What is Modern Monetary Theory?

[GamezRule]

Not that long ago, Modern Monetary Theory made it into the news, as a component of the Green New Deal proposed by some of the new progressives in Congress. My knowledge of it is limited. My understanding of it is limited to the idea that nations with fiat currency and the ability to issue bonds should print whatever money is necessary to fund the government, and taxes and bond issuance should only be used to control inflation.

What are the advantages and disadvantages of this idea? Is this an idea that is fringe or is it gaining support among mainstream economists? Is it a model that is sustainable in the long term?

 

[Hygro]

There are two parts:
The people and their opinions
The economic theory and empiricism

MMT is a rebrand of post-Keynesian economics. Almost all of it is minor patches to mainstream macro econ even though its proponents pretend it’s bigger than that. The fight against it is political in the public and turf driven in academia.


Here are the basic tenets:

1) bank managers have a financial incentive to rob their own banks by providing loans that are only viable during during good years, earning bonuses along the way, and do so in lock step so when the margin call comes they all blame the economy at once. Prosecuting them with existing laws would solve this.

2) Money is created via charter: the government and banks. Money has to exist to be taxed so it is spent into existence first and taxed second. Aka in the order of printed and then unprinted. Similarly, it is loaned into existence first and repaid into non existence second.

3) deficits means surplus money is being printed and spent into the private sector. Surpluses means more money is removed from the private sector than is provided. This is so obviously and inherently true and yet is where people get the most confused.

4) deficits being surplus money, and bank reserves being liabilities, not assets, to banks means that deficits naturally drive down interest rates rather than raise them as banks seek loan more aggressively to acquire loan assets. The reason deficits correlate to higher interest rates is the central bank choosing the raise them to prevent inflation.

5) lowering interest rates are stimulating because more borrows become viable and lower profit opportunities become viable, so more loans are created. Raising interest rates do the opposite. In orthodox theory they teach it that individuals choose to put more money in savings accounts for take advantage of higher rates and that’s why there is less spending. Like I said, minor patches to make Econ closer to reality and logic rather than convenient narration.

 

[Cutlass]

It's wishful thinking. No one in the economics profession takes it seriously.

 

[Hrothbern]

It's wishful thinking. No one in the economics profession takes it seriously.

From the Romans to the Spanish Kings it was already done before proto capitalism started in 1600.
You can do it right... you can do it wrong.

 

[Ferocitus]

As always, it's helpful to have a chant and a tune to inspire the plebs...

The best things in life are free,
But only if you steal them from the bourgeoisie!
I want money!

 

[El_Machinae]

It's one of those things that honestly worth a few hours of your time. There are many introductory lectures available on YouTube. each will be in a professional setting and over 40 minutes long. Highly recommended. My criticism of it only is really understandable when someone has the basics.

 

[Hygro]

It's wishful thinking. No one in the economics profession takes it seriously.

It’s amazing how certain you are and yet you don’t understand it.

There’s a phenomenon that describes this. Some kind of “effect”

 

[Cutlass]

It’s amazing how certain you are and yet you don’t understand it.

There’s a phenomenon that describes this. Some kind of “effect”

It’s amazing how certain you are and yet you don’t understand it.

There’s a phenomenon that describes this. Some kind of “effect

 

[Lexicus]

MMT I think represents more than 'minor patches' to neoclassical macro, but it's, like, whatever

Is it a model that is sustainable in the long term?

Well, it's an accurate theory so it will come to be "mainstream" to the extent that economics is actually scientific.

It’s amazing how certain you are and yet you don’t understand it.

There’s a phenomenon that describes this. Some kind of “effect

Do you think you're doing your case any favors by stooping to this kind of pathetic childish stuff?

 

[Perfection]

Wait money is still a Thing? I thought we transitioned to a likes based economy.

 

[El_Machinae]

The US government has never borrowed a cent as long as it's existed.

This one seems to go too far, maybe you could unpack it. Buying a T-bill deprives me the use of my dollar. It's how the Fed controls the supply of money. They then give me more money than I gave them when the coupon is due.

 

[Farm Boy]

Acolytes of God Money get into it about heresies instead of mechanics. Mechanics are impacted or blamed for the gettin' into it. News on the hour?

 

[Lexicus]

This one seems to go too far, maybe you could unpack it. Buying a T-bill deprives me the use of my dollar. It's how the Fed controls the supply of money. They then give me more money than I gave them when the coupon is due.

The US government, being the sole issuer of the dollar, is technically incapable of borrowing dollars from anyone. The idea that it would need to is absurd and 'borrowing' is at best a misleading metaphor to describe what is happening when the US issues bonds. The main point is that the savings used to "purchase" the bonds, which the government is supposedly "borrowing" by issuing the bonds, have already been created by federal spending when the bonds are issued.

I mean if you think about how it all works for about five seconds you see the the idea of the currency-issuing government borrowing its own currency is completely absurd.

 

[El_Machinae]

I don't know. I think you're going too far. Using similar math, I can't actually borrow money off of the contractor I hired to build a house. Or the bank can't borrow money off of him. Or whatever it is you're trying to say.

Of course they can borrow the currency they created, the currency they created exist as a legal entity with the ability to be owned.

When the government issues a bond, and someone buys it at the price it was offered, what word would you use instead for that transaction?

