MMT and the impossible trinity

There’s generally not a lot of common ground between fans of Robert Mundell (the intellectually respectable face of supply side economics) and those of Modern Monetary Theory. Yet in one very important respect, their ideas are two sides of the same coin.

Mundell got his Nobel Memorial Prize, in large measure, for what’s been called the ‘impossible trinity’, namely that a country can’t have all three of a fixed exchange rate, an independent monetary policy and free capital movement.

Turn that round and it says that, if you are willing to give up one of the three, you can have the other two. If we ignore the idea of controlling capital movements completely (limited controls don’t do the job) the trinity becomes a simple two-way choice: fixed exchange rate or independent monetary policy.

If you are on the gold standard, or part of a monetary union, then you are stuck with a fixed exchange rate, and Mundell’s point is that you can’t have an independent monetary policy. Conversely, if you are a sovereign nation, issuing your own fiat money, and you choose not to defend a fixed exchange rate, you can choose your own monetary policy.

That observation is what gives Modern Monetary Theory its name. Under modern (post-gold standard) conditions, any country with its own currency can choose its own monetary policy.

28 thoughts on “MMT and the impossible trinity

  1. I thought the observation that, under fixed exchange rates and capital mobility, monetary policy cannot affect anything (other than your stock of reserves) was standard macroeconomics. Then you can have no impact on interest rates. An open market sale of bonds is offset by a capital inflow. Mundell wrote down an IS-LM model where that was true. His key insight? An “insight” of MMT?

    Under flexible exchange rates and with perfect capital mobility monetary policy is liberated but only because an exchange rate depreciation/appreciation is triggered by an open market purchase/sale of bonds.

  2. Harry, it’s standard macroeconomics because of Mundell (1960), I think – open economy macro was pretty new then. Mind you, my recollections of late 50s macro are a little dim – I had other things on my mind at the time. Maybe you have a better memory 🙂

  3. On reflection you are probably correct about Mundell. A great thinker. I did treat his book “International Economics” as a valued resource – but years later around 1976.

  4. MMT are the bankers infiltration into economic thinking in order to AVOID monetary reform. Its a bait and switch. Leading up to the last financial meltdown we had this realisation that the banks were grasping all the seignorage and causing all manner of problems with their fractional reserve racket. Whereas that money creation benefit might better and more justly be captured by the treasury, and to some extent the mining industry. On the right you had fans of Murray Rothbard but it didn’t sit well on the right because you are looking at a lot of tribal people who wanted to justify their unproductive real estate fortunes.

    On the left you had people like Joe Bongiovanni. You also had the social credit crowd.

    Well when the global financial meltdown went forward these three groups were all triumphant. We thought our case had been proved without doubt. But the people who benefit from all this financial rent-seeking are the most powerful, the richest, and the most influential people in the world. They weren’t going to take this lying down. Currently the MMT crowd are pleading social progressive. But its banking that they emerge out of.

    Teaching people about money is like teaching kids butterfly. You cannot do full-blown Olympic style butterfly in one hit. You need to go through a process. The key to MMT is they skip the process, they take the modern central bank computer generated money scam for granted. And they totally confuse all their followers. Then posing as reformers they say “look over there” and they start advocating pure red ink. Fiscal incontinence. Everyone gets so confused and they wind up with this exaggerated Keynesianism which is the pretence that fiscal irresponsibility is demand management.

    Actually demand management ought to be simple cash management, under a system wherein the money supply and the supply of cash is one and the same thing. Warren Mosler is the banker behind this scam. And it must be understood that they are AGAINST reform. They pose that they are for reform but they are totally against it.

    There are only two valid types of demand management. Two, not three, and not red ink. One is to establish and raise a reserve asset ratio to dampen demand. The other is new cash creation, printed and sent out in vans at the first possible convenience. Not promises to deliver cash on demand. No obscurantism. No debt creation. Plain old cash used to reduce debt. Any level of nominal business revenues can be achieved with these two measures.

