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. @David

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

    That is the key. That is the mechanism how monetary policy can bite. And banks also follow that rate for private loans too. And inflation follows movement of private borrowing rate.
    The cost of borrowing from Central Banks is what determines state and private borrowing and with it inflation follows.

  2. @Senexx

    “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.

  3. 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.

    Since MMT also accepts this, what exactly is the difference between MMT and your views? Is it that you believe that there is an equation that must be satisfied at some time in the future?

  4. John Quiggin :
    Taxes are the primary instrument by which resources are transferred from private to public expenditure

    You’re in Australia, aren’t you, John? Perhaps they do it that way in Australia, although I doubt it.

    It is absolutely not the case in the US. The entire meaning of ‘transferring resources’–be they natural or human–from the private to public sector means the government is buying them. Whether that is hiring people to work for the government (human resources) or it is provisioning itself by purchasing natural resources through the aegis of companies that can generate value-added products for the government (planes, roads, communication systems, etc), whichever it is, the US federal government spends on these items solely by Congressional appropriation.

    There is absolutely no congressional procedure in the USA that checks the amount of money in the treasury kitty before appropriations are made. Why? Because there is no need. We have a 100% fiat currency. The only binding law still on the books is the “debt limit” from 1917 created to place a belt and a set of suspenders on the national gold supply. It’s an artifact of a discontinued system that congress didn’t get rid of after 1933 because managing the Depression and WWII intervened.

    In the US, the government spends first, then issues treasury securities in the same amount. This not only rebalances the money supply that the spending has created, but supports the interest rate. This is feloniously called “borrowing,” only because lazy government economists use accounting terms to describe the transactions. This government spending adds varying degrees of aggregate demand into the economy (needed when the economy is in the toilet), government taxing reduces this demand (used to balance the economy), and government ‘borrowing’ supports interest rates.

  5. @John Quiggin

    Taxpayer dollars did NOT pay for the Hoover Dam and the vast pubilic works during the Great Depression. Taxpayer dollars did NOT pay for the national interstate road system during the Eisenhower administration. Taxpayer dollars did NOT pay for the space program during the Kennedy adminstration.

    All of those were initiated by Congressional appropriation, which authorized the spending, and paid for by the government creating money to pay for people and natural resources. This is no different than what Russia can do today, if it chooses.

  6. @MRW

    I am sorry but I think MMT has a problem. This is not to say that MMT is useless or uninteresting. However, to illustrate this problem I have to get rather philosophical. This will get so long I will have to use Parts. Here is Part 1. BTW I assert copyright on this text if for no other reason than I just might start formal study again one day and I might need these ideas for a Thesis. I hope my document tabs don’t go haywire below.

    PART 1 – What Ails MMT?

    In summary, what ails MMT is that it is a description of a Modern Monetary System seemingly trying to be an entire theory of economics.

    We must begin with definitions.

    Definition 1 – A Formal System is any well-defined system of abstract thought based on the model of mathematics or language.

    Examples: (a) The Federal constitutional-legal system of the USA is a formal system.
    (b) The current monetary system of the USA is a formal system.

    We can see that (a) precedes and to a very considerable extent creates, amends and conditions (b). We can note that a real society of real people precedes, creates, amends and conditions (a).

    Formal systems have rules. Rules are alterable at the level of personal agency or at the level of social agency. However, within a given system, rules must remain strictly consistent if it is a maths based model or at least functionally or broadly consistent if it is a language based model. Rule inconsistency over a system-specific tolerance level will break the system.

    It is here we must re-term legal “laws” as legal “rules” in order to reserve the term “laws” for a more precise and limited purpose. So the legal “laws” in the US constitution and/or Federal legislation that create the US dollar as legal tender and define its characteristics (e.g. fiat money) are to be termed “rules” in this discussion. They are rules because they can be and indeed are from time to time changed by humans.

    Definition 2 – A Real System is any system governed by the Laws discoverable by the hard sciences particularly physics, chemistry, biology and ecology.

    Every real system will obey the highest or most general Laws if science has derived those Laws accurately. The laws of thermodynamics are amongst the highest and most general Laws derived. Physical processes, chemical processes, biological processes and ecological processes obey these Laws. In fact, every real system obeys these Laws. Therefore, the real economy as a real system obeys these Laws.

    However, the total economy is a hybrid system. It consists of a Formal System combined with a Real System. To be more accurate it consists of a large set of Formal Systems combined with a large set of Real Systems. This starts to give an idea of the complexity of the beast that is the economic system.

    MMT places particular emphasis on the Formal System that is the Monetary System. After all, its name gives it away, Modern Monetary Theory. It begins its analysis of economics at that point. However, even from our discussion above which is barely more than definitions and a few examples, we can see that MMT has plunged in medias res (“in the midst of things”). It has started somewhere after the middle of the story and in a small chapter of rather technical contemporaneous exposition.

    Real people, real conditions and real history condition the development of a real economic system. All of this tends to condition the development of a ruling-legal system or constitutional-legal system. The boundaries are not neat of course and various feeds and feedbacks occur. The constitutional-legal system conditions the monetary system which conditions the finance system along with other conditioning factors. The finance system conditions and continually re-conditions the economy. Feedback loops from the real economy go back to the financial economy.

    Let us develop an example of the philosophical problem with the MMT approach. The description of a specific formal monetary system at a particular time and in a particular jurisdictional place may well be right but the subsequently developed theory or even dogma which seeks to advance Universal Set Law (ULS) from one specific Formal System rule set is fallacious. Here I have introduced a new term “Universal Set Law” (USL). Universal Set Law is certainly not Universal Law such as the Laws of Thermodynamics. However, Universal Set Laws are special and have a central bearing on the problems of relating and integrating Formal System Theory with Real System Theory. The exposition below should explain these ideas. The meaning of Universal Set Law will also be made clear.

    MMT says fiat money (as accounted quantities) must be created (printed or accounted) before it is destroyed (taxed). Now these quantities of fiat currency CAN be created before they are destroyed but they do not HAVE to be. These quantities may ALWAYS be created before being destroyed in a given monetary system (say the contemporary US monetary system) but they do not HAVE to be so processed in ALL possible monetary systems. A system is conceivable where this MMT “Economic Law” does not hold. Thus it is not a Universal Set Law, it is a system-specific rule of one or several but not all members of the set. It does not apply to the full possible set of Monetary Systems.