 

[Samson]

It's one of those things that honestly worth a few hours of your time. There are many introductory lectures available on YouTube. each will be in a professional setting and over 40 minutes long. Highly recommended. My criticism of it only is really understandable when someone has the basics.

Any recommendations? There is a lot of misinformation on youtube and view count is no guarantee of quality.

 

[Lexicus]

When the government issues a bond, and someone buys it at the price it was offered, what word would you use instead for that transaction?

I would simply say the government is issuing bonds, not borrowing money. The bond issuance is something that, as you note, they choose to do to help hit the target interest rate and to reduce inflation. There is no sense in which they need to issue bonds to raise revenue.

Of course they can borrow the currency they created, the currency they created exist as a legal entity with the ability to be owned.

What do you think happens to the money you use to buy a T-bill? If you pay in cash it gets burned, just like if you pay your taxes in cash. It's a technical point but it really is true that the government is incapable of "funding" its operations using existing money. The Treasury issues its own liabilities, which we call dollars, to cover its costs, every time it spends. Money paid into the treasury is wiped from a balance sheet, it doesn't go anywhere and it isn't used for anything.

Any recommendations? There is a lot of misinformation on youtube and view count is no guarantee of quality.

Anything with Stephanie Kelton is likely to be sensible and informative. Randall Wray is another good one although I'm not sure he has much Youtube presence.

If you're more into reading, this is a short and easy book with no technical or theoretical content at all.
http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf

 

[El_Machinae]

I would simply say the government is issuing bonds, not borrowing money. The bond issuance is something that, as you note, they choose to do to help hit the target interest rate and to reduce inflation. There is no sense in which they need to issue bonds to raise revenue.

I never said anything about 'need to'. You said they never have. We saw during the GFC how the government is willing to bribe the rich to help them print money. But no, sometimes they borrow. It's distinct from taxation. Unlike taxation, it creates a temporary property right in its stead. And a government spends in order to pay off outstanding debts. It's a voluntary transaction. Right-wingers prefer deficits to taxation, because they're fundamentally different on who gets rewarded by the government.

What do you think happens to the money you use to buy a T-bill?

So? It works whether the dollar retains existence or not. It works if it's a cryptocurrency. It works if it's a coin. As you said, it's a 'savings' created by the government. It's legal property. It exists. To call it anything but 'borrowed' from the person who uses it to buy a t-bill is just nonsensical. Dollars are fungible.

If I say "hey, can you lend me an hour on your deck and I'll pay you back with an hour on your deck?", does some person come along and say "what do you think happened to those seconds you 'lent'?, they're GONE forever."? No.

The person who buys a bond loses use of the dollars. There's a promise to repay. It's 'borrowing'. It's distinct from 'printing'. You've (many times) pointed out how dollars are spent into existence, and we all get that. And we all get how borrowing removes money from circulation, to reduce one person's spending to improve another's.

 

[Cutlass]

Do you think you're doing your case any favors by stooping to this kind of pathetic childish stuff?

If I treat the issue seriously, you attack me. If I don't treat the issue seriously, you attack me. Where's my motivation?

 

[Lexicus]

I never said anything about 'need to'.

But that is a crucial point that can't be handwaved. When I "borrow money" it is because I am dependent on the lender for money. I cannot issue my own money. Or rather, I can, but no one will take it (whole 'nother discussion).

You said they never have.

Not since the domestic convertibility of the dollar to gold was suspended.

So? It works whether the dollar retains existence or not.

It's not about the specific dollars. Your point would make more sense if the cash was burned but the money was still retained on a balance sheet somewhere. But it is not. It is wiped off the balance sheet, it is destroyed, poofed out of existence.

To call it anything but 'borrowed' from the person who uses it to buy a t-bill is just nonsensical.

If this is a purely semantic issue to you, then frankly I don't care what you call it. You can call it borrowing, that's fine, just please stop trying to get me to call it borrowing because I'm mostly not going to. I don't think borrowing is a good term because of the connotation I mentioned at the top of my post here: it implies the government is dependent on revenue from the "lenders" which is false, as you freely acknowledge. The main point is that the "borrowing" operation is discretionary and done by the government for purposes that have nothing to do with obtaining dollars.

If I treat the issue seriously, you attack me. If I don't treat the issue seriously, you attack me. Where's my motivation?

Intellectual honesty ought to be its own motivation. But if we get down to it: you've never treated MMT seriously and you know it. For example you know have never read a single academic paper written by an MMT economist. In fact I am not sure you have ever read a single word written by an MMT economist, period. Your "serious" arguments against it, where original and not just Paul Krugman blog posts, incorporate statements which you would never have made if you actually knew anything about it, for example your assertion earlier in this thread that "no one in the economics profession takes it seriously."

Disagreement with you is not attacking you. Attacking the outmoded and empirically false economic theories to which you subscribe is also not attacking you.

The sad thing is I think you could benefit quite a bit from serious engagement with these ideas - even if you ultimately decide you don't agree with them - but you refuse because you seem to think you know everything worth knowing about economics already.

It's up to you what you want to do about that. If you don't think MMT is worth spending any time bothering with, I wonder why you think it's a good use of your time to post snide one-liners in threads about MMT.

 

[TheMeInTeam]

What I'd like to see MMT explain is how much a government can get away with printing money and why. How much is too much?

There must be a reason USA is different from aforementioned Roman/Spanish governments, else anticipating a different/better outcome isn't justified.