    So posing as reformers MMT are dead against reform. Posing as leftist progressives, they are really bankers proxies.

  5. “I thought the observation that, under fixed exchange rates and capital mobility, monetary policy cannot affect anything (other than your stock of reserves) was standard macroeconomics.”

    Wouldn’t that imply that MMP would not work in a closed economy?
    Wouldn’t a central bank still be able to control demand/interest rate?

  6. Harry

    “Under flexible exchange rates and with perfect capital mobility monetary policy is liberated but only because an exchange rate depreciation/appreciation is triggered by an open market purchase/sale of bonds.’

    The United States government sells $1 trillion of additional bonds every year (that’s trillion, one thousand billion) with no discernible effect on bond rates or its exchange rate. Meanwhile monetary policy has no discernible effect on the economy.

    Your theory needs updating.

  7. “So posing as reformers MMT are dead against reform. Posing as leftist progressives, they are really bankers proxies.”

    Many MMT advocates (strictly MMT followers, but apparent clever well informed ones), I’ve heard will stress that MMT isn’t so much a doctrine that needs to be implemented as a means of reform, but more it’s the system being implemented right now in floating exchange economies like Australia’s. They’ll produce quite detailed descriptions of money flow to explain this. Whether true or not, I’m too naive to know or understand, but if their claims are true, it’s not necessarily a glowing endorsement of its apparent virtues given the issues with the financial sector in particular.

  8. Smith9, Then US monetary policy will have no effect on nominal interest rates and be irrelevant.

  9. @AleD A closed economy has no capital mobility

    @Smith9 It’s not a matter of updating. Liquidity traps have occurred before now, which is why Keynes coined the term. If you like IS-LM it’s the flat section of the LM curve, while full employment is the vertical section

    Keynes big claim is that he had a *General* theory, encompassing everything from full employment to liquidity trap. One way of looking at MMT is that it’s Keynesian economics for the liquidity trap case, just as classical economics is the case of full employment

  10. @John Quiggen
    “Closed economy has no capital mobility”

    Yes I know this (clear from def of cap monility).
    But the premise, as far as I could tell, did not require it to exist in the first place.
    I guess I’ve misse something.
    Definitely confused.

  11. “The United States government sells $1 trillion of additional bonds every year (that’s trillion, one thousand billion) with no discernible effect on bond rates or its exchange rate. Meanwhile monetary policy has no discernible effect on the economy.”

    This is for historical and political reasons that relate to no other country. The Americans have lost their industry because of this, they have lost their living standards, their rural life, and their capacity for exports.

    What happened is this. Henry Kissinger went to the Shah Of Iran and got him to go to OPEC to pump the price of oil up several times. This was blamed on the Arab people as an international smear. But the deal was that all Arab revenues had to, in the first instance, be deposited into big New York banks. The New York banks could then pyramid up on these deposits.

    What happens from there is that the American dollar is always overvalued. If this continues forever the country will fall apart. But the cleverness and entrepreneurial spirit of the Americans have meant that this is a long drawn-out catastrophe. But for the meantime, since they have this constant boost to the value of the dollar, they can issue all this destructive debt for a parasitical financial sector to trade back and forth, and still keep a high dollar value.

    But there are other effects. Since the OPEC dollars are not initially US dollars the act of depositing in New York banks has a similar effect to local US citizens feeling kind of daffy and moving all their cash to New York. So rural banks are starved of funds. Small banks tend to lend to small business. Bigger banks to bigger business, and huge banks to huge business.

    So the effect of the monetary base always being diverted to New York, is that the loans made today are massive low interest loans to big business. When tax deductions and money supply growth is taken into account this leads to a subsidy to these big-shots. So the big boys start giving themselves pay rises to obscene levels. They steal off their shareholders with stock options. New share issues are another way of thieving. The CEO’ are no longer chasing profits, so much as exploiting this orgy of interest rate subsidy.

