The roots of MMT do not lie in Keynes

I am currently working on an introductory chapter to a collection I have prepared for my publisher (Edward Elgar) which describes the evolution of Modern Monetary Theory (MMT). The task might appear to be straightforward but in fact is rather vexed. There is considerable dispute as to where the roots lie. A specific debate is the importance of the work of John Maynard Keynes. Many Post Keynesians, almost by definition, believe that Keynes was a central figure in the development of what we now call Post Keynesian economics, although that ‘school of thought’ evades precise identification and is certainly anything but homogenous. There are MMT proponents, who while sympathetic with much of Post Keynesian theory, disagree on key propositions – specifically relating to debt and deficits (as an example). But then they also point to Keynes’ work as seminal in the development of MMT. My own view is that many of the important insights in Keynes were already sketched out in some detail in Marx. Further, the work of the Polish economist MichaΕ‚ Kalecki was much deeper in insight than the work of his contemporary, Keynes. But for me the real sticking point against Keynes was his view that fiscal deficits should be balanced over the business cycle and that would allow governments to pay back debt incurred in the deficit years. That view has crippled progressive thought ever since and is antithetical to MMT. The debate also has resonance with the current leadership struggle within the British Labour Party about fiscal deficits and the claims by the ‘socialist’ candidate, Jeremy Corbyn that he will “balance the budget” when unemployment is low so as to avoid inflation. This view derives from the adoption by progressives of Keynes’ views, whether they know that or not. It is a mistaken view and retards progressive policy development.

In his 1961 book article (page 139) – The Burden of Debt – the founder of Functional Finance – Abba Lerner opened with the following parable:

“But look,” the Rabbi’s wife remonstrated, “When one party to the dispute presented their case to you, you said ‘you are quite right’ and then when the other party presented their case you again said ‘you are quite right’, surely they cannot both be right?” To which the Rabbi answered, “My dear, you are quite right!”

It was in reference to economists who were critical of the US government using debt to match spending on public projects. Lerner said the mainstream economists who were mounting such criticisms were “right” but only if they “redefine” key concepts in convenient (but perverse) ways.

Redux: Phelps article on austerity denial which I discussed in yesterday’s blog – Greece – now the conservatives are denying there was austerity

Keynes did not discuss fiscal policy in great length in his most famous work – The General Theory of Employment, Interest, and Money (1936).

But in two articles which appeared in the The Times (November 14 and 15, 1939) under the title “Paying for the War”, Keynes provided detailed analysis of the conduct of fiscal policy. These articles came out in his short 1940s book “How to Pay for the War”.

The context was the fear that if governments use debt to ‘fund’ fiscal deficits to prosecute the War effort it was likely that inflation would result from a shortage of productive resources.

The inflation would most likely come from stronger consumption on the back of higher incomes and a limited availability of consumption goods.

He disliked the distributional effects of inflation – and considered it to be a tax on workers and the debt issued by governments would be a source of wealth for the capitalist class.

So he thought fiscal deficits pushed resources towards the rich and as a result of their low propensity to consume (high savings rate) would endanger the viability of the capitalist system – bias it towards depression.

He also didn’t want the workers to be taxed more to ‘pay’ for the deficits.

His solution, outlined in those articles, was to introduce a ‘compulsory saving scheme’ with progressive income tax rates, which would reduce consumption (divert income into financial wealth accumulation) but ensure that the low income workers benefited from the deficits.

He wrote that this system would be beneficial because:

… it would be the wage earners, and not the profit takers, who would emerge from the war as the main holders (in the form of deferred pay claims) of the newly created National Debt.

Suffice to say the trade unions and labour activists were horrified by the proposal. They wanted heavy taxes to be levied on the rich capitalists to pay for the War.

Keynes’ fear of inflation also meant that he was not enamoured with fiscal deficits. He saw them as being necessary in times of recession but should not be a general tendency for governments.

Deficits were a means of resolving a “deficiency of effective demand”, which Keynes demonstrated was the principle cause of mass unemployment.

