By Gareth Vaughan
COVID-19 has turned the world upside down. Globally the number of people catching the virus continues to rise and the economic fallout is enormous. The uncertainty this is causing shows no signs of abating.
With governments and policy makers facing huge challenges, there's plenty of scope to think outside the square. Turning the clock back to 2019 is not an option. Unconventional ideas should be on the table, and perhaps there's even scope for a paradigm shift in the way we view, or consider, certain issues?
We recently ran a video of this conversation between American economist Stephanie Kelton and DCReport editor David Cay Johnston. In June Kelton published a book entitled The Deficit Myth, Modern Monetary Theory and How to Build a Better Economy. Kelton is a professor of economics and public policy at New York's Stony Brook University.
Whilst there are those who argue Modern Monetary Theory (MMT) is not new, it's certainly not the conventional way economists and politicians think about money.
Before this year I hadn't given much though to MMT. During the series of lockdown video interviews I did, David Skilling, director at economic advisory firm Landfall Strategy Group, suggested we were defacto moving in the direction of MMT which had been "fringe economic policy even a year ago." Strategy and risk consultant Raf Manji, another interviewee, talked about upgrading New Zealand's infrastructure at effectively no cost, and learning about money transmission from trading the yen and Japanese government bonds.
With my interest piqued, I've read Kelton's book and there's certainly food for thought in it. Especially against a COVID-19 backdrop.
The powers of a currency issuer
The fundamental point Kelton makes is that countries with monetary sovereignty such as the United States and New Zealand, where the government is the monopoly issuer of a fiat currency, don't have to manage their budgets as a household, business or local government does. This is because the government is the currency issuer. The others are currency users. Or, put another way, unlike a household, business or local council, the government issues the currency it spends.
Being a currency issuer gives a special power that must be exercised with great care, Kelton says. Rather than asking how the government will pay for something we should be asking how will they resource it.
"The problem we have today is that economic policy is often prescribed by people who, despite holding advanced degrees in economics, possess no real understanding of how our monetary system works," Kelton says.
She likes to talk about looking at things through an MMT lens. When doing so, things look quite different to when using a conventional economist's lens.
"When a country issues its own nonconvertible (fiat) currency and only borrows in its own currency, that country has obtained monetary sovereignty. Countries with monetary sovereignty, then, don't have to manage their budgets as a household would," says Kelton. "Most importantly, having monetary sovereignty means that a country can prioritise the security and wellbeing of its people without needing to worry about how to pay for it."
The world through an MMT lens is arguably rose tinted compared to the world through an orthodox economist's lens. But it isn't limitless milk and honey.
"Do I believe the solution to all our problems is to simply spend more money? No, of course not. Just because there are no financial constraints on the federal budget doesn't mean there aren't real limits to what the government can and should do. Every economy has its own internal speed limit, regulated by the availability of our real productive resources - the state of technology and quantity and quality of its land, workers, factories, machines, and other materials. If the government tries to spend too much into an economy that's already running at full speed, inflation will accelerate. There are limits. However the limits are not in our government's ability to spend money, or in the deficit, but in inflationary pressures and resources within the real economy. MMT distinguishes the real limits from delusional and unnecessary self-imposed constraints," Kelton says.
She declares austerity and trade wars "a failure of imagination," and says the "cruel and inefficient" practice of relying on democratically unaccountable central bankers to target the "right" mix of inflation and unemployment must end.
The government's budget isn't supposed to balance, Kelton argues. A fiscal deficit adds more dollars than it subtracts, while a fiscal surplus subtracts more dollars than it adds. And government surpluses shift deficits onto the non-government sector.
'A keyboard at the New York Federal Reserve Bank'
Even at US$26 trillion, the US national debt "poses no financial burden whatsoever." That's because it "could be paid off tomorrow and none of us would have to chip in a dime." Some Americans fret about China holding more than US$1 trillion of US treasuries securities. But Kelton doesn't see a problem.
"Borrowing from China involves nothing more than an accounting adjustment, whereby the Federal Reserve subtracts numbers from China's reserve account (checking) and adds numbers to its securities account (savings)...To pay back China the Fed simply reverses the accounting entries marking down the number in its securities account and marking up the number in its reserve account. It's all accomplished using nothing more than a keyboard at the New York Federal Reserve Bank."
