=
MMT is a description of the monetary system within a nation operating a
fiat currency which involves an autonomous monetary system, monopoly
supply of currency and floating exchange rates. MMT describes how a
government creates, destroys and utilizes its monetary unit and also how
the private sector utilizes the state’s monetary unit for its own
benefit. [1]
Definition
"Modern Monetary Theory (MMT) is based on the following principles:
- The Federal government is the monopoly supplier of currency.
- The modern floating exchange rate system helps to maintain equilibrium and flexibility in the global economy.
- The currency unit created by the state via deficit spending can
only be extinguished by payment of taxes. Therefore, a modern monetary
system can best be thought of as a system of debits and credits where
government deficit spending credits the private sector and payment of
taxes debits the private sector."
(
http://pragcap.com/resources/understanding-modern-monetary-system)
See also:
Functional Finance
Description
Source
* Article: Understanding Modern Monetary Theory. Tadit Anderson.
URL =
http://economics.arawakcity.org/node/674 ;
Based upon a review by Tadit Anderson of
Understanding Modern Money by L. Randal Wray
1
Tadit Anderson:
"The purpose for this set of two flyers is to describe what can
be done when a sovereign nation restores its ability to issue fiat debt
free money. A very important point to remember here is that the US
already has a fiat based currency. "Fiat," as a word means "by
declaration." The odd pieces are that although the U.S. has had a fiat
currency since 1971 and the banking management practices reflects that
fact, the conduct of fiscal policies continues to assume that we are
still operating with a gold based currency and that we have to borrow
our money into existence.
Monetary reform is an important agenda for ethical, economic, and
political reasons and to undo the privatized franchise by which our
economy has been based upon a debt based currency. Ending the enormous
unearned profits acquired by the means of the privatization of our
sovereign currency is important The resistance to monetary and fiscal
reform is based upon the fear of established interests of losing both
the private control that the monetary franchise allows and the enormous
profits that result from that private control. The primary policy
conclusion that comes out of this analysis is perhaps shocking, but it
can be stated simply: It is possible to have truly full employment
without causing inflation."
A number of concepts that are important in the current economic
debate. When these ideas are looked at from the perspective of modern
monetary theory and functional finance, they take on implications
different from the privatized and gold era perspective. The list of
concepts includes government deficits, the value of the currency,
monetary policy, government bond sales, employment policy, exogenous
pricing versus endogenous pricing, the tax liability validation of fiat
currency, and using employer of last resort labor as a valuation buffer.
This process further presents a series of definitions including "state
money," "commodity money," "fiat money," "bank money," "the monetary
unit of account," and "full employment."
The nature of the of money that circulates within a sovereign
economy makes a major difference in how monetary and fiscal policies are
structured. The conventional concept of money includes the assumption
that money is based upon the value of precious metals and thereby there
is an intrinsic scarcity. Because the need for currency often surpasses
the availability of that currency, on a one for one basis, there are
certain ways that the apparent amount of money in circulation can exceed
the actual amount precious metal available. The actual value of modern
money is determined by that which is accepted in the payment of taxes by
the sovereign government. The second characteristic of money is under a
fiat system which is useful is that it is used as a unit of accounting.
Under the specie convention and different regulatory standards
specie based currency can be leveraged. The k through 12 version will
allow nine dollars of debt based money to issued for every one dollar
held on deposit. The amount of money or specie held in reserve is
described as the reserves for whatever type of money or bond are issued
Under certain extreme and even questionable situations the leveraging
ratio can be as much as 1 "real" Dollar to 70 dollars or more of
leveraged, ie fictional money.
Under the specie era model it is assumed that the rate of debt
being created is more that the amount of funds being deposited and then
used as reserves. Under the same specie era model the institutions of
central governance are assumed to operate similar to how an ordinary
household would sustain. Funding of programs and projects are then
believed to happen by a process of either collecting taxes and/or
borrowing money from privately held banks. before programs and projects
are funded. Under the simple version of this specie model when an
individual or a government borrows money from a bank the amount that is
paid back over time is actually the principle and the interest. The
principle was fictional debt based money that was leveraged into
service. The interest percentage, however it is calculated, only
represents a small portion of the short term profit for the bank. As a
loan's interest is compounded over time, the original principle will
dwindle as the interest rate adds to the running principle.