Keynes actually moved somewhat away from this position by 1943 when he supported the proposals by the British Treasury (from James Meade) to introduce a social security system to attenuate periods of deficient demand.

In other words, put the burden of adjustment onto the automatic stabiliser component of the fiscal balance rather than the discretionary component.

So when private spending fell and unemployment rose, workers would attenuate the loss of earned income by the receipt of income support payments through the social security system, which would provide some floor in the recession.

He also divided the fiscal balance into what he called the ‘current budget’ (we now use the term recurrent to describe revenue and spending flows exhausted within a year) and the ‘capital budget’, which relates to public infrastructure expenditure.

In correspondence to Sir Richard Hopkins (July 20, 1942) – which is recorded in his Collected Works, Volume 27, Keynes wrote:

… the ordinary Budget should be balances at all times. It is the capital Budget which should fluctuate with the demand for employment.

This is the precursor to the modern concept of the ‘golden rule’. which limits fiscal deficits to the rate of public investment in productive capital.

The ‘golden rule’ essentially means that over some defined economic cycle (from the peak of activity to the next peak) the government deficit should match its capital (infrastructure) spending.

All ‘recurrent’ spending (that is, spending which exhausts its benefits within the current year) should be ‘funded’ through current revenue (taxes and fines, etc.).

The ‘golden rule’ is considered equitable across generations because the current taxpayers ‘pay’ for the public benefits they receive now, while the future generations have to pay for the benefits that the infrastructure delivers to them in the years to come.

Thus, day to day spending that benefits the current taxpaying public should be covered by taxation revenue and capital infrastructure should be funded through debt.

The fiscal balance would thus always be zero net of public investment spending.

The ‘golden rule’ reflects the mainstream economics view that governments have to ‘fund’ their spending just like a household.

But Keynes went one step further and driven by his fear of inflation concluded in the General Theory (Chapter 13, Section III) that:

If, however, we are tempted to assert that money is the drink which stimulates the system to activity, we must remind ourselves that there may be several slips between the cup and the lip

Monetary policy (adjusting interest rates) was uncertain and Keynes didn’t have confidence that it could constrain and inflationary boom.

So fiscal policy was the principle policy tool for constraining inflationary episodes, just as it was the most effective means of overcoming a recession.

So in Victorian times, the ‘golden rule’ was that in good times, the current ‘budget’ should deliver a surplus, which would then allow the government to repay the debt incurred in bad times, when it was running deficits.

This reasoning then lef to the conclusion that balanced ‘budgets’ as a principle was dangerous and that ‘budgets’ should, rather, be balanced over an economic cycle.

Run deficits in bad times and surpluses in good times to avoid inflation and build up the funds to run down the debt accumulated during the deficit years.

Most of this analysis was conducted under closed economy assumptions. Keynes was focused on fluctuations in private investment and national income and certainly didn’t consider what an on-going external deficit would mean for the conduct of fiscal policy if the private domestic sector desired to net save.

The point is that I depart from the view espoused by many Modern Monetary Theory (MMT) proponents who suggest that Keynes is one of the important precursor economists to the development of MMT.

As I explained in this blog – Corbyn should stop saying he will eliminate the deficit – there is no foundation in the idea that fiscal balances should ever be balanced much less over the course of some discrete economic cycle (peak to trough to peak).

Keynes’ views in this context were relatively conservative and mistaken.

1. Issuing debt to match fiscal deficits does not reduce the inflation risk of the initial spending, whether that spending be government or non-government.

It just swaps one financial asset – a saving balance (deposit) for a government bond. Moreover, the latter carries an income flow which is likely to be larger than the former.

2. There is no reason to believe that continuous fiscal deficits will be inflationary. Extending Keynes’ own logic, deficits are required when non-government spending is insufficient to generate sales that would justify firms fully employing all available labour.

As long as firms can continue to respond to nominal demand growth through increased output growth, there is no major likelihood of an inflation breakout.

In other words, a deficit could easily be a ‘steady-state’ policy position to support full employment when the other sectoral balances (external and private domestic) were in particular states.

