Monday, June 19, 2017

Claire Connelly — The cost of getting it wrong

What most of us have long believed about how the economy works is based on a set of fundamental myths, supported by a series of inappropriate and misleading metaphors, from which it is difficult to escape. The emotional investment we have made in these myths has allowed for levels of unemployment, underemployment, inequality and relative poverty which would have seemed incredible a generation ago.
  • Somehow we have convinced ourselves of the following:
  • Governments need taxpayers’ money to pay for things.
  • Governments, like households, need to at least balance their budgets.
  • Deficits are bad and government surpluses are good.
  • Deficits paid for by printing money causes inflation.
  • Surpluses set aside savings which can be spent in the future.
Lower wages promote full employment.
Wrong, wrong, all wrong.…
Democracy at Work
The cost of getting it wrong
Claire Connelly


MRW said...

What you give your newbie friends to MMT.

Noah Way said...

Nice, simple, logical, easily digested. Thanks for posting it.

Bob said...

I wonder if this article has Richard Wolff's tacit support. He hasn't addressed MMT in his weekly or monthly shows.

Kaivey said...

Okay, I love MMT.

The MMT people say that the government issues the currency and if it creates a surplus there will be a deficit in the economy. But private banks issue money too, so could they make up for the lack of government money?

Ellis Winningham says that banks only issue I.o.u's designated in the currency, say, dollars, or GBP's, etc. So I takes this to mean what unless the government issues the money in the first place the banks could not use the multiplier effect. Now all dollars come from the government, they say, but if the government supplied no money, could the banks could still create loans and make enough money for the economy to work?

I tell my friends that banks take take out as much money as they put in, plus interest. This could mean a net loss to society. But Steve Keen talks about the velocity of money, and so the interest is found because banks pay their staff and money gets recycled when bankers buy things and invest in things (but what about the Cayman Islands)? Ellen Brown always has trouble seeing this and other economists say Steve keen has got it wrong.

So, when I'm down the pub telling my friends about MMT and I say that unless the government spends money into the economy there will be no money supply, what do I say about the banks? And why isn't bank I.o.u's designated in dollars not the same thing as dollars because no one would know the difference?

Perhaps I need to read a good book, or is there good article on a site I could read?

GLH said...

The banks create most of the money in our economy not the government. Read, "The Bubble and Beyond" "Killing the Host" and "J is for Junk Economics." Also, read "Why we Can't Afford the Rich." Also tell your friends that banks are a scourge on humanity and all of them should be nationalized.

Neil Wilson said...

"what do I say about the banks?"

The current monetary system *is* designed to get banks to do the monetary injection. We are all supposed to see our wealth going up (the wealth effect caused by too many savings chasing too few assets) pop down the bank and discount that wealth into cash to spend on fripperies.

That's how it is set up at present - a gift to the wealthy who hold the assets that are going up in price and a gift to bankers who do the discounting.

It's also a fallacy that it will work as Kalecki demonstrated decades ago. In every cycle the top interest rate required to encourage private investment will get ever lower until it becomes negative and the system stops working. As we've seen we've hit that point.

The MMT proposals say you don't have to set things up like that if you don't want to. You can constrain the banks and use government intervention to maintain the economy alongside whatever private investment there is. In fact it will 'crowd in' private investment in the same way as dropping interest rates and, if you use a job guarantee, the public spending will get out of the way automatically.

The way you constrain the banks is to implement the Mosler rules for banking. That is an asset side proscription of what a bank can lend money for. If it's not on the list, lending is not allowed (by which we mean that if a bank lends ultra vires it cannot enforce that loan - and it becomes a gift of shareholder equity).

So MMT proposals restrict what banks can lend for and decollateralises lending (banks line up with all other debtors against an entities assets). In return MMT offers banks an unlimited overdraft at the central bank at 0% interest. Therefore bank lending will be at the bank risk margin for as many people who can pay that price on sensible lending proposition.

The cyclical management is moved from banking policy to the automatic stabilisers via a Job Guarantee.

