The paragraph below on MMT came about after doing
a lot of reading about the Global Minotaur (Wiki)
which turns out to be a Greek myth (then and now).
2018 May - Prospect: Rip
it up and start again: the case for a new economics -
Modern Monetary Theory (Wiki: MMT,
MMT is a new way of looking at the economy of
countries. For sure it's a major paradigm shift (Wiki).
This means that it's difficult to convince people that hold
the old fashioned ideas of economics that the new way offers
a more accurate view. This is demonstrated by making
better predictions and explanations of factors that the old
view has been getting wrong for about four decades.
For about 200 generations of economists the monetary system
they were studying had an artificial constraint in that the
money was tied to either gold or silver. There have
only been 2 generations of economists looking at some
economies (like the US, Japan, China) where that's no longer
true. So it's easy to see how they missed the
underlying ideas of MMT.
Prior to 1971 there was "classical economics" but after 1971
everything changed, but most people are still working on the
old rules. If you don't know how something works then
it's hard to make predictions or fix a problem. It's
like a mechanic trained on a
gas engine car horse
and buggy trying to work on an electric car. The
economic policies of political parties are grounded in the
old system and they can not "flip-flop" so have not adopted
MMT yet. But the time is coming when the failure of
the old ideas to work as predicted will be clearly seen and
a change will then occur. For example the idea that
the FED can influence "stability (aka: Inflation) or jobs is
false, but a lot of people still think it's true. Also
the national debt is a good thing now, but is now seen as a
bad thing. The idea that the federal government needs
to raise money to fund their spending programs is false.
|Money based on gold and/or silver
ended in 1971. Prior to 1968 they could be changed
for silver, after than only into a Federal Reserve
"Silver Certificate (Wiki)
this certifies that there is on deposit in the
treasury of the United States of America One Dollar"
Note the Series (year) 1957 B on this case is not
the year printed but rather related to the year the
design was first introduced. The newest $1
silver certificate is this one.
The replacement Federal Reserve Notes now used are
not redeemable for anything. But they say
"This note is legal tender for all debts public and
This is an idea that came about post 1971 (Wiki: Nixon
Shock), so does not agree with prior economic
theories that go back thousands of years. The
benefits of MMT apply only to sovereign governments where
there are no constraints on the money (for example not on
the gold standard) and the government is the issuer of the
money (not a user like the members of the EMU) . But
MMT can also be used to get insight into economies where
the benefits do not apply, such as the EU. The U.S.
federal government operates using MMT rules but elected
officials don't understand that. MMT does not apply
to the EU (Wiki),
states, cities or households. The key concept is
that when MMT applies the government can always pay for
what it wants, i.e. it's checks never bounce.
There's never a solvency issue.
I see MMT as a new framework or point of view in
understanding how the US (and other countries) economy
works. It is not a policy. That's so say how
someone uses the ideas of MMT depends on them. For
example the quantity (G-T) government spending minus
government taxes can be changed many ways. Bill
made (G-T) negative, i.e. he paid down the national debt,
which MMT teaches us means he sucked money out of the
private sector, not a good thing in a healthy
economy. So how you raise or lower spending and/or
taxes is a policy decision. MMT allows you to
predict the impact based on (G-T).
Recognizing that MMT is the correct way of seeing the US
government financial situation does not mean that there
will be more money to spend but rather it makes much more
clear how fiscal and monetary policy work.
The mood of society today (2016) seems pessimistic.
For example the movie Requiem For The American Dream
reinforces the pessimism. While American
manufacturing output is at an all time high in terms of
dollars, employment in the private sector is down about
30% from 20 years ago. That's to say there are a lot
(tens of millions) of people out of work. It's clear
that the private sector has traded jobs for profits and
they will not be the source of new jobs any time
soon. None of the presidential candidates has
presented a concrete program for job creation. But
MMT offers a lot of hope for job creation.
I've heard from some people that they "don't like MMT"
because if the government "adopts" MMT they will end up just
printing a huge amount of money. This mistakes the
reality of how our economy works with a policy
decision. It's not that the government should adopt
MMT, but rather MMT explains how a policy will impact the
economy. MMT is a description of how the economy
currently works. For example the FED currently has: "
three key objectives for monetary policy in the Federal
Reserve Act: maximizing employment, stabilizing prices, and
moderating long-term interest rates. (Wiki)".