For a nation such as Britain, we note the following:

1. A fairly sizeable external deficit which drains domestic spending in net terms (more cash flows out via imports than flows in via exports) and is not going to go away anytime soon and is not a problem anyway, given it means the British people enjoy advantageous real terms of trade (foreigners are willing to send them real goods and services in exchange for bits of paper – financial assets).

2. The private domestic sector is already highly indebted and cannot be expected to sustain even higher debt levels.

3. There is considerable idle capacity – unemployment, underemployment etc.

In this context, a continuous fiscal deficit is indicated.

Remember, a fiscal deficit is a flow of net spending that disappears each period and if not sustained will lose its impact.

As long as that flow is supporting a flow of production in each period then there is no inflation risk. That is the desirable policy position – to ensure all real resources are in productive use.

If from a position of full employment, the external deficit narrows (via export expansion), or private domestic investment increases, then depending on what the society sees as a desirable mix between private and public resource usage, the fiscal deficit will have to decline to avoid inflation.

But that is not the same thing as invoking a ‘balanced budget rule over the cycle’. Even when private domestic spending is stronger, public deficits will normally be required to maintain full employment.

Governments should not follow fiscal rules like a ‘balanced budget rule over the cycle’. Rather, they should be guided by evaluations which show the impact of different fiscal policy parameters on the well-being of the population.

If there is a need for the private domestic sector to have less purchasing power, then a tax increase is indicated. Not to generate revenue for the government but to reduce purchasing capacity of households and firms.

The tax increase is serving a specific function – to deprive the private domestic sector of purchasing power, presumably, because the government wants extra real resource space available to pursue its own socio-economic mandate and/or exports are booming.

It needs to create the extra resource space because if the taxes weren’t increased there would be incompatible claims on those real resources from all the claimants (households, firms, government, foreigners) which would result in inflation.

But no rule can be devised to automatically ensure that these functional decisions will be made effectively. It is the art of the policy maker that rules rather than a rule driving the policy.

Keynes did not take into account the sectoral balances. MMT makes them a central part of the macroeconomic evaluation and policy development framework. Understanding them in an accounting sense is only the first step. The art is to understand what drives these balances and how they interact.

So a ‘balanced budget over the cycle’ rule would mean the private domestic sector has a deficit equivalent to the external deficit on average over the same cycle.

Why is that desirable? It implies that the private domestic sector will be accumulating ever-increasing debt levels, which eventually will become unsustainable.

MMT focuses on the private debt dynamics and considers the public debt dynamics to be passe. It goes further and recommends that governments break the nexus between debt-issuance and fiscal deficits.

In this sense, governments should use Overt Monetary Financing rather than going through the pretence that they are being funded by private bond holders. The bond sales are made possible by past deficits, which generate net financial assets for the non-government sector.

Further, they are just an example of corporate welfare, which is totally unnecessary.

There is some progressive argument that the debt helps pension/superannuation funds provide safe returns to workers in retirement. My solution would be to nationalise superannuation funds, eliminating the managerial fee grab of workers’ savings, and using the government’s currency-issuing capacity to fund workers’ retirements.

That is pure MMT but very non-Keynes.

I have run out of time today but you might also like to reflect on David Colander’s article in the Journal of Economic Literature (December 1984) – Was Keynes a Keynesian or a Lernerian? – which mounts the argument that Keynes shifted ground in the 1940s and considered Lerner’s Functional Finance to be a sound framework.

[Full Reference: Colander, D. (1984) ‘Was Keynes a Keynesian or a Lernerian?’, Journal of Economic Literature, 22(4), December, 1572-1575].


Progressives should abandon the notion that they attribute to Keynes that the fiscal balance should be zero on average over the course of the economic cycle.

In this regard, the work of Abba Lerner in the 1940s on Functional Finance is much more seminal to the development of MMT than was Keynes’ offerings, which I believe are antithetical to the foundational blocks of MMT.

Progressive narratives should aim to educate the public as to the need in normal times for continuous fiscal deficits. Then we would start getting somewhere.

Off to catch a big airplane!

That is enough for today!

