Modern Monetary Theory: shiny, new and good? Part II

I’ve been digging deeper into MMT at Bill Mitchell’s blog, and finding the effort both stimulating and rewarding. My studies thus far have yet to answer all questions I have, and neither have my concerns been completely allayed, but I become friendlier with the idea the better I get to know it (with caveats of course). This post represents Stage 2 of my Modern Monetary Theory Journey.

One point I raised in my first post on MMT was about private-sector credit transactions netting to zero. The claim struck me as fallacious, as interest accrues to lenders, representing, from their point of view, a net positive. If this were not so, they would not lend money in the first place. Further study has updated my position. “Netting to zero” actually means “no new net wealth is created,” which is true. Only the loan is created, which is expunged either upon the last repayment or upon default. The interest must be fished out of the existing pool of money and handed over to the lender. Credit extension is therefore not a net wealth creating process, it is a shuffling-money-to-the-banks process. In a pure debt-money system, in which no money at all is created by government spending, we have a ponzi-like situation that can only fail. In such a system existing wealth in the economy is slowly transformed into debt obligations as private banks extend the credit economic activity requires. At some point over-indebtedness crashes the system, and all that apparent wealth disappears. (This short analysis equates wealth with money — an equation I don’t usually make.) Money spent into existence by the sovereign on the other hand, assuming it finds goods and services to buy, is, in contradistinction to credit, wealth creation.

So strictly speaking, and when seeing wealth as money — which is a legitimate assumption in this exercise of understanding how money works in a fiat economy — extending credit creates no new wealth, or “nets to zero.” My bad. However, that it nets to zero may be largely unimportant, because the public can be too heavily indebted regardless, but I’ll get to that in a moment. For know I want to go over how MMT views a monetary system.

Below is a graphic I’m borrowing from Bill Mitchell (please refer to his site for details):



A short time pondering this chart gives the viewer the impression of a system of flow, with injections, transactions, and removals taking place both vertically and horizontally. Rather wonderfully, tax is seen as taking out the trash. If there’s too much money in the system, tax it out and trash it. There’s no need for government to save if it can simply spend what the economy needs, in particular circumstances, into existence. (This is of course quite a trick to get right, but the idea is sweet.) We don’t need to think of money like we used to think of gold, as having magical intrinsic value, or as representing deserved reward for hard work and so on. It’s merely the lubricant the system needs in the correct quantities (which change over time) to hum along. Let’s not get all romantic and religious about it. This newer perception empowers us to get rid of the rather presbyterian idea of saving up for a rainy day (at the level of the sovereign — thrift and saving are still handy values for the private sector), and treat deficits and surpluses as necessary positions of balance that arise dynamically as the economy moves through time.

Two quotes from Bill Mitchell capture the essence of this nicely:

“Accordingly, the concept of fiscal sustainability should never make any financing link between debt issuance and net government spending. There is no inevitability for debt to rise as deficits rise. Voluntary decisions by the government to make such a link have no basis in the fundamentals of the fiat monetary system.”

“The real cost of any program is the extra real resources that the program requires for implementation. So the real cost of a Job Guarantee is the extra consunmption [sic] that the formerly unemployed workers can entertain and the extra capital etc that is required to provide equipment for the workers to use in their productive pursuits.”

However, as one of the stated aims of MMT is full employment, we must be careful not to set up a system characterized by moral hazard. If we deploy MMT within a GDP-growth obsessed paradigm, with conspicuous consumption the economy’s locomoting force, a citizenry confident there will always be work might be easier than ever to goad into buying more than it can afford. That innocuous looking rectangle in the middle of the graphic is therefore a weak spot as far as I can tell, unless we wean ourselves off our addiction to consumption and shopping. Until we have a more mature attitude to material acquisition at the cultural level, I fear MMT would be like letting children into the candy store, a candy store with finite resources.

In terms of the money, how would this play out? A population up to their eyeballs in debt after a multi-year shopping binge suddenly stops consuming at the rate they have been. Demand falls, business suffers, unemployment rises, and people have to pay off their debts. In steps the government and employs the cast-offs, but the money thereby injected into the economy is used to pay off debts. Government therefore has to employ/spend until those debts are down again, and the party can start over. This would be a smoothed out boom-bust cycle with less suffering, but may stoke consumption even further beyond current unsustainable levels. Keeping our eyes on the ecosystem and how wasteful our production/consumption processes are is of course essential.

I can envisage too that private industry, aware that displaced workers will find work in the government sector, might more aggressively pursue automation, not having to fear a consequent collapse in purchasing power. A weird world in which say 80% are perpetually employed (doing what?) by a State spending money into existence, effectively to fund a private sector which hardly need employ anyone, all to keep the system ticking over. Without intending the worst aspects of communism, MMT might deliver them. It would all depend on other elements of how we change the way we do business, e.g. how we educate our young, other money-types we introduce (see Bernard Lietaer), lowering the working week while changing the nature of waged-labour, and whether MMT can be effective alongside a drive to consume more sensibly and sustainably.

The money controlled by MMT, namely the fiat currency of the sovereign, would still be a scarcity-based tool, so having more would be better than having less. Consequently, it would pool to the rich over time, and the rich, via lobbyists and other techniques, would of course attempt to bring their influence to bear on government to favour their chances of staying rich. But, in a situation where the government is skilled at spending money into existence, the rich have no real leverage. Money creation is owned by the sovereign, which no longer has to borrow from the rich and powerful. Therefore, redistributive taxes aimed at inhibiting the process of social stratification that so bedevils countries like the US and UK, would be far easier to deploy. This is a Good Thing. This element of MMT alone (freeing the sovereign from the money lenders) may be enough to reshape our attitudes to monetary wealth culturally, and this change may be sufficient to make government a better shepherd of the economy, and more resistant to money-based corruption.

However, could we lurch from a Market run world to a State run world? I fear this is a possibility, though of course I cannot prove it one way or the other. The current paradigm asserts that Markets, via the Invisible Hand and arbitrary, almost blind money-processes, do what’s best for us in the end. This paradigm is under severe attack on many fronts. Books are available aplenty which pick apart this idea and expose it for the empty, though manipulated platitude it is. Those who call for less regulation/intervention need to address the underlying assumptions of how markets work (perfect knowledge and rational market participants) in order to appreciate what it means to rely entirely on the blind wisdom of The Market. However, government is also incapable of perfection, though it is foolish to demand perfection of any system.

In the final analysis we need to guard against over-dependence on any one component of society, and develop instead a far less centralized, networked and redundantly laid out set of interdependent, competing (though complementary) components. I recommend Bernard Lietaer’s talk for more on this. Right now my initial basket of components looks like this:

1: One global currency which must be used for international trade and has a demurrage of maybe 5%.

2: National fiat currencies deployed by sovereigns along MMT lines, for taxation and general economic activity; money as economic lubricant.

3: Many local currencies, or alternative currencies to compete with the sovereign’s currency, but supported by the sovereign.

4: Technological unemployment must be embraced as part of the 100% employment push (unintuitive as that sounds at first hearing), while things like education, societal health, beating crime, and living within the limits of the ecosystem must be prioritized.

MMT is but one component of many, but a very important first step out of our current self-imposed dilemma. A path away from material acquisition as society’s primary locomotion must, I feel, be pursued in conjunction with MMT’s deployment, alongside that of the competing/complementary monies touched upon above.

All in all I would characterize MMT as a very welcome breath of fresh air to economics, one which has the potential to pull us out of our self-imposed, debt-based dilemma and off in a far different, far healthier direction. Spread the word!