So the amount of bank lending will drop somewhat, making space in the economy for government spending, and that is how MMT creates space without requiring taxation increases. Restricting bank lending has the same economic effect as raising taxes, but only affects bankers.

Neil Wilson said...

As to paying interest it is important to remember that interest is charged in £s per month not £s. The difference is the same as the difference between miles per hour and miles. It is a category mistake to mix the two.

So Interest is simply the wages of bankers, which they spend back into the economy in return for produced resources. The more interest is paid in the circulation, the more bankers get stuff over other people getting stuff.

Interest, like profit and wages, is paid from turnover, not borrowing.

Interest is the wages of bankers, profit is the wages of capitalists. It's all just wage distribution.

The private circuit can create enough money for everything to work - as long as nobody saves. See

The problem is that there is free choice and once you don't need all the workers to produce the stuff required, or you allow saving, you drop into an involuntary unemployment equilibrium that the private sector can't get out of itself.

Kaivey said...

I read all those books except J is for Junk economics. Very good books.

Kaivey said...

It's good to see Steve Keen taking about MMT.

Neil Wilson said...

Steve doesn't seem to get it all. For some reason he's against government intervention - particularly the provision of jobs.

I don't whether that is deliberate, or just politically expedient because he's talking to Europhiles that don't seem to get it either - Ann Pettifor, Jo Mitchell, etc.

Kaivey said...

Thank you, Neil.

I did think that. If there was only private bank money which has to be paid back how would there be any savings? Yes, people can save when other people borrow and spend their money. But this seems like a fragile system not guaranteed for long.

I have thought about money a lot and it starts off simple and then gets really complicated.

I wrote to Micheal Hudson once explaining how Modern Money Theory works and asked him what he thought of it, but I never got an reply so maybe I got it a bit of it wrong. It was just a few paragraphs. How can you explain MMT on that? I've got it somewhere on One Drive somewhere but I don't think I will put it it here.

Kaivey said...

Do you know Neil, I thought the same thing. Steve Keen in his interviews is always praising capitalism and saying governments would get banking wrong, so he doesn't believe in public banking. He sounds like a bit like a neoliberal.

I wrote to Michael Hudson, who sometimes kindly replies, and said that I didn't think that Steve Keen is as left as us, and he wrote back and said, don't worry about Steve, he just works differently to himself. He said that Steve prefers to work within the mainstream where he prefers to work from the left.

When Steve Keen praised the Labour Party manifesto I sent the video to Micheal Hudson.

Matt Franko said...

"Interest is the wages of bankers"

Its part of the revenues of bankers... the banks have expenses...

"Net interest income is the difference between the revenue that is generated from a bank's assets and the expenses associated with paying out its liabilities. A typical bank's assets consist of all forms of personal and commercial loans, mortgages and securities. The liabilities are the customer deposits."

Read more: Net Interest Income
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Matt Franko said...

"banks are a scourge on humanity and all of them should be nationalized."

This is evidence of a big bias within MMT and is a big reason why they continue to get nowhere.... they refuse to completely understand the role of banks (fiscal agents) in the system due to this bias....

Matt Franko said...

"The private circuit can create enough money for everything to work - as long as nobody saves."

Well many people are savers... in US ERISA accounts there is $25T... earning zirp for last 8 years of shitty us growth...

Neil Wilson said...

"Its part of the revenues of bankers... the banks have expenses"

Nothing material in a correctly configured banking system. Interest charged is the price paid for the job of credit analysis.

Neil Wilson said...

"they refuse to completely understand the role of banks (fiscal agents) in the system due to this bias...."

Warren fully understands the role of banks in the system. And they should be paid for their credit analysis skills. And little or nothing else.

The banks have become too powerful with too much political clout. They have to be trimmed right back to return the power to the elected government where it belongs.

That means proscribing banking activities and possibly removing any profit payment from the capital buffer (i.e. nationalisation).

None of that will stop credit analysis, but that can be done just by paying credit analysts and sacking them if they get it wrong.