(c) Copyright 2015 William Mitchell. All Rights Reserved.

This Post Has 33 Comments

  1. Not that I’m any sort of authority on Keynes or economics for that matter, but I don’t see much value in reading anything other than Chapter 19 of the General Theory.

  2. Dear Bill,

    You wrote: “The tax increase is serving a specific function – to deprive the private domestic sector of purchasing power, presumably, because the government wants extra real resource space available to pursue its own socio-economic mandate and/or exports are booming.”

    Functions are not “served”. Functions of A are objective consequences of a beneficial kind of A for a particular, specified system B. (Those of a deleterious kind are dysfunctions).

    A particular function of A, in the above sense, may be the purpose of an agent. A is the policy or instrument, and its function for B is the desired outcome, the purpose, the intended effect of an agent (individual or collective).

  3. The problem we have here in the UK is that Keynes has become the ‘defunct economist’ that ‘practical men’ are slaves of.

    The idea that Keynes failed to get it all right is heretical.

    And again it is tied in with the deferential British attitude towards the elites. If somebody is/was from Oxbridge they are accorded far too much leeway by people, when if fact their suggestions should be questioned even harder because they come from the establishment.

  4. “Bring some sunshine with you Bill.”

    Unfortunately, Andy, the weather forecast is for rain in the South East. Mind you they were wrong last Saturday. At least the London Underground strike has been called off which could have affected late tube trains on Thursday.

  5. Bit of a nit-picking technical point this, but here goes…

    Bill makes a good point when he said that Keynes was no MMTer in that Keynes believed in balancing the budget over the cycle. On the other hand he did say (in a letter to Roosevelt in 1933) that recessions could be dealt with by simply creating new base money and spending it.

    So presumably he’d have believed in subsequently WITHDRAWING that base money, so as to balance the budget over the cycle. But if you’d said to him “what if that withdrawl causes another recession”, then presumably he’d have said “create new base money and spend it”.

    So my nit-picking technical point is that Keynes boxed himself into a corner there: a corner where has must logically admit to the validity of MMT and the nonsense that is the “balanced budget” idea.

  6. Sadly, Neil is right, with possibly a few exceptions, about the British and Keynes. An exception from his own time would have been his own Treasury. With regard to the roots of MMT, possibly you might wish to consider Robert Malthus, the “inventor” of the concept of effective demand and to whom Keynes gave credit. I realize this goes rather far back but there is an interesting history in the conflict between the ideas of Malthus and those of his great friend Ricardo; and anti-Ricardoism, if I can refer to it as that, is part of the supplementary narrative of MMT. Of course, you may not wish to go that far afield.

  7. Bill,

    I don’t think that Keynes thought that simply issuing debt led to lower inflation. His compulsory saving program was simply to take some of workers wages and hand them government bonds in return. This was a precursor to modern day wage restraint policies — but was of a type that ensured higher spending power in the future; in this case, after the war. I think this was a very sensible proposal. And very progressive. He was all too aware of how the high debt levels in Britain in the 19th century were used to suppress workers’ spending power through VAT/vice taxes — ones that Marx railed against as workers being exploited to fund capitalist wars, mind you.

    I’m also not convinced that his desire to balance the current budget was because he wanted fiscal balance over the cycle. The letters between Keynes and Harrod in the late-1930s show that, although he disagreed on some points, Keynes was well aware of the ‘Harrod knife-edge’ and that there was no reason why an economy should tend toward full employment. This is further buttressed by the paragraph in the GT where he distinguishes clearly between the ‘marginal productivity of capital’ and the ‘marginal efficiency of capital’. The former implicitly assumes that interest rates will distribute resources to full employment levels over the long-run; the latter places investment under the sway of the ‘state of long-term expectations’ and the ‘animal spirits’. I think you see this clearly in the way Keynes articulates his business cycle theory in the late chapters of the book.

    Finally, there is the fact that Keynes ultimately fell in line with Lerner’s ‘functional finance’. His original objections were never about the theoretical merits of the approach. Rather they had to do with how the new economic policy should be ‘sold’ to policymakers. He thought that functional finance would be too shocking. But then he changed his mind and invited Lerner to do a seminar at the Treasury. Actually, this is the debate that still rages to this day around Corbyn.

