Dougald, whenever I read one of your posts it makes me want to find you and have a coffee and talk about what you have written. I came upon MMT because I was searching for a reason why the massive money supply expansion in 2008-09 did not result in massive inflation they way I had been taught that it would in grad school.
It has now been shown quite conclusively that there is no relationship between the money supply and inflation. And the “too much money chasing too few goods” monetarist explanation is incredibly simplistic in a way that Kelton and other MMT theorists make clear. Inflation that results from supply chain issues (such as experienced in the pandemic and its aftermath) needs a fiscal policy reponse aimed at increasing supply (or potentially regulating prices or even rationing in the short term).
Increasing central bank interest rates to address inflation (however caused) works. But the way it works is cruel and almost always “overshoots” its objective. Making business investment more expensive due to a higher rate of interest kills job growth which siphons wage income out of the economy, which leads to a lower rate of inflation.
So the wage earners typically in the bottom half (or third, or quarter) of the labour market pay an exorbitant cost of the “war on inflation” while those holding assets benefit. I am not a communist but this doesn’t sound like a plan any democratic country should be pursuing on behalf of its citizens.
Dougald you have mentioned the New Deal and the changes ushered in by FDR in several posts. One of the very significant changes that occurred during WWII and was cemented through unions after the war was the 40 hour work week.
Prior to WWII the typical full time work week was 60 hours! Rifkin in The End of Work makes a convincing case that the Depression was largely caused by wage income not keeping pace in the economy with productivity gains as the US industrialized its economy. Workers simply could not afford to buy what the economy was producing and the economy ground to a halt.
Not only did the work week decline to 40 hours post-war, but incomes also rose! In effect the balance between worker productivity and earnings was “reset” and remained in step as the economy grew until about 1978/9. Policy decisions by government systematically empowered corporations in the wage setting process and in fact, inflation assists this process in that wages did not rise as fast as prices throughout the next 4 decades.
Anyway, this is turning into its own post (sorry).
In the 1920s, union membership slumped. It only rose again once there were jobs to be had. The 1920s had plenty of turmoil but the “roaring 20s” was a gilded age like today where debt-driven stock and property speculation was driving the market. The high-pressure economy of the great compression 1938-1945 had the effect of inflating away people’s personal debt.
It wasn’t until the Wagner Act was passed in 1935 that unions had the right to organize and employers had to recognize (and bargain with) unions though. In Canada PC 1003 put essentially the same framework in Canada, but not until 1944.
Prior to the passage of legislation that established a framework for union recognition and bargaining, employers often resisted (violently in many cases) recognizing unions. The tradition of referring to fellow union members as “brother” and “sister” dates from a time when joining a union was a political act and the use of names was to be avoided.
The impact of unions (including union avoidance strategies that mirrored provisions in union contracts in terms of wages and benefits) explains much of what happened in terms of post war wage growth and how it was able to keep pace with productivity gains.
I get the focus on debt flows over time but I think there is another aspect to the story of where we are now that is the “wage/effort” bargain and how that has changed over time, and the government’s role in it.
Thanks for such a well thought out piece and for making these points. I have read Keltons book as well. And I agree so much with how you describe the religious aspect of our economic policy. No matter how much evidence piles up, we can reject it out of hand because it doesn't fit our beliefs. If I had a nickel for every time I've heard someone say that "we can't run government policy that way because that's not how I run my household" I would have a hell of a lot of nickels. Maybe not quite as many as Mellon. But it would be close.
I've become more convinced that we should be designing our society around caring for people. That's seniors, young people, those with disabilities. That our economy and money are just tools in that end goal. But fear is in the way. It seems that all of us get captured by the fear that if we even make small changes the whole existing structure will collapse. So we just go back to our zero sum game, and try to pry some dollars from the hands of our neighbours.
I should also point out that I really like how this article lays out the fact that far left snd far right are so similar in what they want.
Yes, quite, right. MMT is not helicopter money, but it does mean that policies like monetized deficits, or helicopter money are possible and could be beneficial and not harmful as claimed under orthodox economics.
Excellent, clear post, and I certainly have some follow-up reading to do from some of your references, but I stumbled on this: “What is required is a Marshall Plan of structured debt reductions to prevent a crisis,”
I just don’t follow what that means or prescribes in this context. Is there an easy example of an activity that falls under that rubric?
The Marshall Plan after the Second World War was the opposite of the mistakes after the First World War, where harsh reparations were demanded.
William White, who is a Canadian economist has recognized that there are going to be defaults because current debt levels are so high, has argued that we are better off with orderly defaults and debt reductions instead of a string of chaotic and disorganized defaults.