MRW said...


You write, “But private banks issue money too, so could they make up for the lack of government money?”

No. Not under our current domestic federal monetary system (past 85 years in the US).

Banks don’t “issue money.” They issue bank credit. Big diff.

Only federal governments “issue money,” or as MMT says “issues currency.” [Like UK, US, Canada, Australia, Japan.] It’s brand new ‘money’ added to the economy. Interest-free. Recipients don’t have to pay it back like bank credit.

Banks issue bank credit in the form of loans.

Those loans are a liability of the bank. But that liability is somebody else’s asset. It all nets to zero across the horizontal.

Tell your pub buddies it’s like a cross (+).

That is how Warren explained it to me…well, corrected me.

Federal overnment currency creation, money creation, base money, etcetera, whatever you want to call it, is vertical.

Bank credit, how the banks operate across the economy, is horizontal.

I like to think of it as the vertical raining down its riches on the horizontal, like fireworks.

The vertical supplies what is available as currency to the horizontal.

(People will argue that bank credit creation is 3X to 8X the federal government insertion, or supply, of federal government sovereign currency into the economy. They are correct. That’s the nature—and definition—of credit. Nonetheless, bank credit cannot exceed what will be available in the future.)

Tom Hickey said...

Short answer, Kaivey.

1. In principle, banks could create all the money in the economy by crediting deposit accounts, but loans create deposits and so there is the problem of private credit. Loans need to be repaid over time by drawing on income or selling assets or more borrowing. But at some point, credit worthiness decline and it biomes impossible for a significant enough number of creditors to meet their repayment schedules to generate a credit crisis and ensuing economic contraction. Private credit becomes unsustainable over time unless everyone spends their income and income is distributed in such as way that all can meet their obligations on schedule. That is not the case in a modern economy and there is no way to force it in a capitalist system.

2. Interest is revenue. For banks it is the chief source of income. Banks distribute income just as do other firms. As in other cases, some of that distribution flows to spending and some to saving. Interest doesn’t just disappear when it is paid as the objection assumes.

3. The problem is saving. This is the difference between neoclassical economic and Keynesianism and it was one of the chief insights of Keynes.

The basis of MMT is that only a sovereign currency issuer is able to provide net financial assets in aggregate to match saving desire at constant full employment and optimal economic performance.

Tom Hickey said...

Steve doesn't seem to get it all. For some reason he's against government intervention - particularly the provision of jobs.

I don't whether that is deliberate, or just politically expedient because he's talking to Europhiles that don't seem to get it either - Ann Pettifor, Jo Mitchell, etc.

Whatever the reason, it is part and parcel of the incompetent unqualified left syndrome that makes it impossible for left-leaning governments to govern successfully when the accede to power, further damaging the cause of the left to improve people's lives.

Voting for the left has generally been a waste of time and huge disappointment, if not a disaster.

Tom Hickey said...

Modern banks have access to the central banks and the ability is create credits in the unit os account. These are delegated powers and and as a result commercial banks function at the pleasure of the state and subject to central bank policy and regulation.

The problem is not with banks, but with governments. The fundamental problem now is that banks, the big banks that is, have captured government. The result is a form of fascism.

The solution is not ending private banking but ending government capture, which is form of corruption that has been legalized. Just because something legal doesn't imply that it is not corrupt.

Tom Hickey said...

Clarification: Fascism is corporate statism.

Bob said...

Banks create loans and can take a loss if those loans go bad. Quite a difference from the ability to create money.

Bob said...

Clarification: Fascism is corporate statism.

Yeah, bankers wear a different uniform.

Neil Wilson said...

"Banks create loans and can take a loss if those loans go bad. Quite a difference from the ability to create money."

Not really Bob. It's a distinction without a difference for all practical purposes. Banks are public/private partnerships - outsourcers under contract at a stretch.

They never go bust in the way normal firms go bust. There's always a rescue, or a merger or a recapitalisation from somewhere.