  8. Addendum:

    I should have been clearer about the view of Keynes that the British Treasury of Keynes’ time had of him, which is that they didn’t think that he was necessarily the bee’s knees. While they agreed that he was a great economist, that didn’t mean that they thought he was always right or, sometimes, even mostly right.

  9. Economics is a eccentric “science”. In Natural science Newton is a historical revered hero but as a science and profession no one would engage in debate to interpret if Newton was applicable on the problems facing Natural Science today. They would rely on the latest knowledge in Natural science.
    But in economics old masters is scrutinized in minute as it was religious scholars interpreting holy books to see if the “religion” is valid.

    Keynes was a very smart and clever fellow, if he had resurrected today he would of course analyzed with today’s environment and knowledge as base. And been a MMT.

    When the facts change, I change my mind. What do you do, sir?

    Didn’t he in an open letter to FDR and USA recommend increased deficits, and said it could be done either by borrowing or by the “printing press”? As if it was irrelevant what they choose.

  10. A very educational piece and interesting.
    One of the problems with economics I feel is that people do not seem to want to recognise that theories evolve and develop, and that descendants of theories are like Einsteins quote that he “stood on the shoulders of giants.” He proved Newton wrong, who is still obviously considered a giant of physics. Darwin’s insights were ingenious, but he knew nothing about genes.
    I see Keynes as laying some good ground work, but it would not be a good thing if people did not improve on it with even better insights, we would not make progress.

  11. “Keynes….. certainly didn’t consider what an on-going external deficit would mean for the conduct of fiscal policy if the private domestic sector desired to net save.”

    So, a key problem with Keynes, was that he didn’t incorporate the concept of sectoral balances into his thinking?

  12. MMT is a very good set of tools for building the economy and providing jobs. Government spending is not inflationary but lack of resources would be if the money were created with no where to put it.
    It makes me worry a little that at the moment we have an enormous amount of bank debt caused by inflated house prices, student debt and even wonga loans.
    Deficit spending and OMF would help people to pay this off given the chance to earn government money, but is there a danger if productivity cannot rise to the level to pay it off? Many peoples mortgages are now eating into half or more of their income. Is there a case for debt jubilees as well. Elizabeth Warren has called for a student loan jubilee in the US. It seems like a good parallel policy to MMT.

  13. Very informative Bill and it makes me realise I have a lot more to learn about history. Have a safe flight! I can’t wait to hear how you go in London and I really hope we get some good videos on MMT soon as it will make my life a lot easier to help educate more people and get them as excited as I am about MMT.

    As the commenters above have mentioned it’s interesting how humans hold on to previous information like Keynes as being infallible (like the bible) and needing to interpret and work everything else from that starting point. Keynes old style English I’m sure only adds to that mystique and interpretation. Science doesn’t work like that it just keeps moving forward. I see MMT as very much like economics as a science. As a chemistry major myself i think I’ve been drawn to MMT because it really just explains macroeconomics in a more scientific way than all the other psycho-political economics around. We still have some way to go on educating people but your work and other MMTers are incredibly exciting.

    I’ve been enjoying Stephanie Kelton’s podcasts but sadly there’s not many. I must wrote her to encourage more if she has time. Are there any other podcasts on MMT out there?

    Thanks for all you do. Hope u get over the jetlag ok. There’s a prescription melatonin which I find helps a lot called circadin which is the real deal for how the brain naturally regulates sleep.

  14. Ann Pettifor called for a debt jubilee a number of years ago. This mechanism has ancient historical precedents. As for Keynes’ General Theory, I think we should not forget that he was revising the book as he went along and virtually after its publication considered producing a revised version. He never got around to it, as events, and his bad heart, caught up with him. It is likely that he published when he did because “the time was right”, not because he thought the book was in a finished state, because it clearly wasn’t.

