An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
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Friday, March 24, 2017
Miguel Navascués— The huge fallacy of the Modern Monetary Theory: money is not free
Should we really waste our time reading this? I started to read it, but there doesn't seem to be anything of substance, just a bunch of shouting in the usual Austrian sense. Let me know if I missed anything incisive.
It's worthwhile being aware of MMT criticism so that one can meet objections. This post is short and it is evident that the author seems to based his understanding of it on cursory reading. It is not well-informed and pretty much attacks a straw man.
A major objection has to do with sectoral balances and his understanding of the MMT position is superficial at best.
These are points that are sure to come up and MMT advocates need to be ready for them. So it is good to keep up with the criticism. But no one will miss much by passing over this one. It's mercifully short though, and that is what is wrong with it. It bespeaks insufficient research.
If the external sector holds our country’s debt, the size of this can influence our creditors’ confidence ... more so if this debt is in foreign currency.
Needless to say, MMT does not advocate governments issuing debt in a foreign currency.
there is no guarantee that money issued like this and put into circulation by the government via a hike in public spending is efficiently spent.
True but also true of any government spending or any private spending. You may think the F-35 jet is worthwhile, I may not. You may think your 2nd home in Aspen was efficient spending, I may not. This does not change the fact that capitalist economies are driven by money and that money has to be pumped into the economy to keep it going.
As Warren would point out, stimulus can take the form of either an increase in government spending or a decrease in taxes, depending on your politics.
I'm not gonna read that, but just wanna say there was some progressive in a comment section of a YouTube video I commented on who tried to claim MMT is a scam and that it's another way to steal your money. I couldn't even believe the stupidity of these statements, so I mentioned Stephanie Kelton, Bernie Sanders and how that's the last thing they were thinking when coming up with economic plans.
There was a Positive Money supporter in the comments who likes some of the stuff that's come out of MMT people, but talked to me about private money creation and how state-owned banks aren't enough.
I'm just wondering how I can better defend MMT principles when even a few people on the left simply don't get it or understand it and think MMT is trying to steal their money. Tom, thoughts?
"I'm just wondering how I can better defend MMT principles when even a few people on the left simply don't get it or understand it and think MMT is trying to steal their money"
We can start by ourselves. We MMTers in general believe that the other theories (including the orthodox) are a scam. We don't acknowledge that other people are sincere in their ignorance. But we should acknowledge it. That's how you start.
I mean, maybe not you yourself... Maybe you are one of the few MMTers that don't believe in some sort of orthodox scam, or orthodox intellectual dishonesty, or orthodox conspiracy. But then you are different from most MMT community... So maybe you could help to solve this problem in MMT community first and then move on to the other communities...
Penguin-- Here's something I wrote to try to cut through some of the quagmire in a simple, non-offensive manner: The Socrates Show, with guest Pete Peterson. It doesn't reference MMT directly, but rather addresses the national debt.
The only ones stealing their money are the private banks and policy makers who encourage private debt accumulation and non repayment of those debt. https://newarthurianeconomics.blogspot.com/2010/12/changing-topic.html
I'm just wondering how I can better defend MMT principles when even a few people on the left simply don't get it or understand it and think MMT is trying to steal their money. Tom, thoughts?
Be well-versed in MMT and money$banking (see Eric Tymoigne's course at New Economic Perspectives in the menu) and keeping engaging them.
If you run into something you don't understand or can't answer, find out.
@Penguin Pop, I believe there are legitimate reasons to question some aspects of MMT, and I often do so -- mainly the political problems that MMT has no solution for, and the fact that MMT is yet another attempt to save capitalism from itself -- but the operation of fiat money and functional finance should be straightforward, once explained, and they pre-date MMT. In America functional finance dates at least as far back as the Greenback Party and the Populist Party of the 1800's.
In my mind I view functional finance separate from MMT. I see MMT as a particular set of political positions that build on a functional finance foundation. One can accept functional finance and yet not care for some of MMT's political positions.
There will always be people who oppose the various "soft money" proposals. For some, it is because they can only understand money at a household level, both morally and operationally. For the rich, hard money policies are a matter of self interest. There will always be class issues and moral issues underlying the economic issues.
In general, I recommend that we do like FDR and frame our policies in terms of moral and human issues. Economics is merely the answer to "how do we make it work?"
I think this shows that there's a need for MMT explainers aimed at trained economists. There's the MMT academic literature, but outsiders will not easily find that literature; they are going to do what this guy did - grab a infographic off the first page of a Google search.
I could try doing that, but I would end up getting hit on all sides by post-Keynesian academic politics...
" In America functional finance dates at least as far back as the Greenback Party and the Populist Party of the 1800's. "
Not possible back then Dan as the state of IT was still wire line Morse Code... not even wireless had been invented...
so we were using mass measures of the metals which had become scarce vs where world population had grown to over the centuries...
So functional finance not possible...
We can again run a numismatic system successfully today due to how IT has finally caught up with population over the last 40 years or so...
There was always a functional relationship between the population and numismatics under metals... the tax the Romans used was called "kensou" in the original Greek which is where we get our word "census"...
Same today we have to have a regulated population and when people come in here we have to make numismatic adjustments... the interface with the external sector is very important...
@Matt someone forgot to tell Abe Lincoln that he could not use functional finance to pay for the Civil War.
The Populist party received 8.5% of the vote in 1892, and carried 5 states. Their platform called for "a national currency, safe, sound, and flexible issued by the general government only, a full legal tender for all debts, public and private, and that without the use of banking corporations; a just, equitable, and efficient means of distribution direct to the people," public banking, a progressive income tax, an 8 hour workday, and nationalization of transportation and communication.
They could and better if they'd decide to take on the banks rather than try to save the banks from themselves.
One glaring target is government-provided deposit insurance - the proper abolition of which should require $trillions in new fiat to be equally distributed to all US citizens.