A related piece is that mortgages do not represent loans from
banks or mortgage companies. It is your signature on the mortgage
contract which makes a mortgage contract valuable. Under a fiat and debt
based currency, money is put into circulation largely by making a
ledger entry into a loanee's account. This is partly possible because a
majority of our "currency" in circulation is actually neither paper
currency or coinage. Under a fiat system currency cannot not be directly
converted into precious metal anymore than buying it at the current
market value which as a commodity it value is determined by supply and
demand.
Another detail is that the banking reserve process does not
operate according to the fractional reserve principles as defined that
was used while specie and debt monetary model operated. The scarcity of
gold has in a sense been replaced by a scarcity of loan applications
that are judged to be a profitable risk. What actually happens under a
privately controlled monetary system is that a loan application is
reviewed based upon whether it represented an good opportunity for a
banking investment on some basis. and then after approving the loan the
bank borrows funds from the central bank, in the case of the US it is
the US Federal Reserve, to cover the reserve requirements. Because the
US Federal Reserve is now operating under a zero interest rate policy
(ZIRP). this money is being put into circulation on a even higher net
leverage ratio. The ZIRP is a significant side issue in this context,
because the central bank has no requirement.
Given that the US congress voted in 1913 to both set up the US
Federal Reserve and turn over the issuance and management of the economy
in large part to the privately owned corporation the US Federal
Reserve, this decision could in principle be reversed as being
un-Constitutional, which it is. The problem is that these finance sector
corporations by having the power to create fiat money on their own
authority their corporate "free speech" is potentially endless as
contributions to the political campaign funds, and thereby their
influence upon politicians will always be greater than the free speech
of natural citizens, until this franchise is removed.
Taxation at the federal level within the principles of fiat
sovereign currency is largely a method of controlling the excess
accumulation of wealth. When taxes are collected by the U.S. I.R.S.
those amounts are simply deleted from the tax payer's accounts. Again,
under the specie based currency, those taxes were held and then
disbursed for Federal government programs and projects. And again, to
remind you, we do not currently have a specie based currency, so it ends
up being fairly ignorant to continue imagine that the current fiat
currency serves in the same way a specie based currency. So the deficit
terrorism threatening austerity and even deeper privatization is based
upon a specie era monetary model, and is thereby false and clearly a
fear tactic based upon disinformation.
Because we could be operating under a sovereignty based version
of fiat currency, we could have the government act in a counter cyclical
way to increase the demand for goods and economic exchanges by putting
currency into circulation through the funding of projects and programs
directly. Part of the problems of debt based money is the enormous
profits being made off of a social institution to facilitate exchange.
Another is that the expansion of currency in circulation is that debt
based money is erased from people's accounts once the loans are either
paid off or defaulted on. Debt based currency is not designed to serve
in a relatively permanent fashion to maintain the illusion of scarcity.
Based on understanding how sovereign fiat money actually is used
would allow the Federal government to extend funding to states on a per
capita basis for the construction of roads, mass transit, bridges and
other "hard" infrastructure to put people back to work which would
increase demand for products. This same process can be applied to social
infrastructure such as national health care, education, and pensions.
Further, an employer of last resort (ELR) process could be established,
whereby individuals who wanted to work could be provided a living wage
for advancing any number of needed projects toward building communities.
This would remove the expense of funding most unemployment benefits and
most social welfare. This would also support the cultivation of a work
ethic and of being involved in some sort of productive process. This
could also be used to incubate new industries until that establish a
virtuous process of productivity and trade.
The ELR process would also have other benefits. At the level of
economic models labor would no longer be treated as a commodity without
any connection to the consumer demand represented by labor as
participants in an economic process. As productive industry is able to
re-establish itself, the need for ELR labor will diminish greatly, and
people can be hired into expanding productive activities.
Banking would be largely reduced to a social utility, where it
could actually participate in the development of productive industries,
rather than basing its profits on the degree to which wealth could be
extracted from a community.
When we align the nature of our economics and the capacities of
modern money with the policies of governance as a socializing agenda
significant changes will be possible. This change will require reform
and education on several levels. In effect the precious metal era
economics tends to be structured to serve concentrations of private
interests, particularly as in the cynical version of the "golden rule,"
which is "those who have the gold make the rules." One of the major
contradictions of conventional economics is that the actual banking and
monetary processes operate much closer to a chartalist view of money
than to precious metal centered assumptions. This includes the
leveraging allowed by way of the legitimization of the fractional
reserve process which in other contexts would be described as a fraud."