    For not only is fiat currency invented (notional or ideational) but laws establishing fiat currency are also invented and the administrative and accounting flows and practices are also invented. As formal systems they must have internal consistency but the mechanics of their accounting flows can be set up in various ways according to different rules.

    I believe the approach of placing emphasis on notional category characteristics compared to real category characteristics (or the ideational versus the material) will yield progress in resolving seeming paradoxes surrounding MMT. MMT bills itself as a descriptive discipline in the first instance. Their first goal is to describe exactly what happens in a formal fiat monetary system. To describe a formal fiat monetary system accurately in all detail you must describe a specific formal fiat monetary system at a specific time as details can differ in different jurisdictions and at different points in history.

    MMT next seems to derive general “Laws” from a specific formal fiat monetary system namely that of the USA or that of USA and Australia if they have converged in detail. This phenomenon of convergence or non-convergence of world jurisdictional monetary systems is important but a bit outside the range of what I am discussing in this exploratory paper. The point remains that it is invalid to derive Universal Set Laws for a set of formal systems from one instance, namely one system in the set. Rather, you would have to look across all systems in the set to sift the rules ideosyncratic to single members of the set out from the rules that apply to all members of the set. I use the terminology of “rules” versus “laws” to highlight their real qualitative difference. Rules can be changed. Laws cannot be changed.

    To reiterate, the above could cause terminological confusion when referring to legal laws. In my terminology legal laws are really rules but physics laws are really laws. Humans can change rules but they cannot change laws.

    How can “Universal Set Laws” apply to all members of a set of what I call formal systems (as opposed to a natural or physical system set)? It would seem to be a characteristic of formal systems that as they are rules based and all the rules can be changed (apparently) then they could have no “Universal Laws” as opposed to “Universal Set Laws”. Strictly speaking this is correct. Universal Laws must by definition apply to the entire Universe. Physics attempts to find Universal Laws. However, both natural systems which are material sub-sets of the universe and notional systems which are ideational sub-sets of the universe can have Universal Set Laws: Laws universal to a set if not universal to the entire universe.

    The Universal Set Laws of a set are what defines that set as a set. This is where this theory gets interesting and useful I believe. It can turn out that Universal Set Laws are close analogs to real Universal Laws. I do not yet know if they are merely close analogs or precise analogs so I can claim no more than “close analogs”. I do not yet know if ALL Universal Set Laws for Formal System Sets are close analogs of Universal Laws or if only SOME are. I suspect ALL are and that this would be one of the defining characteristics of Universal Set Laws. However, I possess no formal mathematical set theory so I won’t even be able to work this out. Sad face.

    Provisionally, Universal Set Laws (USLs) for Formal System sets are as follows and must meet all these criteria;

    (1) True for all members of the set (by definition);
    (2) Determine the membership of the set (every member must conform to every USL).
    (3) are close analogs of real Universal Laws;

    I am not sure I have defined that list well. There may be some logical overlap. I am still working this out.

    Next, I must make an argument about why we create extensive notional systems at all. The simple reason is that they help us, as ideational and social beings as well as material beings, to deal with each other and with the real material world. The interface between ideation/formal system and the material world is where “the ideational rubber hits the material road” so to speak. The ideation/formal system and the material world must have something in common, some connection for this process to make contact and happen successfully. I argue that this common interfacing property is the analog-like matching or meshing of Universal Set Laws with Real Universal Laws.

    In a way, the above “discovery” might well see, trivial as it can be seen as simply the matching of models, plans and templates with the real world. It happens all the time when you make a plan or build something real from a plan. It is kind of trivial and obvious in this sense. But when one asks philosophically why it works, the answer clearly resides in shared characteristics like dimensionality for example. Newtonian dimensions, including time, exist in the real world at the macro or classical level and they exist in the set of all good plans which include a succession of point-in-time assembly templates when needed. (Think of an Ikea flatpack of furniture and its assembly instructions sheet.)

    In full Formal Systems there are internally consistent rules of course but there are also the Universal Set Laws which are analogs of Universal Laws. Language demonstrates this. I have studied none of the detail of Noam Chomsky’s language theories so I am unknowledgeable in that regard. But what was Chomsky’s search for a Universal Grammar but a search for the Universal Set Laws for the set of languages?

    I don’t know if or how Chomsky related his search for Universal Grammar (Universal Set Law) to real Universal Laws but if he did I think it would be a fruitful area. One would have to not only look comparatively at lexicons and grammars across the set of human languages but one would also have to look at how language allows us to manipulate reality. We would have to look at whether and how the Universal Set Laws of the set of languages were analogs of Universal (Physical) Laws.

    The laws of physics operate in time. They take one state to the next. This is true of at least classical physics and humans do experience the world in the classical physical sense. So we would expect language to reflect this manner of operation. Language would have analogs for time and for processes from one state to another. One would expect this to be a part of Universal Grammar and to be part of the arena where Universal Grammar as Universal Set Law has analogs to Universal (Physics) Law. Is time a Law? That might be a vexed question but the Law of Entropy or the Second Law of Thermodynamics strongly implies the “arrow of time”. Time is universally one way. Reversible processes do exist but the diagnostic is that irreversible processes also exist (especially entropy at the universal level) and point all the universe’s macro-system processes one way.

    The above indicates why at least many (or perhaps all?) languages have tense. Tense is where Universal Set Law shows congruence or analog characteristics to Universal Law. Language can express materially possible and materially impossible things but only the possible can be enacted. Language can only influence or induce a possible real world action if the language expression and the real world share or rather match an analog universal set law to a universal law.

    If the language example is unclear (because language as a whole is complex, abstruse, metaphorical and so on) it might be better to use Mathematical Array Games as an example. There is a set of games we may call Mathematical Array Games. We are all familiar with the most common examples. Noughts and Crosses is a Mathematical Array Game. So are tic-tac-toe, draughts, chess, go and even computer RTS (Real Time Strategy) games. They can be termed Mathematical Array Games because, in programming computers to play them, we set up arrays with numeric values in each array element. Then these values are processed in iterated algorithmic chains by straightforward mathematical methods applied in modules such as Legal Move Generators, Game Specific Heuristics, Tree Search Algorithms and Position Evaluation Functions.