  15. This is excellent. What really comes across, here, is the *singularity* of the MMT synthesis. While MMT draws variously from heterogenous traditions, it is simply irreducible to any one of them–including Keynesianism!

    Thanks for writing this, Bill.

  16. Most interesting and important! – But I fear a rather big irony if one of the world’s best economic thinkers plan to publish a book with enormous progressive political potential. And then it might be that not many people will ever read it, because it will be (very) expensive. I certainly hope this will not happen.

  17. It is not often remembered that, in a radio broadcast in 1933 with J. C. Stamp, Keynes memorably said, “Look after … unemployment, and the Budget will look after itself.”

  18. petermartin2001,

    I think it accurate to say Keynes wouldn’t have realized the external sector merited such consideration. He came from a time when central banks had closely coordinated in preventing and correcting balances of trade destabilizing to the then-existing gold standard and his own proposal for the Bancor reflected this. I’m guessing he would have thought mad the notion of some nations running more-or-less permanent external surpluses/deficits.

  19. I love it when you slag off at the private rent seeking bond holders for their corporate welfare, while promoting “Overt Monetary Financing”. I find it quite appealing… As well as your point on the superfunds, I couldn’t agree more; it seems so logical. Also find it good how you keep reinforcing that the inflation risk is in the spending, while taxation is a tool to reduce inflation.
    Though you could probably mention that “tax increases” as a means to make room for more govt spending – in a time when the deficit needs to shrinks – depends where the taxation is placed/targeted (for reducing inflation) and how cutting spending may or may not work as a substitute policy based on where that spending is cut. E.g. Obviously cutting healthcare funding is unlikely to reduce inflation in asset markets, whereas a tax targeted towards those markets is far more likely to be successful. The size of government is not just a matter of politics when you examine the allocation of taxes and spending from what I can gather…
    On the more general topic of Keynes in relation to MMT, very interesting insights.

  20. The problem does not lie within the memory of Keynes or his thought, but within the selective memory of the economic mainstream. Always see what they do, not what they say; Keynes was very pragmatic in that sense, I doubt it would be different today.

    We still are dominated by the neoclassicals even when Sraffa debunked it, and it is because the entrenched academe and their masters (which are elitists and fascists which hate democracy). You simply can’t trust economists in the academe for reasons states by Schopenhauer (regarding philosophy) long ago.

  21. I think Bill you’ll end up saying publicly in London that People’s QE is a step in the right direction but it ain’t the full monty, being able to walk and chew gum at the same time! Anyway good luck!

  22. I’m no authority on Keynes but maybe we should cut the guy some slack.
    It may not be relevant to the context of the article but it was a time when managing the exchange rate was paramount. From what I’ve read of him he was still way ahead of his time. Clearly though so was Lerner.

  23. By the way Bill,

    It occurred to me that in your analysis of the flaws of the (Keynesian?) “Golden rule” of having trending balanced current expenditures with revenues, you only did so from the currency issuer perspective.
    I’d be interested in hearing whether you think the “golden rule” should apply to currency using governments like our state governments. Shouldn’t they be attempting to balance current expenditures with revenues, while using “debt financing” (or possibly interest free credit financing from a state owned bank) to pay for public capital expenditures (e.g. infrastructure); while doing so in a counter-cyclical implementation (during downturns) for maximum benefit? What are your general recommendations for the fiscal policy of currency using governments? Or do you charge for that advice?

    Additionally, RE: “Progressive” argument of having bonds for pension/super funds.
    I’m surprised you didn’t go further to demolish the idea that this is a “progressive” argument. We all know the superannuation system inherently favours men over women (women have half the superannuation of men), as well as the wealthy. Women end up with less super than men due to their tendency produce children etc. and thus bonds are fueling an industry which promotes gender inequality. Whereas the pension makes no such descrimination against women or the poor; who didn’t earn as much in their life time of lower paid or less frequent work.
    A pension financed using “Overt Monetary Financing” is a far fairer method to ensure the elderly are taken care of than this idea that we should create a whole compulsory superannuation industry, which we should then subsidise with interesting paying bonds; when those interest payments could be going directly into pensions.

