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

  2. Topic 1

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

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

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

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

    +1 – 1 = 0

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

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

    -1 + 1 = 0.

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

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

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

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

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

    Topic 2.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    The World Socialist Website says;

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

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

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

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

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

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

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

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

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

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

    all quotes from oil-price.net

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

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

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

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

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

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

    himi

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

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

    the USD is the world’s de facto reserve currency

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

    the US has the rule of law

    None of those conditions apply to Russia and the rouble.

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

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

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

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

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

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

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

    To achieve desired distributive outcomes.

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

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

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

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

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

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

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

    Mathematically the above equate to;

    (A) +1 – 1 = 0
    (B) -1 + 1 = 0

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

    With real quantities, you can do A from scratch:

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

    But you cannot do B from scratch:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  13. @himi

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Please correct my naivety.

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

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

  18. @plaasmatron

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

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

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

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

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

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

  19. @nom de plume

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

    The summary of the video says;

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

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

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

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

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

  21. @Ikonoclast

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

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

  22. @Ikonoclast

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

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

  23. Sometimes asking the question, you realise the answer.

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

  24. @plaasmatron

    Please correct my naivety.

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

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

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

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

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

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

  25. @plaasmatron

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

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

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

    Abbott and Hockey are clearly economic zombies in this sense.

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

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

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

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

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

  26. MMT is very helpful on Russia.

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

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

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

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

    Raising rates to catastrophic levels has never worked.

  27. @Charles Hayden

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

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

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

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

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

  30. @GrkStav

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

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

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

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

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

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

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

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

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

  33. @JQ

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

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

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

  34. Re J.Q.’s statement.

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

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

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

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

    OMG! I sound like J-D!

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

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

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

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

  36. Very well said @ Auburn Parks

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

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

  37. @Ikonoclast

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

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

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

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

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

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

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

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

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

    No, that’s done by the Treasury.

  40. @Jordan

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

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

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

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

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

  41. @John O’Connell

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

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

  42. @Ikonoclast

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

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

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

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

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

  44. @Alex K.

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

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

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

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

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

  45. @Ikonoclast

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

    How can you destroy a car you never had?

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

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

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

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

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

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

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