    The point is that these array games also model key realities of the real universe, its Universal Natural Laws or at least the scalar phenomena they share with the real world because they model it and reflect it back. Dimensions are scalar phenomena so the classical three space dimensions are modelled, become Universal Set Law and in fact define the genre or set of Mathematical Array Games. If a Mathematical Array Game does not model at least one dimension and the time dimension (so it can evolve sequential game states) then it simply cannot belong to the genre or set of Mathematical Array Games.

    Within this set of Mathematical Array Games a Universal Set Law (A Law universal to this set). is that an “entity” in the centre of the array can “see” more array elements in straight lines than an entity at the edge of the array provided that the array does not wrap mathematically. Perhaps I should have called it the set of Mathematical Non-Wrapping Array Games and then I wouldn’t have had to add the provision. A queen on a chessboard obeys this law. Think of its possible moves from the centre of the board and its possible moves from the corner of the board. This is an analog of real world dimensions where I can sweep more area with my arms in the centre of the room than I can in the corner of the room.

    To summarise, it is these analog-like realities that link viable, workable Formal Systems to Real Systems and allow influences, feedbacks and conditioning to proceed both ways.

  7. @Jordan

    One correction: you seem to be exaggeration the extent of dollar borrowing by Russian companies and households. Mostly it is exporters that have dollar debts, and a relatively small number of unwise mortgage holders who switched from ruble into dollar loans to save on the interest rate.

    Otherwise, I think I can understand your logic and as far as the interest rate is concerned, obviously the 17% ruble rate is unsustainable beyond a few weeks. As I’ve said, Russia is essentially a dictatorship operating through a vast bureaucracy and its worst fear is massive popular discontent and panic. The government thinks whatever works in the short run is acceptable but it looks like the high interest rate is going to be replaced with informal capital controls.

  8. @Ikonoclast

    It occurs to me that I have used non-standard terminology when discussing sets in my philosphical argument with MMT above.

    I have used the term Universal Set Law. It is not directly related to the term Universal Set. What I mean by Univeral Set Law is “Laws universal to a set”.

    For example, take monetary systems as a set. A law universal to this set is “Monetary systems must have a medium of exchange.”

    This has the character of a circular definition. This is the case as the laws of a set define the set.
    However change or progress can alter our definition of such a set and a “law”, which we thought to be a law that played a role in defining the set, devolves to being only a rule in some members of the set. An example of this is:

    “The medium of exchange must be a physical object passed at the final settling of accounts in the opposite direction to the movement of the desired good or service.”

    In the days of commodity money this appeared to be a law of all monetary systems. After the creation of fiat money and the advent of electronic processing this no longer appears to be the case.

    Thus the set of monetary systems has one less Law that applies to the whole set and defines it.

    Implicit in this concept of sets is that each set is a system, either a formal system or a real system.

    Footnote: There are many problems of definition in economics itself. For example on a site billing itself as Principles of Economics I found this definition:

    “An economic system is the set of rules that define how an economy’s resources are to be owned and how decisions about their use are to be made.”

    This definition is surely wrong. Let me correct it.

    “The set of rules that define how an economy’s resources are to be owned and how decisions about their use are to be made is the political-financial sphere of the economy. In other words it is the Formal System of the economy. The other sphere is the Real System of the economy usually called the Real Economy.”

  9. @MRW “Taxpayer dollars did NOT pay for (massive public projects)”

    This is very much the kind of claim I referred to in the OP. I’ll leave it to supporters of MMT to say whether this is a correct interpretation of MMT or (as i asserted) a misunderstanding. If the latter, I’d suggest that serious advocates of MMT need to do a lot more work to present their analysis in ways that don’t lead to this misunderstanding.

  10. @John Quiggin
    I would say a correct MMT interpretation is that government can not only spend what it receives in taxation but that it can spend what is saved in its currency too. So from a MMT perspective if Government issues currency into the economy by spending it must inevitably come back in taxation providing those taxes are finite. That is saying nothing about potential inflation which will certainly be unacceptably high if those taxes are too low.

    It can only be temporarily reprieved if it is saved. Either domestically or in the central banks of the big exporters. So if Government doesn’t spend the saved money, ie deficit spending, the economy will spiral downwards as we’ve seen happen in the Eurozone.

    So the spending on the Hoover Dam could be considered to be that type of deficit spending. The Moon space program would be less clear. Maybe there’s a bit of both. The best description of the 60’s USA economy , IMO, is military Keynesianism so the Space program could be considered to be that type of spending too. Just about.

    Keynesian stimuli seem to work relatively well if inflation is low and extra spending is utilising extra resources in the economy rather than creating extra inflation. Where I would disagree with MRW is that it would be at all applicable to an economy, like Russia’s, which has just about double digit levels of inflation and unemployment.

  11. what ails MMT is that it is a description of a Modern Monetary System seemingly trying to be an entire theory of economics.

    From my reading of Warren Mosler, L Randall Wray, and Frank Newman, I would say that MMT explains how a monetary system functions on a day-to-day, transaction-by-transaction basis, how it links the government, domestic nongovernment, and foreign sectors, and how these operations differ between nations that are currency issuers and nations that are currency users.

  12. MRW :

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

    You’re in Australia, aren’t you, John? Perhaps they do it that way in Australia, although I doubt it.
    It is absolutely not the case in the US. The entire meaning of ‘transferring resources’–be they natural or human–from the private to public sector means the government is buying them.

    I am going to make a different interpretation of what John Quiggin said. I think (and, fortunately, he can correct me :)) that he is referring to potential private expenditure to actual public expenditure. That is to say, the taxes that are collected do not pay for private expenditure that they could have paid for, but pay for actual public expenditure. I think that that is correct, but commonly misinterpreted.

    Let me illustrate with American Continental Dollars, which were not taxed away, because Congress did not have the power to tax. Congress used Continentals to buy goods and services to conduct the Revolution. That was actual public expenditure. Then, presumably, the recipients of those dollars used them to buy actual goods and services. That was actual private expenditure. And then the recipients of those dollars presumably did the same, at least for a while. Finally the Continental crashed. (IIRC, they were eventually redeemed at two cents on the dollar.)