After WWII Instead of repeating the punitive war reparations of WWI, which led to more conflict and war, the Marshall Plan provided capital for previously enemy countries to rebuild, and it also included a component of debt reduction.
There were a series of measures around the world to reduce debt. In Germany, they brought in a new currency which replaced all savings at a 1-1 ratio, but replaced debt at a 10-1 ratio, reducing personal debts by 90%. There were "debt compromise boards" in Canada where lenders could meet and restructure debts to affordable levels without going into receivership or bankruptcy. In Canada, the federal government helped cancel the Depression-era debt of the Western Provinces.
Outstanding. The post moved me from a free subscriber to a founding subscriber. As an avid reader of Kelton Steve Tain dickheads Randall Ray, Warren Mosler, etc. this article is a great mini book on MMT, adding a succinct discussion of the political and philosophical benefits and opposition to MMT the 400 word summary was particularly nice although I can’t get any of my friends, family or peers to get past point one the use of the term “taxpayer of money “is so pervasive in the media and a literature, even in Substack and other newsletters of otherwise very bright people I don’t know how we get past this point
Thank you! I will be writing more. The challenge of understanding what's actually happening is both that for most people, their experience of money is totally different, precisely because they are not a central bank! As Galbraith said, when it comes to economics, the majority is always wrong.
It is also the case - which needs to be addressed in deeper detail - is that theorists have been unable to articulate how money works, because it is treated as something material - a coin or a bill or a gold bar - when it is symbolic. As a result, economics has been expressed throught metaphors of the age - liquidity and flows, or hydraulics, or mechanical efficiency, or physics, when money itself is information, and information works in very counterintuitive ways, although there is tremendous science and engineering that describes its functioning, we are stuck with what is essentially a string of superstitious taboos.
I think part of the challenge is that our formative experience of money as children is to encounter it as an object — usually in the form of coins or notes — which habituates us to mistake the object which is the money token for the underlying credit system which remains invisible to us. This is further compounded by subsequent formative experiences as currency users; having never experienced operating as a currency issuer it then becomes very difficult to transfer internal framing to one necessary to grasp monetary operations as a system/network of obligations recorded on a ledger as debits and credits.
Really great reading. I can’t say I fully understand MMT but this was the best explanation so far. I do agree that clearly public deficits are no where as problematic as the build up of private debt. Places like Australia are an accident wait to happen.
A fascinating read. Seems to point at the background reasons for why I have been thinking what I have been thinking. If your long held habit is to play with an elastic band and nearly every time you snap that elastic band and it flicks back and painfully hits you, well, maybe you should stop doing that.
"An understanding of how the monetary and fiscal system actually works reveals this to be, to borrow Rogoff’s term, nonsense. In fact, when a government spends it simply tells the central bank to credit the government’s account with funds (created by keystrokes). Similarly, when a government taxes, these funds eventually end up as a credit to the government in its central bank account.
Ergo, when a government runs a fiscal deficit, it creates more money than it receives (by definition). This money is then used to purchase goods and services, so the central bank transfers money from the government’s account to the reserve account of the bank with which the sellers of goods and services happen to hold their accounts. This creates excess reserves at the bank. No bank willingly sits on excess reserves, and so money is lent out in the interbank market. This has the effect of lowering the interest rate towards zero (or to the level that the central bank pays on reserves)"
1. When the CB buys bonds from the banks, they pay interest on the reserves. Most central banks are now going to have negativity equity for that. Even if the CB bought the bonds from the government directly, the reserves will end up at the bank earning interest.
2. When the CB buys bonds from pension funds, the reserves still end up at the banks and earn interest from the CB.
Note in this video how the reserves are converted into bank credit money. That is reserves and credit money have increased. So you could argue the bank is double dipping. Earning money on the new deposits which it pays less interest for, and earning interest on the reserves
MMT seems to be incorrect about its 'issuer' position. Canadian academic and Fed VP David Andolfatto says something that sounds MMTish - "When the interest comes due, it can be paid in legal tender—that is, by printing additional U.S. or Federal Reserve Notes. It follows that a technical default can only occur if the government permits it." But he includes what could make the MMT position true. The Fed would have to provide all the money in banknotes, because reserves are only useable by the banks.
"All the money we use today consists of bank liabilities, either private or central. Let me label this private bank digital currency (PBDC). I’ve also mentioned that CBDC exists in the form of reserves held in accounts with the central bank. Reserves are counted as a liability of the Federal Reserve. The third type of money takes the form of small‐denomination paper bills issued by the Federal Reserve. Let me label this central bank paper currency (CBPC). These too are counted as liabilities of the Fed.
