MMT and the scope for seigniorage

The central idea of Modern Monetary Theory (MMT), as I understand it, is that, rather than worrying about budget balances, governments and monetary authority should set taxation levels, for a given level of public expenditure, so that the amount of money issued is consistent with low and stable inflation. In this context, the value of the net increase in money issue is referred to as seigniorage. To the extent that seigniorage is consistent with stable inflation, it is achieved by mobilising previously unemployed resources.

A crucial question is: what is the scope for seigniorage? In particular (expressing things in MMT terms), is the scope for seigniorage sufficient to permit the introduction of ambitious programs like a Green New Deal without the need for higher taxes to prevent inflation.

The recent episode of Quantitative Expansion in the US provides some evidence here. Contrary to the dire predictions of some critics, QE did not lead to runaway inflation. This is consistent with the view, shared by MMT advocates and mainstream Keynesians, that, in the context of a liquidity trap and zero interest rates, there is substantial scope for monetary expansion.

How much is “substantial”?

According to the St Louis Fed, the monetary base grew from around $800 billion to just over $4 trillion between 2008 and 2016. That’s an increase of $3.2 trillion, which is a lot of money. Expressed in terms of GDP, though, it doesn’t seem quite as large. Over eight years, $3.2 trillion is $400 billion a year or around 2 per cent of US GDP ($20 trillion).

Assuming that this is an upper bound for the scope of seigniorage, it’s much smaller than the amount needed to finance, say, a Green New Deal.

What qualifications need to be made here? First, it might be argued that QE should have been more aggressive than it was. Certainly, looking at things with a focus on the real economy, as traditional Keynesians do, the stance of fiscal and monetary policy overall was too restrictive. But, if you assess things on the MMT criterion of low and stable inflation, the Fed got it pretty much right. Deflation was avoided, and the inflation rate was restored to the target level of 2 per cent in a reasonably short time. That’s continued as QE has been partially reversed in recent years.

A second point is that QE wasn’t (directly) an expansionary fiscal policy of the kind Keynesians favour. Rather, the budget deficit (smaller than it should have beeb) was financed with bonds. The sale of these bonds to the public would have depressed demand, but instead the Fed bought them (and also some high-grade corporate bonds). That’s not the best way to stimulate the economy, but from an MMT viewpoint it’s not obvious that it matters (interested to get comments on this).

Overall, the evidence of QE suggests to me that the basic idea of MMT is sound, at least in the context of a llquidity trap. On the other hand, the same episode shows that a widespread interpretation of MMT, that we can greatly expand public expenditure with no corresponding increase in taxation, is both wrong and inconsistent with the core idea of MMT.

88 thoughts on “MMT and the scope for seigniorage

  1. “This is the process by which Consolidated Government has unlimited money to produce by circulating process without ever printing cash.”

    This is complete nonsense, as is

    “Totally different sources of funds for private and public sectors are used.”

    You only need to consider the real side of the economy to understand that this has to be wrong. The total resources of the economy are finite, and the public and private sectors draw on the same resources. Lots of governments have tried to avoid this logic. The result has invariably been inflation, and, within a couple of years, hyperinflation.

  2. John Quiggin,
    Your answer to John from Croatia is a terrible answer. Where is the hyperinflation for Japan, the USA or Germany?
    Let me try to answer that question for you. It is in Venezuela, Zimbawue, and Iran. We live in a global economy and imports allow the core capitalist countries to avoid hyperinflation by importing real resources. The rate of inflation is based on accounting. Accounting is based on market value which is based on an illusion. An illusion which counts a hector of Brazilian Rainforest being converted to cropland as a gain rather than a loss.
    None the less the reaction of economists in core capitalist countries to inflation is also an illusion. It is based on the illusion that money should store the value of our labor and entrepranurial risk for the future. Can you figure out why that is an illusion or will I need to explain that once I get back home?

  3. @Curt As the OP shows, money creation in the US has been very modest. amounting to a few per cent of GDP each year. The same is true in Japan and the eurozone. Countries that have tried unlimited money creation, as suggested by John from Croatia, have experienced hyperinflation. MMT does not distinguish between “core” capitalist countries and others. So, the many instances of hyperinflation in countries with sovereign currency are relevant to the nonsense version of MMT put forward by JfC and apparently endorsed by you. To restate, the whole point of (correctly defined) MMT is that monetary expansion should be determined by the need to avoid inflation.

