We should talk about MMT

MMT, or Modern Money Theory. At first you dismiss it as a crazy conspiracy: of course it makes no sense. Then you hear it mentioned again and again, and… it actually does? What the hell?

Really, I’ve come to think that it offers a valid alternative way to regulate money policy.

After all, once you get some historic perspective, money policy like we know it is…. a science still surprisingly in evolution! I was born under a different currency. My father became an adult before my central bank was independent from the government. And in fact, he was born in the world of Bretton Woods, where every currency was pegged to… gold!


Don’t you just think of top hats if you hear “gold standard”?  And yet, for everyone up to 1971, being pegged to gold-dollar was THE pinnacle of monetary science. Today, we see it as a weird residue of antiquated thinking -you’ll hardly find an economist alive endorsing the gold standard. Could it be that we in turn, still aren’t perfect? Looking at the state of our economy… it seems a reasonable bet, to say that we aren’t.

Unfortunately, we also can’t be that off the mark. Abandoning the gold peg didn’t make us all work 4 hours a week; very, very likely, no theoretical shift will ever do that overnight. No matter how much some want to believe it.

And that’s precisely the reason of my article: MMT is presented by many supporters as if it was a pot of gold; which could solve all problems ever. As such, in the world of Trump, it has the potential to spread like wildfire in distorted, rose-tinted version among the ignoramus… and then, equally tragically, come to be automatically rejected by those “right-thinkers” who don’t think any more than the others do, but just assume the opposite to feel superior to “those crazy conspiracy theorists”.

I want you to do what neither of those groups do: to know what we’re actually talking about.

You’ll see the world after will be …still basically the same. You do have to work to eat.

Yet: new perspectives bring new insights. Would have said, in 2008, that central banks could just create money to buy us out of the crisis? It took years for most people to come to terms with that; yet everyone now agrees it was the only right thing to do.

How it works right now

Money exists independently of governments. Governments have to either get it through taxes or debt.

In fact money is created by lending. Bank lending creates money in the form of filling the bank account of the borrower; money he can then spend. In accounting terms that money cancels with the negative value of the debt; but while the debt just sits there, the money is spent and spent again. Until the debt is repaid, that money actually exists.

Central banks keep private banks in check by requiring they keep a ‘reserve’ of at least a certain percentage of the money they lend. And not “bank money” of deposits created by other banks; but “central bank money”; that is a deposit at the Central Bank itself. Note that bank notes are “central bank money” -a physical representation of a deposit there.

If for instance the reserve is 5%, then the bank has to borrow at least 1 million to lend 20 millions. Banks can borrow that money from depositors or other banks, but ultimately the increase in the total amount of money comes from the Central Bank; and the Central Bank charges an interest for it.

Why do we let banks create money? The Central Bank could definitely raise reserve requirements to 100%, create all the money, charge banks for it, and turn huge profits to the state. But we as a society have decided this is not how it should work. If the Central Bank tried to earn money, it would be a tax on the economy (which would take the form of either hiking the interest rate for borrowers or slashing it for savers). We have decided this is not within the scope of a Central Bank; let the Government explicitly tax the banks instead, if it needs money.

With that out of the way, please appreciate how it makes sense: lending implies the expectation of real value being created in the future. So it’s quite proper that it would also create the corresponding amount of money!

In this picture, the government is just a borrower among many. Which was definitely the case when the European kingdoms were dwarfed by private interests (most king’s finances were just a footnote in Venice’s affairs in 1300, and later India was first conquered by …a trading company); but it still quite makes sense in the big-state world of today: government debt is typically ‘just’ between a half and a third of the total debt of a modern rich nation (the rest being corporate debt, and mainly mortgages; although you also have consumer credit for medium purchases, payday loans, student debt, etc).


…simply throws all that out of the window. The Government and the Central Bank are both expression of the State -so, why should they be separate? Can’t they work better together?

The intuition (which is interesting) is that the functions of both could be accomplished using only one tool: the state’s budget. At least, once you throw away the constraint that the budget must be balanced like a private institution.

The “shape” of taxes and expenses would keep doing the “government” function; to redistribute money among citizens. But monetary expansions (and contractions) would be realized just by spending more (or less) than it is raised in taxes. Both of which tings would be done without any ‘debt’ at all, mind.

Debt would be still an option, actually: it could be used to reduce inflation without having to reduce the deficit right away. But: this point of view reduces debt to the role of a tool, rather than a tyrannical maser like it’s come to be seen now.

The result of such a policy would be… rather much of the same? Consider:

  • If inflation is too low, MMT mandates that the government spend more or collect less taxes. The additional money flows in the bank system and allows them to lend more, creating even more money and lowering the interest rate. What happens now instead? Well, the Central Bank directly lowers the interest rate, allowing the banks to create more money at a lower interest; and then the reduced interest burden allows the state to spend more.
  • If the inflation is too high, MMT mandates that spending be cut or taxes raised. Less money in the system causes banks to lend less, further destroying money, and hiking rates for the real economy. Now? The Central Bank raises interest rates, forcing banks to raise rates and lend less. And concerns over the rise of interest costs then force the state to cut costs or hike taxes.

Soo… looks like the world would still look very much the same. Just… backwards? But the end result is about right. Who would have thought? 😉

Still, there are situations where the result starts being different.