"In my mind I view functional finance separate from MMT. I see MMT as a particular set of political positions that build on a functional finance foundation. One can accept functional finance and yet not care for some of MMT's political positions."
I would say that was where I think a lot of the mistrust of MMT is coming from when I talk to some of these left-wing people. I commented months back about how I tried explaining it to a Marxist and a lot of the people in the comments really thought MMT was "utopian Keynesianism." It was so hard for them to wrap their minds around what it all means and the many implications of what it can do for policy. I also can understand how MMT can be construed as trying to defend capitalism as it stands today.
"In America functional finance dates at least as far back as the Greenback Party and the Populist Party of the 1800's."
Right I'm pretty sure Ellen Brown did a whole book about that. The Positive Money supporter also brought her up and some website called monetary.org. The American Monetary Institute is behind it, and on a Facebook page called Real Progressives, one of the guys behind it has been very critical of AMI consistently and had other economists on to offer rebuttals against them.
"In general, I recommend that we do like FDR and frame our policies in terms of moral and human issues. Economics is merely the answer to "how do we make it work?"
FDR is still one of my greatest influences when it comes to how I think about so many of these issues and that's how I tried engaging with the left-wing MMT doubters. I even said something as to the effect of "austerity = making you poorer and drowning yourself in private debt."
This critique is garbage again. These are probably pretty typical thoughts for a person who learned about MMT a few hours ago. He is careful because it all sounds too good to be true and why haven't others picked It up if It was true? He is sceptical. Who wouldn't be?
It would only be possible if the metals were abundant relative to population .. which was not the case in the 1800s in North America.. the metals were scarce and in short supply..
The easy to mine quantities of silver and gold were already accessed by the 19th century using the contemporary mining methods..
Read 19th century author Alexander Del Mar a mining engineer and numismatist ...
"I mean, maybe not you yourself... Maybe you are one of the few MMTers that don't believe in some sort of orthodox scam, or orthodox intellectual dishonesty, or orthodox conspiracy. But then you are different from most MMT community... So maybe you could help to solve this problem in MMT community first and then move on to the other communities..."
Yeah I took intro mainstream econ courses in college. I honestly don't in that situation there was any malice or scam intended. A lot of economics is like IT if there weren't any huge updates or innovations in the past 30 years. In the IT world, technology is always changing and it's very easy for something published about a year ago to become completely obsolete now in that world. With economics however, the same tired, crap ideas still linger on decades after abandoning Bretton Woods and over 70 years after getting off the domestic gold standard, so I think in that case, economics is like a worn out dinosaur. Even smart people still believe in absolute bullshit because they've been told it's just the way it is and it's hard to radically change that way of thinking after yrs and yrs of such rhetoric spewed everywhere.
From a political perspective however, there's tons of stupidity there too, but mixed with narcissism and psychopathic behaviors when you hear some of these politicians talk, especially the GOPhers. Combine those negative traits and sheer idiocy when it comes to not knowing anything about how our monetary system works and you have a recipe for disaster.
"From a political perspective however, there's tons of stupidity there too, but mixed with narcissism and psychopathic behaviors when you hear some of these politicians talk, especially the GOPhers. Combine those negative traits and sheer idiocy when it comes to not knowing anything about how our monetary system works and you have a recipe for disaster."
BTW, when I said "austerity = making you poorer and drowning yourself in private debt" to the progressive MMT critic, he agreed with me on that one, but still tried to claim MMT is a scam, so it was sheer cognitive dissonance on his part.
it is not true that the private sector usually saves. Companies normally take on debt to invest. During the bubble, families took on debt to buy houses at exorbitant prices
There must be some confusion on his part here. If companies take on debt from commercial banks or other private institutions (Pension funds and others) and households get credit from banks then net saving by the aggregate private sector does not change.
Anyway, apart from the somewhat muddled reasoning of some parts of the article (perhaps it was written in haste?), it's still a plus that the author took time to engage with MMT. Maybe some readers who've never heard of it will now seek information about the workings of modern money.
Anyway, apart from the somewhat muddled reasoning of some parts of the article (perhaps it was written in haste?), it's still a plus that the author took time to engage with MMT. Maybe some readers who've never heard of it will now seek information about the workings of modern money.
Agree. I think that most people with even a basic knowledge of economics and finance would read that and think that either the MMT economists must be dumbbells, or this guy doesn't really get what they are doing. Some people might be curious enough to check it out for themselves.
But there is no such thing as bad publicity. The more MMT is mentioned in any way, the more it permeates the public mindset.
I liked this sentence: "It’s difficult to imagine that money issued by a private entity would be as universally well accepted as fiduciary money today." Hilarious.
Actually the MAJORITY of money in circulation is created / printed by private banks, not central banks, as the opening sentences of this Bank of England make clear.
Actually the MAJORITY of money in circulation is created / printed by private banks, Ralph Musgrave
Private banks are not really private given government-provided deposit insurance, exclusive access to inherently risk-free accounts at the central bank and other privileges for depository institutions including a lender of last resort, positive yielding sovereign debt, IOR, etc.
That said, 100% private banks with 100% voluntary depositors could still create SOME liabilities for fiat and hope to get away with it - SOME of the time.
Private banks are not really private? Never heard that before.
Maybe it depends on your definition of the word "private". But banks are private in the sense that private individuals invest money into the bank, own the bank and make the business decisions, get dividends from it, and they may face failure/default and lose all invested money or even more, depending on the jurisdiction.
The holder of the bank's IOU will face losses if the bank fails. In some jurisdictions part of the investors may have some sort of protection, like deposit insurances, but that doesn't make the bank public...
I may be wrong, but I agree with Ralph Musgrave view. Most IOU circulating in modern economies are private...
"It’s difficult to imagine that money issued by a private entity would be as universally well accepted as fiduciary money today."