  4. John,
    I have been reading MMT web sites for a couple of years now. No where I have seen any MMT economists talking about creating unlimited amounts of money. The goal as I understand it is to have enough money in cicultation to assist in achieving full employment.

    As a sociologist, a lay economist, and a human being. if I had a choice between living in a country with no unemployment and workers recieving a decent wage but suffering from 100% inflation per year, or a country with no inflation but 10% long term unemployment and many more underemployed. or employed at subsistence level I would easily chose the country with the high inflation.

    The costs that unemployment impose on people who are unemployeed for long periods of time is much worse than the costs that 100% inflation impose on everyone else. Inflation is a flat tax on bank accounts. Rich people love flat tax rates. Therefore if they had any sense they should love inflation.
    Now even though I support a full employment policy I do NOT support an MMT full employment policy.

    Just between me, you and your reqular readers:
    I reccomend a path towards achieving full employment by convincing lots of people to committ suicide…………..starting with the highest ranking officers of the US military. Then I reccomend working out from there. Of course I recognize that they all might be harder nuts to crack than Admiral Stearney. At some point I I suspect that there will be a need to have to try to figure out a way to get those obsticals to an ethical society murdered. After all most psycopaths do not have a lot of enthusiasim for dousing themselves in Napalm and setting themselves on fire. These people have no respect for Buddhism let alone Humanism.

    I have an additional problem with Bill Mitchell’s MMT full employment job creation program. It only pays one wage reguardless of what type of work on does. Bill Mitchell claims that one wage is needed to prevent inflation. As a sociologist I do not really care about that concern. If there is only one wage then there will clearly be at least the preception that some workers are being exploited. That is totally unacceptable. If a geovernment could reduce the working population by executing or imprisioning all of the people who have been committing mass murder for decades anyways, which includes not only members of the US military, but the military members of the close allies of the USA, such as Austrialia, then a government will not have to deal with the preception that it is exploiting some of its unemployed citizens,
    No I am not guilty of encouraging tyranny. Of course those members of the miltary who are young and inexpirienced in the ways of the world, or those who are actually working for an alien power would be spared the prison sentences that would remove them from the work force.
    Of course I doubt if my reccomendations would ever be fully implemented. But they have as much chance of being fully implemented as any other plan that would actually benifit the general welfare of humanity.

  5. OOOOh,
    I forgot to mention it, yes of course we live in a global economy, and a global society (of complete anarchy), So of course the economies of Venezuela, Iran, Zimbawue, and Russia are relevent to the discussion of MMT and currencies.

  6. “You only need to consider the real side of the economy to understand that this has to be wrong. The total resources of the economy are finite, and the public and private sectors draw on the same resources.”
    This is a clear mixing of the topic at discussion with additional topic. MMT clearly stays within monetary description while you here introduce real economy. My description is clearly only monetary side description. You are right that inflation limits the usable amount available, but we were not talking about that, we were talking only about financial side of government spending.
    MMT accepts real sector constraint, but it is not about that.

    “different sources of funds” and
    “public and private sectors draw on the same resources” use two different subjects. Me talking about funds, you talk about resources, real resources.
    I separate money as abstract value and goods and services as real values. Do you?
    Your response did not touch the subject you claim to discredit.

  7. “money creation in the US has been very modest. amounting to a few per cent of GDP each year.”
    Budget deficit is new money creation and it is permanent since no country reduce its nominal debts. I explained how circular accounting allows for new money creation by deficit spending. Primary dealers by gov bonds with bank reserves already at the FED, it only changes ownership, not with money that circulates in economy.
    US Private banks money creation runs about 10% of GDP annually. That is net new credit growth. Private banks money creation is temporary money while public deficit spending is permanent new money unless government runs surplus which is a rarity. When there is a budget surplus then the old money gets destroyed.

    ” MMT does not distinguish between “core” capitalist countries and others”
    true, MMT does not name it “core” capitalist countries but it calls it sovereign currency countries and it always says that it talks only about sovereign currency countries which have to be on floating exchange and no debt in foreign currencies.
    They never mention what countries are those, only i do. And only countries with sovereign currency are those 6 “former” empires. MMT leaders do not want to talk about that, they would like to preserve the secrecy of the power source their countries poses.
    But, me, i live in one of those countries that do not have sovereign currency. Those 6 empires forced us to peg our currency by refusing to trade in our money. Thanks to MMT i can understand how such financial colonization works on my government. Countries with pegged currencies have to use Mundell-Fleming model for government spending not to get into problems with raising interest rates while economy is tanking.
    Countries with no debt in foreign currencies can follow Taylor rule and lower interest rates while other countries have to raise interest rates while going into recession shooting themselves in the head just as Greece did. Greek Central Banker raised interest rates as economy was tanking. Do you wonder why they had to default on their debts? Because their CB raised their interest rates, not bond vigilantee.
    Japan on the other hand can lower interest rates and keep them there as long as it needs no matter the level of debt since it is in their own currency.

