There’s what strikes me as a pretty reasonable examination of Modern Monetary Theory, an idea that has captured the imagination of people on both sides of the aisle, removing, as it is perceived incorrectly to do, any need for restraints on federal spending, from Julian Jessup at CapX. Here’s its opening:
Imagine that the government could simply print whatever money it needs to guarantee everyone a decent income, fantastic public services, and a secure job if they wanted one – with enough left over to save the planet too. That, for many, is the promise of a new economic paradigm known as Modern Monetary Theory (MMT).
If you’re already thinking that this sounds too good to be true, you are not alone. Many economists – myself included – think that MMT is a frustrating muddle.
To be fair, MMT has a respectable academic pedigree, helpfully summarised here, which some trace all the way back to Keynes himself. It has several prominent advocates, notably Professor Stephanie Kelton, author of The Deficit Myth and an advisor to the Democrats in the US.
In particular, MMT appears to offer a credible alternative to conventional thinking on the importance of balancing the government’s books. The global economic slump and the explosion of debt and money printing during the pandemic have added to its popular appeal. But I remain a sceptic.
My criticism is a bit different. Like Keynesianism there are folk varieties of MMT and the canonical variety and people who should know better are embracing the folk varieties because they let them do things they very much want to do.
I think there are also knowledge, timing, and political issues but that’s another subject.
In the present economic (not pandemic) crisis, it is the supply chain that is the problem, not the money supply. More money won’t get the supply chains and actual physical production up and running.
The problem is determining when non-productivity (inflation) begins, and that can only be done after the fact. Without the ability to perfectly predict the exact moment non-productivity will begin, you can stop too soon or too late, and if you decide to stop too soon, you will never know how much longer you could have gone.
I am sure that Mr. Jessop is a very nice person, but like most economists, he knows nothing about money, currency, credit, debt, finance, banking, or the international trading system. He does see the link to Keynes. So, there is some hope.
He correctly notes that the government does not print money, but he does not seem to understand that money, in any traditional sense, does not exist in the Modern Monetary System.
Money is a store of value, and currency is the medium used in a value-to-value transaction. Money can be currency, but currency can never be money.
In the MMS, money is not a store of value. It is a store of debt. Balance sheets are used to store value. (Maybe, balance sheets are the gravitational field of finance.)
The traditional concept of a sovereign currency is not applicable to the MMS. Sovereign control is applied through banking and financial laws that regulate balance sheets.
When you turn your sovereign currency into a whore, you should not be surprised that bankers and financiers will become pimps, and your politicians will form a protection racket.
It’s your world. It’s your rules, enjoy.
Even canonical MMT does not fully understand the Modern Monetary System (MMS). What MMT proposes has nothing to do with a sovereign currency. That is a hard money concept. In the MMS, dollars are like inches – a unit of measure.
In the MMS, money is not lent in the classical sense. The money for a loan does not exist until the exact moment it is lent. The bank did not have the money for your mortgage until the exact instant you signed the papers. At that exact moment, the bank’s worth increased, but their net worth was unchanged.
When you or the government borrows money, it is not being diverted from somewhere else. It never existed, and when it is repaid, it will never have existed.
The MMS is backed by a balance sheet, and it operates according to algebraic identities. Like a see-saw, it will be balanced as long as both sides weigh the same, but like a see-saw, too much weight, no matter how well-balanced, can cause it to break.
The economy is the backbone of the MMS see-saw, and if the MMS balance sheet gets too large, it will break the economy. Since all economies are production based, an economy’s production capacity must be strong enough to support the MMS balance sheet.
By acknowledging that production is the limiting factor, MMT & “consumer” economy are mutually exclusive. Also, production means goods and services not esoteric financial instruments.
Portland, coming to a town near you.