I haven’t read Stefanie Kelton’s book and I probably won’t. At the American Institute for Economic Research Joakim Book synopsizes it and critiques several points:
- A currency issuer (a “monetary sovereignâ€) cannot run out of money
- Taxes don’t pay for government expenditures but generate demand for money
- Inflation is the only constraint that a monetary sovereign faces.
and - Capitalist economies have lots of idle resources (unemployment, spare capacity, fiscal space)
but I think there are a few important omissions in his exposition. Unless Dr. Kelton is what I’ve referred to a a “folk MMT-er”, she actually believes that creating more money will increase inflation unless it’s matched by an increase in aggregate product.
The other are the concepts of substitutability and friction. Resources are not automatically substitutable and spare capacity is sometimes just a sunk cost. When you have a thousand idled buggy whip factories because no one is buying buggy whips any more, increasing the money supply by issuing yourself credit won’t inevitably cause people to start buying more buggy whips and bring those factories into production again. And it will take some capital investment to convert those buggy whips so that they can be used to produce something that people are buying. Governments are notoriously bad in picking the right areas for capital investment and expanding the money supply actually discourages private investors from investing their money themselves.
The same is true of labor resources. It is simply untrue that idled coal miners get always be retrained as computer programmers. Why not propose that they be retrained as lawyers or architects or ballet dancers? A 60 year old miner is not going to be retrained for any job for which there is actual demand for the simple reason that by the time he’s gotten the training he’ll be too old to use it.
I have not read any of Dr. Kelton’s books, but I have seen her articles and interviews. From what I can tell, MMT has the best description of the Modern Monetary System (MMS), but they confuse money, currency, and bank cheques (banknotes). This confusion is why the Theory portion is mostly nonsense.
To be fair, most anti-MMTer’s have no idea of how the MMS works, and many are under the delusion that the theories of Adam Smith and David Ricardo are still applicable.
Currency is the medium used in value-to-value transactions. Money is a store of value, and it is used as currency. Bank cheques are debt obligations, and are used as currency. In the US’s MMS, the dollar is used for all three, and from what I have seen, Dr. Kelton does not understand the differences or implications.
I use the term bank cheque because it is more descriptive of the concept of currency in the MMS, and the spelling is to distinguish it from the modern check. Prior to the MMS, a check depended upon a bank’s solvency in addition to the person’s account balance. A promissory note is essentially a bank cheque, and both are IOU’s.
IOU’s are debt obligations that anybody can issue, and these IOU’s could be used as a medium for value-to-value transactions (currency). A post-dated check is an IOU, and if it were used in additional transactions, it would be a form of currency. If the IOU’s were tied to assets, they would be a form of hard money.
Theoretically, I could create a personal currency using personal IOU’s to purchase goods and services keeping a ledger to account for the amount of each. I would need to keep some actual money for whenever somebody wanted to redeem an IOU, but it would only be a fraction of the ledger total. The remaining ledger could be balanced by my assets, or it could be a future debt obligation.
Fractional reserve banking is not a new invention, but it is mostly misunderstood. Under a hard money system, a bank cannot lend any more hard money than it has, but under the MMS, a bank can lend more money than it has. The MMS uses accounting tautologies with the Fed amalgamating its member’s balance sheets to accomplish this.
The MMS is the Fed’s accounting ledger with amalgamated bank assets balanced against dollars issued, and the ledger is required to remain balanced. Debt obligations are assets that can be used to balance the MMS, and since they are the overwhelming majority of banking assets, dollars are basically fractional debt obligations.
The MMS is part monetary and part financial system, and the financial part is vastly greater than the monetary part. M1/M2 is the monetary base. M3 is the financial part, but it does not capture the total.
Under the MMS, the government cannot and does not just create currency. Banks create currency, but this ability is limited by capital requirement regulations. Even leveraging debt obligations multiple times, currency creation is not unlimited, but the monetary balance sheet is a long way from that limit.
The government can and does create debt obligation in exchange for dollars (debt obligations), but without changing the MMS, this is ultimately limited. When the MMS reaches the limit for creating new debt obligations, the government will run out of money.
Financial engineering can create financial assets by leveraging debt obligations, but there is a limit. To increase the limit, productive assets must be created. Productive means producing actual goods and services. In the MMS, productive capacity is the ultimate limiter.
The reason I reject hyperinflation as a possibility because dollars are debt obligations. A currency crisis would be a debt obligation crisis, and a debt obligation crisis would cause an MMS implosion.
Were the Fed to begin adding unbalanced dollars to the government’s account, it would unbalance the entire system, and because the balance sheet includes many, many leveraged financial assets, massive damage would not require a massive unbalancing. (I have no doubt that an actual balancing of the government’s books would result in a massive change to the Fed’s balance sheet, but by taxing and borrowing money, the MMS is generally trusted.)