Even Japan, with the developed world's highest debt-to-GDP ratio of 240%, is not in trouble.
"Financial markets can't push Japan into crisis because the Bank of Japan can override any unwanted move in interest rates. It could also, essentially, retire the entire debt using nothing more than a computer keyboard at the Japanese central bank."
Here in New Zealand net core Crown debt is expected to increase from 19% of GDP in 2019 to 53.6% by 2023 as government bond issues ramp up.
Saying taxes pay for what the government spends is 'pure fantasy'
Conventional thinking is that government funding comes from raising taxes and borrowing. In yet more heresy Kelton labels the idea that taxes pay for what the government spends as "pure fantasy." Actually governments spend before they tax and borrow.
"Taxes aren't important because they help the government pay the bills. They're important because they help to prevent government spending from creating an inflation problem. Similarly, bond sales aren't important because they allow the government to finance fiscal deficits. They're important because they drain off excessive reserves, which enables the Federal Reserve to hit a positive interest rate target. But today the Fed pays interest on reserve balances, so it no longer relies on treasuries to hit its rate target."
To wipe US government debt the Fed could buy up government bonds in exchange for bank reserves, Kelton suggests, using nothing more than a keyboard at the Fed. Or it could phase out the issuance of treasuries over time. Or alternatively those worried about government debt could just learn to live with it.
"There's nothing inherently dangerous about offering a safe, interest bearing way for people to hold on to dollars," says Kelton. "The thing we call the national debt is nothing more than a footprint from the past."
She goes on to say that arguing that so-called entitlement programmes like social security and Medicare are financially unsustainable and can't be afforded is a myth. In reality, Kelton says, so long as the government commits to funding the programmes, it can always afford to do so.
"The deficit myth has warped our understanding of all government spending," says Kelton.
Taxes can't be paid without the government currency monopolist supplying money, and the government "spends its currency into existence" by giving people access to it. Kelton notes former Fed chairman Ben Bernanke refuted the idea that taxpayer funding was being used to rescue banks during the global financial crisis.
"The banks have accounts with the Fed," she quotes Bernanke saying. "We just use the computer to mark up the size of the accounts."
But even though the government can manufacture all the dollars it needs, taxes have their uses. These, Kelton says, include encouraging or discouraging certain behaviours, altering the distribution of wealth and income, and helping avoid an inflation problem.
'A non-partisan lens that describes how the monetary system actually works'
Kelton had a stint as chief economist for the Democrats on the US Senate Budget Committee after being hired by Bernie Sanders in 2015. What she found there was "incredibly disheartening," with none of the committee's senators - Democrats or Republicans - seeming to realise the Federal Budget didn't work like a household budget.
Critics sometimes describe MMT as a cult. It's not. But looking at the world through an MMT lens, as Kelton puts it, changes the view dramatically. She describes MMT as a non-partisan lens that describes how the monetary system actually works. MMT's not a blank cheque, and nor is it a plot to grow the size of government, Kelton argues.
"MMT can be used to defend policies that are traditionally more liberal (e.g. Medicare for all, free college, or middle class tax cuts) or more conservative (e.g. military spending or corporate tax cuts)."
"The point is that we run our economy like a six-foot-tall guy who wanders around perpetually hunched over in a house with eight-foot ceilings because someone convinced him if he tries to stand up tall he'll suffer a massive head trauma," says Kelton.
Helping fix the deficits that actually matter
Kelton argues there are a whole range of deficits that actually matter including a good jobs deficit, an education deficit, an infrastructure deficit, and a climate deficit. One example she gives of what an MMT-led approach could help achieve is a transition to sustainable and zero carbon energy production.
In order to decarbonise the grid she suggests the federal government could allow electric utilities to sell, at book value, any high emission generator to the government no matter its age.
"This would free up private capital for a rapid transition to renewable energy and avoid burdening households and businesses with higher costs for electricity due to a change in public policy. The federal government could go further and increase funding for research and development and scaled up deployment of energy storage technologies. The US could have the lowest electricity costs in the world while rapidly transitioning to 100% renewable energy. That's good for businesses, the environment, and households. And it's financially affordable for the government," Kelton says.
Ultimately MMT is a description of how a modern fiat currency works, she adds.
