Dr. Stephanie Kelton of UMKC and the New Economic Perspectives blog was on Harry Shearer’s “Le Show” this past Sunday explaining MMT. If MMT is of interest, you can download the episode here. It runs about an hour and gives a quite understandable layman’s introduction to MMT. In fact, Professor Wray, a foundational thinker in MMT, introduces her interview this way on Economonitor:
"Here’s Stephanie Kelton, in perhaps the best interview I’ve ever heard on Modern Money Theory"
Being somewhat of a MMT novice, I listened to it, and made the following notes. I skipped the political comments.
1. Money is an IOU.
2. No inherent limit to the amount of dollars that can be created.
3. Concept of Currency Issuers versus Currency Users.
4. Impossible for Currency Issuers to default on national debt – can always issue more currency to pay principal and interest.
5. US government has monopoly rights to issue its own currency, therefore cannot default.
6. EMU governments do not have ability to issue in their own currency. They are currency users, and can default.
7. US government does not need either tax revenue or bond borrowing to fund itself.
8. However, US Treasury not currently legally allowed to run a negative account balance at the FED.
9. Taxes create the demand for the currency.
10. Government borrowing is a “relic” of an old monetary system based on convertible currencies. Now, only purpose is to set interest rate policy.
11. China holds only a small part of US debt. Holding US dollars is the price China must pay if it wants to maintain an export-driven economy. Rather than holding just dollars, which earn no return, China puts dollars into UST’s, which do earn interest. No need to fear China –dollars do not originate there.
12. Deficit spending increases bank reserves.
13. Increasing bank reserves lead to lower interest rates – all banks want to lend, none need to borrow.
14. Bond sales allow the government to soak up excess reserves, and establish/maintain positive interest rates.
15. Government surpluses usually precede recessions/depressions, implying causality.
16. Underemployment is a sign of a deficit that is too small.
17. Inflation is a sign of too much spending.
18. Inflation is countered by slowing demand – cutting spending or raising taxes.
19. Underemployment and excess capacity prevent inflation.
20. Central banks have absolute control over interest rates. The bond markets do NOT control US interest rates.
21. The government’s deficit is the private sector’s surplus.
22. Eight depressions on gold standard, zero off of it.
23. Gold standard places constraints on fiscal potential. These do not exist in a fiat money system.
24. The entire concept of the US government having any kind of fiscal constraint to the amount it can spend is archaic.
25. The concept of the federal government needing to manage its balance sheet as a responsible household would is "malarkey."
26. Austerity is exactly the wrong thing to do in the face of underemployment and excess capacity.
27. The US government should spend whatever it takes to bring about full employment and full capacity utilization – ASAP! Fears of inflation are hysterical. It’s really that “simple!”
Overall, pretty radical stuff. This is not my first exposure to MMT, but I need to study it more in order to offer a more intelligent review. Nevertheless, I do have some initial impressions and questions regarding MMT to share with you.
1. Discards any concept of money as a store of value.
2. Relies on a government’s creditors having unlimited willingness/capacity to accept ever-diminishing real ROI.
3. Correctly points out that currency issuers never have to default outright, but ignores the constant default via currency devaluation, negative real interest rates, and inflation.
4. Seems to rely on the ‘cancer’ growth model. Here, I refer to ‘growth’ accompanied by constant, insidious inflation. Deflation is highly toxic to this model.
5. Unless accompanied by increases in realwages, unsure how MMT benefits ordinary people beyond potentially putting them back to work.
6. Seems to ignore the concept of structural unemployment.
7. Assumes government knows where and how to apply fiscal stimulus.
8. Not sure where Schumpeter’s creative destruction fits into MMT, if at all.
9. How does the stagflation of the 1970’s fit into MMT, with its high inflation and unemployment?
10. If the government spends $3T, but only takes in $1T, MMT states that the private sector receives a transfer payment of $2T. Would the effect be the same if the government “only” spent $2T, and took in nothing?
11. Does MMT render Rogoff and Reinhart’s work regarding debt-to-GDP levels obsolete?
12. Can the concept of money as a store of value truly be ignored? Would that be acceptable domestically? Would it be acceptable to international trading partners? What effect would it have on the idea of the dollar as the world’s reserve currency?
13. Ponder MMT taken to its intellectual/theoretical extreme – where a currency-issuing government could forsake taxes and borrowing and just issue more currency to fulfill all spending requirements.Would this not drive interest rates to zero due to the plethora of government deficits and resultant excess reserves?
· Who would want to lend in a zero interest rate environment, knowing that the principal, when returned, would buy them less goods and services in the future due to unrelenting inflation?
· Would the government maintain its fiscal “reputation,”if you will?
· Could any government get away with this, or only select ones – such as the United States?
· What would this mean for repo markets, with no government securities to swap?
· What tools would be available to counter inflation?
· Is it really that “simple?”
As you can see, this post is short conclusions, and long questions. I obviously have more to discover myself regarding MMT, but think I have posed some intelligent questions. Currently, I don't know whether to feel like the kid who recognizes that the Emperor has no clothes, or the last guy to still believe that the Earth is flat. I’d like to open it up to your thoughts. I have also invited Dr. Kelton to respond to these questions, in the manner of her choosing.
UPDATE: The link below is also quite interesting, as it pits Modern Money Theory against current "neoliberal austerian fiscal responsibility ideology." Included are some really radical ideas about how the US Treasury could fund itself even if Congress refused to raise the debt ceiling. Of particular note, the "Proof Platinum Coin Seniorage" idea would allow the Secretary of the Treasury to mint a platinum coin and assign it an arbitrary value unrelated to its actual worth. For example, the Treasury could mint a single $60 Trillion dollar coin, deposit it with the Federal Reserve, and suddenly have a $60 Trillion dollar credit in its account at the FED. Frankly, this leaves me, well, speechless...