According to MMT, I could issue unlimited IOU’s. Since I can issue an unlimited number of IOU’s, my income is not actually being used to pay for my expenditures, and since my income is being paid by the IOU’s I issued, demanding a higher and higher income will result in the demand for more of my IOU’s.
Except, it does not work like that, even theoretically. MMT assumes that the MMS is natural evolution of a monetary system. In fact, it is a hodge-podge of parts bolted together into a solid structure, but it is actually far more brittle than Dr. Kelton can imagine.
Historically, money has been coined by governments to pay for goods and services and to receive taxes. Additionally, the coined money is used for trade and for storing wealth. Governments have issued currency as promissory notes, and the successful currencies represent an obligation.
In the MMS, almost every dollar is created on a private bank’s balance sheet, but it is backed by a debt obligation. In my opinion, this is where MMT begins to go off-the-rails. For the ledger to remain balanced, the asset column must grow at the same rate as the debit column, but all assets are not created equal.
Malinvestment will be a far greater problem than inflation, and the only way to determine a bad investment is to wait for the investment to fail. It is easy to cause cascading failures, and these are not simply business failures. In the MMS, these failures unbalance bank accounting ledgers, and this unbalancing cascades.
Much of what is deemed idle resources is the result of malinvestment, and it cascades as well. A lot of student debt is the result of malinvestment – failed education investment, failed financial investment, failed academic resource investment, failed infrastructure investment, failed support personnel investment, etc.
In my opinion, we are close to a breaking point because the amount of malinvestment is increasing faster than productive investment, and the shutdown of the economy is a form of malinvestment. Not only has investment in productive capacity almost ceased, but existing productive capacity is being destroyed.
The Theory part of MMT is basically the Broken Window Fallacy. In essence, idle resources would be redirected to breaking windows, repairing windows, manufacturing windows, etc.
Sorry for the length, I got carried away.
That’s precisely the point I have been making for some time. One of the many problems with politically-motivated federal spending is that it produces deadweight loss. IMO a major reason for slowing economic growth is deadweight loss.
I would say it a little differently. Adam Smith and David Ricardo are to economics what Newton was to physics. You need to understand what Newton described to understand Einstein.
IMO many of the MMT-ers make two errors. The first is to think you can ignore microeconomics. The second is that they mistakenly believe that hyperinflation is a species of inflation. It isn’t. It’s a psychological phenomenon.
“Why not propose that they be retrained as lawyers or architects or ballet dancers?â€
Why not?
That would serve the same purpose, Telling the displaced miners that they’re on their own.
How does MMT change when the deadweight loss is domestic and productive corporate investment is in “emerging markets “?
Like predicting the weather, bad and getting worse?
@Grey Shambler
How does MMT change …
It does not. MMT correctly describes the Modern Monetary System, but it does not comprehend the implications. Furthermore, the Theory portion is based on a flawed understanding of currency. Dollars are money, and they can be stuffed in a mattress or deposited in a bank. Dollars are currency, and they can be used to purchase things. In the MMS, dollars are also debt obligations, and they can be created through lending.
Similarly, a foot is a body part, but it is a unit of measure, also. By conflating the meanings, strange conclusions can be drawn, and they may seem logically correct. So, ten feet would require five people, and when purchasing ten feet of rope, the shopping bag would be really, really big.
… when the deadweight loss is domestic and productive corporate investment is in “emerging markets “?
It is my understanding that for MMT, all investments are equal. As long as the goods and services being produced are being purchased, the economy is sound, and the actual value of the goods is immaterial.
By conflating money and currency, MMT does not account for money being a store of value. In MMT (not the MMS), dollars have no value except as use in purchasing goods and services. (With the exception of multi leveraged financial assets, an investment ultimately results in the purchase.)
For MMT, there is little purpose to not spending money, and spending money begets spending. It is like a snake eating its tail, but MMT theorizes that the snake’s tail is almost infinite.
More specifically, MMT does not fully understand the extent of the MMS nor foreign trade, and in the MMS, both are entwined. Basically, domestic financial investments can be balanced by foreign production investments, and as long as the goods produced by both are fully consumed, all is good.
Like predicting the weather, bad and getting worse?
Generally, weather predictions are more accurate.
@Dave Schuler
… deadweight loss …
Through leveraging productive assets, the MMS can sustain an enormous amount of uselessness, but what MMT proposes is leveraging uselessness (deadweight loss).
It might be time for the three merchants and a hat parable.
… You need to understand what Newton described to understand Einstein.
Actually, you need to unlearn Newton to understand Einstein, but you can still build a bridge using Newton. Long after my last physics course, I had a week long argument with a physics professor over the validity of Newton.
His position was that within a very, very large range Newtonian calculations were accurate, but again, numbers lie. To an engineer, the correct number is the goal, but to a scientist, the correct process is the goal.
Presumably, you mean this one.
Yep.