    Meanwhile a fellow has designed all these really great wood gasifiers in a rural area that could make a lot of farmers energy independent. He goes to the local bank. The big banks can borrow money at zero interest for all sorts of speculative game-playing and money for nothing. But what does the fellow who wants to create real wealth find? He can only get a loan to set up a factory at 14%. This is a true story.

    So MMT behaviour is always a catastrophe. But in the American case it can be hard to figure out what is going on.

    When the debt is monetised by the central banks in America why hasn’t this lead to galloping inflation? Sure inflation figures are being rigged but even the real figures are not galloping. The reason is that while MV=PQ, under conditions of financial parasitism, paying back debt amounts to an alternative form of spending. But also under conditions of financial parasitism there are all these vaporware financial product “investments” going on. All manner of share-trading, derivatives, real estate speculation and paying back the debt associated with all of these …. these amount to alternative spending flows. Crypto-currencies would have sucked up a huge amount of potentially inflationary spending as well. And of course these cheap imports are coming in, without an appropriate amount of exports to balance them.

    So its wealth destruction all around. A crisis of waste and employment deprivation. But you take that same MMT idiocy somewhere else, you’ll get the galloping inflation right away. As we have seen through all of history. You have to be particularly focused on the one place and the one time to go for this MMT make believe.

  12. I do find one thing interesting in the comments by Gimme the Bird. The idea that the OPEC oil price increases were not the idea of the Sha or Iran, but the US Deep State is an idea that I had not considered before. A resonable intellegence analyst should have thought of that.
    After all the idea that the US persuaded the Saudis to increase oil production to drop the price of oil to bankrupt the Soviet Union has been out and around for quite a while, whether or not it is true.
    Because the Arab oil producing states plus Iran (minus Libya and Iraq) were buying large quanties of (defective) armaments from the US and western Europe the increase in oil prices was like charging the rest of the world an additional tax for the developement of the US (NATO) military industrial complex.
    The leadership of the west would have actually been very happy about that.
    For the moment I can not take the major implications of this much further. I can take a minor implication of this a bit further though. I have met some people who left Iran after the revolution. A number of them have expressed an idea that the CIA was behind the overthrow of the Sha because he was becoming to independent of the USA and UK. That the Sha was an important player in getting the price of oil raised is a crucial part of this thinking. Some of those who believe the CIA was behind the Iranian revolution believe that the USA, and UK (and France) actually perfered Khomenei taking power in Iran instead of the Sha remaining in power.
    But if one sees that the oil price increases were benificial to the military industrial complexes of the west a person would have serious doubts about the idea that the Sha was distancing himself from western expectations. That would mean that the USA really would NOT have prefered Khomenei.
    Now to most people in the world the antagonism between the Iranian government and the US government is obvious. But because the US has not actually ever openly attacked Iran some opponents of the Iranian regime have maintained that this antagonism is just a show to allow the leadership of both countries to profit from a rally around the flag effect.
    Until now I have never been able to completely rule out that possibilty.
    But one other possiblity that I can not rule out is that the US Deep State was glad to see the sha of Iran fall because his fall could be spun in such a way as to make it seem plausible that the CIA was behind it to punish him for pushing for oil price increases which would then obscure that fact that those who control the CIA were the actual authors of the oil price increases and ALSO THE OIL EMBARGOES OF THE 1970s.
    After all anyone with half a brain now knows that the Israeli government is the bitch of the US government deep state, and the Saudi government leadership is the bitch of the Israeli government.
    Therefore the Saudis would not have done what they did back then with out the approval of the US deep state leadership.
    So now I have to ask a question for the audiance. If you consider yourself a reasonable intellegence analyst did you have all of this figured out before I did?? If not why not?? Did you have access to less classified information than I had access to?? If you did have it figured out before me did you think that the chaos unleshed by the oil embargo of the 1970s was an acceptable thing for the real leaders of the US deep state to instigate? If you thought that it was a bad idea did you think that it was an exception to the normal behavior of the leadership of the US deep state?? If you figured that this is the normal behavior of the deep state leadership did you see any need or reason to oppose it?? If so did you take any initiative at all to organize any opposition??
    If you answered no to any of those questions should you apply the adjative normal or warped to the title intellegence analyst??