The way things presently stand, everyone in the world is permitted access to CBPC, the paper component of the Fed’s balance sheet. However, only banks (and a few other agencies) are permitted access to CBDC, the digital component of the Fed’s balance sheet. Why is this the case?"
MMT is keynesian, and it describes how he system works. What matters for it is the policies - as it did with Keyenes. Goodwin and Hockett have two good essays which show why 1939-75 were so productive.
Pulitzer winner and presidential biographer Professor Doris Goodwin essay
The Way We Won: America's Economic Breakthrough During World War II
Blair Fix (Economics from the Top Down) cemented MMT for me with two sentences:
"But having a correct theory of money is a bit like having a correct theory of traffic lights. Traffic lights (like money) are a social convention."
Lewis Carroll knew as much: "When I use a word,' Humpty Dumpty said in rather a scornful tone, 'it means just what I choose it to mean — neither more nor less.'
Hundreds of billions if not trillions have been spent endowing professorships and think tanks to make voters think their lack of opportunity was their fault and only their austerity was a cure.
Your excellent The Single Most Important Thing We Can do to Address Canada’s Economic Challenges (substack.com) was better than MMT.
Probably the single best monetary tweak would be for the private banks to borrow needed credit expansion from the central bank. The government too could borrow shortfalls in times of unemployment or crisis. The interest for both banks and government would be paid in profits to the government.
Dougald, whenever I read one of your posts it makes me want to find you and have a coffee and talk about what you have written. I came upon MMT because I was searching for a reason why the massive money supply expansion in 2008-09 did not result in massive inflation they way I had been taught that it would in grad school.
It has now been shown quite conclusively that there is no relationship between the money supply and inflation. And the “too much money chasing too few goods” monetarist explanation is incredibly simplistic in a way that Kelton and other MMT theorists make clear. Inflation that results from supply chain issues (such as experienced in the pandemic and its aftermath) needs a fiscal policy reponse aimed at increasing supply (or potentially regulating prices or even rationing in the short term).
Increasing central bank interest rates to address inflation (however caused) works. But the way it works is cruel and almost always “overshoots” its objective. Making business investment more expensive due to a higher rate of interest kills job growth which siphons wage income out of the economy, which leads to a lower rate of inflation.
So the wage earners typically in the bottom half (or third, or quarter) of the labour market pay an exorbitant cost of the “war on inflation” while those holding assets benefit. I am not a communist but this doesn’t sound like a plan any democratic country should be pursuing on behalf of its citizens.
Dougald you have mentioned the New Deal and the changes ushered in by FDR in several posts. One of the very significant changes that occurred during WWII and was cemented through unions after the war was the 40 hour work week.
Prior to WWII the typical full time work week was 60 hours! Rifkin in The End of Work makes a convincing case that the Depression was largely caused by wage income not keeping pace in the economy with productivity gains as the US industrialized its economy. Workers simply could not afford to buy what the economy was producing and the economy ground to a halt.
Not only did the work week decline to 40 hours post-war, but incomes also rose! In effect the balance between worker productivity and earnings was “reset” and remained in step as the economy grew until about 1978/9. Policy decisions by government systematically empowered corporations in the wage setting process and in fact, inflation assists this process in that wages did not rise as fast as prices throughout the next 4 decades.
Anyway, this is turning into its own post (sorry).
In the 1920s, union membership slumped. It only rose again once there were jobs to be had. The 1920s had plenty of turmoil but the “roaring 20s” was a gilded age like today where debt-driven stock and property speculation was driving the market. The high-pressure economy of the great compression 1938-1945 had the effect of inflating away people’s personal debt.
It wasn’t until the Wagner Act was passed in 1935 that unions had the right to organize and employers had to recognize (and bargain with) unions though. In Canada PC 1003 put essentially the same framework in Canada, but not until 1944.
Prior to the passage of legislation that established a framework for union recognition and bargaining, employers often resisted (violently in many cases) recognizing unions. The tradition of referring to fellow union members as “brother” and “sister” dates from a time when joining a union was a political act and the use of names was to be avoided.
The impact of unions (including union avoidance strategies that mirrored provisions in union contracts in terms of wages and benefits) explains much of what happened in terms of post war wage growth and how it was able to keep pace with productivity gains.
I get the focus on debt flows over time but I think there is another aspect to the story of where we are now that is the “wage/effort” bargain and how that has changed over time, and the government’s role in it.
PS. Love the works of Keynes and J. Kenneth Galbraith.