"With an improved understanding of the monetary system comes the ability to distinguish artificial barriers from legitimate constraints. The descriptive side of MMT is about helping us break free of the myths and misunderstandings that have been holding us back. Getting an accurate picture of how the monetary system works is a necessary first step toward building an economy that works for all people."
When there’s a fiscal deficit, gov’t adds dollars to some part of the economy
— Stephanie Kelton (@StephanieKelton) June 30, 2020
When gov’t matches the deficit with bond sales, it turns those dollars into bonds
When gov’t retires bonds, it turns bonds back into dollars
“Paying it back” just shifts dollars between Fed accounts
*This article was first published in our email for paying subscribers early on Wednesday morning. See here for more details and how to subscribe.
91 Comments
If printing money was the solution we would all be mulimillionares at the same time as having zero unemployment. One of the key problems is governments want to get back to where we were pre covid and are doing everything in their power to keep the runaway train on the tracks. Everyone agrees this is going to end badly the only unknown is when.
We could well have had true full employment since the introduction of neoliberalism if governments had continued to sensibly deficit spend rather than running ongoing surpluses and never running the economy hot enough to promote investment in productivity. We've been underutilising our labour and productive potential for a long time.
OK, so MMT runs national debt through a contra account. Easy enough to understand.
For my mind issues arise when states who embrace MMT like this also expect citizens to pay back things like student loans. There's no simple 'accounting adjustment' that I can make that reduces the cashflow impact of repayment obligations. If the state is going to adopt a model where it can merely inflate/print/swap its debt internally, then we have to question its relative standing to expect citizens to repay the state for relatively minor amounts of debt that have a huge impact on their daily lives.
Taxes and the ability to enforce taxes are vital to a modern fiat currency. It drives its value. Taxation is the main way to control inflation when the economy reaches its limits. Expect to go to jail if you don't pay them. Who and what taxes are paid are up to democracy to decide with good research behind it. Whether student debt cancellation right now would cause inflationary pressures right now or be a good way to fill the spending gap is a question for economic modelling. The new era of economics will be - not how do we pay for whatever policy but what would the impact be on the real economy, employment and inflation...
"Taxes aren't important because they help the government pay the bills. They're important because they help to prevent government spending from creating an inflation problem. Similarly, bond sales aren't important because they allow the government to finance fiscal deficits. They're important because they drain off excessive reserves.."
Right there in that one paragraph, is the problem with MMT or it's like.
Show me any Government on the planet with the capacity, or desire, to reign in spending; regardless of the consequences.
As I've written before - taxes under MMT are irrelevant.
They may be seen as 'important' for any number of reason. But in practice - they are not needed; scrap them in the event of MMT. And that is the problem.
MMT is descriptive of the modern macroeonomy. Its model provides accurate prediction of what happens in various circumstances in monetarily sovereign nations. Choosing whether or not to deficit spend to reach full employment is a policy choice - do you like full employment and economic growth spurring investment and repairing household balance sheets or do you prefer the status quo with significant underutilized capacity and idle labour? Do you want to deficit spend via tax cuts or increased spending? Helicopter money for all or targeted benefits? Do you want to tax incomes or wealth? These are all political choices that need to be made whilst recognising the realities that MMT describes about where money comes from, how it gets its value, sectoral balance relationships, the causes of inflation etc.
Wiping this debt would be one way to educate the public about how money and debt works. I suggest wiping $6k (approx 1 year of fees free) from all student loan and beneficiary debt. Could be sold in the interests of fairness (given fees free). Then could be carefully explained how it costs the government nothing upfront ( just future cashflow). Would be great for the economy given the people this would affect.
And refunding $6,000 to each and every past Student Loan borrower who has diligently paid off their debt?
If not, why not?
Perhaps it's in the spirit of "It cost the Government nothing" in the guise of MMT? And let's' remember, The Government is a mystical body that bears no attachment to the People of New Zealand?
In the same way, perhaps making fees uniform across everyone who has a university degree? I.e. older folks who received their education free receive a debt for the cost of the same degree at today's rate. Would be better than the "everything I received free / cheaply thou shalt pay greatly for".