    The more that I learn about the history of the US and Europe the more often that I think the only thing wrong with Joseph Stalin was that he did not kill enough people.

    So I supposed someone is now going to call me the warped barbarian.

    Well in my defence I do not support torture 99.5% of the time. Furthermore I do not support killing dangeous people needlessly. I support converting them from their warped behavior when ever possible. And when the circumstances make it neccessary to kill them, like when they are preparing a war of aggression, I support killing them mercifully with as little pain as possible.
    Conversion is sought. But there are times when the only way that they can prove that they have been converted is to make a very very very painful voluntary self sacrifice. And when such people refuse conversion they might fall in to that .5% catagory.
    A progressive may charge me with holding the view of a Neanderthaler. I say no, it is not the view of a Neanderthaler at all. It is the view of a human accountant.

  13. Jesus, the collective stupity of Israeil intellegence analysists is so great it makes my eyes burn all the way over here. How long will it take you to figure out that if the US deep state was behind the Saudi led OPEC oil embargoes there would need to be a plausible reason for such an embargo? Duuuh? So of course the US was even behind the Egyptian “sneak” attack that started the Yom Kippur 1973 war. What the fuck the US did not have that kind of pull in Egypt at that time you say? What the fuck, where do you work?? You want to tell me that the it was beyond the capabilities of the US deep state to influence Egyptian policy in that way in 1972? The question can not be whether or not the US was behind that sneak attack. But who in the highest levels of the Israeli government knew it was comming?
    I bet a 1000 dollars or scheckels, your choice, that if an investigation could be launched clues would be found that would be indicators that there were people in both the US and Israeli governments that knew about the Egyptian attack attack before it happened.

  14. Curt, it’s hard enough dealing with reality without the added distraction of conspiracy theories.

  15. This link might help you realize that Eye did not make this stuff up.

    One persons religion is another persons cult.
    One persons terrorist is another persons freedom fighter.
    One persons conspiracy theory is another persons history.

    I advise people not ever charge someone with promoting a conspiracy theory because there is no scientific way to define how a conspiracy theory is any different than other “standard” theory. Al Capone was never convicted of the St. Valantines Day Massacre. So would it be a conspiracy theory to say that he was behind it?

    Is evidence needed? The fact is that “evidence” is often false. Is proof needed? The fact is that proof is often not available.

    If you do not like someone’s understanding of history just say what you do not like about it rather than trying to shut down consideration of it by claiming that it is a conspiracy theory.

  16. Doesn’t matter what they agree with. They are monetary cranks, idiots, and they have ruined what was beginning to be a movement in favour of banking reform. Such morons its just unbelievable.

  17. “I do find one thing interesting in the comments by Gimme the Bird. The idea that the OPEC oil price increases were not the idea of the Sha or Iran, but the US Deep State”

    Its not a mystery. It came from Kissinger, Kissinger was a Rockefeller man. The Rockefellers probably beholden to bigger fish in Europe, and who was really calling the shots can be ascertained by way of tracing back the ownership of the banks in New York who scored the guaranteed Opec deposits every month.

    So its not a matter of US interests. Its a matter of the enrichment of a handful of people who owned these chosen-one New York banks.

    There is a lot of nonsense talked about national interest, geopolitics, and political theory. But in reality its a story about a few people stealing off us and throwing up a smokescreen.

  18. Curt!

    Don’t fall victim to somebody else’s fears!