Thanks for such a well thought out piece and for making these points. I have read Keltons book as well. And I agree so much with how you describe the religious aspect of our economic policy. No matter how much evidence piles up, we can reject it out of hand because it doesn't fit our beliefs. If I had a nickel for every time I've heard someone say that "we can't run government policy that way because that's not how I run my household" I would have a hell of a lot of nickels. Maybe not quite as many as Mellon. But it would be close.
I've become more convinced that we should be designing our society around caring for people. That's seniors, young people, those with disabilities. That our economy and money are just tools in that end goal. But fear is in the way. It seems that all of us get captured by the fear that if we even make small changes the whole existing structure will collapse. So we just go back to our zero sum game, and try to pry some dollars from the hands of our neighbours.
I should also point out that I really like how this article lays out the fact that far left snd far right are so similar in what they want.
Thanks for such a great article.
Excellent piece Dougald. However, I don't think MMT proposes helicopter money. Governments could distribute cash, and to some extent did that during the pandemic, but it would not be the norm. See for example - https://www.project-syndicate.org/commentary/modern-monetary-theory-is-not-helicopter-money-by-yeva-nersisyan-and-l-randall-wray-2020-04
Yes, quite, right. MMT is not helicopter money, but it does mean that policies like monetized deficits, or helicopter money are possible and could be beneficial and not harmful as claimed under orthodox economics.
Excellent, clear post, and I certainly have some follow-up reading to do from some of your references, but I stumbled on this: “What is required is a Marshall Plan of structured debt reductions to prevent a crisis,”
I just don’t follow what that means or prescribes in this context. Is there an easy example of an activity that falls under that rubric?
The Marshall Plan after the Second World War was the opposite of the mistakes after the First World War, where harsh reparations were demanded.
William White, who is a Canadian economist has recognized that there are going to be defaults because current debt levels are so high, has argued that we are better off with orderly defaults and debt reductions instead of a string of chaotic and disorganized defaults.
After WWII Instead of repeating the punitive war reparations of WWI, which led to more conflict and war, the Marshall Plan provided capital for previously enemy countries to rebuild, and it also included a component of debt reduction.
There were a series of measures around the world to reduce debt. In Germany, they brought in a new currency which replaced all savings at a 1-1 ratio, but replaced debt at a 10-1 ratio, reducing personal debts by 90%. There were "debt compromise boards" in Canada where lenders could meet and restructure debts to affordable levels without going into receivership or bankruptcy. In Canada, the federal government helped cancel the Depression-era debt of the Western Provinces.
Outstanding. The post moved me from a free subscriber to a founding subscriber. As an avid reader of Kelton Steve Tain dickheads Randall Ray, Warren Mosler, etc. this article is a great mini book on MMT, adding a succinct discussion of the political and philosophical benefits and opposition to MMT the 400 word summary was particularly nice although I can’t get any of my friends, family or peers to get past point one the use of the term “taxpayer of money “is so pervasive in the media and a literature, even in Substack and other newsletters of otherwise very bright people I don’t know how we get past this point
Thank you! I will be writing more. The challenge of understanding what's actually happening is both that for most people, their experience of money is totally different, precisely because they are not a central bank! As Galbraith said, when it comes to economics, the majority is always wrong.
It is also the case - which needs to be addressed in deeper detail - is that theorists have been unable to articulate how money works, because it is treated as something material - a coin or a bill or a gold bar - when it is symbolic. As a result, economics has been expressed throught metaphors of the age - liquidity and flows, or hydraulics, or mechanical efficiency, or physics, when money itself is information, and information works in very counterintuitive ways, although there is tremendous science and engineering that describes its functioning, we are stuck with what is essentially a string of superstitious taboos.
I think part of the challenge is that our formative experience of money as children is to encounter it as an object — usually in the form of coins or notes — which habituates us to mistake the object which is the money token for the underlying credit system which remains invisible to us. This is further compounded by subsequent formative experiences as currency users; having never experienced operating as a currency issuer it then becomes very difficult to transfer internal framing to one necessary to grasp monetary operations as a system/network of obligations recorded on a ledger as debits and credits.
Oops, the power lack of power of dictation obviously I didn’t mean to say dickhead. It was Dick Ehnts. Steve Keen.. Wray.
I just assumed you were Australian.
Really great reading. I can’t say I fully understand MMT but this was the best explanation so far. I do agree that clearly public deficits are no where as problematic as the build up of private debt. Places like Australia are an accident wait to happen.
A fascinating read. Seems to point at the background reasons for why I have been thinking what I have been thinking. If your long held habit is to play with an elastic band and nearly every time you snap that elastic band and it flicks back and painfully hits you, well, maybe you should stop doing that.
You would think.