(
http://economics.arawakcity.org/node/674)
2.
Tadit Anderson:
"Decisive in the process is that the state also defines the
currency accepted by the state as payment in which taxation levies must
be paid. The exchanges between private individuals is less important
though significant in the taxation of those transactions, and as legal
tender. This establishes a ranking of convertibility that places the
currency in which payment of taxation is accepted as the highest form.
Knapp's concept of money is what the sovereign concept of money evolved
toward nearly seventy five years after the publication of Knapp's
theory. Knapp also recognized the probable difficulties of trade between
sovereign nations.
It is the state that determines what thing or token will be
accepted in the payment of taxes or as currency. State money is
identified as taking three forms, commodity(usually specie based), fiat
money, and managed money, the last two also combine as representative
money. Depending upon the state enfranchisement of centralized and
member banks, state money, bonds, and securities would be used as the
basis for held reserves. "In summary, with the rise of the modern state,
the money of account is chosen by the state, which is free to choose
that which will qualify as money ('the thing' that answers to the
description). This supersedes legal tender laws -- which establish what
can legally discharge contracts -- to define that which the state
accepts in payment for taxes at its pay 'offices.'
The state is free to choose a system based upon commodity money,
fiat money, or managed money. Even if it chooses a strict commodity
system, the value of the money does not derive from the commodity
accepted as money. '[f]or Chartalism begins when the state designates
the objective standard which shall correspond to the money of account.'
... '[M]oney is the measure of value, but to regard it as having value
itself is a relic of the view that that the value of money is regulated
by the value of the substance of which ut is made, and is like confusing
a theater ticket with the performance' (from John Maynard Keynes )
The endogenous approach to money supply is characterized by two
elements, first, that the supply of money expands to meet the demand for
money, and second that the central bank exercises no direct or
discretionary control over the quantity of money. It is only in the
twentieth century that the majority of economists came to accept the
"exogenous" view of money creation and that the central bank can
directly control the quantity of money and can be assumed to be fixed so
that it does not respond to demand.
Hyman Minsky presents a successive nesting process of bank monies
which rely on the primacy of state money. The emphasis of both Minsky
and then Lerner are presented as focusing on how in a normally,
well-working economy money is actually exchanged and tied to their
acceptability by the state. The emphasis here is upon the functional
nature of money, monetary policy, fiscal policy, taxation, and banking.
An interesting piece of actual history is a comparison of the
opposing monetary and fiscal policies of the Union as compared to the
Conferation of southern states during the US Civil war. This comes by
way of an analysis done by Abba Lerner. In short the results of that
conflict seemed to have been more determined by the functional versus
dysfunctional natures of the widely different monetary and fiscal
policies than even the military strategies resulting in massive
casualties. This bit of history establishes the validity of fiat
currency, the "Greenback," by the Union both during the US Civil war,
then upto 1869, and then from 1884 forward.
It is necessary to compare "conventional" wisdom regarding these
issues to the examination of these utilities as they are used which
turns conventional wisdom upside down. Abba Lerner approached these
processes according to their actual effects, and it makes for a
startling different view of the general processes. He does make a
distinction between "fiat money" and "bank money." Fiat money as only
being issued through spending by the government. Bank money as being
issued by banks as a product of a contract of indebtedness to a bank.
This is generally described elsewhere as debt based money. Fiat money in
this context would be debt free money issued by a sovereign government.
Being that bank money is created upon the prospect of
profitability, and then any necessary reserves are acquired after the
fact. This clearly establishes an unstable process relative to the
amount of which money is in circulation. To the extent that fiat money
is spent into circulation to greater or lesser effect relative to the
scarcity of currency within a community. To the extent that the leverage
process would be abused both to put bank money into circulation and
remove both it and the interest upon payment. It seems that the
influence of Hyman Minsky's observations of the destabilization of an
economy enters out of the innovation of unregulated financial
instruments and from the deregulation of familiar instruments. In this
context there should be a question regarding limiting the creation of
bank money both by using fiat money to establish a general lack of
currency scarcity and by regulation of the banking leverage ratios. The
mechanism by which the amount of private savings that might be held,
also effects the availability of credit. It seems that the deregulation
of banking industry generally has favored the profitability of bank
money over fiat money at the expense of the general population.