It's fantastic to see this positive depiction of MMT in Interest.co.nz - well done. MMT is all about understanding the powerful tool a modern fiat currency is in monetarily sovereign nations like NZ. We don't need to delude ourselves with mythology that our domestic economy runs on a gold standard or is hostage to a currency crisis via fixed exchange rates or is subject to the whims of bond vigilantes and the ratings agencies. Yes the tool could be used unwisely. But it could also be used to great public purpose. That is the challenge with all human technologies. MMT's time has come. Orthodoxy needs to face up to empirical reality. Their predictions fail (Japan, inflation and QE). Their explanations are objectively untrue (money multipliers, crowding out, loanable funds). Time for a paradigm shift or to step aside.
Yes the tool could be used unwisely.
MMT is not a tool. Its proponents say it simply describes how money is distributed through an economy. Descriptive not prescriptive.
Their predictions fail (Japan, inflation and QE).
Yes, but
-- Japanese h'holds are net savers, unlike the Anglosphere where it's all about living beyond your means.
-- Japan is a creditor nation, like Germany.
-- Japan has a huge industrial complex behind its economy.
-- Japan's public debt is internal (owed to itself).
There are many differences between Japan and the Anglosphere nations who are simply looking for a way to maintain the status quo for the population, which in NZ's case is using the monetary system to create false illusions (housing bubble) and a facade of wealth.
Japanese households have their savings desires accommodated by fiscal deficits. If not spending would fall as would incomes and they wouldn't be able to save.
Meh. Even at the height of their bubble, h'hold debt in Japan to GDP was nothing compared to that of NZ or Australia. Whether you like it or not, the Japanese are a savings culture. That is they allocate more of their income to savings if they can. The idea that the Anglosphere is just as much a savings culture as Japan is ludicrous.
NZ has a current account deficit. Foreigners like to save in NZ dollars. To sustain spending, incomes and gdp we have relied on ever increasing private domestic debt. Private debt has accommodated fiscal surpluses and foreigners savings. That is an unsustainable strategy. It is time for the fiscal surpluses to end and for G-T to increase, allowing households to repair balance sheets and sustain spending levels as households retrench their consumption and quit borrowing. Be a bit more Japanese, let NZ households save and sustain spending/incomes at current and higher gdp levels. Saving money and investing in goods that aren't consumed in the present and produce in the future (income not spent on consumption) equate after the investment spending has occurred. Investment doesn't happen cause households retrench and quit spending or cause interest rates are low. Investment happens when productive capacity has its limits pushed, labour is scarce and demand is strong. NZers may have a lower propensity to save. Fair enough. Smaller deficits than the Japanese economy requires may be needed and multipliers may be higher. That doesn't negate the need to fill the current spending gap right now in NZ.
Well I think it's clearly obvious that the Anglosphere wants to live beyond its means. And that is clearly what the anti-MMT brigade (the Austrian School) are suggesting.
"Foreigners like to save in NZD". That depends what you mean by "save." NZD and AUD have been favored speculative currencies because of the carry trade, but that has evaporated to some degree. Our parent commercial banks like the idea of securing offshore wholesale funding as a cheap way of funding mortgages. I'm not sure there's wholesale proof in what you say. Sure NZD is probably more desirable than Thai Baht or Malaysian ringgit, but perhaps one of the most attractive features of NZD is the fact we're a swap (Fed) country.
The whole world can't run a current account surplus. Some countries are deficit countries. They accommodate the export led strategies of the surplus countries. It's symbiotic. Why run a surplus if you don't want profitable overseas investment opportunities for your net earnings? The US gets boat loads of real stuff from China in exchange for bits of paper. In economics, unlike religion, it is better to receive than to give right? If the Chinese want US dollars rather than stuff everyone's happy. Living beyond your means is pushing your economy beyond its productive limits it can handle. We don't do this in NZ.
I've got nothing against wise strategic government investment, but national debt goes from 19 -> 53% of GDP and we've got nothing to show for it then that will be a tragedy. By "something to show for it" I mean engineering firms producing advanced widgets and selling them overseas.
I've got nothing against wise strategic government investment, but national debt goes from 19 -> 53% of GDP and we've got nothing to show for it then that will be a tragedy. By "something to show for it" I mean engineering firms producing advanced widgets and selling them overseas.
See my comment above about Japan
Hi JC
What you say makes wages themselves also sound like a very poor investment. We've got into the habit of writing wage labour out of the grand narrative when actually, it's consumption that is all important, particularly when the lockdown halted the supply side of the economy. And yes, our $260bil GDP is an income/expenditure measure. One person's spending is another's income. Yes, we do need government to spend big to reshape the economy, living conditions & wellbeing. But don't trash the workers please.
