money, but tying exchange rate to other asset, like gold or foreign money.

  2. @John Hobgood

    You quote what I wrote, describe it as ‘wholly incorrect’, and then continue that quantitative easing is not monetary expansion.

    Your statement that quantitative easing is not monetary expansion would contradict any statement that quantitative easing is monetary expansion; in other words, if your statement that quantitative easing is not monetary expansion is a correct statement, any statement that quantitative easing is monetary expansion would be an incorrect statement.

    But I never made any statement that quantitative easing is monetary expansion. Did you think I did? If so you weren’t following carefully enough.

    I was discussing quantitative easing not on the basis of any views of my own about any connection (or lack of it) between quantitative easing and monetary expansion, but in response to an earlier comment by Crocodile, which, now that I reread it, does look a lot as if Crocodile thinks quantitative easing is a form of monetary expansion, or equivalent to it. If you disagree with that statement, you’re disagreeing with what Crocodile wrote, not with what I wrote.

    I am not a crocodile, as you would realise if you could see me. But you can’t. Perhaps that helps to explain any misunderstanding.

  3. @John Hobgood

    Crocodile thinks quantitative easing is a form of monetary expansion, or equivalent to it. If you disagree with that statement, you’re disagreeing with what Crocodile wrote, not with what I wrote.

    I am not a crocodile, as you would realise if you could see me. But you can’t. Perhaps that helps to explain any misunderstanding.

    Well I’m certainly a crocodile. Maybe I’m not quite following you correctly. Surely, if assets are procured from the private sector regardless of their worth with money that didn’t exist before the money supply must have expanded.

  4. JQ, I’m not the best person to answer – L. Randall Wray, Warren Mosler, Stephanie Kelton or Bill Mitchell could write with authority, but my tentative reply is that MMT proponents do not advocate government spending “for any purpose”. The literature emphasizes productive purposes and keeping within the real economy’s constraints. If there is labour, materials, energy and so on that are not being used, increasing government spending to mobilize those real resources into creating real goods and services will not cause inflation. It will make useful goods and services which otherwise would not have been made. It will increase sales, profits, hiring, investment, and incomes. If, on the other hand, the economy’s real resources are already fully employed, then government spending cannot be increased without causing inflation.

    Russian firms have a large amount of debt denominated in Euros and USD. The sanctions impede their ability to earn the foreign currency they need to service those debts. The Bank of Russia is lending its own reserves of foreign currency to the firms. The Bank obviously cannot create USD and Euros – it can only get its hands on them through the international trade transactions which are currently restricted. Its reserves of those currencies are dwindling. It is not clear that the Russian Government is truly a sovereign currency issuer when the country’s economy is so heavily exposed to debts denominated in other currencies. I also note that the Russian Government has turned itself into a world pariah, which exposes its currency to coordinated speculatative attacks. These attacks its currency sovereignty.

    The other point that occurs to me is that MMT proponents emphasize the importance of a functional tax system which creates demand for the currency and drains purchasing power out of the private sector to prevent inflation. Russia’s tax laws are enforced arbitrarily. This may result in not enough roubles being drained from the private sector to give the government the space it needs to increase spending without destablizing prices.

    If the Russian Government stopped being a pariah that is subject to sanctions and currency attacks, stopped Russian firms from incurring Euro and USD debt, and created a well-administered tax system, it might become a sovereign currency issuer not just in name but in practice.

  5. @John Quiggin

    Sorry I didn’t know you replied especially since MMT’s confinement to the sandpit.

    Well why do all other economists talk about tax revenues as if they are a real thing? Its nominal and a data point, nothing more.

    I don’t know much about the Russian situation so can’t speak to your point there. If its anything like Norway you would be talking about Current Accounts but like I said I don’t know.

    Tax revenues from within a country are as you suggested are to control effective demand.

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

    Reverse that equation so you start from origin point zero – taxes are paid by public expenditure. And since taxes are used to transfer real resources it appears as if public expenditure is paid for taxes but that is an inaccurate statement.

    A lot of your MMT comments seem to say MMT commenters and proponents are saying “x” & I could be wrong as I haven’t seen all those comments but I think you may be taking them out of context & that’s primarily because you’re looking through your paradigm instead of their paradigm. You do manage to exclude the major MMT economists from this commentary.

    I wont link to my site but over there Tom Hickey wrote into one of my blogs about you:

    It is not the case that “more expenditure necessitates higher taxes,” but that beyond a certain point greater expenditure can require raising taxes to control inflation per functional finance. But recent inflations have arguably been more influenced by supply shortages and rising prices of vital materials affecting the price level continuously than demand driven inflation resulting from too much money chasing too few goods when the economy reaches full capacity and cannot adequately respond to increased demand.

    And from what I can see that may be what is you may be getting hung up on.