Common stock (shares in equity) is an asset-backed private money form that requires no government privileges such as a lender of last resort, deposit insurance, etc.
But why should those with equity share it when government privileges for private credit creation allow them to legally steal the purchasing power of others instead?
Banks are a government privileged cartel. That means they are not truly private.
If banks were 100% private with 100% voluntary depositors, their ability to safely create liabilities for fiat would be greatly reduced - as it should be reduced if one believes in justice and honest, not sham*, accounting.
*The sham nature of bank liabilities toward the non-bank private sector will be entirely evident if physical fiat, a.k.a. "cash", is ever abolished since it will then be impossible for a member of the non-bank private sector to "cash a check", i.e. redeem a bank's liability for fiat.
Most banks in the US are chartered members of the Federal Reserve System, which gives them access to an account at the Fed. Since the Fed is the US central bank, this access allows banks to create money denominated in the government's unit of account by crediting bank liability accounts. Banks can create dollar accounts, but they do not issue currency, which is a central bank liability, and they have to obtain it for settlement. But having accounts at the central bank, banks can borrow from the central bank, unlike non-banks. In addition, as lender of last resort, the central bank guarantees all solvent members automatic provision of settlement balances (liquidity) to clear settlement transactions. For this "extraordinary privilege" banks must agree to close regulation and supervision, making them a type of public-private partnership. In this way member banks are distinguished from non-bank firms, which don't have direct access to the central bank or a guarantee of liquidity provision. So member banks of the FRS are not the same as other firms owing to their special relationship to the government through the central bank as provided for by US law and iaw government regulation. Banks serve as intermediaries between the US government as currency issuer and users of the currency.
An interesting artifact of this system is that banks do not go bankrupt when they become insolvent as other firms do. Rather, banks are put into resolution, restructured, and opened under new management. Usually, this occurs at the close on Friday and the bank opens on Monday, making the process seamless for the public. This did not happen with the Too Big To Fail banks even through it is mandated by law. Government covered up any insolvency wrt these "systemically vital" banks and provided unlimited liquidity "in order to support the financial system to prevent financial and economic collapse."
Banks can and do fail. Of course the sovereign government has the capacity to save any bank or non bank corporation. It doesn't make them risk free or public.
Bank [short and long term] deposits are private bank's IOU, even when insured by some kind of public or private insurance scheme.
Deposits are not narrow money - they are promises to pay narrow money. They are below the pyramid of liabilities, as Scott Fullwiler likes to put it. Bank deposits are private banks IOU.
The US there were two types of bank at the time, investment banks an commercial banks. After the crisis, the investment banks were made into commercial banks. Commercial banks make loans and take deposits. Investment banks allocate capital among firms. Their functions are different.
Legman was an investment bank rather than a commercial bank. The US government decided to let it go under on the assumption that it would create an example for other investment banks. They did not realize at the time that these banks were "systemically dangerous institutions" but they found it out as soon as Lehman went belly up. It was possibly the worst decision in the banking history as events played out. The large investment houses were integrated into other large banks and they were all brought in under the rules that apply to commercial banks to make it easier for the government to bail out the system to prevent a financial meltdown.
Btw, corporations that go public are not completely private institutions either. Being public, they subject to different rules than privately owned firms.
The misunderstanding may arise from the difference in meaning between "public" and "publicly owned." All corporations the US are "public" in that they are chartered by the states and regulated based on this "in the public interest", even though ownership remains private.
Economics liberals wish to restrict the level of government involvement in business, but this is actually restricting the public from regulating business in the public interest through elected representatives.
"The misunderstanding may arise from the difference in meaning between "public" and "publicly owned.""
Maybe that's the point - the definition of the word "private" and "public". In my mind, I have no doubt that most investment and commercial banks are private, and I find it difficult to see how they are not. Maybe I'm not smart or maybe we are reinventing the dictionary, I don't know.
"It’s difficult to imagine that money issued by a private entity would be as universally well accepted as fiduciary money today."
That's actually funny, because bank deposits are well accepted money issued by a private entity (commercial banks in majority). And it's as accepted as narrow money in modern economies. In financial volumes, banks deposits are greater than narrow money. That's what make the sentence funny. But you are saying that's not the case, because banks are not private! I'm lost here
If still so, it is because the liabilities that banks create ("loans create deposits") are genuine liabilities BETWEEN banks and with the monetary sovereign (e.g. US Treasury). Why? Because banks and the monetary sovereign have accounts at the central bank and thus may receive fiat in the form of credits to their account. Not so with the non-bank private (i.e. the general population) sector who may only deal with physical fiat since we may NOT have accounts at the central bank.
Or let's put it this way: Why may only depository institutions deal with the Nation's fiat in convenient, inherently safe account form and the citizens may not but instead must work through private banks or be limited to unsafe, inconvenient physical fiat*, a.k.a. "cash"? Does that seem entirely private to you? Or does it reek of special privilege?
*For the moment. One "good" thing about the abolition of physical fiat is that citizens will then be ENTIRELY UNABLE to use their Nation's fiat!! Then they will perhaps realize that they are slaves to a government-privileged usury cartel and we can finally have fundamental reform.
Banks serve as intermediaries between the US government as currency issuer and users of the currency. Tom Hickey
Entirely unnecessary intermediaries. This has ALWAYS been true in the case of the US but is especially true today given modern computers and communications.
"Entirely unnecessary intermediaries. This has ALWAYS been true in the case of the US but is especially true today given modern computers and communications."
That's an interesting topic. Banks do exploit they privileged positions, but at what extent is it good or bad to the society?
In my country we the people didn't have direct access to treasury bonds. If I wanted to invest in bonds, I would have to do it thought banks, and they did charge high fees. Then the government introduced "treasury direct", a channel where people can buy treasury bonds without banks as intermediates. I think that was an excellent advance. It is good for the society.