Much of what Lerner demonstrated came out of the financing and
pricing of commodities and labor by the US government during World War
II, and those economic lessons were soon dismissed. Another portion came
from the interrelating of the financial spread sheets of the US
Treasury and the US Federal Reserve. All this was supplemented by
Lerner's study of the fiscal and monetary policies of both the Union and
Confederate governments during the US Civil War. I think that generally
it has been amply demonstrated that Minsky was entirely correct that
economic stability cultivates economic instability. By extension it is
probable that Lerner was also right about the capacities under the
insights of functional finance.
Economic illiteracy by multiple sources and the profitability of
bank money obstruct change to a more functional basis. The obstructions
to functional fiscal and monetary policies relative the benefits to the
general population are primarily political. A similar analysis can
demonstrate the inadequacy of monetary policies and how the banking
actually operates as an institution.
The logic of the employer of last resort processes as proposed by
both Minsky and Lerner. In this context there is a huge positive
potential in stabilizing both retail prices and wages in a down cycle
period and to avoid the multiple negative effects of using unemployment
as a weapon against unionization and the expectation of higher wages
according to productivity. The core suggestions are revolutionary, in
the sense of the over-turning of long held assumptions. I have
difficulty believing that these "conventions" were sustained solely out
of ignorance, but more likely as a form of oligarchic dysfunctional
finance.
The premise that labor should be a participant within an economy
both as a producer and as a consumer, shifts the processes of economy
from being privatized to being a fully public process. Counter cyclical
employer of last resort paid on the basis of a living wage not based
upon the errant piece of usury referred to as the Federal minimum wage.
Because the nominal Federal minimum wage is substantially below the
actual cost of a living wage, it represents a form of subsidy by the
work force. The idea that in a down cycle period people might be
productive in service to the community, rather than sustaining both a
culture of idleness and idle profit is also revolutionary. Further,
using the living wage as a basis of valuation of the currency is another
major innovation and a humanization of economic processes.
Reserve requirements might be treated as an additional option for
control. He doe not explore this possibility with any sense of
completeness. Given that the established privatization of debt based
currency and the lack of an integrated control over the creation of debt
based bank money, the current system permits multiple drivers. The use
of reserves to leverage the production of debt based money needs to be
integrated as part of a fully coherent set of macro-economic policies in
service of the public interest. A full reserve structure for all bank
lending is the necessary solution. Under the condition of an adequate
distribution of sovereign fiat money, debt based money would be not be
necessary. Lerner's single driver metaphor can also be taken in the
opposite direction toward the corporate takeover of the process of
governance. This choice also offers a "single" driver for the most part,
but it is exactly what we have now in the control of governance by
corporations and particularly by the "finance" sector. This option is
obviously hazardous because this particular driver is blind to every
issue other than its own return on investment. It is also an extremely
unproductive use of capital relative to the entire economy. It serves a
fictional function other than acting as a wealth extraction process.
Relying on a privatized central banking process to control hazardous
driving by the application of monetary policy changes has been
inadequate to limit primitive accumulation. Perhaps we can recognize
this pattern by its current enactment in real time on a global scale.
Most of the changes necessary to making the economic processes
functional require no specific reform, just changes in the way policy
makers understand the capacity of the system they already have. The one
large piece that is missing is an advocacy for the restoration of
monetary sovereignty that was yielded in the establishment of the US
Federal Reserve specifically to greatly eliminate the private franchise
to create debt based money and to bring the control of central banking
under the authority of the U.S. Treasury. The US Government must restore
its ability to issue fiat and debt free money before Functional Finance
can be made operational. In addition the deregulation banking and
speculation must be restored and improved upon. Using Lerner's wisdom,
going for a macro-economic drive requires that a coherent set of public
policies be established to take control of the steering wheel and
accompanied by knowing how the mechanism actually works and interacts
with its environment. We will not have a coherent public agenda
controlling the economy until the power to issue fiat and debt free
money is restored to serve the public interest."