    I hate all the jargon in econ but I do like MMT in its simplest form

    There are only three ways to put the private sector in surplus (unfortunately this implies a policy goal)

    Run a government deficit & a current account surplus
    Run a government deficit > current account deficit
    Run a government surplus < current account surplus

    However I would rather have $ in my pocket than the governments & yes private sector here includes the ROW

  6. John Quiggin :

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

    This is common ground for just about all economists. All expenditure is paid for by resources (more precisely, consists of the allocation of resources to some particular goal.
    Taxes are the primary instrument by which resources are transferred from private to public expenditure, so it’s usual to speak of public expenditure being paid for by taxes (or, better, tax revenues), but it’s really the resources these revenues command that matters.
    But, as someone above said, the point that public expenditure is resource allocation is neither modern, nor monetary nor a theory. It’s a fact about the real economy that has been known since time immemorial.

    I just re-read what you wrote but what it is “usual to speak of” is exactly what gives the wrong impression – even the impression to some that surpluses are good. I find it is this wording that is the problem not the wording of MMT.

    Taxes are the primary instrument by which resources are transferred from private to public expenditure

    It would be more useful to say Taxes are the primary instrument by which resources are transferred from private to public sector – as the expenditure is not the relevant part, its the resources. This provides clarity.

    It’s a fact about the real economy that has been known since time immemorial.

    Whether it is a fact or not economists-at-large in the mainstream clearly use inappropriate wording.

    As for MMT which is largely an operational description of macroeconomic operations and its constraints depending on whether currencies are free floating etc. includes much more than what is being discussed here. So will be happy to discuss the definition of modern, monetary, & the misnomer of theory another time – though largely previously discussed in one of your other earlier threads.

  7. @ alfred venison
    Berkshares is not social credit, it is only a way to keep more transactions in local area. It is not social credit because of this

    Federal currency is exchanged for BerkShares

    from your link.

    WIR Credit is social credit because it is not exchanged for Swiss Franc and it is credited as needed.
    Berkshares replace prime currency while WIR is added, it is a paralel economy, complementary.

    Although WIR started with only 16 members, today it has grown to include 62,000. Total assets are approximately 3.0 billion CHF, annual sales in the range of 6.5 billion, as of 2005.[4] As of 1998, assets held by the credit system were 885 million and liabilities of 844 million, i.e. the circulating WIR money, with equity in the system of 44 million. These WIR obligations being interest free have a cost of zero. Income from interest and credit clearing activities were 38 million francs.

    And yes, those complementary currencies are using full power of MMT knowledge.
    Fiat money is also MMT but it is masked by sheer size and complexities of a monetary system. And difference is that fiat money is crediting people’s needs basing on the size of income, while complementary/ paralel/ ‘funny money’ is credited basing it on needs.

    ‘Funny money’ never suffered evolution from Gold Standard as Dollars/Franc/ Yen has, so they went right for human needs as the base for issuing the credits. And they usually do not cost, there is no interest attached to crediting the ‘funny money'(usually).
    A bank issuing the credit in US$ or AUS$ is also ‘funny money’ since it gives you what you need, it gives you aditional buying power to fulfill your need, but it limits it by your ability to pay it back.

    Social credit can be payed back with goods or labour directly to issuer or to whome they direct you, while credits in US$ can be payed back only with same. That is another difference.

    Other fiat moneys also are in evolution toward the social credit set up. Slowly but surely they are changing. By today, it is only that corporations, mostly banks, are enjoying such evolution of fiat money, but in time, people will be using it because automatization demands it.

  8. @J-D

    I’m going to have to backtrack and say while QE is indeed “monetary expansion”, it isn’t an increase in the “money supply” (unless the Fed buys an asset that ends up being worthless). Generally, QE increases the level of reserves in the banking system in hopes of stimulating lending.

    What I was responding to was your statement (page 4, #15) wherein you mention QE in the 1st sentence and seem to consider it a form of monetary expansion in the 2nd sentence. Well, QE is “monetary expansion”, but we have seen that, in general, it really doesn’t have the ability to counter deflation/increase inflation. Why is this? Because bank lending is capital constrained, not reserve constrained. If a bank finds a creditworthy customer and figures it can make a profit on the loan, it can just go ahead and make the loan without regards to the level reserves in the banking system (where you have a “Lender of Last Resort” like the Fed). If, having made the loan, they find themselves short of reserves and they can’t borrow them from another bank, they will have an overdraft at the Fed. The Fed doesn’t allow this and will automatically lend that bank the required reserves via the Fed’s “Discount Window” or their Term Loan Facility. But all of this hinges on being able to find a creditworthy customer that actually wants to take out a new loan. Otherwise, increasing the level of reserves in the system via QE/Monetary Expansion is just pushing on a string. Meanwhile, QE acts as a tax on the private sector by decreasing the amount of interest income it gets from investing in T-Securities.

  9. @Crocodile

    “Surely, if assets are procured from the private sector regardless of their worth with money that didn’t exist before the money supply must have expanded.”

    Yes, less any “profit” the Fed has made on other assets it has procured from the private sector, as the Fed sweep it’s profits into the Treasury’s General Account.