Bank reserves, on the other hand, are a much complex issue. Today the central banks usually deal directly with 100 or 200 banks in their jurisdictions. That's entirely different from the scenario where the central bank would deal directly with millions of individuals. I understand the banking system as an necessary intermediary, that needs to be subjected to strong regulation and supervision. But to abolish the banking system and put everything on the back of the central bank seems a recipie for disaster...
The fact that some companies have some sort of privilege doesn't make them public. The fact that banks only have access to bank reserves may make them special in some ways, but it doesn't make them public.
And I personally don't see that the bank reserves access restriction is so damaging as you see it, but that subject has nothing to do with the public/private discussion.
The demand deposit is an IOU where the the bank promises to pay narrow money on demand to the costumer. And the holder is subjected to credit risk and people know that. They "withdraw" their deposits when they think the bank is facing difficult times. Confidence does play a role and may affect its acceptance...
To say that banks are not entirely private is not to say that banks are public. Instead, banks are a monstrous public-private partnership that systematically loots the poorer, the less so-called credit-worthy, in favor of the richer, the more so-called credit-worthy of what is, in essence, the PUBLIC's CREDIT but for private gain.
But to abolish the banking system and put everything on the back of the central bank seems a recipie for disaster... Andre
Entirely private banks with entirely voluntary depositors would still exist and still have accounts at the cb but without special privileges.
As for the cb itself, it would be forbidden from creating fiat EXCEPT for its monetary sovereign (e.g. US Treasury) so it would not lend to or buy assets from the private sector - leaving those functions to entirely private banks, businesses and individuals.
De-privileging the banks must be done thoughtfully and carefully, that's for sure. But we also have a huge opportunity to reverse a lot of unjust wealth inequality by, for example, abolishing government-provided deposit insurance since to do that properly, in the case of the US, should require $trillions in new fiat to be equally distributed to all US citizens - to provide the new reserves needed for the xfer of at least some currently insured deposits with banks to inherently safe accounts at the cb itself.
I like this sentence of Andrew Anderson’s: “But why should those with equity share it when government privileges for private credit creation allow them to legally steal the purchasing power of others instead?” Private banks really do “steal purchasing power” in the following not uncommon situation.
If the economy is at capacity (or the Fed thinks it’s at capacity), and private banks create and lend out an extra $X, that money will be spent, which will be inflationary. Ergo the state must impose some sort of deflationary counter measure: raising taxes and confiscating about $X from the general population would do. Hey presto: $X of purchasing power is stolen from the population!!!
Maybe that's the point - the definition of the word "private" and "public". In my mind, I have no doubt that most investment and commercial banks are private, and I find it difficult to see how they are not. Maybe I'm not smart or maybe we are reinventing the dictionary, I don't know.
Depends on how much legal control the government has on a firm. The government has a great deal of control over banks, somewhat less over financial institutions, less over publicly listed firms, and little over privately owned firms. These are legal issues and words have a technical meaning that is somewhat different from the ordinary language application. That is why lawyers.
The demand deposit is an IOU where the the bank promises to pay narrow money on demand to the costumer. And the holder is subjected to credit risk and people know that. They "withdraw" their deposits when they think the bank is facing difficult times. Confidence does play a role and may affect its acceptance...
Outside the US maybe. Not in the US with deposit insurance and very close supervision of commercial banks. In addition, Lehman is going to be the last banking institution that the US government lets actually go under now that systemic risk is understood. The likelihood is that large banks will be temporarily nationalized like GM was.
The problem with late-stage capitalism is that the size of firms to take advantage of economies of scale, efficiency and concentration of economic power makes the system vulnerable to collapse owing to systemic risk (knock-on effects). Government have to have the power to intervene to prevent economic depression.
MMT views banks as "public-private partnerships" and it views the Federal Reserve as the government. This allows simplifying the MMT model of money. It is a useful model but not 100% accurate.
Yes, private banks are regulated by government and protected by government. So are Monsanto and Apple and Pfizer, yet no one accuses Monsanto of being a public-private partnership.
The bottom line is that banks are run for private benefit not public benefit. Perhaps banks can be described as a regulated public utility, but like gas & electric utilities they are still run for private benefit subject to regulatory oversight that is often captured by the utilities.
I would like to see banks defined legally as public utilities but they are not at this point. Public utilities regulate natural monopolies. Modern banking can be viewed as a type of natural monopoly. It seems it would make public banks more available as a political choice, and this would provide a public option to level competition in the banking sector.
and concentration of economic power makes the system vulnerable to collapse owing to systemic risk (knock-on effects). Tom Hickey
How can we really know that given that we've never, at least in US history, ever had truly private banks given that it's obviously, at least in retrospect*, an inherent duty of a monetary sovereign to provide accounting and transaction services in its fiat to ALL CITIZENS and not just to depository institutions or not at all**?
*Given the instability of borrowing short or no term to lend long term, the modus operandi of banks. **In both cases leaving the citizens forced to deal with mere private liabilities for fiat or else be limited to mere physical fiat or barter.
Should we really waste our time reading this? I started to read it, but there doesn't seem to be anything of substance, just a bunch of shouting in the usual Austrian sense. Let me know if I missed anything incisive.
ReplyDeleteIt's worthwhile being aware of MMT criticism so that one can meet objections. This post is short and it is evident that the author seems to based his understanding of it on cursory reading. It is not well-informed and pretty much attacks a straw man.
ReplyDeleteA major objection has to do with sectoral balances and his understanding of the MMT position is superficial at best.
These are points that are sure to come up and MMT advocates need to be ready for them. So it is good to keep up with the criticism. But no one will miss much by passing over this one. It's mercifully short though, and that is what is wrong with it. It bespeaks insufficient research.
If the external sector holds our country’s debt, the size of this can influence our creditors’ confidence ... more so if this debt is in foreign currency.
ReplyDeleteNeedless to say, MMT does not advocate governments issuing debt in a foreign currency.
there is no guarantee that money issued like this and put into circulation by the government via a hike in public spending is efficiently spent.