But after 1971 monetary policy has no effect on jobs, hence
after all the Quantitative Easing (Wiki: QE)
there has been no impact on jobs because the rules have
changed. In fact the only thing the Fed can do is
control the overnight interest rate. It does not have
any tools that will do anything else. There is talk of
just folding it into the Dept. of the Treasury since what it
does now is an automatic function.
If you don't know how something works and you try to fix or
modify it the results may not be what you expect. For
example if you believe that when your car is going down the
freeway it makes a lot of exhaust, so if you pipe the
exhaust back into the engine the car will run better, it
will not work the way you expect. A good understanding
of how things really work is necessary in order to make
changes that will work the way you expect. The
economic ideas prior to 1971 were sort of OK for their time,
but now no longer describe how the system really works.
1776 - There were two revolutions, one summarized in the
Declaration of Independence (Wiki)
and the other in the book Wealth of Nations by Adam Smith (Wiki),
which is the basis of capitalism. (but with errors)
1946 - American Affairs Jan 1946 V VIII, No. 1 - Taxes
for Revenue Are Obsolete (pdf),
Beardsley Ruml, Chairman of the Federal Reserve Bank of New
York - The experience of W.W.II showed that the U.S.
could pay for the war without raising the needed revenue
from taxes. (for more see Other MMT references)
1960s - YouTube: The Spider's Web:
Britain's Second Empire | Documentary Film, 1:18:01,
"The government asked Chase to setup a branch in Saigon
during the Vietnam war. As you can imagine it didn't
have windows. It was sort of a fortress. It
lost money but the government went to Chase because it
said 'If you don't get this money thrown off by the
military in Vietnam then it's going into French banks and
it will get to general de Gaulle (Wiki: US
dollar crisis) and you know what he's going to do
every month. He's going to cash it in for
gold. That's what the United States is trying to
stop." Michael Hudson (Wiki)
- also see an out take: The Origins of
Offshore (The Spider's Web deleted scene), 2:45
1971 - Another major revolution happened, but very few
people really understood the implications. It wasn't
until 1992 that Warren Mosler, the father of Modern Monetary
Theory (MMT) had an epiphany in relation to the bond market
in Italy where he understood better than the Italian
government that they could never default on their bond
payments because they were at that time a sovereign
government with a floating currency. That meant that
they could always pay their bills.
1998 - Forecast of 2008 Global Financial Crisis (Wiki): Goldilocks
and the Three Bears - the 3 bears are: Asian debt
deflation, belief that economy was strong 1996 - 1997,
Clinton budget surplus
1999 - Forecast of 2008 Global Financial Crisis: Can
Goldilocks Survive? - "Goldilocks is doomed"
forecast the Global Financial Crisis and cites the Clinton
budget surplus as the cause
2001 - Forecast 2009 European Union debt crisis (Wiki),
of Passage financial problems would happen in
the European Monetary Union (see EU below) in the exact way that
talk: Warren Mosler, The Euro: past, present and
future. The Crossroads Workshop 1 in Zurich
2003 - Iraq War: taxes were not raised to pay for
the war, the government just wrote checks to pay for it
2003 - Convergence
Going In, Divergence Coming Out Default Risk Premiums and
the Prospects for Stabilization in the Eurozone - "Until something is done to enable
member states to avert these financial constraints (e.g.
political union and the establishment of a federal (EU)
budget or the establishment of a new lending institution,
designed to aid member states in pursuing a broad set of
policy objectives), the prospects for stabilization in the
Eurozone appear grim."
Long and Short of It at Goldman Sachs (Ben Stein was
very wrong) - Jan Hatzius of
Goldman Sachs forecasts trouble with home mortgages based
Godley's Sectoral balances.