By "something to show for it" I mean engineering firms producing advanced widgets and selling them overseas.
Well what would you accept as evidence of having "something to show for it"?
If we didn't have the wage subsidy, then we surely would have had more businesses close and lay off people by now. They didn't. Those businesses are still there. So that's what we have to show for the wage subsidy. It just looks mostly like 'business as usual', but that doesn't mean that nothing was achieved.
Ah, yes. The Renminbi. That 'currency' that can change in value and convertibility at the whim of the CCP. Witness the changes to Hong Kong over the last few hours.
Who is going to want to take Renmimbni in exchange for anything of value if the 'rules' can and will change at the flick of Xi's pen?
Very few.
The US$ will remain a pool of security. And as the pool shrinks, it will appreciate in value - and other currencies weaken about it - the Renminbi especially.
All sounds wonderful. There be dragons, though. I guess the problem is that it transfers more power to a small group of politicians and technocrats and takes power from the masses (that is, you and me). There is a lot of truth in the decription of how modern money works, or doesn't.
I see the appeal of closing the Inland Revenue down, but is that really likely to happen? I mean, really? Somehow the end result will be fashionable things to waste money on, that look like a good idea at the time. Things like new sports stadia, convention centres, light rail, that sort of thing.
Sound money is a necessary basis for trade and productive endeavour to flourish. If we are not very careful we follow Argentina's path, where people store their money in USDs or gold, as the local peso is unsound. Our current silly house prices suggest we are already well down that slippery slope, dangerously so.
How does it go? In theory there is no difference between theory and reality. In reality there is.
I mean zeros and ones in a computer. No liability, just an electronic cancellation. Think of it this way. Suppose you owe me $20 and I say, forget about it. That costs me nothing now. What I have done is cancelled a future transaction where your wealth goes down by $20 and mine goes up. When it is the one hand of govt owing the other hand of govt (like in half of Japan’s govt debt), the effect of cancelling that future transfer is zilch.
Indeed - I suppose that's why I refused to accept money as remuneration for work done 22 years ago, but accepted it as unearned income in early retirement. The devaluation of money is evident for all to see when non productive asset price rises outstrip collective wage growth over protracted time scales..
Where do you think money comes from?
I think it is mainly created credit as described in the three links below.
https://sciencedirect.com/science/article/pii/S1057521915001477
https://sciencedirect.com/science/article/pii/S1057521914001070
https://sciencedirect.com/science/article/pii/S1057521914001434
It just a simplistic and careless analysis to try to further explain what a fiat currency is. I think it's just meant to sound good to help sell her book and she does not fully believe in MMT. If she does believe this could ever be a good idea well I don't know what to comment.
Can you imagine if the FED/government made a compulsory UST buyback with money printed from a keyboard with 24 hours notice?
Using MMT to solve an education deficit is laughable. The only deficit it will cure is the wealth deficit for banks, and large asset holders caused by interest rates reaching zero percent. Once MMT gets going, there's going to be some very wealthy people, and the rest of us.
If a country has X number of goods and services and assets (e.g which is the net present value of all the goods and services that asset will produce in future) at time 0 that are valued at Y units of the currency, then the X*Y=total money supply (MS). Now If you print more money at t1, there are four possible outcomes:
1) X increases but Y decrease (i.e. the supply of real goods and services is simulated so much that demands drops and prices must drop to a new equilibrium)
2) X increases but Y is not changed. This is similar to 1 but more limited.
3) X increases and Y increases. There is a smaller increase in supply compared to 1 and 2 and the additional demand (enabled by printed money) is now greater than the supply pushing the prices up.
4) X decreases but Y increases. Supply drops and but there is a greater demand enabled by printed money pushing up prices (the greater the quantity of printer money the greater the increase in prices).
5) X is not changed but prices increases. This is similar to 4 above.
One might argue that 1 and 2 are desirable, the desirability of 3 depends on the relative magnitude of increase in prices and supply, and 4 and 5 being undesirable.
Experience shows that only US manages to achieve 1 and 2. This is because their money printed enables local demand but the supply to meet that demand is increases elsewhere (i.e. China, Japan, Germany etc produce more to meet the additional supply). This is due to USD unique position as the global trade currency.