True but also true of any government spending or any private spending. You may think the F-35 jet is worthwhile, I may not. You may think your 2nd home in Aspen was efficient spending, I may not. This does not change the fact that capitalist economies are driven by money and that money has to be pumped into the economy to keep it going.
As Warren would point out, stimulus can take the form of either an increase in government spending or a decrease in taxes, depending on your politics.
I'm not gonna read that, but just wanna say there was some progressive in a comment section of a YouTube video I commented on who tried to claim MMT is a scam and that it's another way to steal your money. I couldn't even believe the stupidity of these statements, so I mentioned Stephanie Kelton, Bernie Sanders and how that's the last thing they were thinking when coming up with economic plans.
ReplyDeleteThere was a Positive Money supporter in the comments who likes some of the stuff that's come out of MMT people, but talked to me about private money creation and how state-owned banks aren't enough.
I'm just wondering how I can better defend MMT principles when even a few people on the left simply don't get it or understand it and think MMT is trying to steal their money. Tom, thoughts?
"I'm just wondering how I can better defend MMT principles when even a few people on the left simply don't get it or understand it and think MMT is trying to steal their money"
DeleteWe can start by ourselves. We MMTers in general believe that the other theories (including the orthodox) are a scam. We don't acknowledge that other people are sincere in their ignorance. But we should acknowledge it. That's how you start.
I mean, maybe not you yourself... Maybe you are one of the few MMTers that don't believe in some sort of orthodox scam, or orthodox intellectual dishonesty, or orthodox conspiracy. But then you are different from most MMT community... So maybe you could help to solve this problem in MMT community first and then move on to the other communities...
Penguin-- Here's something I wrote to try to cut through some of the quagmire in a simple, non-offensive manner: The Socrates Show, with guest Pete Peterson. It doesn't reference MMT directly, but rather addresses the national debt.
ReplyDeleteThe only ones stealing their money are the private banks and policy makers who encourage private debt accumulation and non repayment of those debt.
ReplyDeletehttps://newarthurianeconomics.blogspot.com/2010/12/changing-topic.html
I'm just wondering how I can better defend MMT principles when even a few people on the left simply don't get it or understand it and think MMT is trying to steal their money. Tom, thoughts?
ReplyDeleteBe well-versed in MMT and money$banking (see Eric Tymoigne's course at New Economic Perspectives in the menu) and keeping engaging them.
If you run into something you don't understand or can't answer, find out.
@Penguin Pop, I believe there are legitimate reasons to question some aspects of MMT, and I often do so -- mainly the political problems that MMT has no solution for, and the fact that MMT is yet another attempt to save capitalism from itself -- but the operation of fiat money and functional finance should be straightforward, once explained, and they pre-date MMT. In America functional finance dates at least as far back as the Greenback Party and the Populist Party of the 1800's.
ReplyDeleteIn my mind I view functional finance separate from MMT. I see MMT as a particular set of political positions that build on a functional finance foundation. One can accept functional finance and yet not care for some of MMT's political positions.
There will always be people who oppose the various "soft money" proposals. For some, it is because they can only understand money at a household level, both morally and operationally. For the rich, hard money policies are a matter of self interest. There will always be class issues and moral issues underlying the economic issues.
In general, I recommend that we do like FDR and frame our policies in terms of moral and human issues. Economics is merely the answer to "how do we make it work?"
I think this shows that there's a need for MMT explainers aimed at trained economists. There's the MMT academic literature, but outsiders will not easily find that literature; they are going to do what this guy did - grab a infographic off the first page of a Google search.
ReplyDeleteI could try doing that, but I would end up getting hit on all sides by post-Keynesian academic politics...
" In America functional finance dates at least as far back as the Greenback Party and the Populist Party of the 1800's. "
ReplyDeleteNot possible back then Dan as the state of IT was still wire line Morse Code... not even wireless had been invented...
so we were using mass measures of the metals which had become scarce vs where world population had grown to over the centuries...
So functional finance not possible...
We can again run a numismatic system successfully today due to how IT has finally caught up with population over the last 40 years or so...
There was always a functional relationship between the population and numismatics under metals... the tax the Romans used was called "kensou" in the original Greek which is where we get our word "census"...
Same today we have to have a regulated population and when people come in here we have to make numismatic adjustments... the interface with the external sector is very important...
So functional finance not possible... Franko
ReplyDeleteWrong since a Federal fiat accounting and transaction service could have existed in decentralized form in the US.
Ethical finance has always been possible in the US.
@Matt someone forgot to tell Abe Lincoln that he could not use functional finance to pay for the Civil War.
ReplyDeleteThe Populist party received 8.5% of the vote in 1892, and carried 5 states. Their platform called for "a national currency, safe, sound, and flexible issued by the general government only, a full legal tender for all debts, public and private, and that without the use of banking corporations; a just, equitable, and efficient means of distribution direct to the people," public banking, a progressive income tax, an 8 hour workday, and nationalization of transportation and communication.
Has MMT received 8.5% of the vote yet?
Has MMT received 8.5% of the vote yet? Dan Lynch
ReplyDeleteThey could and better if they'd decide to take on the banks rather than try to save the banks from themselves.
One glaring target is government-provided deposit insurance - the proper abolition of which should require $trillions in new fiat to be equally distributed to all US citizens.
"In my mind I view functional finance separate from MMT. I see MMT as a particular set of political positions that build on a functional finance foundation. One can accept functional finance and yet not care for some of MMT's political positions."
ReplyDeleteI would say that was where I think a lot of the mistrust of MMT is coming from when I talk to some of these left-wing people. I commented months back about how I tried explaining it to a Marxist and a lot of the people in the comments really thought MMT was "utopian Keynesianism." It was so hard for them to wrap their minds around what it all means and the many implications of what it can do for policy. I also can understand how MMT can be construed as trying to defend capitalism as it stands today.