Say you are… the United Kingdom, from 2014 to 2017. Inflation has been under 2% for much of the three-year period, flirting with 0% for a whole year, as the central bank struggled to enact a monetary policy expansionary enough to restart it. Still, only worried about “reducing the debt” the government kept cutting the budget deficit, from -4,4% in 2014 to -2,9% in 2016. MMT would have told them to just keep spending fresh printed money -if it isn’t creating inflation, it isn’t hurting! (of course, stop creating money after inflation restarts.) Were some painful cuts to the welfare system entirely avoidable? The United States had a very similar situation, too.

Even more -Japan. The country which has been stuck at 0% inflation for 20 years now. Contrary to the UK, Japan did spend -its public debt is now at 250% of GDP. But it isn’t really working, for a simple reason: rather than spending in turn, Japanese citizens dutifully put the money back by buying more bonds! Which on one side is necessary, to avoid the collapse of the debt system -if the interest rates were to rise, Japan would be in default instantly. And yet on the other side, it plainly defies the whole idea of giving money to the citizens to restart the economy, if they won’t spend it. Indeed the economy isn’t restarting. Add to that that Japanese politicians still sometimes keep reacting to the increase of the debt by raising taxes “to pay for it”, as if it was possible. Which only sends the economy tumbling, and inflation in negative territory. I cannot honestly say that following the MMT, throwing away the debt dogma and spending fresh, free money would be bad for them. Can you?

But what about when inflation rises again? Can the government really self-restrain, and cut spending to stop inflation? I think a compromise can be found. Just apply MMT… only in the rare case where it is superior to the classic system; and revert to the known path otherwise. It’s not difficult: IF inflation is low and the interest rate is already 0, then it must be a possibility for the central bank to just pass the government money free of any interest, not counting in any way as debt -but when inflation rises again, then this goes back to taboo, like it is now.  This avoids the trap of monetary policy becoming ineffective because, everyone being concerned with ‘too much debt’, no one (and particularly not the state) will borrow at any rate: as, indeed, the state would be able to spend without borrowing. But only after an unusually large crisis, which doesn’t mend by itself like they usually do. As soon as the conditions return normal, that is, to the situation for which independent central banks were invented in the ’70, then we would revert to that.

Best of both worlds!

The problem is wholly another. That is, that the adepts of MMT, and indeed the guru himself, go on building on this theory shiny catchphrases… which don’t make sense -not even within the theory itself!

Read some of the founder’s thesis, here. Ok, #1 is the main theory. #3, #4, #6? He’s basically right!

But go to #5 for a great example of what I mean.

Deadly Innocent Fraud #5:
The trade deficit is an unsustainable imbalance that takes away jobs and output.
Imports  are  real  benefits  and  exports  are  real costs. Trade deficits directly improve our standard of living. Jobs are lost because taxes are too high for a
given level of government spending, not because of imports.

Main thesis? He’s one of the few to get the obvious right: more stuff is good!

But then he goes on a tangent to fairyland.

 And what options do foreign savers have for their dollar deposits?
They  can  do  nothing,  or  they  can  buy  other  financial assets  from  willing  sellers  or  they  can  buy  real  goods and  services  from  willing  sellers.  And  when  they  do that at market prices, again, both parties are happy.

Come again? If China selling goods and buying bonds means for America more goods, if China decided to do the exact opposite and cash out their dollars to bring back real goods, it would mean for America, mh… less goods? And more money. In a word, inflation. To sap away that inflation, our central bank system would restrict lending, and his MMT would raise taxes; as we have seen, the first would cause the second and the second would cause the first, so not much changed. It would be a disaster. And really: if A is ‘very good’, how can non-A …not be something to worry about? If logic has any value, it should be definitely not-good!

But also

Deadly Innocent Fraud #2:
With government deficits, we are leaving our debt burden to our children.
Collectively,  in  real  terms,  there  is  no  such burden possible. Debt or no debt, our children get to consume whatever they can produce.

Oh, absolutely! Except… ‘collectively’? You really have to ‘see the world as one’ to a tree-hugger hippie level, to buy this argument. Yes, the world in 2050 will consume what they produce. But if we get into huge debt now, those who will be holding that debt will be entitled to a larger share of it, to the expense of those who don’t -he isn’t even trying to deny this. So… what side will you be on? The side with two chicken, or the one with no chicken, of the one-chicken-each-on-average world?

And… the climax is clearly the last:

Deadly Innocent Fraud #7:
It’s a bad thing that higher deficits today mean higher taxes tomorrow.
I agree – the innocent fraud is that it’s a bad thing, when in fact it’s a good thing!!!

How? Well, he’ll tell you:

And  why  would  we  ever  increase  taxes?  Not  for  the government to get money to spend – we know it doesn’t work that way. We would increase taxes only when our spending power is too high, and unemployment has gotten very low, and the shelves have gone empty due to our excess spending power, and our available spending power is causing unwanted inflation.

So… is he unaware that it is possible to have a tanking economy, struggling families, high unemployment -AND high inflation? As is the case in nearly every crisis but the last one? You don’t have to go to Venezuela -just think what happened in the ’70 -including his United Sates; when the term “stagflation” was created, from “stagnation”+”inflation”. Just what planet, where this doesn’t regularly happen, is he thinking of?

To conclude: seeing reality through new, and perhaps sometimes better lenses? Cool! No, really: cool! Sometimes, it just might save us years of unnecessary suffering -not something to overlook.

Using the confusion from said novelty, to fly egregious crap past people’s radar?




Informazioni su francescodondi

Qui il mio curriculum online. "nerd score"
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