In almost anywhere else, you are much more likely to end up with 4 or 5. Terrible outcomes.
Given that MMT states that the purpose of tax is to prevent govt spending causing inflation, I presume that implies not all tax types are equivalent? I would guess a wealth tax would be one of the least efficient since the wealthy are unlikely to spend less due to it? Does Kelton’s book discuss this?
:) it is a very funny argument:we tax to curb spending, print less money in the first place. there problem solved. If deficit spending is to be funded by printed money, tax is entirely irrelevant. Curbing spending? that could be taken into account when they decided how much to print. Redistribution? that can be decided by government of who will get how much of the printed money. Private profit, interest income and interest rate, etc are all irrelevant. We all have to work for the government, and only do what government orders, It is as simple as that.
We dont want to be victims of something akin to Greshams Law , where people lose faith in our currency due to it being debased, and convert it to another 'good" currency
Thankfully we have an independent monetary institution in the form of the RBNZ , free from political interference.
MMT will only be used to a limited degree here to prevent us ending up with a debased currency a-la Greshams Law
There is enough evidence in history where the politicians mess with the Central Bank leading to chaos , or where the line is not clear , leading to all sorts of problems like debt defaults
Examples include :-
The Wiemar Republic
Argentina
Venezuela
Zimbabwe
Zambia
Turkey
Lebanon
And to be honest most Latin American and African developing countries have Central Banks that have been hijacked
Not sure I agree about the sagacity of our institutions. If they knew what they were doing we would not have house prices at high multiples of wages. Our high house price to income ratios are a symptom of institutional incompetence. Not catastrophic incompetence, but they have been behind the ball in identifying and implementing solutions, prefering to blather on to hide their lack of understanding.
I watched Princes of the Yen again the other night. The similarities between Japan late 1980's and other western countries right now scares me. And the talk about the vested interests in Japan not to do anything to prevent their outcome - as some were doing too well on the way up...its just insanity and looks like we're going to repeat the lessons.
MMT is The Next Step to formalise what's already happening. Tell people that 'MMT will be good for you' and The Game's already over.
Two generations ago, nobody knew the name of the Federal Reserve's chairperson. Now that chairperson is in the news virtually daily. The media exposure of the Fed chair far exceeds that of elected officials...In effect, the nation has become dependent on its central bankers and their limited agenda (expand the wealth and power of the financial sector). The elected government and the real-world production of goods and services both have taken a back seat to conjured "wealth."
The ascendance of finance and the decay of labour's value is the result of the ascendance of monetary stimulus as the core driver of "wealth" and thus "growth." It was once expected that consumption would be funded by wages earned by labour, and investment would be funded by savings set aside from earnings. That era is long past. What's been normalized is a systemic reliance on debt to fund consumption and on the euphoric "animal spirits" of the wealth effect generated by soaring assets such as homes and stocks.
History offers a number of parallels to the ascendance of borrowed capital over labour and central bank money-printing over the creation of productive value. History suggests eras that have normalized economic and financial extremes; extremes of inequality, policy, and decay, haven't ended well for anyone.
Just as the rewards of central-bank bubbles have not been evenly distributed, the pain created by the collapse of the bubbles won't be evenly distributed, either....Let's ask a very simple question. The S&P 500 stock index went up five-fold from its 2009 low at 667 to a recent high around 3,400. Did your income rise five-fold since 2009? Probably not.
(CH Smith)
Economics is NOT a science , for many good reasons , including the fact that your view on any economic issue is influenced by your political view , but there are some fundamental laws to economic theory that cannot be ignored .
One of those laws relates to money creation .
We know that any debasing of the currency through the growth in money supply can lead to problems that take years to address or unwind .
For that reason , growth should be funded through long term borrowing at market rates to prevent distortions arising
Interesting theory. But there has to be a finite limit to such MMT expansion in money supply. It cannot be unending. How is that limit defined and measured and reported? Otherwise it will be la la land for everybody. Zimbabwe tried this and the country went bankrupt and stayed that way for many years.
We are converting ours to non-productive carbon sequestration forests, that cannot be harvested. The effect is the same, except we also get to pay a tax to the foreigners who own them. Maybe I've misunderstood something, it seems too daft even for our dumb as fruitcakes politicians.
The Minister of Health, should have taken Peter Thiel's call.