(
http://economics.arawakcity.org/node/675)
History
1.
"MMT is based on the state theory of money which says that modern
fiat money is always a “creature of the state”. The theory was first
introduced by GF Knapp as “Chartalism”. This is derived from the Latin
word “charta” which means token. This is used to describe the reality of
modern fiat currencies as nothing more than a state issued token with
no linkage to commodity based money. We do not reside in a system in
which currencies have any linkage to metals therefore, such thinking is
not applicable to a modern fiat monetary system, although such thinking
has persisted and still clouds much economic thinking to this day.
Significant contributions to Chartalism were made by Alfred
Mitchell-Innes and Abba Lerner. The gold standard, however, rendered
much of their work incomplete as governments were still constrained in
their ability to issue currency. This changed in 1971 when Nixon closed
the gold window. Since then, Chartalism has undergone a significant
revival although much of the economic thinking based on the gold
standard continues to this day. The work of Hyman Minsky, Wynne Godley,
Warren Mosler and Randall Wray have been particularly central to this
revival that has come to be known as “Neo-Chartalism” or Modern Monetary
Theory (MMT)."
(
http://pragcap.com/resources/understanding-modern-monetary-system)
link title
2.
Dylan Matthews:
“Modern Monetary Theory” was coined by Bill Mitchell, an
Australian economist and prominent proponent, but its roots are much
older. The term is a reference to John Maynard Keynes, the founder of
modern macroeconomics. In “A Treatise on Money,” Keynes asserted that
“all modern States” have had the ability to decide what is money and
what is not for at least 4,000 years.
This claim, that money is a “creature of the state,” is central
to the theory. In a “fiat money” system like the one in place in the
United States, all money is ultimately created by the government, which
prints it and puts it into circulation. Consequently, the thinking goes,
the government can never run out of money. It can always make more.
This doesn’t mean that taxes are unnecessary. Taxes, in fact, are
key to making the whole system work. The need to pay taxes compels
people to use the currency printed by the government. Taxes are also
sometimes necessary to prevent the economy from overheating. If consumer
demand outpaces the supply of available goods, prices will jump,
resulting in inflation (where prices rise even as buying power falls).
In this case, taxes can tamp down spending and keep prices low.
But if the theory is correct, there is no reason the amount of
money the government takes in needs to match up with the amount it
spends. Indeed, its followers call for massive tax cuts and deficit
spending during recessions. Warren Mosler — a hedge fund manager, sports
car company owner and frequent gadfly political candidate (he earned a
little less than 1 percent of the vote as an independent in
Connecticut’s 2010 Senate race) — is among the movement’s more prolific
authors. He says that to combat the current downturn he supports
suspending the payroll tax that finances the Social Security trust fund,
and providing an $8 an hour government job to anyone who wants one.
The theory’s followers come mainly from a couple of institutions:
the University of Missouri-Kansas City’s economics department and the
Levy Economics Institute of Bard College, both of which have received
money from Mosler. But the movement is gaining followers quickly,
largely through an explosion of economics blogs. Naked Capitalism, an
irreverent and passionately written blog on finance and economics with
nearly a million monthly readers, features proponents such as Kelton,
fellow Missouri professor L. Randall Wray and Wartberg College professor
Scott Fullwiler. So does New Deal 2.0, a wonky economics blog based at
the liberal Roosevelt Institute think tank."
(
https://apps.facebook.com/wpsocialreader/me/channels/read/content/kHoQP?)
Discussion
MMT on Monetary Policies as a Managed Commons
Tadit Anderson:
"In a "translation" of an essay by Dan Kervick that was entitled
"Occupy the Fiscal Debate" I have been substantially editing it to be
used as a set of my trifolds. The value of the article is that it is a
fairly compact description of how sovereign fiat currencies operate on a
managed commons basis. The appended version of "functionality" by way
of "functional finance" is directed to serving the common purpose, and
it is intended as an integral concern of MMT/FF. It generally does not
address other aspects or levels of the Commons, which I will be adding
as policy options on a sub sovereign basis, such as regional,
state/province, or municipal basis for policy options congruent with the
commons concept in fiscal debates. I am am inserting to extend the
commons basis to integrating "subsidies" and "depletion allowances" as
net negative contributions to the sovereign or national net
contribution. Thereafter annexing water, mineral resources, the
atmosphere, and other more typical commons elements is a short step.