"In America functional finance dates at least as far back as the Greenback Party and the Populist Party of the 1800's."
Right I'm pretty sure Ellen Brown did a whole book about that. The Positive Money supporter also brought her up and some website called monetary.org. The American Monetary Institute is behind it, and on a Facebook page called Real Progressives, one of the guys behind it has been very critical of AMI consistently and had other economists on to offer rebuttals against them.
"In general, I recommend that we do like FDR and frame our policies in terms of moral and human issues. Economics is merely the answer to "how do we make it work?"
FDR is still one of my greatest influences when it comes to how I think about so many of these issues and that's how I tried engaging with the left-wing MMT doubters. I even said something as to the effect of "austerity = making you poorer and drowning yourself in private debt."
This critique is garbage again. These are probably pretty typical thoughts for a person who learned about MMT a few hours ago. He is careful because it all sounds too good to be true and why haven't others picked It up if It was true? He is sceptical. Who wouldn't be?
ReplyDeleteNo Lincoln did not Dan that is MMT dogma about Lincoln... he didn't want to do it he wanted Congress to establish a metal based national currency...
ReplyDeleteHe used Greenbacks as a last resort and wanted the notes redeemed asap and replaced by a metallic based system...
Check the history...
AA no way Jose..
ReplyDeleteIt would only be possible if the metals were abundant relative to population .. which was not the case in the 1800s in North America.. the metals were scarce and in short supply..
The easy to mine quantities of silver and gold were already accessed by the 19th century using the contemporary mining methods..
Read 19th century author Alexander Del Mar a mining engineer and numismatist ...
"I mean, maybe not you yourself... Maybe you are one of the few MMTers that don't believe in some sort of orthodox scam, or orthodox intellectual dishonesty, or orthodox conspiracy. But then you are different from most MMT community... So maybe you could help to solve this problem in MMT community first and then move on to the other communities..."
ReplyDeleteYeah I took intro mainstream econ courses in college. I honestly don't in that situation there was any malice or scam intended. A lot of economics is like IT if there weren't any huge updates or innovations in the past 30 years. In the IT world, technology is always changing and it's very easy for something published about a year ago to become completely obsolete now in that world. With economics however, the same tired, crap ideas still linger on decades after abandoning Bretton Woods and over 70 years after getting off the domestic gold standard, so I think in that case, economics is like a worn out dinosaur. Even smart people still believe in absolute bullshit because they've been told it's just the way it is and it's hard to radically change that way of thinking after yrs and yrs of such rhetoric spewed everywhere.
From a political perspective however, there's tons of stupidity there too, but mixed with narcissism and psychopathic behaviors when you hear some of these politicians talk, especially the GOPhers. Combine those negative traits and sheer idiocy when it comes to not knowing anything about how our monetary system works and you have a recipe for disaster.
"From a political perspective however, there's tons of stupidity there too, but mixed with narcissism and psychopathic behaviors when you hear some of these politicians talk, especially the GOPhers. Combine those negative traits and sheer idiocy when it comes to not knowing anything about how our monetary system works and you have a recipe for disaster."
Delete100% agreed.
BTW, when I said "austerity = making you poorer and drowning yourself in private debt" to the progressive MMT critic, he agreed with me on that one, but still tried to claim MMT is a scam, so it was sheer cognitive dissonance on his part.
ReplyDeleteThe author writes:
ReplyDeleteit is not true that the private sector usually saves. Companies normally take on debt to invest. During the bubble, families took on debt to buy houses at exorbitant prices
There must be some confusion on his part here. If companies take on debt from commercial banks or other private institutions (Pension funds and others) and households get credit from banks then net saving by the aggregate private sector does not change.
Anyway, apart from the somewhat muddled reasoning of some parts of the article (perhaps it was written in haste?), it's still a plus that the author took time to engage with MMT. Maybe some readers who've never heard of it will now seek information about the workings of modern money.
Anyway, apart from the somewhat muddled reasoning of some parts of the article (perhaps it was written in haste?), it's still a plus that the author took time to engage with MMT. Maybe some readers who've never heard of it will now seek information about the workings of modern money.
ReplyDeleteAgree. I think that most people with even a basic knowledge of economics and finance would read that and think that either the MMT economists must be dumbbells, or this guy doesn't really get what they are doing. Some people might be curious enough to check it out for themselves.
But there is no such thing as bad publicity. The more MMT is mentioned in any way, the more it permeates the public mindset.
I liked this sentence: "It’s difficult to imagine that money issued by a private entity would be as universally well accepted as fiduciary money today." Hilarious.
ReplyDeleteActually the MAJORITY of money in circulation is created / printed by private banks, not central banks, as the opening sentences of this Bank of England make clear.
http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf
Actually the MAJORITY of money in circulation is created / printed by private banks, Ralph Musgrave
ReplyDeletePrivate banks are not really private given government-provided deposit insurance, exclusive access to inherently risk-free accounts at the central bank and other privileges for depository institutions including a lender of last resort, positive yielding sovereign debt, IOR, etc.
That said, 100% private banks with 100% voluntary depositors could still create SOME liabilities for fiat and hope to get away with it - SOME of the time.
Private banks are not really private? Never heard that before.
DeleteMaybe it depends on your definition of the word "private". But banks are private in the sense that private individuals invest money into the bank, own the bank and make the business decisions, get dividends from it, and they may face failure/default and lose all invested money or even more, depending on the jurisdiction.
The holder of the bank's IOU will face losses if the bank fails. In some jurisdictions part of the investors may have some sort of protection, like deposit insurances, but that doesn't make the bank public...
I may be wrong, but I agree with Ralph Musgrave view. Most IOU circulating in modern economies are private...
"It’s difficult to imagine that money issued by a private entity would be as universally well accepted as fiduciary money today."