Peter Thiel on "The Straussian Moment".
https://youtu.be/iRleB034EC8
- thinking on China too.
Alright then - there are upper and lower limits to money creation in MMT largely defined by how much inflation is desired. what does it take for the Government to sit up and take notice of this? They have just increased the tax on fuel, but GR says he is not keen on taking money out of people's pockets. it is acknowledged that any recovery can only be arranged through spending, but it is clear that the Government and a lot of others are worried about the deficit. How do we make this happen?
Good article, very well spelled out.
My questions are basically:
If the government can and does just keep pumping printing money into the economy, using the money to pay off it's debts and fund say infrastructure investment... what is the point in working for a living outside of the system that is printing money? Because essentially you will be working for an ever decreasing size of the pie - working harder for less buying power (inflation).
To an internal economy, wouldn't the embrace of MMT result in all private enterprise eventually having to be reliant on ever increasing amounts of printed money? This is evidenced by how markets have been dysfunctional for the past decade or so, even more so now, because printed money flows directly into their bottom lines. It becomes a game of "who can get the most out of the government" (hell, see what's happening with NZ businesses taking government hand outs at the moment).
Therefore all private enterprise would eventually fall into state ownership? Essentially the state will control the means of and value of transactions. It would decide who wins and loses and would lead to the misallocation of resources a-laa solicalism. Would not MMT put the state and it's currency at the centre of the economy?
This is why the government must run deficits. It funds our savings for one thing and it finances our current account deficits for another.
https://gimms.org.uk/fact-sheets/sectoral-balances/
I think you've misinterpreted the article. It says the Government prints money to fund it's spending plan (the debts are a carry over from the current system). But this money printing doesn't pay you, the job you do, does. Again the upper and lower bounds of the system are defined by targeted inflation (how much v how little money is available), but will also be impacted by other social issues too, such as the question you ask - why work? No society wants idle hands because of mischief. So the Government could print money to fund infrastructure, health, education, but it could also do it to support the creation of revenue generating industry in the regions to provide employment. Taxation is used to pull money out of circulation and to influence behaviours and so on.
So you as an individual could save, and invest your money and get a return, but if you chose not to work, where would you get that money from?
Are we in a MMT system? Outside of COVID the Government is borrowing for it's spending, not just creating funds. That alone says it is not a MMT system. The author states the Government does not need to borrow to spend in an MMT system, but money taken out of the economy is only done to control inflation.
Please if you are to contribute to this forum put your interpretation down for debate. Don't just criticise, it makes you look like you don't understand why you believe what you do.
For me, it's an unlimited capital problem. Once people know how to game the system, or that the system can be gamed, they will spend their time doing just that NOT concentrating on working harder/smarter (which is real productivity). You can see exactly this, with how banks in the US acted under the TARP programs and how almost all businesses are acting around the world now - hand out for government money regardless of their financial position. If businesses know that the government will print any amount of money to fund "core businesses" (notice how suddenly Tourism is a core business here?), particularly government agencies and infrastructure etc. The result of unlimited capital is obvious, you will have projects that go on forever, which suffer "delays" and need to be constantly topped up (see projects like Transmission Gully). Businesses know that the government has an endless supply of funds and therefore will try to maximise their gains through minimal real inputs - hence people working for those businesses will be paid accordingly (then that's you and me). And no, you won't be paid any more for working longer hours or being a diligent worker, actually that is counter productive to the businesses bottom line. Instead you will be rewarded for finding ways to delay your project, so the business can continue the gravy train from the government.
With limited capital businesses are forced to maximise their outputs through productivity increases. With unlimited sources of funding available, businesses know they don't need to do anything productive, they need only game the system so that they will receive more and more printed money.
Who said anything about bail-outs?
You need to read the book and stop misrepresenting what she was written.
"Gaming the system" as the current unregulated economy allows will no doubt be legislated against.
But that is a policy decision for parliament and our democracy.
Bail-outs were, as you put it, simply MMT theory playing out. As you state we are in MMT at the moment and we are seeing exactly what I describe. No productivity (even backwards), everyone with their hand out for free government money.
The purpose of MMT appears to describe the current system and then suggest that it can be used forever. The problem here is the current system is quite broken, allocating capital to the rich and to asset holders while effectively punishing productive, profitable businesses. I fail to see how extending MMT is going to fix that problem, rather I see it exacerbating the problems we are seeing today (low productivity, high asset prices with no fundamental value).