    Now, who paid for the Revolution, at least for the expenditures of Congress? In one sense, Congress did. But that viewpoint is shallow. Ultimately, it was the people who held Continentals while their value dropped. That is not a tax; in fact, it is worse. In real terms the cost is what those people, like the people who traded in Continentals before them, could have bought but did not. In effect, those potential private resources were transferred to the war effort. The cost was borne by ordinary people, patriots who accepted gov’t money. Many were devastated, like Andrew Jackson’s mother. Her experience soured Jackson on paper money for life.

    Now, if Continentals had been taxed, then, instead of having a terrible day of reckoning which ruined many, taxpayers could have spent their potential resources to pay for the war gradually over time.

    In that case, Congress could have recycled Continentals instead of destroying them, just as the British Crown had recycled tally sticks. It is this recycling that leads to the common misconception that the gov’t has to go, hat in hand, to taxpayers to fund future expenditures, when, in real terms, taxes pay for past expenditures and the gov’t is the source of the money that the taxpayers have. (It was not always so, but that is the setup we have now, with fiat money.) This misconception leads people to ask how can we get the money instead of how can we get the real resources.

  13. @Nicholas

    I have explained above how a mere description of one Modern Monetary System at a point in place and time, say that of contemporary USA, cannot be an analysis of an entire economic system, even that of the contemporary USA.

    An economy contains the Real System sphere (the real economy) and the Formal System sphere (the legal-monetary-financial economy. The spheres interect, effect, reinforce and damp each other in a system of complex and ramifying feedbacks.

    MMT or at least its popular proponents seem to want to be reductionist and reduce modern economics to being mainly or solely about the modern monetary system and macroeconomics and the effects of these on the economy. Please don’t interpret this as me being a fan of microeconomics either. I think it too is horribly simplistic and reductionist.

    Reductionism is fine as a matter of investigation, to learn the parts. It’s a necessary phase. After all, what is Grey’s Anatomy but reductionism? But as some stage you have to try to put it all back together and work out how it (a human or an economy) really works as an organic whole.

    I see no sign of MMT yet entering this genuine holistic or synthesising phase. A case in point is these endless dogmatic claims that under a fiat currency “expenditure preceeds taxation”. Yes it does in the Formal System under current accounting rules. But this is just formal and notional. It is not real in the sense of belonging directly to the real economy.

    It has one reality I have discovered. I won’t bore you with my full thought experiment. It is not that “expenditure must preceed taxation” per se. Rather the real rule of a fiat currency as for any commodity currency and note currency is that the currency issuer must maintain a positive (not zero or negative) money supply. Think about it. A physical currency, commodity money or notes of course mandates a positive or zero money supply. But a zero money supply throws people back to barter.

    A fully notional or fiat currency would theoretically allow (precisely because the notional is not real) a postive, zero or negative money supply. This is what I discovered in my thought experiment when I proved at year zero of fiat money supply creation I could engineer a situation where taxation preceeded expenditure. It took a few silly (unwise) steps but it really could be done. Once counter instance, no matter how silly, refutes the proposition.

    However, as I continued my thought experiment I rapidly ran up against the problem of zero or negative money supply thus throwing my mythical island nation back to barter. I could not chronically put taxation before expenditure for a fiat currency. It turns out even a notional fiat currency must run a positive money supply. Thus, positive money supply is the notional system rule or axiom that workably link all monetary systems (all systems of commodity money or symbolic exchange) to the real system.

    We see the above is the case because something must always be exhanged for the good or service at the time of paying or settling accounts. That something might be physically real like commodity money a legal tender bank note (and being real it has to exist in a positive quantity) or it might be only notionally real being fiat currency credited via changing numbers electronically in an account. However, the notional quantity must still be positive so “something” is exchanged.

    MMT does itself a disservice on at least a couple of levels. First, some assertions about notional of Formal System truth run counter to material or Real System truth meaning the real flow of goods and services. They also run counter to most monetary history and the taxpayers experience of what taxation means for him/her. As such the insistence on a very artifical and notional “truth” does little to help people understand goverment deficit budgeting and why the government budget is indeed different from a household budget.

    MMT also claims to just examine the modern monetary system. Then it goes ahead to do macroeconomics on that basis and that is more than fair enough. I think it is a good way to look a macroeconomics and adjust things. But then macroeconomic advocates go ahead to make all sorts of economic prescriptions (the vast majority of which I agree with by the way) but MMT does not develop a theory of how or why these prescriptions follow for MMT. That the Labour Guarantee proposal based on buffer stock concepts might be an important exception to this I admit as very possible but don’t know the validity of that admission as I do not have enough technical knowledge. Otherwise though, the MMT prescriptions of at least Bill Mitchell come from political economy (meaning both national economy and that the political conditions the economic) and very arguably from Marxist, Marxian, Veblenian or Insitutional political economy or any mix thereof. It cannot be otherwise because pure MMT contains no class theory and no theory about capital and its forms instead of talk about mere money unless it takes that theory of class and capital from already developed political economy.

    in summary, advocates specifically say it is a narrow description of the modern monetary system then almost instantly proceed to the broadest categorical claims about all of economics and all sorts of political economy prescriptions. They can’t have it both ways.

    Ispso facto, QED, etc. etc. 🙂

  14. With an unbacked fiat currency that floats on the fx, the Gov’t doesn’t need revenue in order to spend. “Borrowing” or taxing for revenue would be silly when you can just roll up to the keyboard and credit someone’s account. Treasuries allow the Fed to set interest rates, but this could be done without the sale of bonds if balances in reserve accounts were fully insured and paid a bit of interest (think IOER). The big, scary “National Debt” would go away and politicians might have to find something useful to talk about.

    So, that’s really it. The Gov’t credits private accounts with X amount of it’s fiat tax credits (aka US dollars) and in a given year it either taxes them all back or it doesn’t. What it doesn’t tax back ends up as a surplus in the accounts of dollar savers. If the velocity of that money gets so high that consumption outstrips production, then you’ll get inflation and will need some combination of cutting spending/increasing taxes in order to maintain price stability.