ReplyDeleteCommon stock (shares in equity) is an asset-backed private money form that requires no government privileges such as a lender of last resort, deposit insurance, etc.
But why should those with equity share it when government privileges for private credit creation allow them to legally steal the purchasing power of others instead?
Banks are a government privileged cartel. That means they are not truly private.
ReplyDeleteIf banks were 100% private with 100% voluntary depositors, their ability to safely create liabilities for fiat would be greatly reduced - as it should be reduced if one believes in justice and honest, not sham*, accounting.
*The sham nature of bank liabilities toward the non-bank private sector will be entirely evident if physical fiat, a.k.a. "cash", is ever abolished since it will then be impossible for a member of the non-bank private sector to "cash a check", i.e. redeem a bank's liability for fiat.
Most banks in the US are chartered members of the Federal Reserve System, which gives them access to an account at the Fed. Since the Fed is the US central bank, this access allows banks to create money denominated in the government's unit of account by crediting bank liability accounts. Banks can create dollar accounts, but they do not issue currency, which is a central bank liability, and they have to obtain it for settlement. But having accounts at the central bank, banks can borrow from the central bank, unlike non-banks. In addition, as lender of last resort, the central bank guarantees all solvent members automatic provision of settlement balances (liquidity) to clear settlement transactions. For this "extraordinary privilege" banks must agree to close regulation and supervision, making them a type of public-private partnership. In this way member banks are distinguished from non-bank firms, which don't have direct access to the central bank or a guarantee of liquidity provision. So member banks of the FRS are not the same as other firms owing to their special relationship to the government through the central bank as provided for by US law and iaw government regulation. Banks serve as intermediaries between the US government as currency issuer and users of the currency.
ReplyDeleteAn interesting artifact of this system is that banks do not go bankrupt when they become insolvent as other firms do. Rather, banks are put into resolution, restructured, and opened under new management. Usually, this occurs at the close on Friday and the bank opens on Monday, making the process seamless for the public. This did not happen with the Too Big To Fail banks even through it is mandated by law. Government covered up any insolvency wrt these "systemically vital" banks and provided unlimited liquidity "in order to support the financial system to prevent financial and economic collapse."
So why Lehman Brothers failed?
DeleteBanks can and do fail. Of course the sovereign government has the capacity to save any bank or non bank corporation. It doesn't make them risk free or public.
Bank [short and long term] deposits are private bank's IOU, even when insured by some kind of public or private insurance scheme.
Deposits are not narrow money - they are promises to pay narrow money. They are below the pyramid of liabilities, as Scott Fullwiler likes to put it. Bank deposits are private banks IOU.
So why Lehman Brothers failed?
ReplyDeleteThe US there were two types of bank at the time, investment banks an commercial banks. After the crisis, the investment banks were made into commercial banks. Commercial banks make loans and take deposits. Investment banks allocate capital among firms. Their functions are different.
Legman was an investment bank rather than a commercial bank. The US government decided to let it go under on the assumption that it would create an example for other investment banks. They did not realize at the time that these banks were "systemically dangerous institutions" but they found it out as soon as Lehman went belly up. It was possibly the worst decision in the banking history as events played out. The large investment houses were integrated into other large banks and they were all brought in under the rules that apply to commercial banks to make it easier for the government to bail out the system to prevent a financial meltdown.
Btw, corporations that go public are not completely private institutions either. Being public, they subject to different rules than privately owned firms.
The misunderstanding may arise from the difference in meaning between "public" and "publicly owned." All corporations the US are "public" in that they are chartered by the states and regulated based on this "in the public interest", even though ownership remains private.
ReplyDeleteEconomics liberals wish to restrict the level of government involvement in business, but this is actually restricting the public from regulating business in the public interest through elected representatives.
"The misunderstanding may arise from the difference in meaning between "public" and "publicly owned.""
DeleteMaybe that's the point - the definition of the word "private" and "public". In my mind, I have no doubt that most investment and commercial banks are private, and I find it difficult to see how they are not. Maybe I'm not smart or maybe we are reinventing the dictionary, I don't know.
"It’s difficult to imagine that money issued by a private entity would be as universally well accepted as fiduciary money today."
That's actually funny, because bank deposits are well accepted money issued by a private entity (commercial banks in majority). And it's as accepted as narrow money in modern economies. In financial volumes, banks deposits are greater than narrow money. That's what make the sentence funny. But you are saying that's not the case, because banks are not private! I'm lost here
Banks can and do fail. Andre
ReplyDeleteIf still so, it is because the liabilities that banks create ("loans create deposits") are genuine liabilities BETWEEN banks and with the monetary sovereign (e.g. US Treasury). Why? Because banks and the monetary sovereign have accounts at the central bank and thus may receive fiat in the form of credits to their account. Not so with the non-bank private (i.e. the general population) sector who may only deal with physical fiat since we may NOT have accounts at the central bank.
Or let's put it this way: Why may only depository institutions deal with the Nation's fiat in convenient, inherently safe account form and the citizens may not but instead must work through private banks or be limited to unsafe, inconvenient physical fiat*, a.k.a. "cash"? Does that seem entirely private to you? Or does it reek of special privilege?
*For the moment. One "good" thing about the abolition of physical fiat is that citizens will then be ENTIRELY UNABLE to use their Nation's fiat!! Then they will perhaps realize that they are slaves to a government-privileged usury cartel and we can finally have fundamental reform.
Banks serve as intermediaries between the US government as currency issuer and users of the currency. Tom Hickey
ReplyDeleteEntirely unnecessary intermediaries. This has ALWAYS been true in the case of the US but is especially true today given modern computers and communications.
"Entirely unnecessary intermediaries. This has ALWAYS been true in the case of the US but is especially true today given modern computers and communications."
DeleteThat's an interesting topic. Banks do exploit they privileged positions, but at what extent is it good or bad to the society?