    MMT explicitly always mention that it is description only for sovereign currencies. Only 6 countries in the world have sovereign currencies, say i. And they are “former” empires.

    BTW i’m Jordan

  8. Apologies for getting your name wrong, Jordan. I thought “John” was wrong, checked and somehow convinced myself it was right. My only excuse is that it was late at night.

  9. no problemo on getting the name wrong.
    “To restate, the whole point of (correctly defined) MMT is that monetary expansion should be determined by the need to avoid inflation.”
    the whole point of MMT is that TARGETED monetary expansion should be determined by the need for full employment and better living standard. Inflation is to be watched for, not predicted (as is suggested in the quote) and not to be worried if it is a temporary event. Only accelerating inflation is dangerous.
    My US econ professor taught me that the only cost of high inflation is “thinner soles” by people running to spend their money immediately after receiving it. I did not understand it then but i tried to believe it. Now i know it is truth. I know that inflation up to 20% is a benefit since debt burden gets lessened, and pretty much everyone is in debt while others are protected from inflation. Only mattress staffers loose.

    So, inflation can not be predicted so it should not be in mind while calculating expenditure needed.
    Good wages arriving after longer full employment period would allow for higher credit issuance which would cause inflation. That should be controlled by issuing quotas to banks and for sectors not by lowering employment as is the case last decades. Public expenditure would be reduced by automatic stabilizers as wages go up.
    So it is not the public expenditure that would cause inflation but with more credit issued by banks. (Banks issue new money when issuing credits and destroy it as credit is payed back)

  10. The differences between MMT and Keynesian economics net out to the narcissism of small differences. “The narcissism of small differences is the thesis that it is precisely communities with adjoining territories and close relationships that engage in constant feuds and mutual ridicule because of hypersensitivity to details of differentiation.”

    MMT and Keynesian economics belong to that general orthodox economics paradigm which sees economic growth as the solution to current economic and social ills. They are both wrong. Endless growth is impossible and we are now entering the zone where further growth will do more damage than good. MMT-ers and Keynesians (of all types) are fighting the ideological and academic battles of the last real dilemma not the next real dilemma.

    Orthodox economics operates as if the real economy is a standalone system. No proper attention is paid to the fact that it is a sub-system of the biosphere. The real economy is of course a dissipative system: a thermodynamically open system operating far from thermodynamic equilibrium in the environment with which it exchanges energy and matter. The order and complexity of the natural environment are plundered and broken down to increase order and complexity in the economy. Anthropogenically driven climate change and the 6th mass extinction are proofs of the proposition that the current form of economics, especially but not only as growth economics, is unsustainable.

    MMT and Keynesian economics, in all their variants, are both orthodox and both wrong.

  11. I agree with everything posted by Ikonoclast. My only helpful suggestion is that he remembers that as a body of knowledge Economics may have had its birth in Europe, its upraising in France (no pun on the French Revolution intended) but it was a “stolen generation” (apologies to our first nation people) subject. The Scottish moral philosopher Adam Smith stole all his theory from the French Physiocrats. He was called the father of modern economics but really was the step father only. This gave early economics a sort of straight jacket of Presbyterianism in that it was infused with values from the Protestant church but administered by so-called elders of equal rank in a regional/nationalistic and legalistic framework. When Smith writes about the DIVISION of LABOUR he means division by a class system prevalent in his day. When he extols the virtues of a “pin factory” productivity gains he forgets to mention that the workers are all fourteen year old boys. By explaining specialization using a framer’s supposedly lost productivity as the farmer switches from one task to the next; Smith exhibits his own farming ancestry.
    By the time the very rich David Ricardo comes along the focus is on industrialization. Then John Stuart Mills and Alfred Marshall entrench classical economics in a web of Englishness. Marx calls this out as capitalistic imperialism. His Hegelian dialect rejects such a monocultural approach.
    Orthodox economics came out of the neoclassical school that Milton Friedman sponsored. It had now a decidedly American flavor. Suddenly the would “free” was attached to everything as the ideal. Like
    FREE TRADE (instead of the comparative advantage term from Ricardo). FREE MARKETS instead of simply a place where “buyers and sellers meet and there is a exchange” it becomes a place of rampant exploitation where market power is abused.
    The assumptions of orthodox economics include the unreasonably simplistic ones of “perfect knowledge” and “totally free choice”. This is the Achilles heel of orthodox economics. But its proponents answer all challenges with statement of faith rather than logic. They will rant about “red tape”, “government intrusions into private decision making” and rage against the big SIN of government monopolies.
    Keynesian economics carries some of this baggage. That is why John Maynard Keynes ( a non-economist) stated forcibly in 1946 that he “WAS NOT A KEYNESIAN supporter”. Even neo-Keynesianism failed to overcome this attached baggage preventing lift off into the Twenty-First Century. With many cultures, many religions now immersed in capitalist economic systems the past theories are less relevant.
    For example sustainable economic development has arisen to replace Rostow’s stages approach.
    But much more needs to be jettisoned before economics recovers its moral philosophy origins.