    Core MMT basically isn’t a lot more complex than this. As you get more granular, political preferences come into play and that’s something that doesn’t belong on the spreadsheet. It’s a fully fiat currency. It’s really not all that complex. You want to control the interest rate? You let the quantity float. You want to control the quantity? You go to Europe.

  15. @John Hobgood

    MMT is useful and interesting but it is not political economy: meaning it is not full national economy as it does not include the real economy and it is not political economy as it does not include class analysis and an analysis of capital which is not merely money. After all, capital is at least comprised of fixed capital (real productive factories and plant), money capital mostly in accounts and fictitious capital meaning stocks and bonds etc. where there is an ownership claim against future projected income from production which has not occured yet (and might just never occur).

    I have a few serious questions.

    Do MMT proponents think they know a lot more about the modern monetary system than the people who designed and built it and the people who now exploit and game it?

    Do MMT proponents think they know a lot more about the modern monetary system than sophisticated and empirically based economists in say Marxian economics or various modern branches of post-Keynesian but still broadly Keynesian economics?

    I seriously doubt they know more or have discovered much new.

    I could have and did predict the EU would be a disaster without the need for MMT. MMT helps make the monetary mechanics clearer to me though. It was obvious to me even before being exposed to MMT that;

    (a) the EU was not an optimal currency area.
    (b) it needed a proper federation to have one currency.
    (c) specifically it needed processes for horizontal wealth transfers between states or regions typical of federations like the USA or Australia.
    (d) that a technocratic and neoliberal approach would leave behind the poor.
    (e) that only a truly democratic approach will ensure welfare and equity for all.
    (f) that reducing the scope and power of democratic government reduces the scope and power of democracy itself.

    Heck, I didn’t need MMT to tell that. MMT or at least some of its amateur proslytisers make out that MMT is the big secret that explains everything. It’s nothing of the sort. But it a useful additional tool or weapon in the armory of the left broadly speaking.

  16. An unnecessary dig at MMT. You say someone will pop up. As you know that your comments on MMT are a way of getting those comments. I am no sort of theorist but we can read what is simply stated by one its main theorists: “MMT is not a religion. It is not a panacea. It is not a policy code. It is not a solution.

    MMT is a way of thinking about modern monetary systems. …MMT provides an organising framework for understanding the possibilities available to a currency-issuing government and the limitations that a currency-using government (such as a Member State of the Eurozone) faces. It allows us to understand in a deeply-grained way, the relationships between the treasury and the central bank and the relationship between the government sector in aggregate and the non-government sector.”

    I think from my minimal understanding that Bill Mitchell does not see your view on MMT as a way of thinking about particular problems in Russia at the moment

  17. @Ikonoclast
    “or at least some of its amateur proslytisers make out that MMT is the big secret that explains everything.”

    Who’s said that? Any examples? I would agree that some MMT proponents do get it wrong but no theory can be proved wrong on the basis that it might be somewhat misunderstood.

    A contribution MMT would have made on the Euro question, which is omitted from your list, would have been an analysis in terms of sectoral balances. The peripheral EZ countries are being asked to do the impossible. Again, that is neither new nor the sole preserve of MMT. MMT like many theories simply pulls ideas from different sources and integrates them into one coherent theory.

    I’d suggest the 2008 crash wouldn’t have come as quite the shock it did if the mainstream economic profession paid more attention to MMT based ideas. The next one, which I’d estimate was due to arrive in 2016, might be less of a surprise too!

  18. @Ikonoclast

    “MMT is useful and interesting but it is not political economy…”

    Yes. By design.

    MMT mainly isn’t about economics, though you will see MMT proponents talking about economic issues and politics. That’s their take on things and their opinions may be soundly based in MMT or they may just be going off about their political beliefs. MMT isn’t pro left or right, but if a politician
    starts mewling about the US running out of a fiat currency to support rhetoric about cutting this or that program, an electorate that understands how a fully fiat currency works might well find his argument wanting. So while MMT may have something to say about the validity of this or that economic policy, it has no political design to offer.

    Kudos for you seeing the path of the Euro disaster. How do you think the vote would have gone if the Europeans had known what you do?

  19. @Neale

    It’s not unnecessary. In fact, it is very necessary if one cares about economics and political economy at all. Clearly there is a substantial gap between Chartalist/Circuit Theory/MMT exponents and economists of many other schools, many orthodox but some heterodox including Marxians. MMT is kind of on the outer with everyone. Neoliberals spurn it of course because they like to promote their ridiculous myths like “a government budget is just like a household budget”, I wouldn’t worry about neoliberals intellectually or morally. They are just plain wrong intellectually and morally. Pretty much every other school agrees on that. But neoliberals have might and this trumps right of course. I won’t go into the sources and possible persistence of their might. It would take us off topic.

    Why is MMT on the outer with the rest? Is it a communication problem? Partly, it is I think. Is it an arrogance, turf, intellectual and emotional investment thing? Partly, I think and that’s on both sides. Are there some fundamental irreconcilable differences where some non-MMT school is “more right” or where MMT is “more right”? That’s a key question.

    Economists as technocrats want to “own” economics totally in a sense. (This is not fair to some democratising economists like Bill Mitchell and John Quiggin). Joe Public is supposed to just cop it sweet from these technocrats and not argue back. Well it’s time to argue back. If the issue isn’t settled, or re-settled as nothing is settled for ever, at the level of argument and concessions (reforms in the proper sense of the word) then it will be violence, both revolution and reaction. It’s up to the broad left to get its intellectual house and its program in order. Currently it’s not in order. They are still squabbling or politely skirting around and ignoring each. It is time to synthesise a full understanding and not stay in separate stovepipes.

    In 95% of cases the quickest way for the interested layperson to get dismissed as a crank by just about all other economists is to mention anything to do with MMT. I am trying to nut out some underlying reasons for this. Why don’t the two sides “grok” each others’ systems of thought? I am looking at why they seemingly misunderstand each other by trying look at the characteristics of notional systems and real systems (for economics these are the legal-monetary-financial systems which mesh with the real economy). Naturally information, impetus and effects pass both ways.