There is a difference between taxing the use of commons resources as a
principle and defining a more specific value to the use of commons
domains in quantifying net negative consumption of various commons
domains.
I hope that this responds to your question. In short, in
principle I believe that the concern about the commons is already
implied though not yet explicitly addressed within the MMT/FF framing.
To the level of peer to peer applications of the commons principle it
seems like short step into embedding the commons principle into legal
language for contracts and regulator functions. This is currently not
the case as per the patenting of genomes and similar capturing of what
is essentially a commons domain."
(email, December 2012)
Can MMT save Europe from Austerity?
The Economy doesn't Need to suffer Neoliberal Austerity!
By Michael Hudson
[2]
"I have just returned from Rimini, Italy, where I experienced one of the
most amazing spectacles of my academic life. Four of us associated with
the University of Missouri at Kansas City (UMKC) were invited to lecture
for three days on Modern Monetary Theory (MMT) and explain why Europe is
in such monetary trouble today -- and to show that there is an
alternative, that the enforced austerity for the 99% and vast wealth
grab by the 1% is not a force of nature.
Stephanie Kelton (incoming UMKC Economics Dept. chair and editor of its
economic blog, New Economic Perspectives
[3]), criminologist and law
professor Bill Black, investment banker Marshall Auerback and myself
(along with a French economist, Alain Parquez) stepped into the
basketball auditorium on Friday night. We walked down, and down, and
further down the central aisle, past a packed audience reported as over
2,100. It was like entering the Oscars as People called out our first
names. Some told us they had read all of our economics blogs. Stephanie
joked that now she knew how The Beatles felt. There was prolonged
applause -- all for an intellectual rather than a physical sporting event.
With one difference, of course: Our adversaries were not there. There
was much press, but the prevailing Euro-technocrats (the bank lobbyists
who determine European economic policy) hoped that the less discussion
of possible alternatives to austerity, the easier it would be to force
their brutal financial grab through.
All the audience members had contributed to raise the funds to fly us
over from the United States (and from France for Alain), and treat us to
Federico Fellini's Grand Hotel on the Rimini beach. The conference was
organized by reporter Paolo Barnard, who had studied MMT with Randall
Wray and realized that there was plenty of demand in Italian mass
culture for a discussion of what actually was determining the living
conditions of Europe -- and the emerging financial elite that hopes to
use this crisis as an opportunity to become the new financial lords
carving out fiefdoms by privatizing the public domain being sold off by
governments that have no central bank to finance their deficits, and are
tragically beholden to bondholders and to Eurocrats drawn from the
neoliberal camp.
Paolo and his enormous support staff of translators and interns provided
an opportunity to hear an approach to monetary and tax theory and policy
that until recently was almost unheard of in the United States. Just one
week earlier the Washington Post published a review of MMT
[4],
followed by a long discussion in the Financial Times
[5].
But the theory remains grounded primarily at the UMKC's economics
department and the Levy Institute at Bard College, with which most of us
are associated.
The basic thrust of our argument is that just as commercial banks create
credit electronically on their computer keyboards (creating a bank
account credit for borrowers in exchange for their signing an IOU at
interest), governments can create money. There is no need to borrow from
banks, as computer keyboards provide nearly free credit creation to
finance spending.
The difference, of course, is that governments spend money (at least in
principle) to promote long-term growth and employment, to invest in
public infrastructure, research and development, provide health care and
other basic economic functions. Banks have a more short-term time frame.
They lend credit against collateral in place. Some 80% of bank loans are
mortgages against real estate. Other loans are made to finance leveraged
buyouts and corporate takeovers. But most new fixed capital investment
by corporations is financed out of retained earnings.
Unfortunately, the flow of earnings is now being diverted increasingly
to the financial sector -- not only to pay interest and penalties to
banks, but for stock buybacks intended to support stock prices and hence
the value of stock options that managers of today's financialized
companies give themselves. As for the stock market -- which textbook
diagrams still depict as raising money for new capital investment -- it
has been turned into a vehicle to buy out companies on credit (e.g.,
with high interest junk bonds) and replace equity with debt. Inasmuch as
interest payments are tax-deductible, as if they were a necessary cost
of doing business, corporate income-tax payments lowered. And what the
tax collector relinquishes is available to be paid out to the bankers
and bondholders who get rich by loading the economy down with debt.