The government deficit spending right now is replacing the lost private sector spending due to Covid that sustained many private business and enterprises in NZ in the past. Without it you would see mass closures and loss of productive capacity as businesses went bankrupt and liquidated their capital. MMT advocates sensible deficit spending to run the economy hot enough to promote full employment offsetting spending leakages to savings, imports and taxes. It does not promote wasteful spending, it does not mean the end of competitive tendering for government contracts, it does not mean bailing out badly run enterprises that deserve to fail, it does not mean paying people to do nothing, it does not mean supporting harmful or outmoded industries that need to disappear (but it might help fund a just transition for workers affected). MMT does not solve all the problems of the industrial structure or supply side of the economy but it does ensure demand is enough to allow the economy to reach full employment with an eye to price stability and real resource constraints so that investment in productive capacity is promoted and the hysteresis effects of long term unemployment are avoided. There are no financial constraints to government spending. There are real resource constraints. There are good and bad ways to spend. You could pay people to build the Panama Canal. Or you could pay them to blow it up. Both will increase demand and employment but one clearly has much better outcomes for the long term productivity of the economy.
This is the problem as I see it here: "There are no financial constraints to government spending. There are real resource constraints."
Yes, there is no financial constraint because there is no limit to the amount of money that can be printed. But remember people are in charge of pricing those resources, which are constrained (I charge x amount for my labour, they charge x amount for their steel). Now with human behaviour being what it is, if I know the government has no financial constraints, I am damn well going to start charging more for my steel or labour, because that maximises my profit for the least inputs.
I am yet to see how MMT would address this problem and you have not explained why that is. In fact your assertions are the opposite of reality. For instance you state " it does not mean bailing out badly run enterprises that deserve to fail". But if we are living in an MMT world now, that is EXACTLY what is happening. Hence the rise of zombie companies, hence the declaration of companies as "too big to fail". Hence productivity losses and mis-allocation of that unlimited capital.
The problems solution is identified. The limit on Government money creation is their inflation tolerance. You could charge what ever you want for your resource, but if no one has the money to pay for it, how much would you sell? That is what the author identifies as the limits on the Government's money creation.
I suggest we are not in an MMT world now. True some parts of appear that it is so, but i think Governments are picking bits to keep the old world going, rather than moving over completely. So in reality it is a bastardisation or corruption of what it should be. No surprise that the Pollies are screwing it up!
You can start charging more, and the government can respond to that in several ways. There are a few examples I could think of off the top of my head. In a rough ranking of extremes, the government could respond by: not buying your product at all, going to a competitor instead, raising the taxes on your profits, imposing price controls on you, requisitioning your resources. The government, backed by the law, has a monopoly on the issuance of currency, and a monopoly on violence (police/jail/enforcement of the law). Thus the government has a lot more power than you do to dictate the terms of the allocation of resources.
Yes. Now the question as to structural transition in a changed world is important. De carbonising and moving away from mass tourism also. So i personally favour deficit spending supporting workers' incomes to allow a just transition rather than subsidising businesses that are no longer demanded or are unethical given climate change.
Im so convinced everyone else is wrong about magical money that I started convrrting all my cash into income producing assets many years ago. I wonder how many will survive the tidal wave of hyper iflation that is going ro wipe out the value of their cash savings and other financial instruments.
So how would your assets provide an income in an economy without any money and where did the money originate to purchase your assets in the first place? Only the government can create net financial assets for households to fund their savings.
https://www.economicsjunkie.com/sectoral-balances-and-private-saving/
I pay my suppliers with cash I got from my customers. Those customers may or may not be in new zealand. My customers and I can agree to transact in any form of currency we find acceptable. Like I said, I manage my own treasury. Governments dont create value, they only police one medium of exchange, a role which is becoming increasingly pointless.
You can use chickens as currency if you want but good luck with ird if you try pay you tax with them. My suggestion to you is think about where profits come from? It can't come from workers wages in aggregate right? Government deficit spending, along with capilist consumption, investment spending and net exports is the source of private profits. I think your balance sheet will do better with g-t>0. Governments create value whenever their spending stimulates the production of goods and services. Are you seriously arguing your nurse teacher and cop produces nothing of value?
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