In my country we the people didn't have direct access to treasury bonds. If I wanted to invest in bonds, I would have to do it thought banks, and they did charge high fees. Then the government introduced "treasury direct", a channel where people can buy treasury bonds without banks as intermediates. I think that was an excellent advance. It is good for the society.
Bank reserves, on the other hand, are a much complex issue. Today the central banks usually deal directly with 100 or 200 banks in their jurisdictions. That's entirely different from the scenario where the central bank would deal directly with millions of individuals. I understand the banking system as an necessary intermediary, that needs to be subjected to strong regulation and supervision. But to abolish the banking system and put everything on the back of the central bank seems a recipie for disaster...
The fact that some companies have some sort of privilege doesn't make them public. The fact that banks only have access to bank reserves may make them special in some ways, but it doesn't make them public.
ReplyDeleteAnd I personally don't see that the bank reserves access restriction is so damaging as you see it, but that subject has nothing to do with the public/private discussion.
The demand deposit is an IOU where the the bank promises to pay narrow money on demand to the costumer. And the holder is subjected to credit risk and people know that. They "withdraw" their deposits when they think the bank is facing difficult times. Confidence does play a role and may affect its acceptance...
Who's saying that banks are public? Not me.
ReplyDeleteTo say that banks are not entirely private is not to say that banks are public. Instead, banks are a monstrous public-private partnership that systematically loots the poorer, the less so-called credit-worthy, in favor of the richer, the more so-called credit-worthy of what is, in essence, the PUBLIC's CREDIT but for private gain.
They "withdraw" their deposits when they think the bank is facing difficult times. Andre
ReplyDeleteAnd then what? Pay their bills with cash? That they carry on their persons at considerable risk? And be subject to home invasions too?
Hence the need for convenient, inherently safe accounts for all citizens at the central bank and not just for depository institutions.
But to abolish the banking system and put everything on the back of the central bank seems a recipie for disaster... Andre
ReplyDeleteEntirely private banks with entirely voluntary depositors would still exist and still have accounts at the cb but without special privileges.
As for the cb itself, it would be forbidden from creating fiat EXCEPT for its monetary sovereign (e.g. US Treasury) so it would not lend to or buy assets from the private sector - leaving those functions to entirely private banks, businesses and individuals.
seems a recipie for disaster... Andre
ReplyDeleteDe-privileging the banks must be done thoughtfully and carefully, that's for sure. But we also have a huge opportunity to reverse a lot of unjust wealth inequality by, for example, abolishing government-provided deposit insurance since to do that properly, in the case of the US, should require $trillions in new fiat to be equally distributed to all US citizens - to provide the new reserves needed for the xfer of at least some currently insured deposits with banks to inherently safe accounts at the cb itself.
I like this sentence of Andrew Anderson’s: “But why should those with equity share it when government privileges for private credit creation allow them to legally steal the purchasing power of others instead?” Private banks really do “steal purchasing power” in the following not uncommon situation.
ReplyDeleteIf the economy is at capacity (or the Fed thinks it’s at capacity), and private banks create and lend out an extra $X, that money will be spent, which will be inflationary. Ergo the state must impose some sort of deflationary counter measure: raising taxes and confiscating about $X from the general population would do. Hey presto: $X of purchasing power is stolen from the population!!!
Maybe that's the point - the definition of the word "private" and "public". In my mind, I have no doubt that most investment and commercial banks are private, and I find it difficult to see how they are not. Maybe I'm not smart or maybe we are reinventing the dictionary, I don't know.
ReplyDeleteDepends on how much legal control the government has on a firm. The government has a great deal of control over banks, somewhat less over financial institutions, less over publicly listed firms, and little over privately owned firms. These are legal issues and words have a technical meaning that is somewhat different from the ordinary language application. That is why lawyers.
The demand deposit is an IOU where the the bank promises to pay narrow money on demand to the costumer. And the holder is subjected to credit risk and people know that. They "withdraw" their deposits when they think the bank is facing difficult times. Confidence does play a role and may affect its acceptance...
ReplyDeleteOutside the US maybe. Not in the US with deposit insurance and very close supervision of commercial banks. In addition, Lehman is going to be the last banking institution that the US government lets actually go under now that systemic risk is understood. The likelihood is that large banks will be temporarily nationalized like GM was.
The problem with late-stage capitalism is that the size of firms to take advantage of economies of scale, efficiency and concentration of economic power makes the system vulnerable to collapse owing to systemic risk (knock-on effects). Government have to have the power to intervene to prevent economic depression.
MMT views banks as "public-private partnerships" and it views the Federal Reserve as the government. This allows simplifying the MMT model of money. It is a useful model but not 100% accurate.
ReplyDeleteYes, private banks are regulated by government and protected by government. So are Monsanto and Apple and Pfizer, yet no one accuses Monsanto of being a public-private partnership.
The bottom line is that banks are run for private benefit not public benefit. Perhaps banks can be described as a regulated public utility, but like gas & electric utilities they are still run for private benefit subject to regulatory oversight that is often captured by the utilities.
I would like to see banks defined legally as public utilities but they are not at this point. Public utilities regulate natural monopolies. Modern banking can be viewed as a type of natural monopoly. It seems it would make public banks more available as a political choice, and this would provide a public option to level competition in the banking sector.
ReplyDeleteand concentration of economic power makes the system vulnerable to collapse owing to systemic risk (knock-on effects). Tom Hickey
ReplyDeleteHow can we really know that given that we've never, at least in US history, ever had truly private banks given that it's obviously, at least in retrospect*, an inherent duty of a monetary sovereign to provide accounting and transaction services in its fiat to ALL CITIZENS and not just to depository institutions or not at all**?
*Given the instability of borrowing short or no term to lend long term, the modus operandi of banks.
**In both cases leaving the citizens forced to deal with mere private liabilities for fiat or else be limited to mere physical fiat or barter.