Welcome to the post-industrial economy, financialized style. Industrial
capitalism has passed into a series of stages of finance capitalism,
from the Bubble Economy to the Negative Equity stage, foreclosure time,
debt deflation, austerity -- and what looks like debt peonage in Europe,
above all for the PIIGS: Portugal, Ireland, Italy, Greece and Spain.
(The Baltic countries of Latvia, Estonia and Lithuania already have been
plunged so deeply into debt that their populations are emigrating to
find work and flee debt-burdened real estate. The same has plagued
Iceland since its bank rip-offs collapsed in 2008.)
Why aren't economists describing this phenomenon? The answer is a
combination of political ideology and analytic blinders. As soon as the
Rimini conference ended on Sunday evening, for instance, Paul Krugman's
Monday, February 27 New York Times column, What Ails Europe?
<
http://www.nytimes.com/2012/02/27/opinion/krugman-what-ails-europe.html?hp>
blamed the euro's problems simply on the inability of countries to
devalue their currencies. He rightly criticized the Republican party
line that blames European welfare spending for the Eurozone's problems,
and also criticizing putting the blame on budget deficits.
But he left out of account the straitjacket of the European Central Bank
(ECB) unable to monetize the deficits, as a result of junk economics
written into the EU constitution.
- "If the peripheral nations still had their own currencies, they
could and would use devaluation to quickly restore competitiveness.
But they don't, which means that they are in for a long period of
mass unemployment and slow, grinding deflation. Their debt crises
are mainly a byproduct of this sad prospect, because depressed
economies lead to budget deficits and deflation magnifies the burden
of debt."
Depreciation would lower the price of labor while raising the price of
imports. The burden of debts denominated in foreign currencies would
increase in keeping with the devaluation, thereby creating problems
unless the government passed a law re-denominating all debts in domestic
currency. This would satisfy the Prime Directive of international
financing: always denominated debts in your own currency, as the United
States does.
In 1933, Franklin Roosevelt nullified the Gold Clause in U.S. loan
contracts, enabling banks and other creditors to be paid in the
equivalent gold value.
But in his usual neoclassical fashion, Mr.
Krugman ignores the debt issue:
- "The afflicted nations, in particular, have nothing but bad choices:
either they suffer the pains of deflation or they take the drastic
step of leaving the euro, which won't be politically feasible until
or unless all else fails (a point Greece seems to be approaching).
Germany could help by reversing its own austerity policies and
accepting higher inflation, but it won't."
But leaving the euro is not sufficient to avert austerity, foreclosure
and debt deflation if the nation that withdraws retains the neoliberal
policy that plagues the euro. Suppose the post-euro economy has a
central bank that still refuses to finance public budget deficits,
forcing the government to borrow from commercial banks and bondholders?
Suppose the government believes that it should balance the budget rather
than provide the economy with spending power to increase its growth?'
Suppose the government slashes public welfare spending, or bails out
banks for their losses, or takes losing bank gambles onto the public
balance sheet, as Ireland has done? Or for that matter, what if the
governments do not write down real estate mortgages and other debts to
the debtors' ability to pay, as Iceland has failed to do? The result
will still be debt deflation, forfeiture of property, unemployment --
and a rising tide of emigration as the domestic economy and employment
opportunities shrink.
So what then is the key? It is to have a central bank that does what
central banks were founded to do: monetize government budget deficits so
as to spend money into the economy, in a way best intended to promote
economic growth and full employment.
This was the MMT message that the five of us were invited to explain to
the audience in Rimini. Some attendees came up and explained that they
had come all the way from Spain, others from France and cities across
Italy. And although we did many press, radio and TV interviews, we were
told that the major media were directed to ignore us as not politically
correct.
Such is the censorial spirit of neoliberal monetary austerity. Its motto
is TINA: There Is No Alternative, and it wants to keep matters this way.
As long as it can suppress discussion of how many better alternatives
there are, the hope is that the public will remain acquiescent as their
living standards shrink and wealth is sucked up to the top of the
economic pyramid to the 1%.