    Please see my reply to J-D in #35.

  10. @John Hobgood

    It’s hard for me to tell, but it looks as if the structure of the argument you’re making here goes something like this, in outline:

    Quantitative easing can never affect bank lending; therefore, quantitative easing can never affect inflation.

    If that is a correct interpretation, then there’s a great big gap in the middle that needs to be filled in.

    But perhaps I have misunderstood, and in some way your argument is different from what it seems to me to be.

  11. I have philosophically solved the issue of the apparent disagreement between orthodox academic economics and MMT. Note: I exclude cheap, politicised neoliberal economics from the category “orthodox academic economics”.

    The MMT argument occurs when people fail to note a fundamental fact. There are formal systems (e.g. the fiat money system and the financial economy) and there are real systems (e.g. the real economy and the biosphere). Economics is difficult to grapple with and one reason is that it involves interactions and feedbacks between formal systems and real systems.

    The apparent paradoxes and contradictions between orthodox academic economics and MMT occur because of reification mistakes followed by category mistakes in the hands of amateur proponents on each side. The reification mistakes are often quite subtle. On the MMT side, proponents begin by explicitly noting the Formal and entirely notional nature of fiat money. However, the drift to a reification mistake occurs when the potential to create money without limit is asserted as meaningful in isolation from the real economy. It is not meaningful or real on its own so it is not worth saying except to counter some of the more absurd neoliberal propaganda. The attempt to make it independently real and meaningful is to reify it. It must be linked via macroeconomics to the real economy and thus to real limits in the real economy and the real environment. In this sense, the statement “the government is not spending constrained” is meaningless and indeed false.

    On the other hand, orthodox academic economists use a shorthand which appears to reify money too. They use “taxes” as a shorthand and proxy for real costs. Orthodox academic economists know what they really mean. With their integrated understanding of economics, the one wholly implies the other. But MMT proponents take this apparent or implied reification as literally intended. This might true when it comes from neoliberal economists (though even there it is often intended as obscuring propaganda).

    The whole thing is a failure to communicate between MMT proponents and orthodox economics proponents. It is even doubtful that this disagreement amounts to anything at the academic level as opposed to the amateur proponent level. There is really no fundamental disagreement except with neoliberal propaganda and practice.

  12. @Ikonoclast
    From reading “Economics and the powerful” (Haering and Douglas), it would seem that many “orthodox” economics are engaged in neoliberal propaganda and practice. In fact, almost all economists commenting in the MSM, as well as many of those in Treasury, appear to belong in this camp. They will deny that “taxes” is a form of shorthand.

  13. @Totaram

    NB, Greenspan told Paul Ryan “…that there’s nothing to prevent the federal government from creating as much money as it wants and paying it to somebody.”

    Mr. Greenspan’s comments in later days suddenly shifted towards deficit hysteria.

    Imagine that.

  14. @J-D

    I’ll give you a couple of clues:

    1. QE, to the extent it lowers interest rates, is deflationary. It removes net interest income from the private sector.

    2. Consumer spending is necessarily pro-cyclical.

  15. @Totaram

    Exactly, that’s why I delineated “orthodox academic economics” from “neoliberal economics”. Neoliberal economics never earned the term “academic economics”. I refer especially to those charlatans, Milton Friedman and the Chicago school. Mere situation in academe does not earn the honour of “academic”. Neither does singing tunes for pay from the rich men. There is more to it than that.

  16. @J-D

    Quantitative easing can never affect bank lending; therefore, quantitative easing can never affect inflation.

    That would be correct only in normal times, not when banks are insolvent as today. Zombie banks would reduce lending by increasing interest rates. Something like what happened in 2008-9 by raising rates on credit cards. ANy excuse to raise rates was used. Customers refused to increase borrowing at such rates. So lending fell.

    QE helps bank become solvent by giving them chance to earn money when they lost a lot if not for QE. QE was acctually about saving banks, full stop.
    Interest rates for government borrowing was allready very low and did not need to go lower. A large part of buying assets from banks was to buy assets at face value, not at market value. Many assets were worthless.

    John Hobgood acctually noted importance of that in comment #36

    I’m going to have to backtrack and say while QE is indeed “monetary expansion”, it isn’t an increase in the “money supply” (unless the Fed buys an asset that ends up being worthless).

  17. @Ikonoclast
    Nice work there about phylosophical solution, even tough i should warn you about your own excellent warnings about “one shot cure for all problems” ideas.

    Yes, MMT often jumps between nominal and real terminology trying to recognize feedbacks.
    2) MMT often accounts only change part. Yestrday was allready determined; change is today; what effect will change have on tomorrow. While ortodox economic always count the whole, valued in nominal, Calculate whole of yestrday, calculate whole of today and what trend is? But “in long term, we all are dead” because there will be change tomorrow too. Only chnge from yestrday matter.
    3) Arguing in nominal terms is better suited for prediction since goods follow where money is, not opposite.

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