This is some years after the 1998 & 1999 papers making
the same case. I'm looking for the paper by Jan
2008 - Alan Greenspan when asked if taxpayer money was
used to bail out the banks he said no, it was just
Governments operating under the MMT rules (see Scope
above) are the issuers of their currency. They
must spend money BEFORE they can collect it using
taxes. (see gold
below for how it used to be) The current misconception that
the federal government must tax in order to raise money so
they can spend it on government programs appeared to be true
prior to 1971, but that's no longer the case. This is
similar to a football stadium issuing tickets then
collecting them, in both cases the issue comes before the
Note that for a simple model of the economy where there is
only the government sector and the private sector (i.e.
assuming balanced imports and exports) any deficit in the
government sector is balanced exactly to the penny with a
private sector surplus. This is an accounting
identity, not a theory. It's like looking at a
transaction as if you are the government or the private
sector. So if the federal government balances the
budget, or worse runs a surplus, the private sector is
drained of money, that's not a good thing. Since it's
impossible for a government operating under the MMT scope to
bounce a check there's no problem with a deficit. In
fact if the economy is healthy you would expect the federal
deficit to grow. That's to say the surplus in the
private sector will grow.
The book The Deficit Lie points to the
1992 presidential debate where a question about how the
deficit personally effected Bush can not be answered, and
may be the reason he lost that election.
After W.W.II the U.S. invested heavily in Germany and Japan
rather than punishing them like Germany was punished after
W.W.I. Since W.W.II the US has imported many products
from Germany and Japan, and more recently from China.
The countries whose products we import are getting paid in
US dollars. The reason we are importing these goods is
because they appear to be a good deal to us and the sellers
are happy to get US dollars in exchange. There is some
current worry about the amount of US bonds and Treasury
bills held by China. But China can not ask the US to
cash in their bonds/bills in gold (see Scope above). Their
options are limited. They can buy US products or
exchange the US dollar denominated bonds/bills for some
other currency at the existing exchange rate. Note
that a large currency exchange will have the effect of
making the Chinese money stronger (which has been the desire
of the US government for a long time) thus making Chinese
imports more expensive and also making US exports to China,
Germany and Japan more attractive to them.
Trade allows for world wide competition so a free market
allows consumers to pay a lower price. So economists
say it's a good thing. But, when US workers compete in
a world wide market they loose their jobs. So, while
it's true that in an economic sense everyone is better off
(in terms of being able to buy goods at lower prices) it
comes at the expense of jobs that are permanently lost.
MMT offers a solution to the unemployment problem (see jobs
below). Classical economics offers no solution to
unemployment. That's to say classical economics has
blood on it's hands in terms of human suffering.
I expect that in the future a larger percentage of the
population will be permanently out of work. The
existing support structure for the unemployed is far from
adequate and needs to be improved.
Prior to 1971 the government did need to use federal
taxes to fund their spending (see Gold
below), but that's very different since 1971.
I now think the ideas of MMT were in effect going back
thousands of years. It appeared like taxes funded
spending when the money supply was restricted by fixing the
price of gold.
Since there is no need to collect taxes in order to spend,
the policy of taxes can be seen in light of two ideas.
First, if the federal government did not require anyone to
pay them using US dollars then the currency probably would
not have value. So if somewhere the federal government
requires a payment in US dollars then the US dollar has some
value. Because MMT is such a new idea no one has
really determined what level of payments to the government
are required, if any, to give the US dollar official
value. Prior to 1971 this was not an issue.
Second, taxes should be used for progressive purposes and to
punish "evils" such as alcohol, tobacco or other things
society wants to discourage. So when the purpose of
taxes is seen in this light, payroll taxes are a very bad
idea. They penalize employers, employees, drive jobs
off shore and encourage replacing workers with
automation. So a very progressive income tax
would stop the extreme compensation packages that C-suite
executives now get. Prior to 1980 the marginal rate
was 80% now it's more like 15%. In my opinion is
should be 50.0%. I choose half because if the rate
goes over half then the taxpayer is encouraged to waste
money on buying tax losses. That's to say people do
stupid things when they are dealing with losses rather than
A really simple solution would be to eliminate all payroll
taxes and provide all citizens Social Security (medical then
retirement) benefits and eliminate all the current payroll
taxes and record keeping and replace that with an annual W2
statement of taxable income that would determine the
retirement benefit amount. Note "medicare for all"
greatly simplifies the current record keeping both for the
government and for the vendor (doctor, hospital,
employer...). I expect this simple idea would save
billions if not trillions of dollars in record keeping costs
alone. Currently every medical facility in the country
has a staff of people whose only job is to match up the
different insurance payment rules with the procedure the
doctor recorded. In a similar way employers have
record keeping expenses that really are not needed if this
simple idea was adopted.