    The problems of the relative importance and interactions of the Formal and the Real seem to me central to this whole imbroglio and impasse.Being an amateur in all the necessary fields (i.e. not a Ph.D. in anything) I will clearly make no headway. Yeah, get the world’s tiniest violin and play it for me. 😉

    I just wonder when the necessary syncretist, synthesing or polymath thinker will come along to sort this mess. Maybe it’s not possible any more. Everyone is too specialised.

  20. @Ikonoclast

    “I just wonder when the necessary syncretist, synthesing or polymath thinker will come along to sort this mess. Maybe it’s not possible any more. Everyone is too specialised.”

    You’re looking for the silver bullet?

  21. John Quiggin :
    @MRW “Taxpayer dollars did NOT pay for (massive public projects)”
    This is very much the kind of claim I referred to in the OP. I’ll leave it to supporters of MMT to say whether this is a correct interpretation of MMT or (as i asserted) a misunderstanding. If the latter, I’d suggest that serious advocates of MMT need to do a lot more work to present their analysis in ways that don’t lead to this misunderstanding.

    Dammit. I wrote a reply and this iPad acted up and I lost it. In case you don’t know, John, I poured coffee on my laptop keyboard at 5:30 PM on Saturday, which I bitched about here a page or two back. It’s been a series of technical screw-ups beyond that since.

    I asked if you’d read Frank Newman’s “Freedom From National Debt,” which should interest you given your considerable education and accomplishment. Someone on this page–and I am not going to risk locating it now–said I was misunderstanding your words. Is that true?

  22. @John Quiggin

    “Taxpayer dollars did NOT pay for (massive public projects)”
    I’ll leave it to supporters of MMT to say whether this is a correct interpretation of MMT or (as i asserted) a misunderstanding.

    Massive public projects were initially initiated (ex-ante) by fiat (public decision to do it) and money came from creating new money (government bonds as means of exchange/ asset) as base (banking reserve requierment) for creating credits within a Development Bank.
    This economic activity created additional supply of money that was taxed ex-post in order to cover the expenditure.
    I am surprised that you did not consider increase in money supply (that would not be there if no projects were created) that such economic activity created and then which was taxed to pay for some of the costs.

    Taxes pay for projects only partially, while in your writing you express yourself in such a way to comprehend it as it did pay completely/absolutely.
    a) There is also a question of inflation that lessens the burden of credit repayment, and such additional activity sometimes pushes inflation up which eases up the burden of debt even more.
    b) there is the question of how Developement Banks close:
    i)did it close before debts cleared by just erasing all debts or
    ii) by selling outstanding debts to public / privatization of new resources.
    If ii) this is bought by savings which is potential use/ command of resources but it was never used due to lack of resources/ real assets/ capital. And privatization is never done using only savings, sometimes only with 20% -50% savings and rest of it by using credit which is new money. This new credits which became available only thanks to new projects are also an additional supply of money to be taxed.

    Tax revenue increase with fiat created new money and new projects. Hence money multiplyer.

    If you still wonder why economists talk that there is no effective money multiplyer today is because deficits only preserve allready existing real resources to be used and sold, but new money is used only to increase paper assets, no real new assets that can come only from Congressional planing and ordering new projects. Payment for it will come ex-post from additional money that such projects create.

  23. @Ikonoclast @16

    MMT describes how the federal accounting of the monetary system works in nuts and bolts. It explains the quadruple-entry system used by the USG, and their interactions. But it uses double-entry terms to describe it.

    BTW, the proponents of MMT WERE WRITING in the 1990s that the Euro as designed was not going to work: Mosler, Wray, Kelton ,Parguez, Vickery, Godfrey, to name a few.

  24. @MRW

    Correction: Godley

    I still can’t imagine how they managed to sell the damn thing. It’s caused more damage to Europe than the third Reich. It’s architects deserve a special place in the Justizpalast.

  25. The Euro was designed in 1942 by the great economist Francois Perroux (never tranlasted into English) for the presumed WWII win by Hitler. Dr. Alain Parguez described it during a talk in Rimini Italy in 20112, and explaind how he, Parguez, was involved in phase two of the operation that Mitterand was putting in place.

    The French historian describes it here: Bernard Bruneteau. “L’Europe nouvelle” de Hitler: Une illusion des intellectuals de la France de Vichy (Monaco: Editions du Rocher, 2003). ISBN 2-268-04504-8. (Also not translated into English.)

  26. John Hobgood at #27,

    Absolutely correct. I wrote Godley. iPad Autocorrect changed it, even after I saw that it was Godley. Did it the other day recasting Crimea “a Crime.”


  27. Arrgh!

    Is the SSD ok?

    You may be able to do a universal restore to a different laptop/desktop. Strips the hardware info from the restore and lets the new PC fill it in.

  28. John Hobgood :
    …recasting Crimea “a Crime.”
    At least it got that one right.

    On that we disagree. 😉 Although the irony of autocorrect was not lost on me.

    Crimea is as Russian as Key West is American. My great-aunts used to summer there as nannies to the court of Tsar Nicholas the I and II during the 1800s. Crimea has been Russian for centuries…it was the summer ‘White House’ for Russian rulers even during the communist era. The only reason why Kruschchev ‘gave it to Ukraine’ was because his mistress was Ukranian and she sked him to do it. At the time it was like saying, OK, Kansas City is completely in Missouri.

    When I was there I didn’t hear Ukrainian. It’s 100% understandable that the Crimeans called out to Putin to help them. They remember what Georgia did during he Beijing Olympics.

  29. Make that great-great-great aunts. I’m not that old. 😉 They left diaries. The participated in Bloody Sunday in, what? 1905? 1906?

  30. @MRW

    I stand corrected, though I can see why the Ukrainians wouldn’t want to lose it.

    What I don’t understand is why the Ukrainians would consider adopting the Euro. I can’t see it turning out well for them.

  31. “Ukraine’s parliament has voted to drop the country’s non-aligned status and work towards Nato membership.

    Russian Foreign Minister Sergei Lavrov called the move “counterproductive” and said it would boost tensions.” – BBC.

    The West is driving Russia and China together. In the long run, if it cements a full alliance, the Shanghai Cooperation Organisation will outrank the West considerably in economic and military power.