  24. Apologies Bill. My previous comment on you charging for advice was supposed to have a πŸ˜‰ wink face after it to ensure it was interpreted in good faith/humour, based on the underlying knowledge you do consulting for the Andrew’s government in Victoria. If you haven’t cleared it for moderation feel free to put the πŸ˜‰ in there so my comment does not come across as a barb instead of a joke.

  25. MMT is Social Credit for the government. Of course government is separate from and thus once removed from the individual who suffers most after credit bubbles. What we need is actual Social Credit itself which integrates direct financing to the individual into the the economy where Debt ONLY is the curiously monopolistc paradigm in what is allegedly a system pursuing and admiring free market and competitive theory. I would suggest that creating free money for pols dominated by Finance, whose agenda is accomplished by austerity and dedicated to the utter triumph of the paradigm of their profit making product, i.e. Debt, and which pols will then more likely than not waste and use as a means of election, self aggrandizement and the temptation to “build bridges to no where”. The real solution is integrating monetary grace the free and direct to the individual gift into consumer finance. I’m afraid MMTers as well as Keynesians of whatever stripe are nascent Social Crediters.

  26. The most obvious handicap created when a sovereign government insists on running balanced budgets is that the government then no longer possesses the fiscal space required for adding liquidity to the private non-bank sector. However the belief that a regime of balanced budgets is beneficial is also allied with another false belief — the loanable funds hypothesis. Those who hold to the loanable funds hypothesis have always failed to grasp the essence of the mechanics of banking, and also in many cases the important differences between banking reserves, currency and bank credit money. If one holds that all of the money loaned out by banks is simply recycled, then there is no obvious mechanism for implementing necessary increases in the volume of bank credit money, commensurate with the growing demand for credit within a healthy economy. An increase in the volume of reserves per se does not help, and does not guarantee an increase in the money supply because reserves are not interchangeable with other forms of money. And within an endogenously operated financial system reserves are created in a reactive manner — they do not drive the creation of bank credit money. Nevertheless reserves are an essential component of modern financial systems because open market operations carried out by central banks (as a mechanism for managing interest rates) requires that they possess the ability to create and destroy reserves. If, over the course of an economic cycle, no increase is recorded in the volume of treasury securities (implying an average budget condition of balance), then any future attempt by the central bank to add new reserves will deplete the volume of securities that are available to banks and the large institutional investors, leading to a rise in interest rates and also a rise in the institutions’ risk profiles.

  27. It is clear from history that the UK has not balanced the budget over
    any long term cycle.Yet still there has been periodic recessions and
    unemployment.Structural deficits are the norm and they have not
    been large enough.
    Reality trumps theory every time.Must agree with all the contributions
    which show the fundamental non scientific nature of economics in general
    whether classical or Keynesian.

  28. “Ann Pettifor called for a debt jubilee a number of years ago. ”

    It’s an interesting idea, but unfortunately it suffers from the thunderclap problem. It throws a load of petrol on the fire all at the same time and the system will struggle to absorb the energy.

    The problem is less the debt write down. It is more the cash that is handed over to those *without* debt in compensation for their assets collapsing in price. That’s an awful lot of liquidity to put in the hands of a few people – who will tend to be wealthy. Unsurprisingly when you give people money, they tend to spend it. And it will operate on a trickle down basis – meaning it runs up against supply side constraints that much more quickly.

    I much prefer the ‘increase income so people can pay off debt *and* spend’ approach that MMT recommends. Then debt gets eliminated more slowly over time.

    So do you want to pop the balloon with bits flying all over in an uncontrolled manner or let it down slowly.

  29. Good point Neil. Will Bill mention this in speech? Seems like good response – “trickle down.”

  30. > My solution would be to nationalise superannuation funds, eliminating the managerial fee grab of workers’ savings, and using the government’s currency-issuing capacity to fund workers’ retirements.

    Nice article. Till I reached the sentence above. “[U]sing the government’s currency-issuing capacity to fund workers’ retirements”. Oh, dear! I am unsure if you understand what central banks do…

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