Tuesday, May 1, 2018

Stephanie Kelton - Modern Monetary Theory & Economic Education Part 1

Okay, it's basic stuff, but you can send it on to your friends, or whatever. I put it on Facebook.

In this interview we talk to Stephanie Kelton, Professor of Public Policy & Economics, author and economic advisor to Bernie Sanders' presidential campaign in 2016, about Modern Monetary Theory (MMT) and the basic economic concepts related to it.


Konrad said...

Stephanie makes a couple of small errors in the video.

[1] Stephanie correctly notes that euro-zone nations must obtain euros before they can spend euros. At 7:16 she says that euro-zones countries obtain euros by taxing their people, or else by borrowing euros. Stephanie forgets that euro-zone nations also get euros by having trade surpluses. Among the 19 nations that use the euro, those nations with trade surpluses suck euros out of nations that have trade deficits.

Cyprus, France, Greece, Latvia, and Slovakia have large trade deficits, and therefore have large amounts euros continually sucked out of them. Consequently they must borrow euros. This keeps them trapped in a death spiral of debt, austerity, and privatization that will continue to worsen until they finally dump the euro.

Belgium, Estonia, Finland, Lithuania, and Spain swing back and forth between having trade deficits and trade surpluses, depending on the year. As a result, the euros they gain when they have trade surpluses are sucked back out of them when they have trade deficits.

Germany has the biggest trade surplus in Europe. Therefore Germany is a vampire, sucking euros out of nations that have trade deficits. This is why Germany is the strongest champion of the euro-scam.

There are 341 million people in the 19 nations that use the euro, and very few of them understand this simple yet hideous scam. These 19 nations have a monetary union, but not a fiscal union.

[2] At 7:34 Stephanie says the U.S. government borrows dollars when it deficit spends. This is misleading. The U.S. government does not borrow any of its spending money from anyone. The U.S. government creates its spending money out of thin air, simply by crediting accounts.

Granted, the U.S. government is supposed to issue T-securities whose aggregate nominal dollar value are equivalent to the federal deficit each fiscal year, but this has nothing to do with the U.S. government’s ability to create and spend money. The “borrowing” (i.e. "national debt") is a Federal Reserve issue. If investors do not buy enough T-securities to equal the U.S. federal deficit in a given fiscal year, then the Federal Reserve “buys” the T-securities itself, through accounting sleight-of-hand.

At 7:39 Stephanie says that when the U.S, government borrows dollars, there is no risk of default, since the U.S. government can create infinite dollars. Stephanie doesn’t realize that this means the U.S. government does not borrow ANY dollars for spending purposes. If you could create infinite money on your home computer, you would have no need to borrow dollars in order to spend dollars.

Stephanie’s errors may seem trivial, but I am a stickler for precision when it comes to federal finances, since precision is the only way to offset the lies that people are constantly told. Semantic errors create excuses for gratuitous austerity.

For example, if we say that the U.S. government borrows dollars to spend, then we support the lie that the U.S. government is revenue constrained (which it isn’t) and that the U.S. government relies on loans and on tax revenue (which it doesn’t).

Kaivey said...

Thanks, Konrad. Very interesting. So, MMT has even more potential than Stephanie realised, or perhaps she simplified things too much for this video.

Wies de ridder said...

I personally don't feel Stephanie is making errors, but her view is a slightly different one from yours...

(1) European countries can be net owners of euros due to a trade surplus and as such they can reinvest this cash f.i in interest bearing bonds of a specific country, i.e. swapping cash for bonds. They are just another investor.... But it is true that trade surplus countries, like Germany and Holland, are "sucking out" Euros from trade deficient countries, making it very difficult for these countries to get to a much healthier economic situation!

(2) (3) The US government has indeed all the powers to create money, but the current setup is one where this (deficit) money is "borrowed from those who want to get bonds for the cash they have". It could be different though and.... less expensive to government when replaced by a system where the government creates itself an interest free quantity of money.

The constraints on spending money do come from budgetary decisions made by the Congress and the deficit itself will be a consequence of such a decision! The government is not revenue constrained.

There is also a need to control the overnight interest rate. If there is to much cash around due f.i to government spending, the overnight interest will tend to zero. The CB takes therefore cash out of the system, swapping it for bonds.

Tom Hickey said...

"Lending" and "borrowing" are ambiguous terms and can serve as weasel words.

As Eric Tymoigne points out in his money and banking course, most people conceive of lending and borrowing as lending real goods and receiving the same in return, e.g., lending a tool and getting back in the same condition, or lending a cup of sugar and getting a equal cup of sugar back.

That is not how banking works or government finance, although they are analogous to lending/borrowing real goods.

Stephanie is not wrong but her use of the terms does perpetuate a potentially confusing situation that suggests the issuer need to borrow to spend when the fact is a reserve drain.

That is not a simple concept to get across and I can understand why she would not want to go there and create a distraction.

Maybe why is needed is an elevator speech that explains some of the potentially confusing issues precisely and concisely. Its' called "messaging." And it is necessary to construct a frame.