    It’s long been part of one strand of geostrategic thinking that “control of the Eurasian landmass is the key to global domination and control of Central Asia is the key to control of the Eurasian landmass….Russia and China have been paying attention to… (this) theory, since they formed the Shanghai Cooperation Organisation in 2001, ostensibly to curb extremism in the region and enhance border security, but most probably with the real objective of counterbalancing the activities of the United States and NATO in Central Asia”.

    This formulation comes from Iranian writer, Hamid Golpira, but I have removed his reference to it being Zbigniew Brzezinski’s theory. It is not Brzezinski’s theory. The theory was formulated much earlier (early 20th C) by an Englishman, I think, but I can’t re-find my reference at the moment.

    The EU is on the path down because of the common currency arrangements but also because Europe is essentially out of key resources. It’s an exhausted continent. The EU and USA will simply pillage Ukraine anyway.

    On the other hand, Russia still has enormous natural resources untapped. In the long run, Russia is better placed IF they can get themselves properly organised to utilise these resources.

  32. I don’t think the Euro has been as bad for Europe as the Third Reich, and such a comparison is insulting and base.

    What does it say about Economics as a discipline that these schisms exist between major theories, and the “mainstream” of economics can’t adapt its theories to incorporate a new idea? If we think of “fiat currency” as equivalent to the discovery of quantum mechanics (with gold standard as classical theory) then basically what’s happened in economics over the past 50-100 years has been the equivalent of Newtonian and relativistic physics refusing to work with quantum mechanics, and forcing it to be an entirely different stream of thought. Or two streams of biological theory – evolutionary and non-evolutionary. To people from the physical sciences this idea is disturbing on its face, but this kind of exclusion and refusal to cooperate has been a part of the culture of economics for the past 50 years.

    What does that tell us about this discipline?

  33. Well, yes. I was being a bit prejudiced and cavalier about that, but they aren’t through yet.

    “What does that tell us about this discipline?”

    Politics and power are at play, as always. The wealthy families that influence the politicians and the media have their own design. Guess which economist is going to get the sugar.

    So, over here, we get economists telling us about how we need to cut back Gov’t spending (during deflation, mind you) and going on about how Social Security is going to run dry and how we’re burdening future generations with this huge “National Debt”.

    Meanwhile, over in the EU they seem to think everyone can be the net exporter simultaneously and Monti pushes QE, which doesn’t work in the first place (ask Japan).

  34. Re the “MMT controversies”, my argument is simple enough.

    1. A comprehensive economic theory must incorporate the reality that an economy is a set of Formal Systems interacting with a set of Real Systems.

    2. A Formal System is any well-defined system of abstract thought based on the model of mathematics or language.

    3. A Real System is any system governed by the Laws discoverable by the hard sciences particularly physics, chemistry, biology and ecology.

    4. Some important Formal Systems for political economy (as the economics of nations) are the legal system, the monetary system and the financial system.

    5. Some important Real Systems for political economy (as the economics of nations) are the so-called Real Economy itself and the natural environment.

    6. If MMT claims it is just a description of the Modern Monetary System (as it currently exists) then it cannot be a comprehensive economic theory. It is only a description of one Formal system of the many Formal Systems and Real Systems which comprise the economy.

    7. But MMT seems to keep extending its claims without formally admitting its extensions so far as I can see.

    9. First, it extends claims to macroeconomics and proposes new macroeconomic policies.

    10. Then it extends its claims through the finance system to the Real Economy stating that these new macroeconomic policies will have both certain financial economy effects and certain real economy effects.

    11. I actually agree with most of the claims and predictions MMT makes when it extends into these areas but do so because of my own different theories and biases.

    12. MMT itself (or its major proponents) needs to explicitly detail and avow its full political economy theory if it wishes to explicitly operate in the full field of economics.

    I offer all this because MMT is hard to pin down. If you bring full political economy theory into the discussion its lay proponents (at least) start saying it is “just descriptive” of the modern monetary system. But in practice they make many theoretical statements, prescriptive statements and predictions extending right into the political economy sphere and the real economy.

    Then when you challenge anything, they say MMT is “just descriptive” of the Formal System (modern monetary system) and thus all its statements are axioms. This is true as far as it goes. But then they want to imply that because their formal statements are axiomatically true then everything they go on to say about its effects on the real economy are also axiomatically true! It is clear that this does not follow.

    This is my analysis of where the peculiar dogmatic flavour of at least popular MMT actually arises and manifests. It arises where analysis of a Formal System passes into defacto analysis of Real Systems without express admission of the transition and the need for introducing explanatory theory.

  35. @Ikonoclast
    “I have explained above how a mere description of one Modern Monetary System at a point in place and time, say that of contemporary USA, cannot be an analysis of an entire economic system, even that of the contemporary USA.”

    Whoever said that it does?

  36. @Min

    It’s no use taking one point out of context. You need to read my whole statement. If I answer a question about an out of context statement, I just end up repeating myself.

  37. @Ikonoclast

    I don’t think it’s necessary to go through all that to state that, for instance, the US can’t “run out” of it’s own fully fiat currency, or that the “National Debt” is actually a Global $ Surplus and not “a burden on future generations”.

    There’s a lot that can be understood about how our currency works without involving the morass of politics, but the political process could well be improved by an electorate that understands the nature of their national currency. Time-wasting nonsense like the notion that we should worry about “Paying Back the National Debt” or that we should consider a “Balanced Budget Amendment” would cease to give leverage in the political arena (which includes the media). No need to understand how to build a car from A to Z to realize one that only goes in circles won’t do you much good.

    I would think that having a good grounding in MMT (or similar) would also allow you to ferret out someone who side-jacks it to support their point of view that, for instance, we should “eat the rich” because that will make the economy turn out right.

    I don’t think you can stop people from extending the tenets of MMT, some don’t even realize when they’ve done so. I don’t know how many arguments I’ve seem from “MMT’ers” that go on about hiking tax on the one or the other group to “pay for Social Security” (sorry pal, you need to go back and read it again, because you don’t get it.). So, that may be what you’re mistaking for “dogmatic flavor”. It may just be some guy that got into the conversation and is tossing around some ideas, who might just be looking for feedback or to hone their knowledge or get rid of some deadweight that got pounded into his head in College.