I have a problem with this part:
"An understanding of how the monetary and fiscal system actually works reveals this to be, to borrow Rogoff’s term, nonsense. In fact, when a government spends it simply tells the central bank to credit the government’s account with funds (created by keystrokes). Similarly, when a government taxes, these funds eventually end up as a credit to the government in its central bank account.
Ergo, when a government runs a fiscal deficit, it creates more money than it receives (by definition). This money is then used to purchase goods and services, so the central bank transfers money from the government’s account to the reserve account of the bank with which the sellers of goods and services happen to hold their accounts. This creates excess reserves at the bank. No bank willingly sits on excess reserves, and so money is lent out in the interbank market. This has the effect of lowering the interest rate towards zero (or to the level that the central bank pays on reserves)"
1. When the CB buys bonds from the banks, they pay interest on the reserves. Most central banks are now going to have negativity equity for that. Even if the CB bought the bonds from the government directly, the reserves will end up at the bank earning interest.
2. When the CB buys bonds from pension funds, the reserves still end up at the banks and earn interest from the CB.
Note in this video how the reserves are converted into bank credit money. That is reserves and credit money have increased. So you could argue the bank is double dipping. Earning money on the new deposits which it pays less interest for, and earning interest on the reserves
https://www.youtube.com/watch?v=CvRAqR2pAgw&t=156s
New Zealand's Treasury has things to say about this
https://www.treasury.govt.nz/sites/default/files/2023-04/t2022-2562-interest-settlement-cash%20balances.pdf
MMT seems to be incorrect about its 'issuer' position. Canadian academic and Fed VP David Andolfatto says something that sounds MMTish - "When the interest comes due, it can be paid in legal tender—that is, by printing additional U.S. or Federal Reserve Notes. It follows that a technical default can only occur if the government permits it." But he includes what could make the MMT position true. The Fed would have to provide all the money in banknotes, because reserves are only useable by the banks.
https://www.stlouisfed.org/publications/regional-economist/fourth-quarter-2020/does-national-debt-matter
Andolfatto elaborates here -
"All the money we use today consists of bank liabilities, either private or central. Let me label this private bank digital currency (PBDC). I’ve also mentioned that CBDC exists in the form of reserves held in accounts with the central bank. Reserves are counted as a liability of the Federal Reserve. The third type of money takes the form of small‐denomination paper bills issued by the Federal Reserve. Let me label this central bank paper currency (CBPC). These too are counted as liabilities of the Fed.
The way things presently stand, everyone in the world is permitted access to CBPC, the paper component of the Fed’s balance sheet. However, only banks (and a few other agencies) are permitted access to CBDC, the digital component of the Fed’s balance sheet. Why is this the case?"
https://www.cato.org/cato-journal/spring/summer-2021/some-thoughts-central-bank-digital-currency
MMT is keynesian, and it describes how he system works. What matters for it is the policies - as it did with Keyenes. Goodwin and Hockett have two good essays which show why 1939-75 were so productive.
Pulitzer winner and presidential biographer Professor Doris Goodwin essay
The Way We Won: America's Economic Breakthrough During World War II
https://prospect.org/health/way-won-america-s-economic-breakthrough-world-war-ii/
The Lesson Of World War II Robert Hockett
https://www.forbes.com/sites/rhockett/2021/11/12/war-on-inflation-part-1-the-lesson-of-world-war-ii/
typos:
"because that “can’t be bought.”"
that -> they
--
"years of “easy money” under treasury secretary of Andrew Mellon"
extra "of"
--
"when austerity is inevtiably recommended"
inevitably
--
"It is a theory that its proponents describe what is already actually happening, right now."
It is a theory that describes what is already actually happening, right now.
Seems like everyone I've heard who doesn't 'like' MMT hasn't read about or actually learned what MMT is. (e.g. Jerome Powell)
Blair Fix (Economics from the Top Down) cemented MMT for me with two sentences:
"But having a correct theory of money is a bit like having a correct theory of traffic lights. Traffic lights (like money) are a social convention."
Lewis Carroll knew as much: "When I use a word,' Humpty Dumpty said in rather a scornful tone, 'it means just what I choose it to mean — neither more nor less.'
Hundreds of billions if not trillions have been spent endowing professorships and think tanks to make voters think their lack of opportunity was their fault and only their austerity was a cure.
Your excellent The Single Most Important Thing We Can do to Address Canada’s Economic Challenges (substack.com) was better than MMT.
Probably the single best monetary tweak would be for the private banks to borrow needed credit expansion from the central bank. The government too could borrow shortfalls in times of unemployment or crisis. The interest for both banks and government would be paid in profits to the government.
MMT is basically Keynes. MMT is considered a branch of Post Keynesian economics