The interest on the national debt is seen as a problem, but
again a government operating under the MMT Scope there's no
need to raise money by borrowing (or taxing) in order to be
able to spend it. So no borrowing is needed "to fund
the debt" the government just makes the payments it desires.
Fallacy of the Money
When a bank makes a loan thus creating money (see Money
based on debt below), contrary to the current idea
that they are somehow restricted by the reserve requirement,
in fact the bank borrows whatever reserve it needs during
the next week's bank clearing cycle. The problem of
the bank lending only the principal amount (they do not lend
the money needed to pay the interest) is solved because the
other source of money is US government spending. The
idea of a money multiplier (Wiki)
is not valid because the reserve ratio (percent of loans
covered by reserves) is a false concept if the bank does not
restrict loans based on reserves. That's to say
changing the reserve requirement does not change the
The first college text book on MMT was published in 2016: Modern Monetary
Theory and Practice: An Introductory Text by Prof
W F Mitchell (Author),
Prof L R Wray (Contributor),
M J Watts
University and the New MMT Macroeconomics Textbook - MMT University -
William Mitchell - Introduction
L. Randall Wray will discuss how the book treats Keynes
Martin Watts will consider some topics such as the labour
market and international trade.
MMT University background
H. R. 2990 National
Emergency Employment Defense Act of 2011 - idea to
change the law to allow MMT - not passed
Theory and Practice - an Introductory Text -
Part 1 Introduction and
Part 2 Currency, Money and Banking
- Public Purpose, How to think in a macro way.
- Labour Market measurement.
- Methods, Tools and Techniques.
- Framing and language.
Part 3 National Income, Output and Employment
- We meet the government early on.
- We reach an understanding of balance sheets and
Part 4 Unemployment and Inflation
- Keynes and the Classics
- Effective Demand
- Involuntary unemployment
- AD and AS
Part 5 Economic Policy in Open Economy
- Phillips curve.
- Buffer Stocks - core MMT.
Part 6 Economic Stability
- Core MMT
- Fiscal space - real resources
- Monetary Policy - balance sheets - reserves
- Open Economy
Part 8 Contemporary Debates
- Range of topics
- Macro and the GFC
Introduction & Measurement
Chapter 2: How to Think and Do Macroeconomics
Chapter 3: A Brief Overview of the Economic History and
the Rise of Capitalism
Chapter 4: The System of National Income and Product
Chapter 5: Sectoral Accounting and the Flow of Funds
Chapter 6: Introduction to Sovereign Currency: The
Government and its Money
Chapter 7: The Real Expenditure Model
Chapter 8: Introduction to Aggregate Supply
Chapter 9: Labour Market Concepts and Measurement Chapter
10: Money and Banking
Chapter 11: Unemployment and Inflation
Chapter 12: Full Employment Policy
Chapter 13: Introduction to Monetary and Fiscal Policy
Chapter 14: Fiscal Policy in Sovereign nations
Chapter 15: Monetary Policy in Sovereign Nations
It is intended as an introductory course in macroeconomics
and the narrative is accessible to students of all
backgrounds. All mathematical and advanced material
appears in separate Appendices.
April 2016 - just read The Seven Frauds book (Ref) and have a
bunch of MMT books on order.
Here's an introduction to the idea:
YouTube: L. Randall Wray -- MODERN MONEY: the way a
sovereign currency "works" & there are a number of
others by The Modern Money Network (YouTube).