  38. @John Hobgood

    In all fairness to MMT, I should probably say it comprises an analysis of modern monetary systems and an analysis of macroeconomics and its possibilities in a modern monetary system. Its practitioners like Mitchell and Wray do bring a wealth of empirical data to support their macroeconomic assertions.

    I need to and intend to read, “Modern Money Theory – A Primer on Macroeconomics for Sovereign Monetary Systems” By L. Randall Wray, published September 4, 2012, at the earliest opportunity. I fully expect to have it and have it read by the end of Jan. 2015.

    Bill Mitchell’s textbook on MMT is not due out until 2015 IIRC.

    What I get frustrated about is that non-neoliberal economists and MMT economists can’t seem to agree on much except the broadest statements. I think it is not too much to expect everyone to have figured what modern monetary systems are and what they mean for macroeconomcis by now. It’s a long time since 1971 when US money went the Full Monty of full fiat. It’s been 43 years in fact.

    Of course, I discount and ignore neoliberals, monetarists, Austrians (the economists not the people) and the Hayekians. There is little to nothing to learn from them except the apologia for inequality and oppression.

  39. Ikonoklast, it’s because of the recalcitrance of these economics commentators that we still have the unedifying sight of finance ministers in sovereign monetary systems saying things like “we can’t just produce money out of thin air” and “money doesn’t grow on trees, you know” – even though we can, and to the extent that the tree metaphor means the stuff is infinitely abundant, it does. (Even though funnily it isn’t made of paper anymore!)

    And it is those petty sentiments which enable our supposedly responsible leaders and apparently sober economic commentators to obssess about public debt and the viability of pension schemes… at the expense of the poor.

  40. @PeterM

    Peter, I think that is a good way of phrasing it. Consequently, if the Monetary Sovereign would like to say, provide Food stamps for all…what is the constraint on its ability to do so.

    1. Will we have enough food produced if we did so?

    2. When we consider that such a program would likely lead to “deficit spending”, will private citizens who hold dollars be willing to save their dollars in the amount of U.S. Treasuries supplied to the private economy due to deficit spending?

    With regard to the second point it is almost always a yes because treasuries are preferable to bank deposits at private banks.

    Problems arise when people don’t want to hold your currency in the first place, let alone swap it for currency-denominated bonds at your central bank, as is the case in Russia. But, when does this sort of thing happen? When you have a corrupt state that is characterized by kleptocracy and betting the farm on a single commodity and you invade sovereign territories.

  41. Hi,

    the problem is that Russia has debts in foreign currency, and apparently the central bank’s reserves of foreign currency are less than what Russian private sector firms have to repay in foreign currency. Hence firms borrow Rubel from the central bank, exchange rubel into dollars, then repay their loan. The exchange rate tanks, the central bank intervenes. How does this invalidate MMT?


  42. @Cory Hoffman

    “When you have a corrupt state that is characterized by kleptocracy and betting the farm on a single commodity and you invade sovereign territories.”

    All this applies to the USA. Its state is corrupt, it is characterized by kleptocracy, it is betting the farm on a single “commodity” (military power) and it invades sovereign territories. How is the USA different from Russia?

  43. According to the Wikipedia article on Modern Monetary Theory: ‘According to modern monetary theory, “governments with the power to issue their own currency are always solvent, and can afford to buy anything for sale in their domestic unit of account even though they may face inflationary and political constraints”.’

    It seems to me that this can be true of governments issuing specie currency as well as governments issuing fiat currency. Governments issuing specie currency can expand the money supply by debasing the coinage, and often did. Governments debasing coinage faced inflationary and political constraints, but that’s just what MMT says (if Wikipedia is correct).

  44. @J-D

    That seems correct to me. The evolution of money demonstrates a development from the concrete to the abstract or the real to the nominal. Barter (or the gift economy) is an exchange of a real commodity for another real commodity in the main. The next step seems to be a consumable commodity money (say grain) functioning as a proto-currency. After this comes commodity money only “consumable” as ornament, decoration or as a signifier of status and wealth. Gold is the example par excellence. Then follows in order perhaps gold specie, debased gold specie and then token money and promissory notes linked to a gold standard. This link becomes ever more tenuous. After that money is completely nominalised or formalised as a pure fiat currency and its tokens progressively “dematerialised” as electronic transactions and accounting. That’s a potted history of money.

    The important thing to note is the continuous historical process of the dematerialisation and formalisation of money. Another form of the formalisation of money is exhibited by the idea of “fictitious capital” to use Marx’s term. Capital as ownership of stocks, bonds etc, asserts owneship over a future income stream where the real production is at yet unrealised (it is in the future) and there is a risk the production might never be realised.

    All this indicates that a theory of money needs, among other things, to abstract what is constant and universal about money from what is historically conditioned. I think the term “exchange” gives us the hint. Something must pass both ways or rather two somethings must pass in diametric directions. The history of exchange now shows us that such exchange can be;

    (a) Real for Real
    (b) Nominal for Real
    (c) Nominal for Nominal

    At least one lesson that can be drawn from this is exactly the lesson J-D draws in expressing and highlighting the importance of this whole idea. The ability of government to remain solvent longer or indefinitely longer than might be predicted by naive monetary ideas did not suddenly and completely arise from nothing at the point that a full fiat currency was formally established. The full fiat currency does not alter the fact that a government over-stretching this capacity will face problems ranging from real economy problems, to currency debasement to loss of currency credibility and various domestic and international economic and political problems.

    It is true (I believe) that neoclassical economics under-stretches the currency issuing capacity in its operation of the macroeconomics system and tolerates (indeed prefers) capacity under-utilisation of both labour and fixed capital (factories, plant, machinery). I hypothesise that neoclassical economics does this as it is capitalist-oligarch captured and that capitalist-oligarchs can be relatively richer and indeed absolutely richer under this system despite the entire system being poorer in aggregate. This is made possible by the huge inequalities which become glaringly apparent in such a system.

  45. Rereading the line I quoted from Wikipedia, it seems to me to contain a serious internal tension of ideas. If governments face inflationary and political constraints, doesn’t that mean they can’t always afford to buy anything for sale and that their solvency is not absolute? Constraints limit what you can do; that’s what the word means.

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