The audience requested above all more theory from Stephanie Kelton, who
gave the clearest lecture on economics I had ever heard -- a Euclidean
presentation of MMT logic. For a visual of the magnitude, see Stephanie
here. <
http://www.youtube.com/watch?v=XP60tpwu5cs>
The size of the audience filling the sports stadium to hear our economic
explanation of how a real central bank should operate to avoid austerity
and promote rather than discourage employment showed that the
government's attempt to brainwash the population was not working. It was
not working any better than Harvard's Economics 101 class, from which
students walked out in protest against the unrealistic parallel universe
thinking whose only appeal is to highly intelligent but ungrounded
individuals (not yet post-autistic). They are selected as useful idiots
and trained to draw pictures of the economy that exclude analysis of the
debt overhead, rentier free lunches and financial parasitism. One needs
to be very clever, after all, to imagine a system that "saves the
appearances" of an unrealistic Ptolemaic system."
Overview of Critiques
Robert Searle:
"The following could be listed in connection with MMT.
1. Mainstream economists would regard the idea that new non-repayable
money could be created by governments (ie MMT)thereby replacing tax
would be seen as being "too inflationary."
Tadit: this is essentially a red herring. The problem with sovereign
economies is exactly because of of the assumptions that define
neo-classical economics. Based upon this fact being concerned about
supposed criticisms neo-classical economists seems like a non-issue.
Main stream economists should be more concerned about the
unsustainability of neo-classical economics, than attempting to
discredit an economic discourse which is based upon actual practices, ie
MMT/FF
2. The concept from the US point of view that governments should create
their own money sans taxation (except for controlling inflationary
pressures where, and when necessary) would be seen as giving elected
representatives "too much power!"
Tadit: this statement is more about dysfunction economics and the
political interests that the neo-classical model serves. MMT/FF is
reality based and at best neo-classical economics is faith based and
little more. Actually any casual reader who looks into where those
representatives advocates receive their funding, their actual loyalties
should be clear and not supportive of governance as an element of the
political commons.It will be very clear that allowing private banking
interests to issue money as debt and as digital entries has demonstrated
that the privatized franchise to create "money" results in their
control of who gets loans and capitalization, who does not receive
capitalization, and which politicians are bribed and those whose
priorities are primarily aligned with private banking interests, and
those corporations which they serve have the far greater influence upon
policy issuance and thereby political power of blood and flesh citizens.
3. The most obvious obstacle to MMT is of course the Global Bond Market
which would resist any attempt to reduce, or irradicate its power."
(p2p-f mailing list, October 2011)
Tadit: this is patently silly, the global bond market traders if
they are even modestly educated will understand that money is the means
by which wealth is transferred. Certainly the finance centered banks
with object the application of MMT/FF because any monetary reform which
result in less profit going to those banking interests will be resisted
at great effort. Those investor would speculate in currency futures
generally already understand how monetary economics works. Those that
hold the privatized franchaise to issue sovereign currency will never
willingly give up that privilege willingly. This no reason at to
surrender the need for massive reform to that process in favor of the
sovereign economic commons with the expectation that the currency
process be managed in the interest of democratic outcomes and effects..
If you still believe that neo-classical economics is the only
legitimate economic model and you are not a private sector banker, then
you need to do a considerable amount of homework before maybe you will
eventually realize that your education has been seriously deficient. If
you are modestly intelligent, and are interested in learning about an
economic model and the monetary reform which is reality based, then
MMT/FF likely to be a useful alternative. For those who have degrees in
economics and are committed to neo-classical economics, then perhaps you
need to think about demanding a return on your tuition payments.
Tadit Anderson:
"The difference is more a matter of history and focus, because generally
speaking they are integrated. MMT is derived from J. M. Keynes's later
work related to money as an institution and as related to his advocacy of
macro-economics. Functional Finance is based upon work of Abba Lerner (the
New School for Social research through the 1960s and 1970s plus) others.
It is based upon the experience with deficit based government spending
during the "Great Depression/FDR's New Deal and into the transition after
US Pres Nixon "closed" the Gold "window" on the redemption of US Dollars
into gold in 1971. It is functional in the sense of how monetary and
fiscal policy works relative to its outcomes. MMT includes substantial
historical research into the history of the origin and issuance of money.
Functional finance is more about the effects of the macroeconomics of
Keynes and related people."
More Information