Here are the pop quiz questions asked in the beginning of
1. Just like a household, the government has to finance its
spending out of its income or through borrowing. [ ]True
2. The role of taxes is to provide finance for government
spending. [ ]True [ ]False
3. The National Government borrows money from the private
sector to finance the budget deficit. [ ]True [ ]False
4. By running budget surpluses the government takes pressure
off interest rates because more funds are then available for
private sector investment projects. [ ]True [ ]False
5. Persistent budget deficits will burden future generations
with inflation and higher taxes. [ ]True [
6. Running budget surpluses now will help build up the funds
necessary to cope with the aging population in the future. [
]True [ ]False
See answers below.
When the US left the gold standard (see Gold below) a profound
change occurred. Maybe because of the way Nixon made
the change most people did not recognize the HUGE
implications. It may be more accurate to say that
after 1971 how the economy really works was made
clear. It's not that the economy worked in a new and
different way after 1971, but instead it was easier to see
how it had always worked.
Keynes recommends deficit government spending (Wiki: Fiscal
Policy) when there's a recession as does MMT.
But a faster way would be to reduce taxes, for example
have the U.S. Treasury (Wiki)
pay both employer and employee FICA (Wiki)
taxes. The idea is that if the FICA taxes were
eliminated the determination of Social Security benefits
would be difficult, but with the Treasury paying the
records would be as they are now. Note that there's
no problem funding Social Security (Wiki)
since the U.S. is a sovereign country and our money is not
constrained to gold or the euro. Note that
employment taxes hurt the economy, not what you what any
tax to do, by penalizing employers, employees and drives
jobs off shore and encourage automation.
But the idea that lowering interest rates (Wiki: Monetary
easing) will stimulate the economy is wrong "you can
not push a string" (Wiki).
If a business has no customers they don't care what the
interest rate is. Getting out of a depression or
recession requires fiscal policy adjustments.
A sovereign government (U.S., Japan, Turkey, &Etc.
but not EU) puts money into circulation by spending.
Banks can also generate money but that's a small fraction
of the total money. The money has value because it's
what's needed to pay taxes and other government fees.
The purpose of taxation is not to raise money but rather
to control the economy. The government funds
whatever it wants to do directly. For example to pay
for a war the government just writes checks to it's
suppliers. There was not a tax increase to pay for
the recent wars. The old idea that taxes are needed
to pay for government programs is just flat out wrong.
The government buys some goods and services and what's
left the private sector can buy. In a hot economy,
where the government competes with the private sector for
goods and services inflation results.
The standard of living for U.S. citizens depends on the
sum total of goods and services provided in the U.S. plus
what is imported less what is exported. Imports
improve the standard of living for those getting
them. When China (or anyone) exports to the U.S.
they are paid in U.S. denominated currency
(dollars). They can use those dollars to by treasury
bonds which is many believe is funding the U.S. deficit,
but that's not the case. Suppose they get mad at us
what can they do: buy stuff in the U.S., get U.S. paper
money to take back to China, exchange U.S. dollars into
some other currency. If the later that would cause
the exchange rate between China and the U.S. to change
making the dollar weaker and Chinese goods more
expensive. But the U.S. has been trying to get China
to increase the value of their money for many years and if
they changed their dollars to something else it would have
that effect, i.e. making Chinese imports more expensive
and U.S. products less expensive.
MMT predicted the problem with the EU in 2001, see Key Years
When the EU (Wiki)
was setup the European Central Bank (Wiki)
was setup to maintain price stability. But in times of
recession the central bank needs to pump money into the
economy, but the ECB does not have this power (limited to 3%
of GDP) and the member countries in the EU do not have that
power. The problems will continue until there's a way
to deficit spend money into circulation. The IMF (Wiki)
was founded at the Bretton Woods conference and was intended
to work along side a gold standard, the Marshall Plan and
other economics of the 1945 time frame, not the post 1971
non gold standard times. It appears that the IMF is
causing much more harm than good and needs to be shut down
or totally revamped to take into account MMT.
Note the ECB only has monetary policy tools (Wiki),
it does not have fiscal policy tools. MMT (or
Keynes) tells us that fiscal policy is needed it time of a
debt crisis (Wiki)
but the EMU has no fiscal policy tools.
The Stability Growth Pacts (Wiki)
limit the debt of an EU member government so they can not
use fiscal policy to recover from a recession. The
2005 reform still kept the ceilings of 3% for budget deficit
and 60% for public debt were maintained.