  12. Ikonoclast says: March 20, 2019 at 9:21 am
    Orthodox economics .. biosphere .. The real economy is of course a dissipative system: a thermodynamically open system operating far from thermodynamic equilibrium in the environment with which it exchanges energy and matter. The order and complexity of the natural environment are plundered and broken down to increase order and complexity in the economy. .. Anthropogenically driven climate change and the 6th mass extinction are proofs .. current form of economics .. is unsustainable.

    Exponential Economist Meets Finite Physicist

    I believe I’d seen it before, but still it is a good reminder.

    That was spotted it in a comment thread below an article backing big biz and the one-trick treasury crap of the usual sort that frequently is now issued with its fallacious appeals to authority to flood across the msm from various hopelessly compromised ANU departments (read propaganda, pure and simple):
    https ://

    Also from there, worth exploring, an interesting trail blazed by an old Professor of Petroleum and Chemical Engineering re-energised by a new grandchild. Well referenced/resourced by numerous links in articles and comments:

    http ://
    http ://
    http ://
    http ://

  13. When discussing MMT, in comparison to what is a usual Neokeynesian assault on monetarism. it is well to remember that the US currency is a reserve currency. This means that it is a special case. So even after almost a decade of ‘quantitative easing” there is no observable hyperinflation in the US economy. In fact, apart from a few notable exceptions, there is no discernible hyperinflation anywhere in the world toady. Of course Argentina was the last big economy to experience hyperinflation. But then Israel, Brazil and Zimbabwe were big economies that felt the cold grip of hyperinflation in the last fifty years.

    John Maynard Keynes wrote about what he called “The money illusion”. By this he meant that the real economy could become divorced from the money economy. Of course in his days he was struggling to explain deflation but he also observed the impacts of hyperinflation in Germany in the early 1930s. So the Neokeynesian argument rests on this insight from Keynes. The use of money as a store of value and standard for deferred payments can lead to hoarding. This is the curse of all capitalist economies. Keynes wrote that the Paradox of Thrift suggests that private wealth owners may simply refuse to spend money above that needed to maintain a certain standard of living. They then hoard their money surplus. Keynes wrote that this reduces the velocity of circulation of money towards zero. He wrote that deflation is symptom of those aberrant behaviors by individual economic units. Keynes’s point was that, if this was occurring you could print as much money as you like but have an almost negligible effect on the real economy. Keynes explained that means that if there is structural and cyclical unemployment is above the natural rate of unemployment then printing money will not be a solution to that problem. Keynes warned Also it is unlikely that, in these circumstances of rampant hoarding, that investment will increase. Of course inflation will also be largely unaffected.

    Of course globalization has complicated the behaviors of all dependent variables beyond the pure Neokeynesian analytical framework. For example China can affect the global money economy AND the global real economy. They affect the global money economy by loosening credit controls inside China and relaxing the transfer of money out of China. As a command capitalist economy the central planners in China have wide powers of intervention. They can also directly affect the global real economy by influencing the volume of the flow of goods and services (the real economy outputs) into and out of China. As the second largest economy in the world, China can impact a lot of other smaller economies. Australia is now linked into the Chinese economy. For example the current use of technical specifications to delay coal imports from Australia can have a big effect on Australia’s future coal export receipts.

    So MMT has a lot of complications not easily resolved. Globalization has made this worse not better.

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