    They won’t thank you for your support, it’s a zero sum game

  19. Rog,
    I do not understand your comment, What are the somebody elses fears that you are refering to?
    Are you refering to the fear that a few rich jewish bankers control the world?? I figured out that was a smoke screen a long long time ago. But that is not relevent to who was behind the OPEC oil price increases of the 1970s.
    I can clearly understand how such a change to the price of oil benifited the military industrial complex of the west and western oil companies. John Quiggen or Bill Mitchell or Al Gore, or Ron Paul, or Louis Proyect, or Warren Mosler can attest to whether or not the western banking industry relatively benifited from such a policy.
    So what one is left with is that in 1970 there was a better way of doing things for the armaments industry and the oil companies and probably western banks and all of these powerful institutions were unware of this possibility and they just happened to benifit by accident when the dictator of a distant land set things in motiion. A historical change that left these powerful institutions being the innocent benificiaries of luck.
    The alternative is that people who work in a location where all of this diverse knowledge comes together decided that there was no reason to wait on chance (fate) for such a change in history to deliver conditions that would benifit their intrestes but would have to apply measures that would act as a catalyst in the process.
    Much of the world discusses history as if history is a process of chance. Well obviously chance plays a part. But on a different level. Once one sees the outline of manipulation in the outcome of world events a persons eyes are opened to discover how much of what is going on is the result of human design and how much comes as a complete surprise to everyone.

  20. “John Quiggen or Bill Mitchell or Al Gore, or Ron Paul, or Louis Proyect, or Warren Mosler can attest to whether or not the western banking industry relatively benifited from such a policy.”

    We are not talking about the Western Banking industry. We are talking about those banks that got regular oil revenue deposits, as a result of those kind of deals, where the Americans agree to give political and military support for an oil producer ally, if that oil producer, in the first instance, sends their oil revenue to the New York banks.

    If I’m a bank that pyramids up on these deposits twenty to one, I can turn regular deposits of $50, 000 per month into my bank, into one million dollars in new loans every month. So to get access to those kind of deposits that the Sauds and the Shah could muster, even if they are not permanent, but just so long as they are regular, is an unbelievable advantage to the banks who were fortunate enough to get these recycled funds. But it comes at the expense of provincial banks in the US. Its not an advantage to “Western Banks” as such.

    You find these bigger banks cashing in on advantages decade after decade. So for example Volker bailed a lot of these bigger banks out in a low-key fashion, even as he was pumping up the interest rates to the banks in general. Then we had an international bailout of horrifying proportions in 2008 and I don’t think we’ve ever recovered from this explosion of bank subsidies.

    Of course I cannot confirm where the push came from. Whether we blame Kissinger the Shah or others. So since I wasn’t there I won’t push that side of things too much. What I was talking about is the terrible effect that this concentration of funds in bigger banks in New York has on the American economy as a whole. And how it makes the Americans still have a strong dollar even with all this red ink spilling everywhere. Its got nothing to do with daffy MMT notions.

    Thats the main point here. Not pretending to know exactly what went on behind closed doors. But just the malign effects of concentrating funds, and how that this has lead in part to MMT delusions.

  21. Forgive me but that is not what puts the Modern in Modern Monetary Theory at all. It comes from Keynes’ “The State, therefore, comes in first of all as the authority of law which enforces the payment of the thing which corresponds to the name or description in the contracts. But it comes in doubly when, in addition, it claims the right to determine and declare what thing corresponds to the name, and to vary its declaration from time to time – when, that is to say, it claims the right to re-edit the dictionary. This right is claimed by all modern states and has been so claimed for some four thousand years at least.” (Keynes 1930, p. 4)

    As for the relationship between the modern money view and Mundell, I had this conversation with Matt Cowgill a number of years ago.

    And to provide the supporting quote for my earlier comment from Randall Wray

    “According to the well-known trilemma, government can choose only two out of the following three: independent domestic policy (usually described as an interest rate peg), fixed exchange rate, and free capital flows.”

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